Exhibit 10.81


                       PRODUCTION AND MARKETING AGREEMENT

                                     BETWEEN

                              BARON PRODUCTION LLC

                                       AND

                                 PCEC SUB 1, LLC

                                  JULY 28, 2014

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                                Table of Contents

Article I DEFINITIONS AND REFERENCES..........................................1
   Section 1.1    Defined Terms...............................................1
   Section 1.2    Rules of Construction; Monthly and Daily Equivalents;
                  Publications................................................6

Article II NO ADVERSE CHANGES TO SUBJECT INTERESTS............................7
   Section 2.1    Abandonment and Shut-In.....................................7
   Section 2.2    Non-Consent Operations......................................7
   Section 2.3    Production Imbalances.......................................7
   Section 2.4    Defense of Agreement and Production Payment.................8
   Section 2.5    Further Assurances..........................................9

Article III PRODUCTION OF SUBJECT INTERESTS...................................9
   Section 3.1    General Operating Requirements..............................9
   Section 3.2    Rates of Production........................................11
   Section 3.3    Quality and Pressure Requirements..........................11
   Section 3.4    Imbalance Charges..........................................12
   Section 3.5    Environmental Compliance...................................12
   Section 3.6    Maintaining and Restoring Productivity.....................12
   Section 3.7    Insurance; Damage or Loss..................................13
   Section 3.8    Continued Ability to Operate...............................13

Article IV [RESERVED]........................................................14

Article V OTHER AGREEMENTS...................................................14
   Section 5.1    Performance of Production Payment Documents................14
   Section 5.2    Interest on Late Payments; No Usury........................14
   Section 5.3    Indemnity..................................................14
   Section 5.4    Payment of Expenses........................................17
   Section 5.5    Information and Reporting..................................17
   Section 5.6    Marketing of Production Payment Hydrocarbons...............21
   Section 5.7    Preservation of Subject Well Drainage......................22

Article VI LIENS TO SECURE PERFORMANCE; OTHER REMEDIES.......................22
   Section 6.1    Mortgage...................................................22
   Section 6.2    Production Proceeds........................................22
   Section 6.3    Replacement of Operator....................................23

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Article VII MISCELLANEOUS....................................................23
   Section 7.1    Notices....................................................23
   Section 7.2    Successors and Assigns.....................................23
   Section 7.3    Acknowledgments and Admissions.............................24
   Section 7.4    Entire Agreement; Amendments; Waiver.......................24
   Section 7.5    Counterpart Execution......................................24
   Section 7.6    Applicable Law.............................................24
   Section 7.7    Severability...............................................24
   Section 7.8    Termination; Limited Survival..............................24
   Section 7.9    WAIVER OF JURY TRIAL AND PUNITIVE DAMAGES..................25
   Section 7.10   CONSENT TO JURISDICTION....................................25

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                        PRODUCTION AND MARKETING AGREEMENT

     This  Production and Marketing  Agreement (this  "Agreement"),  dated as of
July 28, 2014,  is made by and between  Baron  Production  LLC, a Texas  limited
liability company ("Working Interest Owner" and a "Party"), and PCEC Sub 1, LLC,
a Texas limited liability company ("Royalty Owner" and a "Party").

     WHEREAS,  by means  of a  certain  Conveyance  of Term  Overriding  Royalty
Interest  dated as of the date hereof  from  Working  Interest  Owner to Royalty
Owner  (the  "Conveyance"),  Working  Interest  Owner has sold and  conveyed  to
Royalty  Owner  the  "Production  Payment"  (as  such  term  is  defined  in the
Conveyance) in the Subject Interests described therein; and

     WHEREAS,  the Parties are entering  into this  Agreement to set out certain
agreements with respect to the operation and production of the Subject Interests
and the marketing of the Production Payment Hydrocarbons;

     NOW, THEREFORE, as a material inducement to cause Royalty Owner to purchase
the  Production  Payment  and  in  consideration  of  the  mutual  benefits  and
obligations of the Parties  hereunder,  Royalty Owner and Working Interest Owner
have agreed, and hereby agree, as follows:

                                   ARTICLE I
                           DEFINITIONS AND REFERENCES

     Section 1.1 Defined  Terms.  Reference  is made to the  Conveyance  for the
meaning of all capitalized  terms defined  therein,  all of which will when used
herein (unless otherwise  expressly defined herein) have the meanings given them
in the Conveyance.  As used herein,  the terms "Agreement" and "Conveyance" have
the  meanings  given them  above.  For  purposes of this  Agreement,  unless the
context otherwise requires, the following terms have the following meanings:

     "Agreed  Rate"  means  the  rate of  seventeen  percent  (17%)  per  annum,
calculated on the basis of actual days elapsed and a year of 360 days.

     "Business Day" means any day that is not a Saturday, Sunday or other day on
which commercial banks in Dallas, Texas are authorized or required to close.

     "Company  Engineers" means Cawley,  Gillespie & Associates,  Haas Petroleum
Engineering  Services,  Inc.  and any other  nationally  recognized  independent
reserve engineering firm that Working Interest Owner and Royalty Owner from time
to time agree to designate as the Company Engineers for the purposes hereof.

     "Credit Agreement" means the Credit Agreement, dated as of the date hereof,
among,  Working Interest Owner, the Parent,  the lenders from time to time party
thereto,  and Petro Capital Energy Credit, LLC, as administrative agent for such
lenders.

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     "Downstream Contracts" means all contracts or arrangements to which Working
Interest Owner (or any Person acting on behalf of Working  Interest  Owner) is a
party that provide for or relate to the  gathering,  transportation,  treatment,
processing, marketing or sale of Subject Hydrocarbons.

     "Environmental  Laws" means all  applicable  Laws  regulating  or otherwise
pertaining to (a) the use, generation,  migration,  storage, removal, treatment,
remedy, discharge, release,  transportation,  disposal or cleanup of pollutants,
contamination,  hazardous wastes,  hazardous  substances,  hazardous  materials,
toxic substances or toxic pollutants,  (b)  environmental  matters involving the
soil, surface waters, groundwater, land, stream sediments, surface or subsurface
strata,  ambient  air and any other  environmental  medium on or off any Subject
Interest, or (c) the environment or health and safety-related matters; including
the  following  as from time to time amended and all others  whether  similar or
dissimilar and whether now existing or hereinafter  enacted:  the  Comprehensive
Environmental Response,  Compensation,  and Liability Act of 1980, as amended by
the  Superfund   Amendments  and  Reauthorization  Act  of  1986,  the  Resource
Conservation  and Recovery Act of 1976, as amended by the Used Oil Recycling Act
of 1980,  the Solid Waste Disposal Act amendments of 1980, and the Hazardous and
Solid Waste Amendments of 1984, the Hazardous  Materials  Transportation Act, as
amended,  the Toxic  Substance  Control  Act, as amended,  the Clean Air Act, as
amended,  the Clean  Water Act,  as  amended,  and all  regulations  promulgated
pursuant thereto.

     "Event of Force Majeure" means any of the following:

     (a)  physical   events  such  as  acts  of  God,   landslides,   lightning,
earthquakes,  fires,  hurricanes,  storms  or  storm  warnings  that  result  in
evacuation  of the affected  area,  floods,  washouts,  explosions,  breakage or
accident or necessity of repairs to wells, equipment or lines of pipe;

     (b) weather related events affecting an entire geographic  region,  such as
low temperatures which cause freezing or failure of wells, equipment or lines of
pipe;

     (c) interruption of firm  transportation  and/or storage by transporters of
Hydrocarbons; and

     (d)  orders  of any court or  governmental  authority  having  jurisdiction
(which in each case cannot be satisfied  by actions  taken with respect to wells
other than Subject Wells,  which actions do not violate other contractual duties
of Working Interest Owner), strikes,  lockouts or other industrial disturbances,
riots, sabotage, insurrections, wars and similar acts of other Persons; provided
that (i) in order to be  entitled to assert an Event of Force  Majeure,  (1) the
affected  Party must be making all  reasonable  efforts to mitigate  the adverse
impacts of any such event or occurrence, to resolve the event or occurrence once
it has occurred, and to resume performance (provided that such Party will not be
obligated to settle any strike or lockout)  and (2) the asserted  Event of Force
Majeure must not be within the control of and must not be caused by the fault or
negligence  of the affected  Party and must be the type of event  which,  by the
exercise of reasonable diligence,  the affected Party is unable to prevent; (ii)
no Party  will be  entitled  to assert an Event of Force  Majeure  on account of
economic  hardship or to the extent such Party's  performance is affected by the
curtailment of  interruptible or secondary firm  transportation  unless primary,

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in-path,  firm transportation is also curtailed;  and (iii) no Party claiming an
Event of Force  Majeure  will be excused  from any  responsibility  to make cash
payments that are due or become due during the period in which an Event of Force
Majeure persists.

     "Hazardous   Substances"   means  any   substances   regulated   under  any
Environmental  Law,  whether as pollutants,  contaminants,  or chemicals,  or as
industrial, toxic or hazardous substances or wastes, or otherwise, including any
asbestos or asbestos-containing  materials,  any naturally occurring radioactive
materials,  and any  hydrocarbons or other substances that are released into the
environment.

     "Imbalance Charges" means any fees, penalties, costs or charges (in cash or
in kind, and whether or not  denominated  as price  adjustments or as prices for
spot  sales in place of prices  for  nominated  production)  that are  incurred,
payable or  suffered  by  Royalty  Owner to any  Person in  connection  with any
imbalance between the amount of Production Payment Hydrocarbons delivered at the
Delivery  Points and the amounts of nominated  sales thereof or  transportation,
gathering or processing  capacity scheduled or available  therefor,  or that are
otherwise  assessed  against  Royalty  Owner by a  transporter  or purchaser for
failure to meet such  Person's  balance,  delivery or  nomination  requirements.
Interest  and  penalties  owing with  respect  to  Imbalance  Charges  will also
constitute Imbalance Charges.

     "Losses" has the meaning given to such term in Section 5.3(b).

     "Mortgage" means the Second Lien Deed of Trust,  Assignment of As-Extracted
Collateral  Security  Agreement,  Fixture Filing and Financing Statement of even
date herewith executed in connection  herewith by Working Interest Owner for the
benefit of Royalty  Owner with  respect to the  Retained  Interests  and certain
related assets.

     "NYMEX Strip Prices" means,  as of any Day, the  arithmetic  average of the
settlement  prices  (per  Barrel of Oil) on such Day of the  applicable  futures
contract  traded on the New York  Mercantile  Exchange for the first  thirty-six
Months after such Day. The NYMEX Strip Price for Oil will be the average of such
prices for the West Texas  Intermediate  Crude Oil Futures Contract for Cushing,
Oklahoma Delivery that is traded on such exchange.

     "Overtake" has the meaning given to such term in Section 2.3(a).

     "Parent" means Baron Energy, Inc., a Nevada corporation.

     "Parent  Guaranty"  means the  Guaranty  Agreement  of even  date  herewith
executed by Parent in favor of Royalty Owner.

     "Parties" means Working Interest Owner and Royalty Owner.

     "PDP Reserves" means proved developed  producing  reserves of Hydrocarbons,
as determined in accordance with the  definitions  and standards  promulgated by
the Society of Petroleum Engineers.

     "Performance Default" means any of the following:

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     (a) any  failure  by  Working  Interest  Owner  to pay any  money  owing or
belonging  to Royalty  Owner that  continues  unremedied  for more than five (5)
Business Days after Working Interest Owner becomes aware of such failure;

     (b) any breach by Working  Interest Owner of any covenant or agreement made
by Working  Interest Owner herein or in any other  Production  Payment  Document
(other than as described in the preceding clause (a)) that continues  unremedied
for thirty  (30) days  following  the  earlier to occur of: (i)  written  notice
thereof  being  delivered  to Working  Interest  Owner by Royalty  Owner or (ii)
Working Interest Owner first becoming aware of such breach;

     (c) any of the representations or warranties made by Working Interest Owner
herein or in any other Production  Payment Document is false or incorrect in any
material respect on any date made or as of which made;

     (d) the  commencement  of a voluntary case by Working  Interest Owner under
the United States  Bankruptcy Code, or Working Interest Owner's  application for
or  consent  to any order for relief in any  involuntary  case filed  under such
code;

     (e) the commencement of any involuntary case against Working Interest Owner
under such code that is not dismissed within thirty (30) days after filing; and

     (f)  the  appointment  or  taking  possession  of a  receiver,  liquidator,
custodian,  trustee,  keeper or similar official of any of the Subject Interests
which either (i) is not made  ineffective or discharged  within thirty (30) days
thereafter  or (ii) is  requested,  consented  to or  acquiesced  to by  Working
Interest Owner.

     "Production  Payment Documents" means this Agreement,  the Conveyance,  the
Purchase and Sale Agreement,  the Mortgage,  the Parent Guaranty Agreement,  and
each other agreement, instrument, certificate or other document at any time made
or given by Working  Interest Owner with or to Royalty Owner in connection  with
this Agreement, the Conveyance, the Purchase and Sale Agreement or the Mortgage,
including  all  supplements  and  amendments to and  restatements  of any of the
foregoing.

     "Purchase and Sale Agreement" means the Purchase and Sale Agreement of even
date herewith  between  Working  Interest Owner and Royalty  Owner,  under which
Working  Interest  Owner has  agreed  to sell and  Royalty  Owner has  agreed to
purchase the Production Payment.

     "Remaining  Reserves" means, as of the date of any  determination,  the PDP
Reserves  projected to be attributable to the Subject  Interests (i.e., both the
Production Payment  Hydrocarbons and the Retained Interest  Hydrocarbons)  after
such date for the remaining expected productive life thereof. For the purpose of
calculating Remaining Reserves,  the sales prices of the Oil to be produced from
each  Subject  Interest  will be assumed to be the NYMEX  Strip Price for Oil as
calculated on the date of determination. Calculations of Remaining Reserves will
otherwise be based on the then most recent Reserve  Report,  after  disregarding
any reserves shown in such Reserve Report that have actually been produced on or
before the date of determination of such Remaining Reserves.

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     "Repair Operations" means reworking, redrilling,  reconditioning,  fracing,
refracing,  plugging back, deepening, or other operations to repair, restore, or
enhance the  productivity  of one or more Subject  Wells or to repair,  restore,
replace or enhance  equipment and facilities  used to produce and handle Subject
Hydrocarbons.

     "Reserve Report" means any annual or semiannual reserve  engineering report
prepared by Company  Engineers  or Working  Interest  Owner's  in-house  reserve
engineers  with  respect to the  Subject  Interests  as required  under  Section
5.5(c).  Each Reserve  Report will be in form and detail  acceptable  to Royalty
Owner and will set forth the following:

     (i) an estimation of the Oil and Gas  reserves,  classified by  appropriate
categories, as of such date attributable to the various Subject Interests,

     (ii) a  projection  of the  future  production  of, and net  revenue  from,
reserves,

     (iii) a calculation of the present worth of such net revenue  discounted at
the rate of ten percent per annum, and

     (iv) a schedule or description of the principal assumptions,  estimates and
projections made or used in the preparation of such report,  including estimated
future product prices, capital expenditures, operating expenses and taxes.

     Each  such  report  will be  prepared  in  accordance  with  customary  and
generally  accepted   standards  and  practices  for  independent   professional
petroleum engineers and will be based on the NYMEX Strip Prices on the effective
date of such report.

     "Retained Interest  Hydrocarbons" means the Subject Hydrocarbons other than
the Production Payment Hydrocarbons.

     "Royalty  Owner"  refers  to PCEC Sub 1,  LLC,  a Texas  limited  liability
company, as well as to its successors and assigns hereunder.

     "Royalty Owner  Indemnitees"  has the meaning given to such term in Section
5.3(a).  "Royalty  Owner Spot Market PP  Hydrocarbons"  has the meaning given to
such term in Section 5.6(b).

     "Subject Contracts" means all Upstream Contracts and Downstream Contracts.

     "Trustee"  means the Person or Persons who from time to time serve (or have
served) as the trustee under the Mortgage.

     "Undertake" has the meaning given to such term in Section 2.3(a).

     "Upstream Contracts" means all joint operating  agreements,  unit operating
agreements,  facilities  leases or use  agreements,  water  agreements  (whether
relating to water  injection,  supply,  transportation  or  disposal),  or other
agreements or arrangements to which Working Interest Owner (or any Person acting
on behalf of Working  Interest  Owner) is a party that  provide for or relate to
the  operation  of the  Subject  Interests  or the  production  of  Hydrocarbons
therefrom.

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     "Working  Interest  Owner" refers to Baron  Production LLC, a Texas limited
liability company, as well as to its successors and assigns hereunder.

     "Working  Interest Owner Spot Market PP Hydrocarbons" has the meaning given
to such term in Section 5.6(b).

     Section  1.2  Rules  of  Construction;   Monthly  and  Daily   Equivalents;
Publications.

     (a) Construction.  All references in this Agreement to articles,  sections,
subsections and other  subdivisions refer to corresponding  articles,  sections,
subsections and other  subdivisions of this Agreement unless expressly  provided
otherwise. Titles appearing at the beginning of any of such subdivisions are for
convenience  only and will not constitute part of such  subdivisions and will be
disregarded in construing the language contained in such subdivisions. The words
"this Agreement", "this instrument",  "herein", "hereof", "hereby", "hereunder "
and words of similar  import  refer to this  Agreement as a whole and not to any
particular subdivision unless expressly so limited. Unless the context otherwise
requires:  "including" (and its grammatical variations) means "including without
limitation"; "or" is not exclusive; words in the singular form will be construed
to include  the plural and vice  versa;  words in any gender  include  all other
genders;  references herein to the Conveyance,  the Purchase and Sale Agreement,
or any other instrument or agreement refer to such instrument or agreement as it
may be from time to time  supplemented,  amended  or  restated;  and  references
herein  to  any  Person  include  such  Person's  successors  and  assigns.  All
references in this Agreement to exhibits and schedules refer to the exhibits and
schedules to this Agreement unless expressly  provided  otherwise,  and all such
exhibits and  schedules are hereby  incorporated  herein by reference and made a
part hereof for all  purposes.  This  Agreement  has been drafted with the joint
participation of Working Interest Owner and Royalty Owner and is to be construed
neither  against nor in favor of either Party but rather in accordance  with the
fair meaning hereof.

     (b)  Monthly  Equivalents.  To the  extent  that this  Agreement  refers to
information  or data  measured or based upon Daily  production  or deliveries of
Hydrocarbons  and such information or data is instead provided or available only
with respect to Monthly  production or deliveries of Hydrocarbons,  such Monthly
Hydrocarbons  will be deemed  produced or delivered in equal  quantities on each
Day during such Month.  To the extent that this Agreement  refers to Daily price
information for production or deliveries of Hydrocarbons and such information or
data is instead  provided or  available  only on a Monthly  basis,  such Monthly
price information will be deemed to apply on each Day during such Month.

     (c)  Publications.  To  the  extent  that  this  Agreement  (or  any  other
Production  Payment  Document other than the  Conveyance)  incorporates  prices,
rates,  adjustments  to prices or rates,  or other  information  from a specific
source or  publication  and that  source  or  publication  temporarily  fails or
permanently   ceases  to  publish  such  information,   or  ceases   publication
altogether,  or changes the heading or format  under which such  information  is
published,  or changes the source of information  which it publishes  under such
heading or format, and in any such case the relevant Production Payment Document
does not specify how to deal with such event,  then Royalty Owner will designate
a reasonable  alternative source for the same or equivalent  information and the
Parties will thereafter use such designated alternative source.

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                                   ARTICLE II
                     NO ADVERSE CHANGES TO SUBJECT INTERESTS

     Section 2.1 Abandonment and Shut-In.

     (a)  Abandonment.  Working Interest Owner will not, without first obtaining
the consent of Royalty Owner,  abandon (or propose or consent to the abandonment
of) any Subject Well or surrender,  abandon or release (or propose or consent to
the surrender, abandonment or release of) any Subject Interest.

     (b) Shut-in of Subject  Wells.  Working  Interest  Owner will not,  without
first obtaining the consent of Royalty Owner, voluntarily shut-in a Subject Well
(or propose or consent to such a shut-in),  provided that a shut-in of a Subject
Well  will not be deemed to be  voluntarily  made if it is caused by or  results
from an Event of Force  Majeure,  or from well  servicing or  maintenance in the
ordinary  course of  business,  or if Working  Interest  Owner is waiting  for a
pipeline  connection  or other  transportation  services for Oil produced from a
Subject Well for which  transportation or a pipeline connection is not otherwise
available.

     Section  2.2  Non-Consent  Operations.  Working  Interest  Owner  will not,
without  the prior  consent of Royalty  Owner,  elect to be a  non-participating
party with  respect to any plugging  back,  reworking,  sidetracking,  drilling,
completion  or other  operation on any Subject  Interest or Subject Lands if the
consequence  of such  election  is that any  part of  Working  Interest  Owner's
interest in such Subject Interest on Subject Lands is temporarily (e.g.,  during
a recoupment  period) or permanently  forfeited to the parties  participating in
such  operations or electing not to abandon such well. Upon any such election by
Working  Interest  Owner that is  consented  to by Royalty  Owner (or for which,
pursuant to the preceding sentence, no consent is required),  such election will
also be binding on the  Production  Payment as to the interest so temporarily or
permanently  forfeited  but will not cause  any  modification  in the  Scheduled
Quantities or in any component of the Adjustment Quantity.

     Section  2.3  Production  Imbalances.  (a)  Definitions.  As  used  herein,
"Undertake" means that an owner of production from a Subject Well takes a lesser
share of  Hydrocarbons  produced  from  such  Subject  Well  than  the  share of
Hydrocarbons  which such owner is  entitled  to take by virtue of its  ownership
interest, determined without regard to any rights under any production balancing
agreement or similar  arrangement or any rights under common law with respect to
production  balancing,  and "Overtake"  means that an owner of production from a
Subject Well takes a greater  share of  Hydrocarbons  produced from such Subject
Well than the share of  Hydrocarbons  which  such owner is  entitled  to take by
virtue of its ownership interest,  again determined without regard to any rights
under any production  balancing  agreement or similar  arrangement or any rights
under  common  law with  respect to  production  balancing.  Adjustments  due to
Non-Consent Provisions, however, will not be considered Undertakes or Overtakes.

     (b) No Undertakes Without Consent.  Subject to Section 3.2, without Royalty
Owner's prior consent  Working  Interest Owner will not Undertake from a Subject
Well (either for itself or on behalf of Royalty Owner), except as a result of an
Event of Force  Majeure or a joint  interest  owner in one or more Subject Wells

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electing to Overtake in order to balance  previous  Overtakes  from such Subject
Wells by  Working  Interest  Owner or any of its  predecessors  in title to such
Subject  Wells,  but only to the  extent  that such  previous  Overtakes  either
occurred  after the Effective  Time or occurred  prior to the Effective Time and
are  disclosed  in  Schedule  1 attached  to the  Purchase  and Sale  Agreement,
provided that Working  Interest Owner may Undertake from any Subject Well on any
Day so long as Royalty  Owner's  actual share of production on such Day from all
Subject Wells is the entire Scheduled Quantity and Adjustment  Quantity for such
Day. If any  Undertake  by Working  Interest  Owner  occurs in violation of this
section,  the  Production  Payment  will be  determined  (to the maximum  extent
allowed under applicable Law and any applicable Permitted  Encumbrances) without
regard thereto.

     (c)  Limitation  on  Overtakes.  Subject to Section  3.2,  without  Royalty
Owner's prior consent  Working  Interest  Owner will not Overtake from a Subject
Well on any Day (either for itself or on behalf of Royalty Owner), except either
(i) in order to  produce  and take up to 110% of the  Scheduled  Quantities  and
Adjustment  Quantities  for such Day from the Subject  Wells,  or (ii) if one or
more other owners of production  from such Subject Well elects to Undertake,  in
order to produce and take the same amount of Hydrocarbons  that Working Interest
Owner and Royalty  Owner would have received had such joint  interest  owner not
elected to  Undertake.  If,  pursuant to applicable  contracts and Law,  Working
Interest  Owner does  Overtake,  then the  additional  Hydrocarbons  so taken by
Working Interest Owner will be included among the Subject  Hydrocarbons and will
be subject to the Production Payment.

     (d) No Balancing  From Other  Properties.  Working  Interest Owner will not
allow any Subject Interest to be subject to any production balancing arrangement
or agreement under which one or more third Persons may Overtake a portion of the
production  attributable  to such Subject  Interest as a result of Undertakes or
Overtakes (or other actions or inactions) with respect to properties  other than
such Subject  Interest.  For the purposes of this  subsection  (d), a production
unit in which all parties  have uniform  interests  will be  considered  to be a
single Subject Interest.

     Section 2.4 Defense of  Agreement  and  Production  Payment.  If any Person
(including  Working Interest Owner or its Affiliates but excluding Royalty Owner
and its  Affiliates)  ever challenges or attacks (a) the validity or priority of
the  Production  Payment  Documents  or of any rights,  titles or  interests  of
Royalty Owner that are created or evidenced  thereby or (b) the title of Working
Interest  Owner to any Subject  Interest or of Royalty  Owner to any part of the
Production Payment,  then upon learning thereof Working Interest Owner will give
prompt written notice thereof to Royalty Owner and at Working  Interest  Owner's
own cost and expense will diligently endeavor to defeat such challenge or attack
and to cure any defect that may be  developed or claimed,  and Working  Interest
Owner will take all  necessary or  advisable  steps for the defense of any legal
proceedings  with  respect  thereto,  including  the  employment  of  counsel to
represent Working Interest Owner, the prosecution or defense of litigation,  and
the  release  or  discharge  of all  adverse  claims.  Royalty  Owner is  hereby
authorized and empowered, at the expense of Working Interest Owner, to take such
additional  steps as in its judgment and  discretion  may be necessary or proper
for the defense of any such legal  proceedings or the protection of the validity
or priority of the  Production  Payment  Documents and the rights,  titles,  and
interests created or evidenced thereby,  including the employment of independent
counsel to represent  Royalty Owner,  the  prosecution or defense of litigation,

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the  compromise  or  discharge  of any adverse  claims made with  respect to the
Production Payment, the purchase of any tax title and the removal of prior liens
or security  interests,  and all reasonable and related  expenditures so made of
every kind and character will be paid to Royalty Owner by Working Interest Owner
on demand.

     Section 2.5 Further Assurances.  Working Interest Owner will, on request of
Royalty Owner, (a) promptly  correct any defect,  error or omission which may be
discovered  in the  contents,  execution  or  acknowledgment  of any  Production
Payment  Document,  (b)  execute,  acknowledge,  deliver and record or file such
further  instruments and do such further acts as may be necessary,  desirable or
proper,  in the judgment of Royalty  Owner,  to carry out more  effectively  the
purposes of the Production Payment Documents and to more fully identify and make
subject to the Production  Payment Documents any property intended to be covered
thereby,  including any renewals,  additions,  substitutions,  replacements,  or
appurtenances to the Subject Interests; and (c) execute,  acknowledge,  deliver,
and file or record any document or  instrument  reasonably  requested by Royalty
Owner to protect its rights,  title and interests  under the Production  Payment
Documents  against the rights or interests of third  Persons.  Working  Interest
Owner will  provide  to Royalty  Owner any  assurances  of title to the  Subject
Interests  which  Royalty  Owner may from time to time  request  concerning  the
Production  Payment,  including the recording and filing of the  Conveyance  (it
being understood that no title deficiencies  learned of by Royalty Owner will in
any way be deemed to qualify any of Working Interest Owner's warranties of title
or indemnities with respect to title in any Production Payment Document).

                                  ARTICLE III
                         PRODUCTION OF SUBJECT INTERESTS

     Section  3.1  General  Operating  Requirements.  At all times from the date
hereof  until the  termination  of the  Production  Payment,  and whether or not
Working  Interest  Owner is the  operator  of the  relevant  Subject  Interests,
Working Interest Owner, at Working Interest Owner's cost and expense, will:

     (a) Cause the Subject  Interests to be maintained in full force and effect,
free  of  any  right  of  cancellation,  forfeiture  or  termination,  and to be
developed,  protected  against  drainage,  and  continuously  operated  for  the
production of Hydrocarbons  in a good and workmanlike  manner as would a prudent
operator (and without  regard to the burden of the Production  Payment),  all in
accordance with generally  accepted  industry  practices,  applicable  operating
agreements,  the Leases,  and all applicable  Laws, and will otherwise comply in
all  material  respects  with all  applicable  Laws,  the Leases,  and all other
contracts or agreements forming a part of or related to the Subject Interests.

     (b) Pay, or cause to be paid,  as and when due and  payable,  all  rentals,
royalties,  Taxes and other amounts payable in respect of the Subject  Interests
or the production therefrom,  and all costs, expenses,  capital expenditures and
liabilities   incurred  in  or  arising  from  the  operation,   maintenance  or
development of the Subject  Interests,  or the producing,  treating,  gathering,
storing,  marketing or transporting of Hydrocarbons therefrom at or prior to the
Delivery Points (except,  in each case, to the extent contested in good faith by
appropriate  proceedings  that  effectively  delay any  remedy  for  non-payment
thereof).

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<PAGE>
     (c) Cause all Subject Wells, and all machinery, equipment and facilities of
any kind now or hereafter  necessary or useful in the  operation of such Subject
Wells (as well as all  separation,  metering  and  related  facilities  that are
located at or prior to each Delivery Point and all related wells for the supply,
injection  or  disposal  of water,  to the extent  owned or  operated by Working
Interest  Owner  or its  Affiliates)  to be  maintained  and  kept in  good  and
effective operating condition as would a prudent operator (and without regard to
the burden of the Production Payment), and all repairs, renewals,  replacements,
additions and improvements thereof or thereto, useful or needful to such end, to
be promptly made.

     (d) Give or cause to be given to  Royalty  Owner  written  notice  of every
adverse claim or demand made by any Person affecting the Subject Interests,  the
Hydrocarbons  produced  therefrom,  the  Production  Payment  or the  Production
Payment  Hydrocarbons in any manner  whatsoever,  and of any suit or other legal
proceeding  instituted with respect  thereto,  and at Working  Interest  Owner's
expense  cause  all  necessary  and  proper  steps to be taken  with  reasonable
diligence to protect and defend the Subject Interests,  the Subject Hydrocarbons
produced   therefrom,   the  Production   Payment  and  the  Production  Payment
Hydrocarbons against any such adverse claim or demand,  including the employment
of counsel for the prosecution or defense of litigation and the contest, release
or discharge of such adverse claim or demand.

     (e) Cause the Subject Interests to be kept free and clear of liens, charges
and encumbrances of every character, other than the Permitted Encumbrances.

     (f) Except to the extent contested in good faith by appropriate proceedings
that effectively  delay any remedy for non-payment  thereof,  pay all Taxes when
due and before they become  delinquent  (and provide Royalty Owner with proof of
such payment upon  request),  and reimburse  Royalty Owner for any Taxes paid by
Royalty  Owner  relating to the  Production  Payment or the  Production  Payment
Hydrocarbons.

     (g)  Maintain  or  cause to be  maintained  in full  force  and  effect  in
accordance with prudent operator standards,  all permits,  licenses,  easements,
servitudes,  contracts  and  other  rights  reasonably  necessary  or  useful in
connection  with  the  development,  operation  or  management  of  the  Subject
Interests  and  the  production,  treating,  gathering,  storing,  marketing  or
transportation  of the  Subject  Hydrocarbons  or of water  produced  or used in
connection therewith.

     (h) Not (i) resign as operator (or otherwise  voluntarily  relinquish  such
position) of any of the Subject  Interests that are or hereafter become operated
by Working  Interest  Owner  until and unless the  successor  operator  has been
approved  in  writing  by  Royalty  Owner,  or (ii)  permit  Parent to resign as
operator  (or  otherwise  voluntarily  relinquish  such  position) of any of the
Subject  Interests  that are or  hereafter  become  operated by Parent until and
unless the successor operator has been approved in writing by Royalty Owner .

     (i) Not conduct any work or operation  in any  wellbore of a Subject  Well,
which work or operation is related to any horizon,  zone,  formation or interval
not  included in the Subject  Interests,  without the prior  written  consent of
Royalty Owner.

                                       10
<PAGE>
     Whenever Working Interest Owner is not the operator of a Subject  Interest,
it will use its reasonable best efforts and diligently  enforce its rights under
any operating agreement for such Subject Interest in order to cause such Subject
Interest to be operated and dealt with as contemplated in this Agreement.

     Section 3.2 Rates of Production.

     (a) Rates of Production.  Working Interest Owner will prudently operate and
produce the Subject  Interests  and Subject Wells  operated by Working  Interest
Owner, and Working Interest Owner will use all commercially  reasonable  efforts
to cause the  Subject  Interests  and  Subject  Wells not  operated  by  Working
Interest Owner to be prudently operated and produced by whomever is the operator
thereof,  in each case in  accordance  with prudent  industry  practices and the
following additional requirements:

     (i) the amount of  Hydrocarbons  produced  from any Subject  Well shall not
exceed in any Month the lower of (1) the maximum amount that the Subject Well is
capable of producing at its maximum efficient rate of flow or (2) the respective
allowable rate of flow under applicable orders and Laws, if any; and

     (ii) the amount of  Hydrocarbons  produced  from the Subject Wells shall be
sufficient  to  prevent  a  material  net  migration  of  Hydrocarbons  from the
reservoirs  to which  proved  reserves  are  attributed  underlying  the Subject
Interests.

     (b) Production Goals. Subject to the provisions of the preceding subsection
(a) and Sections 2.1, 2.2, 2.3, 3.6, 3.7(b) and 3.8, Working Interest Owner will
use all  commercially  reasonable  efforts to ensure that the rate of production
from the Subject Wells, taken as a whole, is sufficient to allow the delivery to
Royalty Owner of the  Scheduled  Quantity and the  Adjustment  Quantity for such
Day.

     Section 3.3 Quality  and  Pressure  Requirements.  All  Production  Payment
Hydrocarbons  delivered to Royalty Owner,  or to Royalty  Owner's  credit,  will
satisfy the quality and pressure  requirements and  specifications  as set forth
in:

     (a) all  applicable  agreements  with or  requirements  of  Delivery  Point
Recipients (including tariffs filed with regulatory agencies) for acceptance and
transportation of such Production Payment Hydrocarbons,

     (b)  all  applicable  agreements  with  or  requirements  of  operators  of
processing  plants or treatment  facilities  for  acceptance of such  Production
Payment Hydrocarbons, and

     (c) all applicable  agreements with or requirements of first purchasers for
acceptance and purchase of such Production  Payment  Hydrocarbons,  in each case
without  penalty or  deduction  for  nonconformity.  All costs and  expenses  to
satisfy such quality and pressure requirements will be borne and paid by Working
Interest Owner.

     Section 3.4 Imbalance  Charges.  WORKING  INTEREST  OWNER WILL EXERCISE ITS
BEST EFFORTS TO PREVENT ANY IMBALANCE  CHARGES FROM BECOMING  PAYABLE BY ROYALTY

                                       11
<PAGE>
OWNER,  WILL PAY IN PLACE OF  ROYALTY  OWNER  ALL  SUCH  IMBALANCE  CHARGES  NOT
PREVENTED,  AND  WILL IN ALL  CIRCUMSTANCES  INDEMNIFY  AND HOLD  ROYALTY  OWNER
HARMLESS FROM AND AGAINST ALL IMBALANCE CHARGES.

     Section 3.5 Environmental  Compliance.  Working Interest Owner will not (a)
cause or permit the Subject Lands or the condition thereof or operations thereon
to be in violation of any  Environmental  Laws, (b) cause or permit the disposal
or other  release  of any  Hazardous  Substance  on or to the  Subject  Lands in
violation of any  Environmental  Law, (c) fail to timely remove or remediate any
Hazardous  Substance  which  has been or now or  hereafter  is  released  on the
Subject Lands in amounts which would violate any Environmental Laws, or (d) take
or omit to take any  action  that will  subject  Working  Interest  Owner or the
Subject  Lands to any  remedial  obligation  (or Royalty  Owner to any  remedial
obligation)  under any  Environmental  Laws  pertaining  to the  Subject  Lands,
assuming in each case disclosure to the applicable  governmental  authorities of
all relevant facts, conditions and circumstances, if any. Working Interest Owner
will promptly  notify  Royalty Owner in writing of any existing,  pending or, to
the best  knowledge  of Working  Interest  Owner,  threatened  investigation  or
inquiry of a affecting any Subject  Lands by any private  party or  governmental
authority in connection with any Environmental Laws. Working Interest Owner will
take all steps  reasonably  necessary to determine that no Hazardous  Substances
are  disposed of or  otherwise  released or being  released on or to the Subject
Lands in violation of any Environmental Laws.

     Section 3.6 Maintaining and Restoring Productivity. (a) If any Subject Well
at any time ceases to be a Commercial Well for any reason, then Working Interest
Owner will carry out such Repair Operations on such Subject Well to increase its
productivity as may be reasonably requested by Royalty Owner.

     (b) A well will be  deemed to be a  "Commercial  Well"  unless  and until a
condition arises such that such well is no longer capable of producing in paying
quantities (without regard to the burden of the Production Payment).

     Section 3.7 Insurance; Damage or Loss.

     (a)  Insurance.  Working  Interest  Owner  will  maintain  or  cause  to be
maintained,  at  Working  Interest  Owner's  sole  cost  and  expense  and  with
financially  sound and reputable  insurers  reasonably  satisfactory  to Royalty
Owner, insurance against such liabilities,  casualties, risks and contingencies,
and in  such  types  as is  customary  in the  case of  independent  oil and gas
companies engaged in operations of similar  properties,  including  insurance of
the types and coverages described in Schedule 3.7 and with limits of coverage no
less than those set out in Schedule 3.7. Such  insurance will name Royalty Owner
as an  additional  insured and as a loss payee as provided in Schedule  3.7, and
Working  Interest Owner will  otherwise  take all actions  described in Schedule
3.7.  Any loss  proceeds  from such  property  insurance,  whether  collected by
Working  Interest  Owner or  Royalty  Owner,  will be  applied  to the  costs of
repairing or replacing the property loss or damage  unless  otherwise  agreed by
Working  Interest Owner and Royalty Owner.  Working  Interest Owner will furnish
certificates of such insurance to Royalty Owner and will obtain  endorsements to

                                       12
<PAGE>
such policies providing that the insurer will notify Royalty Owner not less than
30 days prior to the expiration or termination of such policy of insurance.

     (b)  Repair.  In the  event  of any  damage  to or  loss  of any  platform,
pipeline, well, equipment or facility on the Subject Lands or otherwise owned by
any of Working  Interest Owner and used in connection  with the operation of any
Subject  Interest or the production of Subject  Hydrocarbons,  or the balancing,
treating,  gathering,  transporting,  tender,  processing  or other  handling of
Subject   Hydrocarbons,   or  the   marketing,   sale  or  transfer  of  Subject
Hydrocarbons,  Working  Interest  Owner  will (at no cost to  Royalty  Owner and
without regard to whether  insurance  proceeds are available to Working Interest
Owner) will promptly  carry out or cause to be carried out Repair  Operations as
necessary  or  appropriate  to repair,  restore or replace  such damaged or lost
property (or carry out other Repair  Operations  reasonably  expected to replace
the future production lost by such damage or loss).

     Section 3.8 Continued  Ability to Operate.  Working  Interest Owner will at
all times be a limited  liability  company,  corporation or limited  partnership
that is validly  existing  and in good  standing  under the Laws of its state of
formation  and  duly  qualified  to do  business  and in good  standing  in each
jurisdiction  where any Subject Lands are located.  Working  Interest Owner (and
any Person  operating  the Subject  Interest  on its  behalf)  will at all times
obtain and possess (or cause to be obtained and possessed) all consents,  bonds,
permits,  licenses,   right-of-ways,   easements,   authorizations  and  waivers
reasonably necessary under any applicable Law or any Lease or material contract,
indenture,  instrument  or agreement  binding on or affecting  Working  Interest
Owner or the Subject  Interests  in order to permit the  performance  by Working
Interest Owner of the Production Payment Documents.

                                   ARTICLE IV
                                   [RESERVED]

                                   ARTICLE V
                                OTHER AGREEMENTS

     Section 5.1 Performance of Production Payment  Documents.  Working Interest
Owner will, at its sole cost and expense, perform all of its covenants and other
obligations under this Agreement and the other Production Payment Documents,  as
and when provided therein and herein.

     Section 5.2 Interest on Late Payments;  No Usury.  Should Working  Interest
Owner fail to pay  Royalty  Owner any  amount of money due under any  Production
Payment  Document at the time when such amount is due,  Working  Interest  Owner
will also pay  interest  on such  amount at the  Agreed  Rate from the date such
amount  is due  until it is paid.  Working  Interest  Owner  and  Royalty  Owner
stipulate and agree,  however, that they intend to contract in strict compliance
with applicable  usury Law from time to time in effect.  In furtherance  thereof
they  further  stipulate  and agree that neither this Section 5.2 nor any of the
other terms and  provisions  contained in any Production  Payment  Document will
ever be  construed  to create a contract  to pay,  for the use,  forbearance  or
detention  of  money,  interest  in  excess of the  maximum  amount of  interest
permitted to be charged by applicable Law from time to time in effect.  No party
to any Production  Payment Document will ever be liable for unearned interest or

                                       13
<PAGE>
will ever be required to pay  interest in excess of the maximum  amount that may
be lawfully  charged under  applicable Law from time to time in effect,  and the
provisions  of this  section  will  control  over all  other  provisions  of the
Production  Payment  Documents  which may be in conflict  or  apparent  conflict
herewith. In determining whether or not the interest paid or payable,  under any
specific  circumstance,  exceeds the maximum amount  permitted under  applicable
Law, the parties to the Production Payment Documents will to the greatest extent
permitted under applicable Law prorate, allocate, and spread the total amount of
interest  throughout  the  entire  contemplated  term  of the  interest  bearing
obligations in accordance with the amounts thereof outstanding from time to time
and the  maximum  legal  rate of  interest  from  time to time in  effect  under
applicable  Law in order to  lawfully  charge  the  maximum  amount of  interest
permitted under applicable Law.

     Section 5.3 Indemnity.

     (a) AS USED HEREIN,  "ROYALTY OWNER  INDEMNITEES"  MEANS (I) ROYALTY OWNER,
(II) EACH OF ROYALTY  OWNER'S  SUCCESSORS AND ASSIGNS  (INCLUDING ITS MORTGAGEES
AND LENDERS),  (III) ALL OF THE AFFILIATES OF EACH PERSON  REFERRED TO IN EITHER
OF THE PRECEDING  CLAUSES (I) AND (II),  AND (IV) ALL OF THE PARTNERS,  MEMBERS,
MANAGERS,   SHAREHOLDERS,    OFFICERS,   DIRECTORS,   AGENTS,   REPRESENTATIVES,
BENEFICIARIES,  TRUSTEES  (INCLUDING  TRUSTEE),  ATTORNEYS AND EMPLOYEES OF EACH
PERSON DESCRIBED IN ANY OF THE PRECEDING CLAUSES (I), (II) AND (III).

     (b) WORKING  INTEREST OWNER AGREES TO INDEMNIFY AND HOLD EACH ROYALTY OWNER
INDEMNITEE HARMLESS FROM AND AGAINST ALL CLAIMS, DEMANDS, DAMAGES,  LIABILITIES,
LIENS,  LOSSES,   FINES,   PENALTIES,   CHARGES,   ADMINISTRATIVE  AND  JUDICIAL
PROCEEDINGS,  ORDERS, JUDGMENTS,  REMEDIAL ACTION REQUIREMENTS,  INVESTIGATIONS,
AND ENFORCEMENT  ACTIONS OF ANY KIND, TOGETHER WITH ALL INTEREST THEREON AND ALL
COSTS AND EXPENSES  RELATED  THERETO  (INCLUDING ALL FEES AND  DISBURSEMENTS  OF
COUNSEL AND OTHER ADVISORS) AND ALL OTHER OBLIGATIONS WHATSOEVER  (COLLECTIVELY,
"LOSSES")  ARISING,  IN WHOLE OR IN PART,  DIRECTLY  OR  INDIRECTLY,  FROM OR IN
CONNECTION WITH ANY OF THE FOLLOWING:

     (i) THE EXPLORING, DRILLING, DEVELOPING, OPERATING, MAINTAINING, REWORKING,
REDRILLING OR RECOMPLETING OF THE SUBJECT  INTERESTS,  SUBJECT LANDS, OR SUBJECT
WELLS, OR OTHER OPERATIONS THEREON,  OR THE PRODUCTION OF SUBJECT  HYDROCARBONS,
OR THE BALANCING, TREATING, GATHERING, TRANSPORTING, TENDER, PROCESSING OR OTHER
HANDLING OF SUBJECT HYDROCARBONS,  OR THE MARKETING, SALE OR TRANSFER OF SUBJECT
HYDROCARBONS;

     (ii) THE PRESENCE OF ANY HAZARDOUS  SUBSTANCES IN,  AROUND,  UNDER OR ABOUT
ANY OF THE SUBJECT  LANDS,  ANY OTHER  PROPERTIES OR ASSETS OF WORKING  INTEREST

                                       14
<PAGE>
OWNER, OR ANY OTHER  PROPERTIES OR NATURAL  RESOURCES IN THE VICINITY THEREOF OR
AFFECTED  THEREBY (IN THIS  SUBSECTION,  ALL OF THE FOREGOING ARE REFERRED TO AS
THE "RELEVANT PROPERTY");

     (iii) THE PRESENCE, USE, GENERATION,  TRANSPORTATION,  TREATMENT,  STORAGE,
REMEDIATION,  DISPOSAL,  RELEASE,  OR  DISCHARGE  AT ANY  TIME OF ANY  HAZARDOUS
SUBSTANCE  ON, UNDER OR FROM THE RELEVANT  PROPERTY;  ANY FAILURE AT ANY TIME BY
ANY  PERSON  (WHETHER  WORKING  INTEREST  OWNER,  ROYALTY  OWNER,  ANY OF  THEIR
AFFILIATES,  OR ANY OTHER PERSONS) TO COMPLY WITH ANY ENVIRONMENTAL LAWS OR WITH
ANY OTHER DUTIES IN RESPECT OF DAMAGE TO OR REMEDIATION OF THE ENVIRONMENT  THAT
ARE IN ANY WAY RELATED TO THE RELEVANT  PROPERTY;  OR THE EXPOSURE OF ANY PERSON
OR  PROPERTY  AT ANY  TIME TO ANY  HAZARDOUS  SUBSTANCE  ON,  UNDER  OR FROM THE
RELEVANT  PROPERTY  OR IN  CONNECTION  WITH ANY  OPERATIONS  CONDUCTED  ON OR IN
RESPECT OF THE RELEVANT PROPERTY BY ANY PERSON;

     (iv) ANY INJURY OR ALLEGED  INJURY TO PERSONS OR  PROPERTIES  OCCURRING  OR
ALLEGEDLY  OCCURRING  IN  CONNECTION  WITH ANY OF THE MATTERS  DESCRIBED  IN THE
PRECEDING SUBSECTIONS (I) OR (II);

     (v) ANY BREACH OF WORKING INTEREST OWNER'S WARRANTIES IN SECTION 1.9 OF THE
CONVEYANCE  (INCLUDING ANY LOSSES SUFFERED BY ANY ROYALTY OWNER  INDEMNITEE AS A
RESULT OF ANY CLAIM THAT SUCH ROYALTY OWNER  INDEMNITEE  LACKS GOOD TITLE TO THE
PRODUCTION  PAYMENT  HYDROCARBONS  OR OTHERWISE  MUST DELIVER OR PAY OVER TO ANY
PERSON ANY PART OF THE PRODUCTION  PAYMENT  HYDROCARBONS OR ANY PROCEEDS THEREOF
AT ANY TIME  PREVIOUSLY  RECEIVED OR  THEREAFTER  TO BE RECEIVED BY SUCH ROYALTY
OWNER INDEMNITEE);

     (vi) THE  BREACH OR  ALLEGED  BREACH OF ANY  SUBJECT  CONTRACT  BY  WORKING
INTEREST OWNER OR ANY OTHER PERSON (INCLUDING ROYALTY OWNER);

     (vii) ANY  VIOLATION OR ALLEGED  VIOLATION OF THE RIGHTS OF ANY PERSON AS A
RESULT OF WORKING  INTEREST  OWNER'S  CONVEYANCE  OF THE  PRODUCTION  PAYMENT TO
ROYALTY OWNER OR WORKING INTEREST OWNER'S EXECUTION,  DELIVERY OR PERFORMANCE OF
ANY PRODUCTION PAYMENT DOCUMENT; OR

     (viii) ANY BREACH BY WORKING INTEREST OWNER OF ANY OF ITS  REPRESENTATIONS,
WARRANTIES,  COVENANTS OR AGREEMENTS IN ANY OF THE PRODUCTION PAYMENT DOCUMENTS,

                                       15
<PAGE>
OR ANY MATTERS RELATING TO THE ENFORCEMENT OR DEFENSE OF THE PRODUCTION  PAYMENT
DOCUMENTS BY ROYALTY OWNER.

     (c) THE FOREGOING  INDEMNITY WILL APPLY WHETHER OR NOT ANY LOSSES ARISE OUT
OF THE SOLE,  JOINT OR CONCURRENT  NEGLIGENCE,  FAULT OR STRICT LIABILITY OF ANY
ROYALTY OWNER  INDEMNITEE OR IN CONNECTION  WITH ANY LIABILITY  IMPOSED UPON ANY
ROYALTY  OWNER  INDEMNITEE  AS ARESULT OF ANY THEORY OF STRICT  LIABILITY OR ANY
OTHER  DOCTRINE OF LAW (IN EACH CASE  WHETHER  ALLEGED,  ARISING OR IMPOSED IN A
LEGALPROCEEDING  BROUGHT BY OR AGAINST  WORKING  INTEREST  OWNER,  ANY AFFILIATE
OFWORKING  INTEREST OWNER, ANY ROYALTY OWNER  INDEMNITEE,  OR ANY OTHER PERSON),
PROVIDED THAT THE FOREGOING  INDEMNITY WILL NOT APPLY TO ANY LOSSES  INCURRED BY
ANY  ROYALTY  OWNER  INDEMNITEE  TO THE EXTENT  PROXIMATELY  CAUSED BY THE GROSS
NEGLIGENCE OR WILLFUL  MISCONDUCT OF SUCH ROYALTY OWNER INDEMNITEE AS DETERMINED
IN A  FINAL  JUDGMENT  BY A  COURT  OF  COMPETENT  JURISDICTION.  THE  FOREGOING
INDEMNITY  WILL NOT BE  QUALIFIED  OR  LIMITED  BY ANY OTHER  PROVISIONS  OF ANY
PRODUCTION  PAYMENT DOCUMENTS AND WILL SURVIVE THE TERMINATION OF THE PRODUCTION
PAYMENT  AND OF THIS  AGREEMENT  AND THE  OTHER  PRODUCTION  PAYMENT  DOCUMENTS.
WITHOUT  LIMITATION OF THE FOREGOING  PROVISIONS,  THE FOREGOING  INDEMNITY WILL
APPLY IN THE EVENT OF ANY DISPUTE,  ADVERSARY  PROCEEDING,  LITIGATION  OR OTHER
ACTION  AMONG OR BETWEEN  WORKING  INTEREST  OWNER AND ANY OF THE ROYALTY  OWNER
INDEMNITEES.

     Section 5.4 Payment of Expenses.  Working Interest Owner will promptly (and
in any  event,  within ten (10) days after any  invoice  or other  statement  or
notice) pay: (a) all transfer,  stamp,  mortgage,  documentary  or other similar
taxes, assessments or charges levied by any governmental or revenue authority in
respect of any of the  Production  Payment  Documents  or any other  document or
transaction  referred to herein or therein,  (b) all costs and expenses incurred
by or on behalf of Royalty Owner (including attorneys' fees,  consultants' fees,
engineering fees,  travel costs and  miscellaneous  expenses) in connection with
(i) the amendment, filing, recording, refiling or re-recording of any Production
Payment  Document (or any waiver in connection  therewith) or any other document
or instrument or further  assurances  obtained,  provided,  filed or recorded or
refiled or  re-recorded in connection  with the terms of any Production  Payment
Document,  the analysis of the Production  Payment,  the  administration  of the
Production  Payment  Documents,  or the monitoring of the Production  Payment or
Working Interest Owner's compliance with the Production  Payment Documents,  and
(c) all costs and expenses  incurred by or on behalf of Royalty Owner (including
attorneys'  fees,   consultants'  fees,   engineering  fees,  travel  costs  and
miscellaneous expenses whether or not related to disputes, adversary proceedings
or litigation  between or involving Working Interest Owner and Royalty Owner) in
connection  with the defense or  enforcement  of any of the  Production  Payment
Documents, any attempt to cure any breach thereunder,  or the defense of Royalty
Owner's exercise of its rights thereunder.

                                       16
<PAGE>
     Section 5.5 Information and Reporting.

     (a) Monthly Statements. Until the termination of the Production Payment and
the  completion of all payments for  Production  Payment  Hydrocarbons,  Working
Interest Owner, at its own expense, will furnish to Royalty Owner within 30 Days
after the end of each Month, a lease  operating  statement in form acceptable to
Royalty Owner, showing (1) gross volumes of Hydrocarbons  produced and sold from
the Subject  Lands during such Month and the portions  thereof that  constituted
Subject  Hydrocarbons,  (2) the average  sales  prices paid to Working  Interest
Owner for the Retained Interest Hydrocarbons, and (3) the severance Taxes, lease
operating expenses,  capital expenditures and any other expenses for such Month.
Each  such  lease  operating  statement  will be in a form and  level of  detail
acceptable to Royalty  Owner and  certified by an authorized  officer of Working
Interest Owner to be materially true and correct.

     (b) Quarterly Reports.  Until the termination of the Production Payment and
the  completion of all payments for  Production  Payment  Hydrocarbons,  Working
Interest Owner, at its own expense,  will furnish to Royalty Owner the following
reports  and  information  within  30 days  after the end of each  March,  June,
September, and December:

     (i) A  certificate  executed by an authorized  officer of Working  Interest
Owner   certifying   that,  to  the  best  of  his  knowledge  after  reasonable
investigation,  all Taxes, royalties,  rentals and other amounts with respect to
the Subject  Interests (other than amounts disputed in good faith by appropriate
proceedings  and  royalties  held in  suspense  due to title  disputes  or title
questions)  have  been  paid in full and in  accordance  with  the  terms of the
Leases,  any other  applicable  agreements  and all  applicable  Laws,  and that
Working  Interest  Owner is in  compliance in all respects with the terms of the
Production Payment Documents,  the Leases, and the Subject Contracts, or if not,
specifying in reasonable detail any exceptions thereto.

     (ii)  Reports  concerning  any  material  change in methods of treatment or
operation of all or any Subject Wells which are productive of Hydrocarbons,  any
new drilling or  development,  any method of  secondary or tertiary  recovery by
repressuring  or  otherwise,  or any other  action  with  respect to the Subject
Interests,  the  decision  as to which may  materially  increase  or reduce  the
quantity of Hydrocarbons  ultimately recoverable from the Subject Interests,  or
the rate of production therefrom,  or which may shorten or prolong the period of
time required for termination of the Production Payment.

     (iii) A report setting out the current status of all production  imbalances
by Subject Well or Subject Interest.

     (iv) Unaudited  consolidated financial statements of Working Interest Owner
as of the end of and for the fiscal  quarter  then  ending,  including a balance
sheet and  statements  of income and cash  flows,  prepared in  accordance  with
generally accepted accounting principles (other than the omission of footnotes),
consistently  applied,  accompanied by a certificate of Working Interest Owner's
chief financial officer stating that such financial  statements were so prepared
and fairly present the matters  addressed  therein,  subject to normal  year-end
adjustments.

                                       17
<PAGE>
     (c) Annual and Semiannual Reports.  Until the termination of the Production
Payment and the completion of all payments for Production Payment  Hydrocarbons,
Working Interest Owner, at Working Interest Owner's own expense, will furnish to
Royalty Owner the following reports and information:

     (i)  Semi-annually,  on or before  April 1 and  October 1 of each  year,  a
Reserve  Report  prepared  as  of  the  preceding   February  1  and  August  1,
respectively.  Each  report  dated as of August 1 will be prepared or audited by
the Company  Engineers,  and each report dated as of February 1 will, at Royalty
Owner's  election,  be prepared by Working  Interest  Owner's  in-house  reserve
engineers or by the Company Engineers.  Each report will incorporate all current
information  and data  available  to Working  Interest  Owner  pertinent  to the
estimation of Oil and Gas reserves attributable to the Subject Interests and the
Production  Payment.  Working  Interest Owner will also furnish to Royalty Owner
Working Interest Owner's internally prepared summary of such report, if any, and
a copy of any other  reserve  report  from  time to time  prepared  for  Working
Interest  Owner by any  independent  petroleum  engineering  firm  covering  the
Subject Interests or any part thereof.

     (ii) Annually,  within 105 days after the end of each fiscal year,  audited
financial  statements  of Working  Interest  Owner as of the end of and for such
year,  including a balance sheet and  statements of income,  owner's  equity and
cash  flows,   prepared  in  accordance  with  generally   accepted   accounting
principles,  accompanied  by a report of Working  Interest  Owner's  independent
certified  public  accountants  stating  that  their  examination  was  made  in
accordance with generally  accepted auditing standards and that in their opinion
such financial  statements  fairly present Working  Interest  Owner's  financial
position,  results of  operations,  owner's  equity and cash flows in accordance
with   generally   accepted   accounting   principles    consistently   applied.
Notwithstanding  the  preceding   sentence,   the  foregoing  audited  financial
statements  of Working  Interest  Owner for the first fiscal year  following the
execution of this Agreement  shall be delivered to Royalty Owner within 150 days
of such fiscal year end.

     (iii) At least 10 days prior to the expiration date of any policy, evidence
satisfactory  to  Royalty  Owner  confirming  timely  renewal  of the  insurance
policies required hereunder.

     (d)  Notices.  Until the  termination  of the  Production  Payment  and the
completion of all payments for Production Payment Hydrocarbons, Working Interest
Owner, at Working  Interest  Owner's own expense,  will furnish to Royalty Owner
the following as and when indicated below:

     (i) As soon as  possible  and in any  event  within  5 days  after  Working
Interest  Owner becomes aware  thereof,  written notice of (A) any breach of any
Production  Payment Document or any breach (by any party thereto) of any Subject
Contract,  (B) any action, event or occurrence that could reasonably be expected
to have a material adverse effect on the Production Payment, or (C) any material
change in the rate of production of Subject Hydrocarbons from the Subject Wells.

     (ii) Promptly after obtaining actual knowledge  thereof,  written notice of
any adverse claim or demand made by any Person  affecting the Subject  Interests

                                       18
<PAGE>
or the  Hydrocarbons  produced  therefrom  in any manner  whatsoever,  or of any
proceedings  instituted  or  threatened  with respect  thereto,  or of any other
matter required to be reported under Section 3.1(d) or Section 3.5.

     (iii) Promptly after the filing thereof,  copies of any notices and filings
made by Working  Interest  Owner or the Parent with the  Securities and Exchange
Commission.

(iv) At least 30 days prior to the occurrence  thereof,  notice of any change in
Working  Interest Owner's name,  identity or  organizational  structure,  or any
     change to its jurisdiction of organization, including in such notice a
ratification  of  Royalty  Owner's  authority  to  file  any  related  financing
statement amendments  contemplated in the Uniform Commercial Code. In connection
with any change in Working  Interest  Owner's name,  identity or  organizational
structure,  or any change to its jurisdiction of organization,  Royalty Owner is
hereby   authorized   (whether  or  not  Working   Interest  Owner's  gives  the
ratification  described in the  preceding  subsection  (iv)) to file any related
financing statement amendments contemplated in the Uniform Commercial Code.

     (e) Other Information Upon Request. Until the termination of the Production
Payment and the completion of all payments for Production Payment  Hydrocarbons,
Working  Interest Owner,  at Working  Interest  Owner's own expense,  will, upon
request,  furnish to Royalty Owner and its consultants and  representatives  the
following information and access as and when requested from time to time:

     (i) Access to the Company  Engineers  or other  engineers  who prepared the
most recent annual and semiannual  Reserve Reports delivered  hereunder,  and to
their  engineering  databases  and  other  relevant  data,  for the  purpose  of
discussing and reviewing their data, analysis, and conclusions.

     (ii) copies of surface maps showing property lines and well locations, well
logs, core analysis data, flow and pressure tests,  production analysis,  casing
programs and other similar  information  related to the Subject  Interests,  the
Subject Wells or the production therefrom.

     (iii) A schedule of the  Upstream  Contracts  pursuant to which  operations
relating to the Subject  Interests  are carried  out, all  reasonably  requested
information  pertaining  thereto,  and copies of each such Upstream Contract (or
amendment thereto).

     (iv) A  schedule  of the  Downstream  Contracts  under  which  the  Subject
Hydrocarbons were  transported,  treated,  processed,  resold or otherwise dealt
with  during  the most  recent  Month(s),  setting  out the  amount  of  Subject
Hydrocarbons dealt with under each such Downstream  Contract and the prices paid
or received  thereunder by Working  Interest Owner,  the Leases covered thereby,
and the remaining term thereof,  and a copy of each such Downstream Contract (or
amendment thereto).

     (v) Access to remote  field  monitoring  data  specifically  related to the
wells subject to the  Production  Payment,  such as SCADA data that is available
electronically.

                                       19
<PAGE>
     (vi) Such  other  information  relating  to the  Subject  Interests  or the
matters addressed in the Production  Payment Documents as Royalty Owner may from
time to time request.

     (f) Audit and  Inspection  Rights.  Royalty  Owner will,  at the expense of
Working Interest Owner,  have the right from time to time to audit the books and
records of Working Interest Owner with respect to the Subject  Interests and the
Subject  Hydrocarbons,  including all information with respect to the matters to
be reported on by Working Interest Owner as provided herein. Such audits will be
conducted during normal business hours at Working Interest Owner's offices or at
the offices where Working  Interest Owner maintains the records  relating to the
items set forth above.  This right to audit will survive the  termination of the
Production  Payment  for two  years.  If, as a result of any such  audit,  it is
determined  that any amount is due Royalty  Owner under the  Production  Payment
Documents,  whether  as a result of the  failure of  Working  Interest  Owner to
properly deliver all Production Payment  Hydrocarbons,  or the proceeds thereof,
to  Royalty  Owner in  accordance  with  the  terms  of the  Production  Payment
Documents, or otherwise,  Working Interest Owner will pay such amount to Royalty
Owner  together  with interest at the Agreed Rate from the date that such amount
should  have  been  delivered  or paid  in  accordance  with  the  terms  of the
Production Payment Documents to the date of payment. Working Interest Owner will
also  permit  the duly  authorized  representatives  of  Royalty  Owner,  at any
reasonable  time,  to make such  inspections  of the Subject  Interests  and the
property, equipment and facilities used in the operation thereof (or any records
of Working  Interest  Owner related  thereto) as such  representatives  may deem
proper.

     Section 5.6 Marketing of Production Payment Hydrocarbons.

     (a)  General  Provision.  As  provided in the  Conveyance,  the  Production
Payment Hydrocarbons will be delivered to Royalty Owner in kind or to the credit
of Royalty  Owner,  free of Delivery Point Charges and other costs and expenses,
at the  applicable  Delivery  Points.  Royalty  Owner  will take and  market the
Production  Payment  Hydrocarbons upon delivery by Working Interest Owner at the
applicable Delivery Points.

     (b) Spot Market PP Hydrocarbons.  Royalty Owner will have the right to take
and market all or any portion of the Production  Payment  Hydrocarbons  and also
the right to require Working Interest Owner to process and/or market, as Royalty
Owner's agent, all or any portion of the Production Payment  Hydrocarbons on the
same  terms  and  conditions  as  Working  Interest  Owner's  Retained  Interest
Hydrocarbons  are  processed  and/or  marketed.   Any  such  Production  Payment
Hydrocarbons  so marketed by Royalty Owner are called "Royalty Owner Spot Market
PP Hydrocarbons" and any such Production Payment Hydrocarbons that Royalty Owner
so requires Working Interest Owner to process or market as Royalty Owner's agent
are herein called "Working Interest Owner Spot Market PP Hydrocarbons".

     (c) Assistance with Marketing. Working Interest Owner will, without charge,
render  all  assistance  that may be useful or  necessary  to  Royalty  Owner in
marketing  the  Royalty  Owner Spot  Market PP  Hydrocarbons,  including  giving
Royalty  Owner  access to and the use of all  treating,  gathering,  processing,
storage, transportation and other facilities available to Working Interest Owner
or Working  Interest  Owner's  Affiliates,  whether by  ownership,  contract  or
otherwise,  which access and use will, to the maximum  extent  allowed by Law or

                                       20
<PAGE>
other  agreements  existing on the date  hereof,  (i) be made  available  to the
Subject  Hydrocarbons  prior to any other  Hydrocarbons  owned or  controlled by
Working  Interest  Owner,  (ii) be  allocated  between  the  Production  Payment
Hydrocarbons  and  the  Retained  Interest  Hydrocarbons  in  proportion  to the
relative amounts thereof,  and (iii) be without charge by Working Interest Owner
or its Affiliates for any such  treating,  gathering or other  facilities in the
area of  production  and with the  same  charges  per unit of Oil as are paid by
Working  Interest  Owner to third  parties  for any  other  facilities.  Working
Interest Owner will process and market all Working Interest Owner Spot Market PP
Hydrocarbons  on the  same  terms  as its own  Retained  Interest  Hydrocarbons.
Working  Interest  Owner  will use its best  efforts  to cause all  proceeds  of
Working  Interest  Owner  Spot  Market PP  Hydrocarbons  and  Retained  Interest
Hydrocarbons to be paid directly to Royalty Owner by the purchasers thereof, and
upon receipt thereof, Royalty Owner will retain the proceeds from the Production
Payment Hydrocarbons and promptly remit the remainder to Working Interest Owner.
Until such  designation  is effective (and if Working  Interest Owner  otherwise
receives any such proceeds),  Working  Interest Owner will receive such proceeds
in trust on behalf of Royalty  Owner and pay such  proceeds to Royalty  Owner by
wire transfer on or before the third Business Day after receipt thereof, without
any setoff,  defense or counterclaim,  all of which are hereby waived by Working
Interest Owner.

     (d) Nominations. Whenever any Royalty Owner Spot Market PP Hydrocarbons are
being sold,  Working Interest Owner will, not less than five Business Days prior
to the first day of each Month in which such sales will  occur,  notify  Royalty
Owner of the daily  quantities  of such  Production  Payment  Hydrocarbons  that
Working  Interest Owner expects to be produced and delivered for Royalty Owner's
account at each Delivery Point during such Month.

     Section 5.7 Preservation of Subject Well Drainage.  From the Effective Date
of this Agreement  through the  termination  of the  Production  Payment and the
completion of all payments to Royalty  Owner that are required  under any of the
Production Payment Documents, Working Interest Owner will not take any action in
drilling or completing any well that is not a Subject Well (or other  operations
in connection  therewith)  that has, or would  reasonably be expected to have, a
negative impact on the performance characteristics of any Subject Well.

                                   ARTICLE VI
                   LIENS TO SECURE PERFORMANCE; OTHER REMEDIES

     Section 6.1 Mortgage. The Conveyance is the grant of a property interest in
the Subject  Interests and the Subject  Hydrocarbons,  pursuant to which Royalty
Owner will own and possess the Production  Payment  Hydrocarbons if, as and when
produced.  Royalty Owner will look solely to the Production Payment Hydrocarbons
for satisfaction and discharge of the Production  Payment,  and Working Interest
Owner will not be personally liable for such satisfaction and discharge (and the
indemnity provided in Section 5.3 will not be construed to make Working Interest
Owner personally liable for such  satisfaction and discharge).  Working Interest
Owner  has,  however,  made  various  covenants,  agreements,   representations,
warranties and indemnities in the various Production Payment Documents for which
it is personally  liable. In order to secure the performance by Working Interest
Owner of all of Working Interest Owner's  obligations and liabilities under this

                                       21
<PAGE>
Agreement or any other Production  Payment  Document,  Working Interest Owner is
concurrently herewith executing and delivering the Mortgage.

     Section 6.2 Production Proceeds.  Notwithstanding that, by the terms of the
Mortgage,  Working  Interest  Owner is  granting  to Royalty  Owner the right to
collect directly all of the "As-Extracted  Collateral" (as defined therein),  so
long as no Performance  Default has occurred Working Interest Owner may continue
to receive from the  purchasers  of  production  all such  Production  Proceeds,
subject,  however,  to the liens  created  under the  Mortgage,  which liens are
hereby affirmed and ratified, and Royalty Owner will not exercise its rights and
powers under  Section 4.03 of the Credit  Agreement.  Upon the  occurrence  of a
Performance Default,  Royalty Owner may exercise all rights and remedies granted
under the Mortgage,  including the right to obtain  possession of all Production
Proceeds then held by Working  Interest Owner and the right to receive  directly
from the  purchasers of production  all other  Production  Proceeds.  In no case
shall any failure,  whether  intentioned  or  inadvertent,  by Royalty  Owner to
collect  directly  any  Production  Proceeds  constitute  in any  way a  waiver,
remission  or  release  of  any of  its  rights  under  the  Production  Payment
Documents,  nor shall any release of any Production Proceeds by Royalty Owner to
Working Interest Owner constitute a waiver,  remission,  or release of any other
Production  Proceeds  or of the  rights of Royalty  Owner to  collect  all other
Production Proceeds thereafter.

     Section 6.3  Replacement  of  Operator.  In addition to its other  remedies
under the Production  Payment  Documents,  upon the continuance of a Performance
Default for thirty  consecutive  days  without  being cured,  Royalty  Owner may
require Working Interest Owner to do (or require Working Interest Owner to cause
Parent to do) either or both of the  following:  (i) employ a contract  operator
designated  by Royalty  Owner for any or all of the Subject  Interests,  or (ii)
resign as  operator of any or all of the Subject  Interests,  whereupon  Working
Interest Owner will so resign and will appoint,  vote for, and otherwise support
a substitute operator acceptable to Royalty Owner.

                                  ARTICLE VII
                                 MISCELLANEOUS

     Section 7.1 Notices. All notices, requests, demands, instructions and other
communications  required  or  permitted  to be  given  hereunder  or  under  the
Conveyance  will be in writing and will be given as provided in the Purchase and
Sale Agreement.

     Section  7.2  Successors  and  Assigns.   The  covenants,   provisions  and
conditions  contained in this Agreement will be binding upon and (subject to the
restrictions  concerning the Subject Interests that are contained in Section 1.8
of the  Conveyance)  inure to the benefit of Working  Interest Owner and Royalty
Owner and their respective  successors and permitted  assigns.  Working Interest
Owner will not transfer, assign or pledge its rights or obligations hereunder or
under the other Production Payment Documents except as allowed under Section 1.8
of the Conveyance. Royalty Owner and its successors and assigns may, and nothing
contained in the Production  Payment Documents will in any way limit or restrict
the right of Royalty Owner, or Royalty Owner's successors and assigns, to, sell,
convey, assign, transfer,  pledge, mortgage or otherwise transfer the Production
Payment or its rights and obligations under the Production  Payment Documents in
whole or in part. If Royalty  Owner,  or any of Royalty  Owner's  successors and
assigns,  at any time executes a mortgage,  pledge or deed of trust covering all
or any part of the Production  Payment as security for any obligation,  then the
mortgagee,  the  pledgee  or the  trustee  therein  named or the  holder  of the

                                       22
<PAGE>
obligation  secured  thereby  will be  entitled,  when  and to the  extent  such
mortgage, pledge or deed of trust so provides or Royalty Owner otherwise agrees,
to exercise all of the rights,  remedies,  powers and privileges  conferred upon
Royalty Owner under the Production Payment Documents and to give or withhold all
consents required or permitted to be obtained from Royalty Owner pursuant to the
Production Payment  Documents.  All references herein to either Working Interest
Owner or Royalty Owner will include their  respective  successors  and permitted
assigns.

     Section 7.3 Acknowledgments  and Admissions.  Working Interest Owner hereby
represents,  warrants, agrees, acknowledges and admits that Royalty Owner is not
a  fiduciary  or an advisor  for  Working  Interest  Owner  with  respect to any
Production Payment Document or the transactions contemplated thereby and that no
partnership  or joint  venture  exists with  respect to the  Production  Payment
Documents between Working Interest Owner and Royalty Owner.

     Section 7.4 Entire Agreement;  Amendments;  Waiver.  This Agreement and the
other Production  Payment Documents  constitute the entire agreement between the
Parties. This Agreement may not be amended or modified,  and no rights hereunder
may be waived,  except by a written  document  signed by the Party to be charged
with such amendment,  modification or waiver.  Provisions of this Agreement that
refer to any consent, approval, amendment or waiver by either Party require such
consent, approval, amendment or waiver to be in writing. No waiver of any of the
provisions of this Agreement will be deemed to be or will constitute a waiver of
any other  provisions  hereof  (whether  or not  similar),  nor will such waiver
constitute a continuing waiver unless otherwise expressly provided.

     THIS WRITTEN AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS REPRESENT
THE FINAL AGREEMENT  BETWEEN  THEPARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR,  CONTEMPORANEOUS,  OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

     Section  7.5  Counterpart  Execution.  This  Agreement  may be  executed by
Working Interest Owner and Royalty Owner in any number of counterparts,  each of
which will be deemed an original instrument and all of which will constitute but
one and the same Agreement.

     Section  7.6  Applicable  Law.  This  Agreement  will  be  governed  by and
construed in accordance with the Laws of the State of Texas.

     Section 7.7 Severability. If any term or provision of this Agreement or any
other  Production   Payment  Document  is  ever  determined  to  be  illegal  or
unenforceable  to any  extent,  such term or  provision  will  otherwise  remain
effective and be enforced,  and all other terms and  provisions of the hereof or
thereof will nevertheless remain effective and will be enforced,  to the fullest
extent permitted by applicable Law.

     Section 7.8 Termination; Limited Survival. Upon both (i) the termination of
the  Production  Payment as  provided  in the  Conveyance  and (ii) the full and
complete  payment  and  performance  of all  obligations  and  duties of Working

                                       23
<PAGE>
Interest Owner under this Agreement and the other Production  Payment Documents,
Working  Interest  Owner will be  entitled to request and receive the release by
Royalty Owner of the liens and security  interests  under the  Mortgage,  and at
such time  Royalty  Owner will,  at the request and expense of Working  Interest
Owner,  execute and deliver an appropriate  release to Working  Interest  Owner.
Notwithstanding the foregoing or anything to the contrary herein or in any other
Production  Payment Document,  the following will survive any termination of the
Production  Payment,  this Agreement,  or any other Production Payment Document:
(a) all waivers or admissions made by Working  Interest Owner herein or therein,
(b) all obligations that any Person may have to indemnify or compensate  Royalty
Owner or any Royalty Owner Indemnitee hereunder or thereunder, and (c) all other
provisions   hereof  or  thereof  that  are  expressly  stated  to  survive  the
termination of the Production Payment or of this Agreement,  the Conveyance,  or
any other Production Payment Document.

     Section 7.9 WAIVER OF JURY TRIAL AND  PUNITIVE  DAMAGES.  WORKING  INTEREST
OWNER AND ROYALTY OWNER HEREBY RATIFY AND REMAKE THEIR WAIVERS OF AND AGREEMENTS
CONCERNING  JURY TRIAL AND PUNITIVE AND OTHER DAMAGES MADE IN SECTION 7.9 OF THE
PURCHASE AND SALE AGREEMENT.

     Section 7.10 CONSENT TO  JURISDICTION.  WORKING  INTEREST OWNER AND ROYALTY
OWNER  HEREBY  RATIFY AND REMAKE  THEIR  CONSENTS TO AND  AGREEMENTS  CONCERNING
JURISDICTION,  FORUM AND VENUE MADE IN  SECTION  7.10 OF THE  PURCHASE  AND SALE
AGREEMENT.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       24
<PAGE>
     IN WITNESS  WHEREOF,  Working  Interest  Owner and Royalty  Owner have duly
executed and delivered this Agreement as of the date set forth above.

BARON PRODUCTION LLC

By:
   -----------------------------------------

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

Title:
      --------------------------------------


                                       25
<PAGE>
PCEC SUB 1, LLC


By:
   -----------------------------------------
   Rosser C. Newton
   Vice President



                                       26
<PAGE>
                                  SCHEDULE 3.7
                      TO PRODUCTION AND MARKETING AGREEMENT
                                    INSURANCE

     Required Coverage

     Working  Interest Owner will at all times while operations are conducted on
the Subject Interests procure and maintain with responsible  insurance companies
for the benefit and  protection of the Parties the following  insurance and such
other insurance as Working Interest Owner deems appropriate:

     (a) Worker's  Compensation  Insurance and Employer's Liability Insurance in
compliance with all applicable Laws.

     (b) Comprehensive  General Liability Insurance (including pollution) with a
combined  single limit of not less than $1,000,000 per occurrence and $2,000,000
in the  aggregate.  This  policy  will  be  endorsed  to  provide  coverage  for
explosion,  collapse  and  underground  damage  hazards to  property  of others;
contractual liability; and products and completed operations;

     (c)  Comprehensive   Liability  Insurance  covering  all  owned,  hired  or
non-owned  vehicles with a combined single limit of not less than $1,000,000 per
occurrence;

     (d) Excess Umbrella Liability Insurance with a combined single limit of not
less than  $5,000,000 per  occurrence,  provided that after August 15, 2014, the
Working Interest Owner shall maintain Excess Umbrella Liability Insurance with a
Combined single limit of not less than $10,000,000;

     (e) Well Control Operator's Excess Expense Liability  Insurance  (including
cost of well  control,  relief  wells,  redrilling)  in an amount  not less than
$15,000,000 per occurrence; and

     (f) Property  Insurance  (subject to deductibles  that are customary in the
case of  independent  oil and gas  companies  engaged in  operations  of similar
properties) fully covering the property subject to this Production and Marketing
Agreement including the value of all facilities and well surface equipment.

     Additional Requirements

     1.  All   insurance   policies   will  be   endorsed   to  be  primary  and
noncontributory with any other valid and collectible insurance.

     2. Working  Interest  Owner will provide to Royalty Owner from time to time
as requested a Certificate of Insurance,  in form satisfactory to Royalty Owner,
as  evidencing  that  satisfactory  coverages  of the type and  limits set forth
hereinabove  are in effect.  Policies  providing  such  coverages  will  contain
provisions that no cancellation or material  changes in the policies will become
effective  except on 30 days' advance  written  notice thereof to Royalty Owner.
Irrespective  of the  requirements as to insurance to be carried as provided for
herein, the insolvency,  bankruptcy or failure of any insurance company carrying
insurance of Working Interest Owner, the failure of any insurance company to pay

                                       27
<PAGE>
claims  accruing,  or the  inadequacy of the limits of the  insurance,  will not
affect, negate or waive any of the provisions of any Production Payment Document
applicable  to  the  property,   including,  without  exception,  the  indemnity
obligations of Working  Interest Owner.  Working  Interest Owner will furnish to
Royalty Owner copies of all renewal applications or applications for replacement
insurance promptly following submission of the same.

     3. Working  Interest Owner will promptly notify Royalty Owner of any one or
more claims made under any insurance  policy where Working  Interest  Owner is a
named or  additional  insured  (whether  such claim is made by Working  Interest
Owner or any other person  insured  thereunder)  where such  claim(s) are for an
aggregate amount in excess of 50% of any aggregate policy limit.

     4. Working Interest Owner will require any policies of liability insurance,
except workers compensation coverage, that are in any way related to the Subject
Interests,  and that are obtained or maintained by Working  Interest  Owner,  to
include Royalty Owner, its parent and affiliated  companies and mortgagees,  and
their directors, officers, employees and agents, as Additional Insureds, without
any limitations  based on the fault or negligence,  in whole or in part, of such
Additional  Insureds.  Working  Interest  Owner will  require any  property  and
casualty policies that are in any way related to the Subject Interests, and that
are obtained or maintained by Working  Interest  Owner, to name Royalty Owner as
the loss  payee to the extent of Royalty  Owner's  or Working  Interest  Owner's
interests.  If any insurance policy is issued with the name of the insured being
other than the name of Working Interest Owner,  then Working Interest Owner will
be added as a named  insured  and  Royalty  Owner and its parent and  affiliated
companies and mortgagees,  and their directors,  officers,  employees and agents
will be named as Additional Insureds and loss payee as required in the preceding
sentences of this paragraph.

     5. Working  Interest  Owner will require all policies of insurance that are
in any way  related to this  Production  and  Marketing  Agreement  and that are
obtained or maintained by Working  Interest Owner to include  clauses  providing
that each  underwriter will waive its rights of recovery,  under  subrogation or
otherwise,  against  Royalty  Owner,  its parent and  affiliated  companies  and
mortgagees, and their directors, officers, employees and agents.

                                       28