<PAGE>
                                                                    EXHIBIT 10.6

                                CANARGO LIMITED


                      TETHYS PETROLEUM INVESTMENTS LIMITED

                                      AND

                              INGALLS & SNYDER LLC

                                      AND

                              THE SECURED PARTIES



                           SECURITY INTEREST AGREEMENT
                                  (SECURITIES)




                                       ABX


<PAGE>

<Table>
<Caption>


                                    CONTENTS


<S>        <C>                                                                                              <C>
1          DEFINITIONS AND INTERPRETATION....................................................................1

2          GRANT OF SECURITY INTEREST........................................................................5

3          THE SECURED OBLIGATIONS...........................................................................6

4          DEBTOR'S REPRESENTATIONS AND WARRANTIES...........................................................6

5          DEBTOR'S COVENANTS................................................................................8

6          LIEN.............................................................................................10

7          EVENTS OF DEFAULT................................................................................10

8          ENFORCEMENT BY THE SECURED PARTIES...............................................................14

9          FURTHER ASSURANCE AND POWER OF ATTORNEY..........................................................15

10         SUSPENSE ACCOUNT.................................................................................16

11         SECURITY CONTINUING AND INDEPENDENT..............................................................16

12         FEES, COSTS AND EXPENSES.........................................................................17

13         REMEDIES AND WAIVER..............................................................................17

14         INDEMNITY AND LIABILITY..........................................................................18

15         RULING OFF.......................................................................................18

16         ILLEGALITY.......................................................................................19

17         CERTIFICATE OF SECURED PARTIES...................................................................19

18         AMALGAMATION AND CONSOLIDATION...................................................................19

19         CONVERSION OF CURRENCY...........................................................................19

20         AMENDMENT........................................................................................20

21         ASSIGNMENT.......................................................................................20

22         NOTICES..........................................................................................20

23         COUNTERPARTS.....................................................................................21

24         GOVERNING LAW AND JURISDICTION...................................................................21

SCHEDULE 1 .................................................................................................25

SCHEDULE 2 .................................................................................................25
</Table>


<PAGE>


                           SECURITY INTEREST AGREEMENT

THIS AGREEMENT is made on                      2005

BETWEEN

(1)      CANARGO LIMITED a company incorporated under the laws of Guernsey
         having its registered office at PO Box 291, St Peter Port, Guernsey
         (the "DEBTOR");

(2)      TETHYS PETROLEUM INVESTMENTS LIMITED a company incorporated under the
         laws of Guernsey having its registered office at PO Box 291, St Peter
         Port, Guernsey (the "COMPANY");

(3)      INGALLS & SNYDER LLC a company formed under the laws of New York having
         its office at 61 Broadway, New York, New York, USA as agent for the
         Secured Parties (the "SECURITY AGENT"); and

(4)      INGALLS & SNYDER VALUE PARTNERS L.P., NIKOLAOS D. MONOYIOS, THOMAS L.
         GIPSON, ARTHUR KOENIG, THOMAS L. GIPSON IRA, EVAN JANOVIC, ARTHUR
         ABLIN, FLEDGLING ASSOCIATES LLC, ADAM JANOVIC, NEIL JANOVIC, ANTHONY
         CORSO, JOHN GILMER, MARTIN SOLOMON all care of 61 Broadway, New York,
         NY 10006, USA as the purchasers (together the "SECURED PARTIES").

WHEREAS:

This Agreement is made between the parties hereto for the purposes of creating
security over the issued share capital of the Company held by the Debtor.

NOW IT IS HEREBY AGREED AS FOLLOWS:

1        DEFINITIONS AND INTERPRETATION

1.1      In this Agreement, the following words and expressions shall, except
         where the context otherwise requires, have the following meanings:

         "AFFILIATE" has the meaning ascribed to it in the Note Purchase
         Agreement;




                                       1
<PAGE>

         "BUSINESS DAY" means any day on which commercial banks are open for
         full banking business in Guernsey;

         "CANARGO ENERGY CORPORATION" means CanArgo Energy Corporation, a
         company incorporated under the laws of Delaware, having its registered
         office at 2711, Centreville Road, Suite 400, Wilmington, Delaware,
         19808 USA;

         "CANARGO GROUP MEMBER" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "CODE" has the meaning ascribed to it in the Note Purchase Agreement;

         "COLLATERAL" means the Securities, the Derivative Assets and the
         Derivative Rights;

         "DEFAULT" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "DERIVATIVE ASSETS" means all rights, moneys (including without
         limitation, distributions and dividends, interest and other property
         whatsoever which may from time to time at any time be derived from,
         accrue on or be offered in respect of, or incidental to or created or
         issued in substitution for the Securities whether by way of redemption,
         exchange, conversion, rights, bonus, capital reorganisation or
         otherwise howsoever;

         "DERIVATIVE RIGHTS" means all present and future right, title, benefit
         and interest in and to the Derivative Assets including without
         limitation all rights to subscribe for, convert other securities into
         or otherwise acquire any other shares, stock, debentures, debenture
         stock, loan stock, bonds or units of a unit trust scheme;

         "ENCUMBRANCE" means any mortgage, charge, pledge, lien, assignment,
         hypothecation, title retention, security interest, trust arrangement or
         any other agreement or arrangement which has the effect of creating
         security;

         "ERISA" has the meaning ascribed to it in the Note Purchase Agreement;

         "ERISA AFFILIATE" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "EVENTS OF DEFAULT" means any of the events or circumstances specified
         in Clause 7;


                                       2
<PAGE>


         "FOREIGN PENSION PLAN" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "GUARANTEE" means the Guaranty Agreement of even date herewith from
         Ninotsminda Oil Company Limited and others (including the Debtor) in
         favour of the Secured Parties;

         "KNOWLEDGE" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "LAW" means the Security Interests (Guernsey) Law, 1993;

         "LIEN" has the meaning ascribed to it in the Note Purchase Agreement;

         "LOAN DOCUMENTS" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "MATERIAL" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "MATERIAL ADVERSE EFFECT" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "MULTIEMPLOYER PLAN" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "NOTE PURCHASE AGREEMENT" means the note purchase agreement dated as of
         the date hereof between CanArgo Energy Corporation and the Secured
         Parties;

         "NOTES" mean the senior secured notes issued to the Secured Parties
         pursuant to the Note Purchase Agreement;

         "OBLIGATIONS" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "PERSON" has the meaning ascribed to it in the Note Purchase Agreement;

         "PLAN" has the meaning ascribed to it in the Note Purchase Agreement;

         "PROPERTIES" has the meaning ascribed to it in the Note Purchase
         Agreement;

         "REDEMPTION PRICE" has the meaning ascribed to it in the Note Purchase
         Agreement;


                                       3
<PAGE>


         "REQUIRED HOLDERS" means, at any time, the holders of at least 51 per
         cent. in principal amount of the Notes at the time outstanding
         (exclusive of the Notes then owned by CanArgo Energy Corporation, any
         of its Subsidiaries or any of its Affiliates);

         "RESPONSIBLE OFFICER" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "SECURED OBLIGATIONS" shall have the meaning given to it in Clause 3;

         "SECURITIES" means the shares specified in Schedule 1 and includes all
         of the Debtor's present and future right, title, benefit and interest
         in and to the Securities;

         "SECURITY DOCUMENTS" has the meaning ascribed to it in the Note
         Purchase Agreement;

         "SECURITY PERIOD" means the period commencing on the date hereof and
         terminating on the date upon which the Required Holders shall have
         determined that all of the Secured Obligations have been irrevocably
         and indefeasibly paid, performed and discharged in full; and

         "SUBSIDIARY" has the meaning ascribed to it in the Note Purchase
         Agreement.

1.2      The Secured Parties shall be the "SECURED PARTIES", the Debtor shall be
         the "DEBTOR" and the Events of Default shall be the "EVENTS OF DEFAULT"
         for the purposes of the Law.

1.3      References to the Secured Parties include their successors and assigns.
         References to the Debtor or the Company include their successors and
         permitted assigns, if any.

1.4      Words and expressions not otherwise defined in this Agreement shall be
         construed in accordance with the Law.

1.5      Except where the context otherwise requires, words denoting the
         singular include the plural and vice versa, words denoting a gender
         include every gender and references to persons include bodies corporate
         and unincorporate.


                                       4
<PAGE>


1.6      References to Recitals, Clauses and Schedules are, unless the context
         otherwise requires, references to recitals and clauses hereof and
         schedules hereto and references to Sub-clauses are, unless otherwise
         stated, references to the sub-clause of the clause in which the
         reference appears.

1.7      The Recitals and Schedules form part of this Agreement and shall have
         the same force and effect as if they were expressly set out in the body
         of this Agreement and any reference to this Agreement shall include the
         Recitals and Schedules.

1.8      Any reference to this Agreement or to any agreement or document
         referred to in this Agreement shall be construed as a reference to such
         agreement or document as amended, varied, modified, supplemented,
         restated, novated or replaced from time to time.

1.9      Any reference to any statute or statutory provision shall, unless the
         context otherwise requires, be construed as a reference to such statute
         or statutory provision as the same may have been or may be amended,
         modified, extended, consolidated, re-enacted or replaced from time to
         time.

1.10     Clause headings and the index are inserted for convenience only and
         shall not affect the construction of this Agreement.

2        GRANT OF SECURITY INTEREST

2.1      Without affecting, and in addition to, the Secured Parties' other
         rights under or pursuant to this Agreement, for the purpose of granting
         each Secured Party a first priority security interest in the Collateral
         pursuant to the Law the Debtor hereby:

         (a)      assigns the Collateral to the Security Agent; and

         (b)      delivers and agrees that the Security Agent or its nominees
                  shall have possession of the certificates of title to the
                  Securities.

2.2      The Debtor hereby agrees that the security interests created by
         Clause 2.1 may exist independently and concurrently.


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<PAGE>


2.3      Pursuant to Section 1(8) of the Law, the Company hereby agrees that it
         has received notice of and acknowledges the creation of a security
         interest over the Securities pursuant to this Agreement.

2.4      Upon the expiry of the Security Period, the Security Agent shall, at
         the request and expense of the Debtor, return to the Debtor the
         certificates of title to the Securities and/or assign, transfer or make
         over title to the Securities to the Debtor (as appropriate), without
         recourse or warranty, executing such documents as may be required to
         release the security created by this Agreement and shall thereby
         discharge the security created hereunder.

3        THE SECURED OBLIGATIONS

         The grants of security interest set out in Clause 2.1 shall secure as a
         continuing security for the payment and/or discharge on demand of the
         Guarantee and of all other present or future obligations, monies and
         liabilities of the Debtor to the Secured Parties which shall for the
         time being (and whether on or at any time after such demand) be or
         become due, owing or incurred to any Secured Party by the Debtor
         whether actually or contingently, solely or jointly with any other
         person or as principal or surety and including interest (whether simple
         or compound and as well after as before judgment) together with
         discount, commission and all other lawful charges and expenses
         (including, without limitation, legal fees and other professional fees
         plus disbursements) of the Secured Parties under the Guarantee
         (together the "SECURED OBLIGATIONS").

4        DEBTOR'S REPRESENTATIONS AND WARRANTIES

         The Debtor hereby represents and warrants to each Secured Party on the
         date hereof that:

         (a)      this Agreement constitutes the legal, valid and binding
                  obligations of the Debtor, and constitutes a valid first
                  priority security interest under the Law, enforceable against
                  the Debtor in accordance with its terms;

         (b)      no event has occurred or circumstance exists which constitutes
                  or with the giving of notice or lapse of time or both would
                  constitute an Event of Default;


                                       6
<PAGE>


         (c)      the Debtor and David Robson are the sole legal and the Debtor
                  is the sole beneficial owner of and has good title to the
                  Collateral subject only to the rights granted in favour of the
                  Secured Parties by this Agreement;

         (d)      the Securities constitute the entire issued capital of the
                  Company and have been duly authorised and validly issued and
                  are fully paid;

         (e)      the Collateral is free from all Encumbrances and rights of
                  set-off other than those created by this Agreement in favour
                  of the Secured Parties;

         (f)      the Debtor has the necessary power to execute, deliver and
                  perform its obligations under this Agreement; and the
                  execution, delivery and performance by the Debtor of this
                  Agreement and the consummation of the transactions
                  contemplated hereby have been duly authorized by all necessary
                  corporate action;

         (g)      all necessary authorisations or approvals or other actions by
                  and notices or filings with any governmental authority,
                  regulatory body or any other third party to enable the Debtor
                  to execute, deliver and perform this Agreement and the
                  perfection of the security interest created hereunder have
                  been obtained and are, in full force and effect;

         (h)      the execution, delivery and performance by the Debtor of this
                  Agreement and the consummation by the Debtor of the
                  transactions contemplated hereby do not:

                  (i)      require any consent or approval of any Person that
                           has not been obtained and each such consent or
                           approval that has been obtained is in full force and
                           effect;

                  (ii)     violate any provision of the memorandum and articles
                           of association of the Debtor;

                  (iii)    violate any provision of any statute, regulation,
                           order, injunction or judgement applicable to each
                           Debtor which violation could reasonably be expected
                           to have a Material Adverse Effect; or


                                       7
<PAGE>


                  (iv)     violate, result in a breach of or constitute a
                           default under any mortgage, indenture or any other
                           material agreement to which the Debtor is a party or
                           by which it or its property may be bound which
                           violation or breach could reasonably be expected to
                           have a Material Adverse Effect.

         (i)      there are no actions, suits, litigation, administrative
                  proceedings or other proceedings at law or in equity or by or
                  before any governmental authority or arbitral tribunal now
                  pending, or to the Knowledge of the Debtor, threatened against
                  or affecting the Collateral which could reasonably be expected
                  to have a Material Adverse Effect.

5        DEBTOR'S COVENANTS

         The Debtor covenants and undertakes to the Secured Parties that:

         (a)      contemporaneously with the execution and delivery of this
                  Agreement and otherwise from time to time and if and when the
                  Required Holders shall require, it shall deliver to the
                  Security Agent, or to its order for the rateable benefit of
                  the Secured Parties:

                  (i)      certificates of title in respect of the Securities,
                           together with undated and signed duly completed stock
                           transfer forms with the consideration left blank and
                           all related declarations of nomineeship/trust in
                           favour of the Secured Parties (if any);

                  (ii)     such other documents as the Required Holders shall
                           acting reasonably require to protect, maintain or
                           enforce their security interest or security interests
                           granted hereby; and

                  (iii)    at any time following the occurrence of an Event of
                           Default do all other acts and things as the Required
                           Holders may acting reasonably require in order to
                           transfer title of the Collateral or any part of it
                           into the name of the Security Agent or the name of
                           its nominees;

         (b)      it will promptly pay all payments to be made or becoming due
                  and discharge any lien which may arise on any of the
                  Securities;


                                       8
<PAGE>


         (c)      any of the Collateral not held by the Security Agent (or its
                  nominees) shall be held on trust for and to the Secured
                  Parties' order or otherwise as the Required Holders may
                  require from time to time;

         (d)      at any time after the occurrence of an Event of Default which
                  is thereafter continuing unremedied and unwaived, and if and
                  when the Required Holders shall require, distributions,
                  dividends, interest or other income declared or payable on any
                  of the Securities shall be paid or assigned to the Security
                  Agent for the rateable benefit of the Secured Parties which it
                  shall then be entitled to apply as though they were proceeds
                  of sale or application provided, however, until the occurrence
                  of an Event of Default which is continuing, Debtor shall be
                  entitled to receive and retain all distributions, dividends,
                  interest or other income declared or payable on any of the
                  Securities;

         (e)      at any time after the occurrence of an Event of Default which
                  is thereafter continuing unremedied and unwaived the Security
                  Agent will forthwith exercise all voting, consensual and other
                  powers and rights attaching to the Securities in such manner
                  as the Required Holders may direct from time to time and, in
                  the absence of such direction, only with the object of
                  preserving or enhancing the value of the Securities provided,
                  however, until the occurrence of an Event of Default which is
                  continuing, Debtor shall be entitled to exercise all voting,
                  consensual and other powers and rights attaching to the
                  Securities;

         (f)      immediately upon receipt of any report, accounts, circular,
                  offer or notice received by the Debtor (or, as the case may
                  be, its nominee) in respect of, or which may affect, the
                  Securities, it shall deliver a copy to the Security Agent with
                  notice that it relates to this Agreement;

         (g)      it will not unless authorised in writing by the Required
                  Holders:

                  (i)      except as set out in this Agreement or the Note
                           Purchase Agreement to any extent sell, assign, grant
                           any option with respect to or otherwise dispose of or
                           create an Encumbrance over or agree to any extent to
                           sell, assign, grant any option with respect to,
                           dispose of or encumber the Collateral; or


                                       9
<PAGE>


                  (ii)     negotiate, settle or waive any claim for loss, damage
                           or other compensation affecting the Collateral;

         (h)      it will do everything in its power to prevent any person from
                  becoming entitled to claim any right over the Collateral;

         (i)      it will do or cause to be done everything necessary to help
                  the Security Agent to:

                  (i)      confirm or protect the interest of the Secured
                           Parties in the Collateral; and

                  (ii)     exercise any of its or the Secured Parties ' rights
                           under this Agreement.

         (j)      it will charge in favour of the Secured Parties, immediately
                  upon its acquisition (directly or indirectly) thereof, any and
                  all additional shares of stock or other securities of the
                  Company not otherwise hereby charged.

6        LIEN

         Without affecting, and in addition to, the grant of security interest
         and other rights hereunder, the Debtor hereby agrees that the Secured
         Parties shall, for so long as any amount remains outstanding under or
         in respect of the Secured Obligations, have a lien over the Securities.

7        EVENTS OF DEFAULT

7.1      There shall be an Event of Default if there occurs or exists any event
         described as or constituting an Event of Default under the Note
         Purchase Agreement namely:

         (a)      CanArgo Energy Corporation defaults in the payment of any
                  principal at the applicable Redemption Price (if any) on any
                  Note when the same becomes due and payable, whether at
                  maturity or at a date fixed for prepayment or by declaration
                  or otherwise; or

         (b)      CanArgo Energy Corporation defaults in the payment of any
                  interest on any Note or in the payment of any expenses due
                  hereunder or under any Security

                                       10
<PAGE>


                  Document for more than five Business Days after the same
                  becomes due and payable; or

         (c)      CanArgo Energy Corporation defaults in the performance of or
                  compliance with any term contained in sections 9.6, 10.11,
                  11.2, 11.3, 11.4, 11.6, 11.7, 11.8, 11.9, 11.10 or 11.11 of
                  the Note Purchase Agreement (an extract of such sections from
                  the Note Purchase Agreement are set out in Schedule 2 hereof);
                  or

         (d)      CanArgo Energy Corporation defaults in the performance of or
                  compliance with any term contained in the Note Purchase
                  Agreement (other than those referred to in paragraphs (a), (b)
                  or (c) above) and such default is not remedied within 30 days
                  after the earlier of (i) a Responsible Officer obtaining
                  actual and not constructive knowledge of such default and (ii)
                  CanArgo Energy Corporation receiving written notice of such
                  default from any holder of a Note (any such written notice to
                  be identified as a "notice of default" and to refer
                  specifically to paragraph (d) of Section 12 of the Note
                  Purchase Agreement); or

         (e)      any representation or warranty made in writing by or on behalf
                  of CanArgo Energy Corporation or any other CanArgo Group
                  Member or by any officer of CanArgo Energy Corporation or any
                  other CanArgo Group Member (including the Company) in the Note
                  Purchase Agreement, in any Security Document or in writing
                  furnished in connection with the transactions contemplated
                  hereby proves to have been false or incorrect in any Material
                  respect on the date as of which made; or

         (f)      CanArgo Energy Corporation or any other CanArgo Group Member
                  including the Company (i) is generally not paying, or admits
                  in writing its inability to pay, its debts as they become due,
                  (ii) files, or consents by answer or otherwise to the filing
                  against it of, a petition for relief or reorganization or
                  arrangement or any other petition in bankruptcy, for
                  liquidation or to take advantage of any bankruptcy,
                  insolvency, reorganization, moratorium or other similar law of
                  any jurisdiction, (iii) makes an assignment for the benefit of
                  its creditors, (iv) consents to the appointment of a
                  custodian, receiver, trustee or


                                       11
<PAGE>
                  other officer with similar powers with respect to it or with
                  respect to any substantial part of its property, (v) is
                  adjudicated as insolvent or to be liquidated, or (vi) takes
                  corporate action for the purpose of any of the foregoing; or

         (g)      a court or governmental authority of competent jurisdiction
                  enters an order appointing a custodian, receiver, trustee or
                  other officer with similar powers with respect to it or with
                  respect to any substantial part of its property, or
                  constituting an order for relief or approving a petition for
                  relief or reorganization or any other petition in bankruptcy
                  or for liquidation or to take advantage of any bankruptcy or
                  insolvency law of any jurisdiction, or ordering the
                  dissolution, winding-up or liquidation of CanArgo Energy
                  Corporation or any other CanArgo Group Member including the
                  Company, or any such petition shall be filed against CanArgo
                  Energy Corporation or any other CanArgo Group Member including
                  the Company and such petition shall not be dismissed or stayed
                  pending appeal within 90 days, or are not discharged within 60
                  days after the expiration of such stay; or

         (h)      a final judgment or judgments for the payment of money
                  aggregating in excess of US$2,500,000 (to the extent not
                  covered by insurance) are rendered against CanArgo Energy
                  Corporation or any other CanArgo Group Member including the
                  Company and which judgments are not, within 90 days after
                  entry thereof, bonded, discharged, finally settled or stayed
                  pending appeal, or are not discharged within 60 days after the
                  expiration of such stay; or

         (i)      if (i) any Plan subject to ERISA shall fail to satisfy the
                  minimum funding standards of ERISA or the Code for any plan
                  year or part thereof or a waiver of such standards or
                  extension of any amortization period is sought or granted
                  under section 412 of the Code, (ii) a notice of intent to
                  terminate any Plan subject to ERISA shall have been or is
                  reasonably expected to be filed with the Pension Benefit
                  Guaranty Corporation referred to and defined in ERISA or any
                  successor thereto ("PBGC") or the PBGC shall have instituted
                  proceedings under ERISA section 4042 to terminate or appoint a
                  trustee to administer any such Plan or the PBGC shall have
                  notified CanArgo Energy Corporation or any ERISA Affiliate or
                  other Affiliate that a Plan subject to


                                       12
<PAGE>


                  ERISA may become a subject of any such proceedings, (iii) the
                  aggregate "amount of unfunded benefit liabilities" (within the
                  meaning of section 4001(a)(18) of ERISA) under all Plans
                  subject to ERISA, determined in accordance with Title IV of
                  ERISA shall exceed US$500,000, (iv) CanArgo Energy Corporation
                  or any ERISA Affiliate or other Affiliate shall have incurred
                  or is reasonably expected to incur any liability pursuant to
                  Title I or IV of ERISA or the penalty or excise tax provisions
                  of the Code relating to employee benefit plans subject to
                  ERISA in excess of $500,000, (v) the present value of the
                  accrued benefit liabilities (whether or not vested) under each
                  Foreign Pension Plan maintained by CanArgo Energy Corporation
                  or an ERISA Affiliate, determined as of the end of its most
                  recently ended fiscal year on the basis of actuarial
                  assumptions, each of which is reasonable, exceeds the current
                  value of the assets of such Foreign Pension Plan allocable to
                  such benefit liabilities by US$500,000 or more, (vi) either
                  CanArgo Energy Corporation or any other CanArgo Group Member
                  (including the Company) incurs a Material liability pursuant
                  to any Foreign Pension Plan which could reasonably be expected
                  to have a Material Adverse Effect, (vii) CanArgo Energy
                  Corporation or any ERISA Affiliate or other Affiliate
                  withdraws from any Multiemployer Plan, or (viii) CanArgo
                  Energy Corporation or any other CanArgo Group Member
                  establishes or amends any employee welfare benefit plan that
                  provides post-employment welfare benefits in a manner that
                  would increase the liability of CanArgo Energy Corporation or
                  any other CanArgo Group Member including the Company
                  thereunder in any Material respect; and any such event or
                  events described in clauses (i) through (viii) above, either
                  individually or together with any other such event or events,
                  has a Material Adverse Effect;

         (j)      (i) the Note Purchase Agreement, the Notes, any Security
                  Document, or any other Loan Document ceases to be in full
                  force and effect (except in accordance with its terms) or is
                  declared null and void or the validity or enforceability is
                  contested or challenged by CanArgo Energy Corporation, any
                  Affiliate of CanArgo Energy Corporation (including the Debtor
                  and the Company) or any of their respective partners or
                  shareholders; (ii) CanArgo Energy Corporation denies that it
                  has any further liability or obligation under


                                       13
<PAGE>

                  any of the Loan Documents prior to the indefeasible
                  satisfaction in full of all Obligations under the Loan
                  Documents; or (iii) any of the Liens and security interest
                  granted to the Secured Parties under the Security Documents
                  cease to be valid or perfected or cease to have the priority
                  required hereby or under the Security Documents prior to the
                  indefeasible satisfaction in full of all Obligations under the
                  Loan Documents, other than as a result of the action or
                  omission by any of the Secured Parties or holder; or

         (k)      CanArgo Energy Corporation or any other CanArgo Group Member
                  (including the Company) modifies or amends any of its
                  constitutional documents in any Material manner without the
                  Required Holders' prior written consent, unless any such
                  amendment will not result in a Default or Event of Default
                  (without regard to this paragraph) and will not adversely
                  affect the rights of the holders under the Loan Documents; or

         (l)      a change occurs in the consolidated financial condition of
                  CanArgo Energy Corporation or in the physical, operational or
                  financial status of the Properties, which change is not
                  otherwise described in this section and has a Material Adverse
                  Effect and which has not been remedied pursuant to paragraph
                  (d) above.

7.2      Any failure on the part of the Debtor to discharge any of its
         obligations and liabilities and/or to pay any monies to any of the
         Secured Parties when due under the Guarantee.

8        ENFORCEMENT BY THE SECURED PARTIES

8.1      At any time following the occurrence of an Event of Default, which is
         thereafter continuing unremedied and unwaived and provided that the
         Security Agent has served on the Debtor a notice specifying the
         particular Event of Default complained of:

         (a)      the power of sale or application under the Law shall become
                  exercisable over the Collateral without any order of the Royal
                  Court of Guernsey;

         (b)      the power of sale or application may be exercised in such
                  manner and for such consideration (whether payable
                  immediately, by instalments or otherwise deferred) as the
                  Required Holders shall in their absolute discretion determine;


                                       14
<PAGE>


         (c)      for the purposes of this Agreement, references to the exercise
                  of the "POWER OF SALE OR APPLICATION" shall include any method
                  or process by which value is given, allowed or credited by the
                  Required Holders for the Collateral against the Secured
                  Obligations;

         (d)      the Security Agent acting at the written instruction of the
                  Required Holders, may exercise and be entitled to any and all
                  rights of an owner of the Collateral subject hereto; and

         (e)      the Security Agent may, at the written instruction of the
                  Required Holders, collect, receive or compromise and give a
                  good discharge for any and all monies and claims for monies
                  due and to become due for the time being comprised in the
                  Collateral subject hereto.

8.2      Neither the Security Agent nor the Required Holders shall be under any
         liability to the Debtor for any failure to apply and distribute the
         proceeds of sale or application of the Collateral in accordance with
         the Law if the Required Holders apply or direct the Security Agent to
         apply and distribute such proceeds in good faith without further
         enquiry and in accordance with the information expressly known to them
         at the time of the application and distribution.

8.3      The exercise by the Secured Parties of any right or power of sale or
         application under this Clause 8 shall not constitute a waiver or
         release of nor the exercise of any other right or power of sale or
         application held by any Secured Party unless expressly stated in
         writing.

8.4      For the purposes of this Clause 8, time shall be of the essence with
         regard to the performance by the Debtor of the Secured Obligations.

9        FURTHER ASSURANCE AND POWER OF ATTORNEY

9.1      The Debtor agrees that it shall from time to time upon the written
         request of the Required Holders promptly do all such things and execute
         and deliver all such instruments and documents (including, without
         limitation, any replacement or supplemental security) as the Required
         Holders may consider necessary or desirable


                                       15
<PAGE>


         for creating the security contemplated hereby, giving full effect to
         this Agreement or for securing or protecting the rights of the Secured
         Parties hereunder.

9.2      In accordance with the Powers of Attorney and Affidavits (Bailiwick of
         Guernsey) Law, 1995 (the "POWERS OF ATTORNEY LAW"), for the purpose of
         facilitating the exercise of the powers of the Secured Parties under
         the Law and the powers given pursuant to this Agreement, the Debtor
         hereby irrevocably appoints the Security Agent, acting upon the written
         instructions of the Required Holders, as the Debtor's true and lawful
         attorney (with full power of substitution and delegation) with
         authority in the name of and on behalf of the Debtor upon the
         occurrence of an Event of Default which is continuing to sign, execute,
         seal, deliver, complete, acknowledge, file, register and perfect any
         and all assurances, documents, transfers, instruments, agreements,
         certificates and consents whatsoever and to do any and all such acts
         and things in relation to any matters dealt with in this Agreement and
         which the Required Holders may deem necessary or advisable in order to
         give full effect to this Agreement (including, without limitation,
         anything referred to in Clause 8 (Enforcement by the Secured Parties))
         and anything to perfect its security over the Collateral. The Debtor
         further covenants with the Secured Parties to ratify and confirm any
         lawful exercise or purported exercise of this power of attorney.

10       SUSPENSE ACCOUNT

         All monies received, recovered or realised by the Security Agent under
         this Agreement may, at the discretion of the Required Holders, be
         credited to a separate or suspense account for so long as the Required
         Holders may think fit without any intermediate obligation on the part
         of the Security Agent or the Secured Parties to apply the same in or
         towards payment and discharge of the Secured Obligations.

11       SECURITY CONTINUING AND INDEPENDENT

         The security constituted by this Agreement:

         (a)      shall not be discharged by any partial or intermediate payment
                  or performance of the Secured Obligations;


                                       16
<PAGE>


         (b)      shall take effect as a security for the whole and every part
                  of the payment or performance of the Secured Obligations and
                  shall be independent of and in addition to, and it shall not
                  be prejudiced or be affected by and shall not affect or
                  prejudice, any other security now or hereafter held by any
                  Secured Party in respect of the payment or performance of all
                  or any part of the Secured Obligations; and

         (c)      shall not be in any way discharged, impaired or otherwise
                  affected by reason of any of the Secured Obligations becoming
                  illegal, void, voidable, invalid or unenforceable or by reason
                  of any other act, circumstance or omission which might but for
                  provisions of this Clause 11 constitute a discharge of such
                  security.

12       FEES, COSTS AND EXPENSES

12.1     Subject to the provisions of Section 10.9 of the Note Purchase
         Agreement, the Debtor agrees to reimburse the Security Agent on demand
         for all fees (including legal fees), costs and expenses incurred by the
         Security Agent in connection with or relating to the negotiation,
         preparation and/or execution of this Agreement, the creation,
         preservation and/or enforcement of any of the Secured Party's rights
         under this Agreement or the exercise or purported exercise of any of
         the powers arising pursuant to this Agreement.

12.2     All such fees, costs and expenses shall be reimbursed by the Debtor on
         a full indemnity basis.

13       REMEDIES AND WAIVER

         Time shall be of the essence of this Agreement but no failure by the
         Security Agent or any Secured Party to exercise, nor any delay by the
         Security Agent or any Secured Party in exercising, any right or remedy
         hereunder shall operate as a waiver hereof nor shall any single or
         partial exercise prevent any further or other exercise thereof or the
         exercise of any other right or remedy. The rights and remedies provided
         herein are cumulative and not exclusive of any rights or remedies
         provided by law, which may be exercised at the Required Holders'
         discretion.


                                       17
<PAGE>


14       INDEMNITY AND LIABILITY

14.1     The Debtor will indemnify and keep indemnified the Secured Parties and
         the Security Agent and/or its nominees (if any) on demand against each
         and every loss, action, claim, expense (including legal expenses), cost
         and liability which the Secured Parties or the Security Agent and/or
         its nominees may incur as holder of the Collateral or which may be
         properly incurred in or in connection with the preservation and/or
         enforcement of any of the Secured Parties' rights under this Agreement
         or flowing from the exercise or purported exercise of any of the powers
         arising under any of the provisions of this Agreement save where such
         loss, action, claim, expense, cost or liability arises as the result of
         the gross negligence or wilful misconduct of either of the Security
         Agent or any of the Secured Parties.

14.2     Without prejudice to any other provision hereof:


14.2.1      the obligations of the Security Agent to the Secured Parties and to
            the Debtor shall not be and/or shall be deemed not to be fiduciary
            in nature;


14.2.2      the provisions of the Trusts (Guernsey) Law, 1989 shall not apply to
            the Security Agent in respect of its duties under this Agreement;
            and


14.2.3      the obligations of the Security Agent to the Secured Parties and to
            the Debtor shall be limited to (a) its obligations as expressed in
            this Agreement and (b) in accordance with the written authorisation
            of the Required Holders, where such authorisation is required.

14.3     Notwithstanding any other provision of this Agreement, hereof neither
         the Security Agent nor its nominees nor any of the Secured Parties
         shall be liable by reason of (a) taking any action permitted by this
         Agreement, (b) any neglect or default in connection with the Collateral
         or (c) the taking possession or realisation of all or any part of the
         Collateral, except in the case of gross negligence or wilful default
         upon their part.

15       RULING OFF

         In the event of the affairs of the Debtor being declared en etat de
         desastre or the commencement of any form of bankruptcy or insolvency
         proceeding affecting the


                                       18
<PAGE>


         Debtor or of all or any part of this Agreement ceasing for any reason
         to be binding on the Debtor or if the Security Agent receives notice
         (actual or otherwise) of any other or subsequent Encumbrance affecting
         the Collateral, the Required Holders may at any time rule off the
         Debtor's obligations. No monies paid thereafter by the Debtor to the
         Security Agent for the rateable benefit of the Secured Parties shall
         thereby discharge or reduce the amount recoverable pursuant to this
         Agreement. If the Required Holders in any of the above cases do not
         rule off the obligations of the Debtor it shall nevertheless be treated
         as if they had done so at the time when the Security Agent first had
         notice (actual or otherwise) of the event in question and all payments
         made by or on behalf of the Debtor to the Security Agent for the
         rateable benefit of the Secured Parties shall not operate to reduce the
         amount recoverable pursuant to this Agreement.

16       ILLEGALITY

         If at any time one or more of the provisions of this Agreement becomes
         invalid, illegal or unenforceable in any respect, that provision shall
         be severed from the remainder and the validity, legality and
         enforceability of the remaining provisions of this Agreement shall not
         be affected or impaired in any way.

17       CERTIFICATE OF SECURED PARTIES

         Any certificate submitted by the Security Agent to the Debtor as to the
         amount of the Debtor's obligations or any part of them shall (in the
         absence of manifest error) be conclusive and binding on the Debtor at
         the relevant time.

18       AMALGAMATION AND CONSOLIDATION

         The rights and benefits of each Secured Party under this Agreement
         shall remain valid and binding for all purposes notwithstanding any
         change, amalgamation, consolidation, migration or otherwise which may
         be made in the constitution of such Secured Party and shall be
         available to such entity as shall carry on the business of that Secured
         Party for the time being.

19       CONVERSION OF CURRENCY

         All monies received or held by the Security Agent subject to this
         Agreement may at any time, after the occurrence of an Event of Default,
         be converted into such other


                                       19
<PAGE>


         currency as the Required Holders consider necessary or desirable to
         satisfy the Secured Obligations in that other currency at the then
         prevailing spot rate of exchange of the JP Morgan Chase Bank (as
         conclusively determined by the Required Holders) for purchasing that
         other currency with the original currency.

20       AMENDMENT

         No variation or amendment of this Agreement shall be valid unless in
         writing and signed by or on behalf of Debtor, the Company and the
         Security Agent, acting upon written instructions of the Required
         Holders.

21       ASSIGNMENT

21.1     Any Secured Party at any time may grant a participation in or make an
         assignment or transfer or otherwise dispose of, the whole or any part
         of its rights and benefits under this Agreement. Subject to the
         provisions of Section 21 of the Note Purchase Agreement, for the
         purpose of any such participation, assignment, transfer or disposal,
         the Security Agent may disclose information about the Debtor and the
         financial condition of the Debtor as may have been made available to
         the Security Agent by the Debtor or which is otherwise publicly
         available.

21.2     Except with the written consent of the Required Holders, neither the
         Debtor nor the Company shall assign or transfer all or any part of
         their respective rights, benefits and/or obligations under this
         Agreement.

22       NOTICES

         All notices with respect to this Agreement shall be delivered by hand
         or sent by first class post to the address of the addressee as set out
         in this Agreement with respect to the Security Agent or Section 19 in
         the Note Purchase Agreement or to such other address as the addressee
         may from time to time have notified for the purpose of this Clause 22
         or to any other "PROPER ADDRESS" as defined in the Law, or sent by
         facsimile transmission ("FAX") and shall be deemed to have been
         received:

         (a)      if sent by first class prepaid post, five Business Days after
                  posting;

         (b)      if delivered by hand, on the day of delivery; and


                                       20
<PAGE>


         (c)      if sent by fax, at the time of transmission provided that the
                  sender shall receive a successful transmission report.

         If the Debtor is a body corporate registered outside the Island of
         Guernsey, it shall appoint a process agent in the Island of Guernsey to
         accept service of notices pursuant to this Agreement on its behalf,
         such appointment to take effect from the date of this Agreement, and it
         shall promptly notify the Security Agent in writing of the identity and
         address of such process agent from time to time.

23       COUNTERPARTS

         This Agreement may be executed in any number of counterparts each of
         which shall be an original but which shall together constitute one and
         the same instrument.

24       GOVERNING LAW AND JURISDICTION

24.1     This Agreement shall be governed by and construed in accordance with
         the laws of the Island of Guernsey and the parties hereby irrevocably
         agree for the exclusive benefit of the Secured Parties that the courts
         of the Island of Guernsey are to have jurisdiction to settle any
         disputes which arise out of or in connection with this Agreement and
         that accordingly any suit, action or proceeding arising out of or in
         connection with this Agreement (in this Clause referred to as
         "PROCEEDINGS") may be brought in such court.

24.2     Nothing contained in this Clause shall limit the right of any Secured
         Party to take Proceedings against the Debtor or the Company in any
         other court of competent jurisdiction nor shall the taking of
         proceedings in one or more jurisdiction preclude the taking of
         Proceedings in any other jurisdiction, whether concurrently or not.

24.3     The Debtor and the Company each irrevocably waive (and irrevocably
         agrees not to raise) any objection which either may have now or
         hereafter to laying of the venue of any Proceedings in any such court
         as referred to in this Clause and any claim that any such Proceedings
         have been brought in an inconvenient forum and further irrevocably
         agree that a judgment in any Proceedings brought in any such court as
         is referred to in this Clause shall be conclusive and binding upon the
         Debtor and/or the Company (as the case may be) and may be enforced in
         the court of any other jurisdiction.


                                       21
<PAGE>


AS WITNESS WHEREOF have caused this Agreement to be duly executed the day and
year first above written.


                                       22
<PAGE>


SIGNED for and on behalf of
CANARGO LIMITED
by:

Name:                                ------------------------------------------

Title:


SIGNED for and on behalf of
TETHYS PETROLEUM INVESTMENTS LIMITED
by:

Name:                                ------------------------------------------

Title:


SIGNED for and on behalf of
INGALLS & SNYDER LLC
by:

Name:                                ------------------------------------------

Title:


SIGNED for and on behalf of
INGALLS & SNYDER VALUE
PARTNERS L.P.
by:

Name:                                ------------------------------------------

Title:


SIGNED by
NIKOLAOS D MONOYIOS                  ------------------------------------------


SIGNED by
THOMAS L GIPSON                      ------------------------------------------


                                       23
<PAGE>


SIGNED by
ARTHUR KOENIG                        ------------------------------------------


SIGNED by
THOMAS L GIPSON IRA                  ------------------------------------------


SIGNED by
EVAN JANOVIC                         ------------------------------------------


SIGNED by
ARTHUR ABLIN                         ------------------------------------------

SIGNED for and on behalf of
FLEDGLING ASSOCIATES LLC
by:

Name:                                ------------------------------------------

Title:

SIGNED by
ADAM JANOVIC                         ------------------------------------------


SIGNED by
NEIL JANOVIC                         ------------------------------------------


SIGNED by
ANTHONY CORSO                        ------------------------------------------


SIGNED by
JOHN GILMER                          ------------------------------------------


SIGNED by
MARTIN SOLOMON                       ------------------------------------------


                                       24
<PAGE>


                                   SCHEDULE 1


99,990 ordinary shares of Pound Sterling0.10 each in the Company registered in
the name of the Debtor

10 ordinary shares of Pound Sterling0.10 each in the Company registered in the
name of David Robson.


                                       25
<PAGE>


                                   SCHEDULE 2

                    EXTRACTS FROM THE NOTE PURCHASE AGREEMENT



SECTION 9.6 CHANGE IN CONTROL

         (a)      NOTICE OF CHANGE IN CONTROL OR CONTROL EVENT. CanArgo Energy
                  Corporation will, within five Business Days after any
                  Responsible Officer has actual and not constructive knowledge
                  of the occurrence of any Change in Control or Control Event,
                  give written notice of such Change in Control or Control Event
                  to each holder of Notes unless notice in respect of such
                  Change in Control (or the Change in Control contemplated by
                  such Control Event) shall have been given pursuant to
                  subparagraph (b) of this Section 9.6. If a Change in Control
                  has occurred, such notice shall contain and constitute an
                  offer to prepay Notes as described in Section 9.6(c) and shall
                  be accompanied by the certificate described in Section 9.6(f).

         (b)      CONDITION TO COMPANY ACTION. CanArgo Energy Corporation will
                  not take any action that consummates or finalises a Change in
                  Control unless: (i) at least 15 Business Days prior to such
                  action it shall have given to each holder of Notes written
                  notice containing and constituting an offer to prepay Notes as
                  described in Section 9.6(c) accompanied by the certificate
                  described in Section 9.6(f), and (ii) contemporaneously with
                  the action taken to consummate or finalise any such Change in
                  Control, it prepays all Notes required to be prepaid in
                  accordance with this Section 9.6.

         (c)      OFFER TO PREPAY NOTES. The offer to prepay Notes contemplated
                  by subparagraphs (a) and (b) of this Section 9.6 shall be an
                  offer to prepay, in accordance with and subject to this
                  Section 9.6 all, but not less than all, the Notes held by each
                  holder (in this case only, "holder" in respect of any Note
                  registered in the name of a nominee for a disclosed beneficial
                  owner shall mean such beneficial owner) on a date specified in
                  such offer (the "Proposed Prepayment Date"). If such Proposed
                  Prepayment Date is in connection with an offer contemplated by
                  subparagraph (a) of this Section 9.6, such date shall be not
                  less than 30 days and not more than 90 days after the date of
                  such offer (if the Proposed Prepayment Date shall not be
                  specified in such offer, the Proposed Prepayment Date shall be
                  the 30th day after the date of such offer).

         (d)      ACCEPTANCE. A Purchaser may accept the offer to prepay made
                  pursuant to this Section 9.6 by causing notice of such
                  acceptance to be delivered to CanArgo Energy Corporation at
                  least 15 days prior to the Proposed Payment Date. A failure by
                  a Purchaser to respond to an offer to prepay made pursuant to
                  this Section 9.6 shall be deemed to constitute an acceptance
                  of such offer by such Purchaser.

         (e)      PREPAYMENT. Prepayment of the Notes to be prepaid pursuant to
                  this Section 9.6 shall be the Redemption Price of such Notes,
                  together with interest on such


                                       26
<PAGE>


                  Notes accrued to the date of prepayment. The prepayment shall
                  be made on the Proposed Prepayment Date.

         (f)      OFFICER'S CERTIFICATE. Each offer to prepay the Notes pursuant
                  to this Section 9.6 shall be accompanied by a certificate,
                  executed by a Senior Financial Officer of CanArgo Energy
                  Corporation and dated the date of such offer, specifying: (i)
                  the Proposed Prepayment Date; (ii) that such offer is made
                  pursuant to this Section 9.6; (iii) the principal amount of
                  each Note offered to be prepaid; (iv) the interest that would
                  be due on each Note offered to be prepaid, accrued to the
                  Proposed Prepayment Date; (v) that the conditions of this
                  Section 9.6 have been fulfilled; and (vi) in reasonable
                  detail, the nature and date or proposed date of the Change of
                  Control.

         (g)      EFFECT ON REQUIRED PAYMENTS. The amount of each payment of the
                  principal of the Notes made pursuant to this Section 9.6 shall
                  be applied against and reduce each of the then remaining
                  principal payments due pursuant to Section 9.6 by a percentage
                  equal to the aggregate principal amount of the Notes so paid
                  divided by the aggregate principal amount of the Notes
                  outstanding immediately prior to such payment.

         (h)      "CHANGE IN CONTROL" DEFINED. "Change in Control" means (a)
                  CanArgo Energy Corporation shall at any time cease to be a
                  publicly held company or cease to have its capital stock
                  traded on an exchange; or (b) a transaction or series of
                  related transactions pursuant to which: (i) at least fifty-one
                  percent (51%) of the outstanding shares of Common Stock of
                  CanArgo Energy Corporation or, on a fully diluted basis, shall
                  subsequent to the date of the Note Purchase Agreement be owned
                  by any Person (as hereinafter defined) which is not related to
                  or Affiliated with CanArgo Energy Corporation; (ii) CanArgo
                  Energy Corporation merges into or with, consolidates with or
                  effects any plan of share exchange or other combination with
                  any Person which is not related to or Affiliated with CanArgo
                  Energy Corporation, or (iii) CanArgo Energy Corporation
                  disposes of all or substantially all of its assets other than
                  in the ordinary course of business.

         (i)      "CONTROL EVENT" DEFINED. "Control Event" means:

                  (i)      the execution of any CanArgo Group Member of any
                           agreement or letter of intent with respect to any
                           proposed transaction or event or series of
                           transactions or events which, individually or in the
                           aggregate, may reasonably be expected to result in a
                           Change in Control, or

                  (ii)     the execution of any written agreement which, when
                           fully performed by the parties thereto, would result
                           in a Change in Control.

SECTION 10.11 TERMINATION OF CORNELL FACILITIES.

         Within ten Business days after the Closing, CanArgo Energy Corporation
         shall deliver to Purchasers: (a) reasonably satisfactory evidence of
         the payment of all CanArgo Energy Corporation's obligations under the
         Cornell Facility and any other agreements relating to or arising out of
         the Cornell Facility by the payment of the


                                       27
<PAGE>


         Cornell Facility in full and in cash with the proceeds from the
         issuance of the Notes; and (b) a copy of the notice of termination
         delivered under the Cornell Facility.

SECTION 11.2 MERGER, CONSOLIDATION, ETC.

         CanArgo Energy Corporation will not, and will not permit any other
         CanArgo Group Member to, consolidate with or merge with any other
         corporation or convey, transfer or lease substantially all of its
         assets in a single transaction or series of transactions to any Person
         (except that a Material Subsidiary of CanArgo Energy Corporation may:
         (x) consolidate with or merge with, or convey, transfer or lease
         substantially all of its assets in a single transaction or series of
         transactions to, another Material Subsidiary or CanArgo Energy
         Corporation; and (y) convey, transfer or lease all of its assets in
         compliance with the provisions of Section 11.8 provided immediately
         after giving effect to such transaction, no Default or Event of Default
         shall have occurred and be continuing).

SECTION 11.3 LIENS.

         CanArgo Energy Corporation will not, and will not permit any other
         CanArgo Group Member to, directly or indirectly create, incur, assume
         or permit to exist (upon the happening of a contingency or otherwise)
         any Lien on or with respect to any property or asset (including,
         without limitation, any document or instrument in respect of goods or
         accounts receivable) of CanArgo Energy Corporation or any such other
         CanArgo Group Member, whether now owned or held or hereafter acquired,
         or any income or profits therefrom, or assign or otherwise convey any
         right to receive income or profits, except:

         (a)      Liens for taxes, assessments or other governmental charges or
                  levies the payment of which is not at the time required by
                  Section 10.4;

         (b)      statutory Liens of landlords, Governmental Authorities and
                  Liens of carriers, operators, vendors, equipment lessors,
                  warehousemen, mechanics, repairmen, suppliers, workers,
                  construction materialmen and other similar Liens and other
                  like Liens incident of the exploration, development, operation
                  and maintenance of oil and gas properties, in each case,
                  incurred in the ordinary course of business for sums not yet
                  due or the payment of which is not at the time required by
                  Section 10.4;

         (c)      Liens (other than any Lien imposed by ERISA) incurred or
                  deposits made in the ordinary course of business: (i) in
                  connection with workers' compensation, unemployment insurance
                  and other types of social security or retirement benefits, or
                  (ii) to secure (or to obtain letters of credit that secure)
                  the performance of tenders, statutory obligations, surety
                  bonds, appeal bonds, bids, trade contracts, leases (other than
                  Capital Leases), government contracts, performance bonds,
                  purchase construction or sales contracts, regulatory
                  obligations and other similar obligations, in each case not
                  incurred or made in connection with the borrowing of money,
                  the obtaining of advances or credit or the payment of the
                  deferred purchase price of the property;

         (d)      any attachment or judgment Lien, not giving rise to an Event
                  of Default;


                                       28
<PAGE>


(e)               leases or subleases granted to others, easements,
                  reservations, servitudes, permits, conditions, covenants,
                  exceptions, rights-of-way, restrictions and other similar
                  charges or encumbrances, in each case incidental to, and not
                  interfering with, the ordinary conduct of the business of
                  CanArgo Energy Corporation or any of its Subsidiaries,
                  provided that such Liens do not, in the aggregate, materially
                  detract from value of such property;

(f)               any Lien created to secure all or any part of the purchase
                  price, or to secure Indebtedness incurred or assumed to pay
                  all or any part of the purchase price or cost of construction,
                  of property (or any improvement thereon) acquired or
                  constructed by CanArgo Energy Corporation or any other CanArgo
                  Group Member after the date of the Closing, provided that:

                  (i)      any such Lien shall extend solely to the item or
                           items of such property (or improvement thereon) so
                           acquired, leased or constructed and, if required by
                           the terms of the instrument originally creating such
                           Lien, other property (or improvement thereon) which
                           is an improvement to or is acquired for specific use
                           in connection with such acquired, leased or
                           constructed property (or improvement thereon) or
                           which is real property being improved by such
                           acquired, leased or constructed property (or
                           improvement thereon),

                  (ii)     the principal amount of the Indebtedness secured by
                           any such Lien shall at no time exceed an amount equal
                           to 80% (but 100% in the case of property (or
                           improvement thereon) the acquisition of which is
                           financed through a Capital Lease Obligation) of the
                           lesser of: (A) the cost to CanArgo Energy Corporation
                           or such other CanArgo Group Member of the property
                           (or improvement thereon) so acquired or constructed;
                           and (B) the Fair Market Value (as determined in good
                           faith by the board of directors of CanArgo Energy
                           Corporation) of such property (or improvement
                           thereon) at the time of such acquisition or
                           construction,

                  (iii)    any such Lien shall be created contemporaneously
                           with, or within 180 days after, the acquisition,
                           lease or construction of such property;

         (g)      Liens securing Indebtedness arising under the Loan Documents;

         (h)      contractual Liens which arise in the ordinary course of
                  business under and pursuant to the terms of the Basic
                  Documents or other concessions agreements, production sharing
                  agreements and contracts; joint venture, exploration, limited
                  or general partnership, dry hole, bottom hole, acreage
                  contribution, purchase and acquisition agreements;
                  exploration, production and development licenses; operating
                  agreements; drilling agreements; oil and gas leases; farm-out
                  and farm-in agreements; division orders; contracts for the
                  sale, transportation or exchange of oil and natural gas;
                  unitization and pooling declarations and agreements; area of
                  mutual interest agreements; overriding and net profits royalty
                  agreements; marketing agreements; processing agreements;
                  development agreements; gas balancing or deferred production
                  agreements; injection, repressuring and recycling agreements;
                  salt water or other disposal agreements; seismic or other
                  geophysical permits or


                                       29
<PAGE>


                  agreements, and other agreements which are usual and customary
                  in the oil and gas business and are for claims which are not
                  delinquent or which are being contested in good faith by
                  appropriate action and for which adequate reserves have been
                  maintained in accordance with applicable GAAP, provided that
                  any such Lien referred to in this clause does not materially
                  impair the use of the property covered by such Lien for the
                  purposes for which such property is held by CanArgo Energy
                  Corporation or any other CanArgo Group Member or materially
                  impair the value of such property subject thereto;

         (i)      Liens arising solely by virtue of any statutory or common law
                  provision relating to banker's liens, rights of set-off or
                  similar rights and remedies and burdening only deposit
                  accounts or other funds maintained with a creditor depository
                  institution, provided that no such deposit account is a
                  dedicated cash collateral account or is subject to
                  restrictions against access by the depositor in excess of
                  those set forth by regulations promulgated by the Board of
                  Governors of the Federal Reserve System of the United States
                  of America (or any successor Governmental Authority) or other
                  Governmental Authority and no such deposit account is intended
                  by CanArgo Energy Corporation or any other CanArgo Group
                  Member to provide collateral to the depository institution,
                  except in each such case in connection with letter of credit
                  obligations issued pursuant to or in connection with any Basic
                  Documents or other agreements referred to in clause (h);

         (j)      Other Liens not described in clauses (a) to (i) of this
                  Section on the property of CanArgo Energy Corporation or any
                  Subsidiary in an aggregate amount at any time not exceeding
                  US$100,000; and

         (k)      Permitted Encumbrances

SECTION 11.4 PRIORITY

         CanArgo Energy Corporation shall not, without the consent of the
         Required Holders issue any Indebtedness with priority over, or pari
         passu with, the Notes.

SECTION 11.6 RESTRICTED PAYMENTS.

         CanArgo Energy Corporation will not make any Restricted Payments,
         except: (a) CanArgo Energy Corporation may declare and pay (i)
         dividends with respect to its Equity Interests payable solely in
         additional shares of its Equity Interests or Indebtedness and (ii)
         interest and principal on Indebtedness owed by CanArgo Energy
         Corporation to another CanArgo Group Member in either case which does
         not contravene the provisions of the Note Purchase Agreement, and (b)
         CanArgo Energy Corporation may make distributions pursuant to and in
         accordance with stock incentive plans or other Plans for management or
         employees of CanArgo Energy Corporation and its Subsidiaries.

SECTION 11.7 SALE-AND-LEASEBACKS.

         CanArgo Energy Corporation will not, and will not permit any of its
         Subsidiaries to, enter into any Sale-and-Leaseback Transaction.


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SECTION 11.8 SALE OF ASSETS, ETC.

         (1)      SALE OF ASSETS ETC. CanArgo Energy Corporation will not, and
                  will not permit any other CanArgo Group Members to, make any
                  Transfer, provided that the foregoing restriction does not
                  apply to a Transfer if:

                  (a)      the property that is the subject of such Transfer
                           constitutes either: (i) inventory held for sale
                           (including the sale of Hydrocarbons in the ordinary
                           course of business, including, without limitation,
                           pursuant to advance sale contracts, forward contracts
                           and production payments), (ii) abandonments,
                           assignments, leases, subleases or farm-outs of oil
                           and gas properties or dispositions of properties
                           pursuant to operating agreements or other forms of
                           exploration and development agreements or option
                           agreements; or (iii) property, equipment, fixtures,
                           supplies or materials no longer required in the
                           operation of the business of CanArgo Energy
                           Corporation or such Subsidiary or that is redundant,
                           condemned, obsolete, and, in the case of any Transfer
                           described in clauses (i) through (iii), such Transfer
                           is in the ordinary course of business (an "Ordinary
                           Course Transfer"); or

                  (b)      either:

                           (i)      such Transfer is from a CanArgo Group Member
                                    to CanArgo Energy Corporation; or

                           (ii)     such Transfer is from CanArgo Energy
                                    Corporation to a CanArgo Group Member or
                                    from a CanArgo Group Member to another
                                    CanArgo Group Member and in either case is
                                    for Fair Market Value,

                  so long as immediately before and immediately after the
                  consummation of such transaction, and after giving effect
                  thereto, no Default or Event of Default exists or would exist
                  (each such Transfer, an "Intergroup Transfer"); or

                  (c)      such Transfer involves oil and gas properties or
                           interests therein that are exchanged for other oil
                           and gas properties or interests therein in arms
                           length transactions or such Transfer is pursuant to a
                           Permitted Farmout Arrangement.

         (2)      DISPOSAL OF OWNERSHIP OF A CANARGO GROUP MEMBER. CanArgo
                  Energy Corporation will not, and will not permit any CanArgo
                  Group Members to, sell or otherwise dispose of any shares of
                  Subsidiary Stock, nor will CanArgo Energy Corporation permit
                  any such CanArgo Group Member to issue, sell or otherwise
                  dispose of any shares of its own Subsidiary Stock, provided
                  that the foregoing restrictions do not apply to:

                  (a)      the issue of directors' qualifying shares by any such
                           Material Subsidiary;

                  (b)      any such Transfer of Material Subsidiary Stock
                           constituting an Intergroup Transfer;


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                  (c)      any such Transfer of Material Subsidiary Stock by a
                           nominee holder as required pursuant to the terms of a
                           Pledge Agreement;

                  (d)      any issuance of shares of Subsidiary Stock by a
                           Material Subsidiary that qualifies as a Permitted
                           Farmout Arrangement; and

                  (e)      the disposition or dissolution of any Subsidiary that
                           is not a Material Subsidiary; provided that the
                           proceeds of such disposition or assets of the
                           Subsidiary are transferred to another CanArgo Group
                           Member and immediately before and immediately after
                           the consummation of such transaction, and after
                           giving effect thereto, no Default or Event of Default
                           exists or would exist.

SECTION 11.9 FUTURE INDEBTEDNESS.

         Without the prior written consent of the Required Holders, which
         consent shall not be unreasonably withheld, conditioned or delayed,
         CanArgo Energy Corporation will not incur any Indebtedness after the
         date of the Note Purchase Agreement other than: (a) Indebtedness
         outstanding under the Notes; (b) any additional unsecured Indebtedness,
         the aggregate amount outstanding thereunder at any time shall not
         exceed US$1,250,000; (c) unsecured Indebtedness of CanArgo Energy
         Corporation to another CanArgo Group Member or unsecured Indebtedness
         of a CanArgo Group Member or direct or indirect Subsidiary of CanArgo
         Energy Corporation to another CanArgo Group Member; and (d)
         Indebtedness of a CanArgo Group Member to a direct or indirect
         Subsidiary of CanArgo Energy Corporation that is not a Material
         Subsidiary, provided that the aggregate amount outstanding thereunder
         at any time shall not exceed US$1,000,000. In considering whether to
         give its consent to any future Indebtedness, the Required Holders shall
         be entitled to take into consideration, inter alia, the potential
         effects of any such proposed Indebtedness upon the financial condition
         and wherewithal of CanArgo Energy Corporation and/or upon their rights
         under the Loan Documents, and any decision by the Required Holders to
         withhold their consent to any such proposed future Indebtedness shall
         be final and binding absent a showing of manifest bad faith.

SECTION 11.10 BASIC DOCUMENTS.

         CanArgo Energy Corporation shall not and shall not permit any other
         CanArgo Group Member, without the prior written consent of the Required
         Holders to (i) cancel or terminate any Basic Agreement to which CanArgo
         Energy Corporation or other CanArgo Group Members are a party or
         consent to or accept any cancellation or termination thereof prior to
         the scheduled expiration thereof; (ii) sell, assign (other than
         pursuant to the Security Documents or a Permitted Farmout Arrangement)
         or otherwise dispose of (by operation of law or otherwise) any part of
         its interest in any Basic Agreements; (iii) waive any default under or
         breach of any provision of any Basic Agreement to which CanArgo Energy
         Corporation or any of its Subsidiaries are a party, or waive, fail to
         enforce, forgive, compromise, settle, adjust or release any Material
         right, interest or entitlement, howsoever arising, under, or in respect
         thereof; or (iv) amend, supplement, modify or in any way vary in any
         respect or agree to any variation of any provision of any Basic
         Agreement to which CanArgo Energy Corporation or any other CanArgo
         Group Members are a party, or of the performance of any Material
         covenant or obligation by any other Person under any Basic


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         Agreement except any amendment, supplement, modification or variation
         of the Basic Agreements as a result of the transfer by (x) NOC
         (Cyprus)'s interest in the Ninotsminda PSC (as defined in Schedule
         6.19) to NOC (Jersey) and (y) CNL (Cyprus)'s interest in the Norio PSC
         and Tbilisi PSC (both as defined in Schedule 6.19) to CNL (Jersey).

SECTION 11.11 ANTI-TAKEOVER DEFENSE.

         (a)      Except has hereinafter specifically provided, so long as any
                  Indebtedness under any of the Notes is outstanding, CanArgo
                  Energy Corporation shall not enter into or adopt any
                  anti-takeover defense, "poison pill", shareholder rights plan
                  or any other device designed to prevent a takeover, hostile or
                  otherwise, that could encumber, restrict or affect Ingalls &
                  Snyder LLC, Robert L Gipson, Thomas O Boucher, and/or Ingalls
                  & Snyder Value Partners L.P. to acquire any Equity Interests
                  of CanArgo Energy Corporation;

         (b)      Notwithstanding the provisions of Section 11.11(a) to the
                  contrary provided, CanArgo Energy Corporation may enter into
                  or adopt an anti-takeover defense, "poison pill", shareholder
                  rights plan or any other device designed to prevent Ingalls &
                  Snyder LLC, Robert L Gipson, Thomas O Boucher , and/or Ingalls
                  & Snyder Value Partners LP or other Note holders to acquire
                  such Equity Interests by means of or in connection with the
                  direct or indirect forbearance, cancellation or exchange of
                  all or any part of the Indebtedness evidenced by the Notes;

         (c)      Notwithstanding the provisions of Section 11.11(a) to the
                  contrary provided, Ingalls & Snyder Value Partners L.P. hereby
                  agrees that so long as any Notes are outstanding and no Event
                  of Default exists and is continuing and until the expiration
                  of the second anniversary after the indefeasible satisfaction
                  of all Indebtedness under the Notes, whether by payment,
                  conversion, exchange or otherwise (other than in connection
                  with any proceeding under the United States Bankruptcy Code),
                  Ingalls & Snyder Value Partners L.P. shall not, without the
                  express written consent or approval of the incumbent Board of
                  Directors of CanArgo Energy Corporation, solicit or otherwise
                  seek to effect or participate in a Change of Control of
                  CanArgo Energy Corporation or a change in the composition of
                  the incumbent Board of Directors by means of the purchase or
                  offer to purchase of any Equity Interests of CanArgo Energy
                  Corporation, the solicitation of proxies or written consents,
                  or by voting any Equity Interests acquired by Ingalls & Snyder
                  Value Partners L.P. upon the conversion of Notes pursuant to
                  Section 10.7, in connection with any solicitation of proxies
                  or written consents or at any regular or special meeting of
                  shareholders or otherwise.


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