<PAGE>
                                                                    EXHIBIT 10.4


                            A.A.P.L. FORM 610 - 1989
                         MODEL FORM OPERATING AGREEMENT



                               OPERATING AGREEMENT

                                      DATED

                             _____________, 20____,


OPERATOR
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CONTRACT AREA               See Attached Exhibit "A"
             -------------------------------------------------------------------

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COUNTY OR PARISH OF                                 , STATE OF
                   ---------------------------------          ------------------




                        COPYRIGHT 1989 ALL RIGHT RESERVED
                        AMERICAN ASSOCIATION OF PETROLEUM
                      LANDMEN, 4100 FOSSIL CREEK BLVD. FORT
                       WORTH, TEXAS. 76137. APPROVED FORM.
                             A.A.P.L NO. 610 - 1989



<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                TABLE OF CONTENTS

<Table>
<Caption>
Article                                                Title                                                   Page
<S>               <C>                                                                                          <C>
I.
DEFINITIONS.......................................................................................................1
II.
EXHIBITS..........................................................................................................3
III.
INTERESTS OF PARTIES..............................................................................................3
         A.       OIL AND GAS INTERESTS...........................................................................3
         B.       INTERESTS AND PARTIES IN COSTS AND PRODUCTION...................................................3
         C.       SUBSEQUENTLY CREATED INTERESTS..................................................................4
IV.
TITLES............................................................................................................5
         A.       TITLE EXAMINATION...............................................................................5
         B.       LOSS OR FAILURE OF TITLE........................................................................5
                  1.       Other Losses...........................................................................5
V.
OPERATOR..........................................................................................................6
         A.       DESIGNATION AND RESPONSIBILITIES OF OPERATOR....................................................6
         B.       RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR...................................6
                  1.       Resignation or Removal of Operator.....................................................6
                  2.       Selection of Successor Operator........................................................6
                  3.       Effect of Bankruptcy...................................................................7
         C.       EMPLOYEES AND CONTRACTORS.......................................................................7
         D.       RIGHTS AND DUTIES OF OPERATOR...................................................................7
                  1.       Competitive Rates and Use of Affiliates................................................7
                  2.       Discharge of Joint Account Obligations.................................................7
                  3.       Protection from Liens..................................................................7
                  4.       Custody of Funds.......................................................................8
                  5.       Access to Contract Area and Records....................................................8
                  6.       Filing and Furnishing Governmental Reports.............................................8
                  7.       Drilling and Testing Operations........................................................8
                  8.       Cost Estimates.........................................................................9
                  9.       Insurance..............................................................................9
VI.
DRILLING AND DEVELOPMENT..........................................................................................9
         A.       SUBSEQUENT OPERATIONS...........................................................................9
                  1.       Proposed Operations....................................................................9
                  2.       Operations by Less Than All Parties...................................................10
                  3.       Stand-By Costs........................................................................13
                  4.       Deepening.............................................................................13
                  5.       Sidetracking..........................................................................14
</Table>



                                       (i)
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

<Table>
<S>               <C>                                                                                          <C>
                  6.       Order of Preference of Operations.....................................................15
                  7.       Conformity to Spacing Pattern.........................................................15
                  8.       Paying Wells..........................................................................15
         B.       COMPLETION OF WELLS; REWORKING AND PLUGGING BACK...............................................15
                  1.       Completion............................................................................15
                  2.       Rework, Recomplete or Plug Back.......................................................16
         C.       OTHER OPERATIONS...............................................................................16
         D.       ABANDONMENT OF WELLS...........................................................................17
                  1.       Abandonment of Dry Holes..............................................................17
                  2.       Abandonment of Wells That Have Produced...............................................17
                  3.       Abandonment of Non-Consent Operations.................................................18
         E.       TERMINATION OF OPERATIONS......................................................................18
         F.       TAKING PRODUCTION IN KIND......................................................................19
                  Option No. 1:     GAS BALANCING AGREEMENT ATTACHED.............................................19
                  Option No. 2:     NO GAS BALANCING AGREEMENT...................................................20
VII.
EXPENDITURES AND LIABILITY OF PARTIES............................................................................21
         A.       LIABILITY OF PARTIES...........................................................................21
         B.       LIENS AND SECURITY INTERESTS...................................................................21
         C.       ADVANCES.......................................................................................23
         D.       DEFAULTS AND REMEDIES..........................................................................23
                  1.       Suspension of Rights..................................................................23
                  2.       Suit for Damages......................................................................23
                  3.       Deemed Non-Consent....................................................................24
                  4.       Advance Payment.......................................................................24
                  5.       Costs and Attorneys' Fees.............................................................24
         E.       RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES...........................................24
         F.       TAXES..........................................................................................25
VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST.................................................................25
         A.       SURRENDER OF LEASES............................................................................25
         B.       RENEWAL OR EXTENSION OF LEASES.................................................................26
         C.       ACREAGE OR CASH CONTRIBUTIONS..................................................................27
         D.       ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST....................................................27
         E.       WAIVER OF RIGHTS TO PARTITION..................................................................28
IX.
INTERNAL REVENUE CODE ELECTION...................................................................................28
X.
CLAIMS AND LAWSUITS..............................................................................................29
XI.
FORCE MAJEURE....................................................................................................29
</Table>



                                      (ii)
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

<Table>
<S>               <C>                                                                                          <C>
XII.
NOTICES..........................................................................................................29
XIII.
TERM OF AGREEMENT................................................................................................30
XIV.
COMPLIANCE WITH LAWS AND REGULATIONS.............................................................................31
         A.       LAWS, REGULATIONS AND ORDERS...................................................................31
         B.       GOVERNING LAW..................................................................................31
         C.       REGULATORY AGENCIES............................................................................31
XV.
MISCELLANEOUS....................................................................................................31
         A.       EXECUTION......................................................................................31
         B.       SUCCESSORS AND ASSIGNS.........................................................................32
         C.       COUNTERPARTS...................................................................................32
         D.       SEVERABILITY...................................................................................32
XVI.
OTHER PROVISIONS.................................................................................................32
</Table>



                                      (iii)
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                               OPERATING AGREEMENT

         THIS AGREEMENT, entered into by and between _________________________,
hereinafter designated and referred to as "Operator," and the signatory party
or parties other than Operator, sometimes hereinafter referred to individually
as "Non-Operator", and collectively as "Non-Operators."

                                   WITNESSETH:

         WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these Leases
and/or Oil and Gas Interests for the production of Oil and Gas to the extent and
as hereinafter provided,

         NOW, THEREFORE, it is agreed as follows:

                                   ARTICLE I.
                                   DEFINITIONS

         As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:

         A. The term "AFE" shall mean an Authority for Expenditure prepared by a
party to this agreement for the purpose of estimating the costs to be incurred
in conducting an operation hereunder.

         B. The term "Completion" or "Complete" shall mean a single operation
intended to complete a well as a producer of Oil and Gas in one or more Zones,
including, but not limited to, the setting of production casing, perforating,
well stimulation and production testing conducted in such operation.

         C. The term "Contract Area" shall means all of the lands, Oil and Gas
Leases and/or Oil and Gas Interests intended to be developed and operated for
Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and
Oil and Gas Interests are described in Exhibit "A".

         D. The term "Deepen" shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated AFE,
whichever is the lesser.

         E. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this agreement.

         F. The term "Drilling Unit" shall mean the area fixed for the drilling
of one well by order or rule of any state or federal body having authority. If a
Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
unless fixed by express agreement of the Drilling Parties.

         G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.

         H. The term "Initial Well" shall mean the well required to be drilled
by the parties hereto as provided in Article VI.A.



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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989


         I. The term "Non-Consent Well" shall mean a well in which less than all
parties have conducted an operation as provided in Article VI.B.2.

         J. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean
a party who elects not to participate in a proposed operation.

         K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas
condensate, and/or all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.

         L. The term "Oil and Gas Interests" or "Interests" shall mean unleased
fee and mineral interests in Oil and Gas in tracts of land lying within the
Contract Area which are owned by parties to this agreement.

         M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean
the oil and gas leases or interests therein covering tracts of land lying within
the Contract Area which are owned by the parties to this agreement.

         N. The term "Plug Back" shall mean a single operation whereby a deeper
Zone is abandoned in order to attempt a Completion in a shallower Zone.

         O. The term "Recompletion" or "Recomplete" shall mean an operation
whereby a Completion in one Zone is abandoned in order to attempt a Completion
in a different Zone within the existing wellbore.

         P. The term "Rework" shall mean an operation conducted in the wellbore
of a well after it is Completed to secure, restore, or improve production in a
Zone which is currently open to production in the wellbore. Such operations
include, but are not limited to, well stimulation operations but exclude any
routine repair or maintenance work or drilling, Sidetracking, Deepening,
Completing, Recompleting, or Plugging Back of a well.

         Q. The term "Sidetrack" shall mean the directional control and
intentional deviation of a well from vertical so as to change the bottom hole
location unless done to straighten the hole or to drill around junk in the hole
to overcome other mechanical difficulties.

         R. The term "Zone" shall mean a stratum of earth containing or thought
to contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.

         Unless the context otherwise clearly indicates, words used in the
singular include the plural, the word "person" includes natural and artificial
persons, the plural includes the singular, and any gender includes the
masculine, feminine, and neuter.



                                      -2-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                   ARTICLE II.

                                    EXHIBITS

         The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:

[X]      A.       Exhibit "A" shall include the following information:

                  (1)      Description of lands subject to this agreement,

                  (2)      Restrictions, if any, as to depths, formations, or
                           substances,

                  (3)      Parties to agreement with addresses and telephone
                           numbers for notice purposes,

                  (4)      Percentages or fractional interests of parties to
                           this agreement.

[X]      B.       Exhibit "B," Form of Lease.

[X]      C.       Exhibit "C," Accounting Procedure.

[X]      D.       Exhibit "D," Insurance.

[X]      E.       Exhibit "E," Gas Balancing Agreement.

[ ]      F.       Exhibit "F," Non-Discrimination and Certification of
                  Non-Segregated Facilities.

[ ]      G.       Exhibit "G," Tax Partnership.

[ ]      H.       Other:
                        --------------------------------------------------------

         If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.

                                  ARTICLE III.

                              INTERESTS OF PARTIES

A.       OIL AND GAS INTERESTS:

         If any party owns an Oil and Gas Interest in the Contract Area, that
Interest shall be treated for all purposes of this agreement and during the term
hereof as if it were covered by the form of Oil and Gas Lease attached hereto as
Exhibit "B," and the owner thereof shall be deemed to own both royalty interest
in such lease and the interest of the lessee thereunder.

B.       INTERESTS AND PARTIES IN COSTS AND PRODUCTION:

         Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be



                                      -3-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

owned, by the parties as their interests are set forth in Exhibit "A." In the
same manner, the parties shall also own all production of Oil and Gas from the
Contract Area subject, however, to the payment of royalties and other burdens on
production as described hereafter.

         Regardless of which party has contributed any Oil and Gas Lease or Oil
and Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each party shall pay or deliver,
or cause to be paid or delivered, all burdens on its share of the production
from the Contract Area up to, but not in excess of, the amount of such burdens
and shall indemnify, defend and hold the other parties free from any liability
therefor. Except as otherwise expressly provided in this agreement, if any party
has contributed hereto any Lease or Interest which is burdened with any royalty,
overriding royalty, production payment or other burden on production in excess
of the amounts stipulated above, such party so burdened shall assume and alone
bear all such excess obligations and shall indemnify, defend and hold the other
parties hereto harmless from any and all claims attributable to such excess
burden. However, so long as the Drilling Unit for the productive Zone(s) is
identical with the Contract Area, each party shall pay or deliver, or cause to
be paid or delivered, all burdens on production from the Contract Area due under
the terms of the Oil and Gas Lease(s) which such party has contributed to this
agreement, and shall indemnify, defend and hold the other parties free from any
liability therefor.

         No party shall ever be responsible, on a price basis higher than the
price received by such party, to any other party's lessor or royalty owner, and
if such other party's lessor or royalty owner should demand and receive
settlement on a higher price basis, the party contributing the affected Lease
shall bear the additional royalty burden attributable to such higher price.

         Nothing contained in this Article III.B. shall be deemed an assignment
or cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.

C.       SUBSEQUENTLY CREATED INTERESTS:

         If any party has contributed hereto a Lease or Interest that is
burdened with an assignment of production given as security for the payment of
money, or if, after the date of this agreement, any party creates an overriding
royalty, production payment, net profits interest, assignment of production or
other burden payable out of production attributable to its working interest
hereunder, such burden shall be deemed a "Subsequently Created Interest."
Further, if any party has contributed hereto a Lease or Interest burdened with
an overriding royalty, production payment, net profits interest, or other burden
payable out of production created prior to the date of this agreement, and such
burden is not shown on Exhibit "A," such burden also shall be deemed a
Subsequently Created Interest to the extent such burden causes the burdens on
such party's Lease or Interest to exceed the amount stipulated in Article III.B.
above.

         The party whose interest is burdened with the Subsequently Created
Interest (the "Burdened Party") shall assume and alone bear, pay and discharge
the Subsequently Created Interest and shall indemnify, defend and hold harmless
the other parties from and against any liability therefor. Further, if the
Burdened Party fails to pay, when due, its share of expenses chargeable
hereunder, all provisions of Article VII.B. shall be enforceable against the
Subsequently Created Interest in the same manner as they are enforceable against
the working interest of the Burdened Party. If the Burdened Party is required
under this agreement to assign or relinquish to any other party, or parties, all
or a portion of its working interest and/or the production attributable thereto,
said other party, or parties, shall receive said assignment and/or production
free and clear



                                      -4-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

of said Subsequently Created Interest, and the Burdened Party shall indemnify,
defend and hold harmless said other party, or parties, from any and all claims
and demands for payment asserted by owners of the Subsequently Created Interest.

                                   ARTICLE IV.

                                     TITLES

A.       TITLE EXAMINATION:

         Title examination shall be made on the Drillsite of any proposed well
prior to commencement of drilling operations and, if a majority in interest of
the Drilling Parties so request or Operator so elects, title examination shall
be made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of
the well. The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable Leases. Each party contributing Leases and/or Oil and Gas Interests
to be included in the Drillsite or Drilling Unit, if appropriate, shall furnish
to Operator all abstracts (including federal lease status reports), title
opinions, title papers and curative material in its possession free of charge.
All such information not in the possession of or made available to Operator by
the parties, but necessary for the examination of the title, shall be obtained
by Operator. Operator shall cause title to be examined by attorneys on its staff
or by outside attorneys. Copies of all title opinions shall be furnished to each
Drilling Party. Costs incurred by Operator in procuring abstracts, fees paid
outside attorneys for title examination (including preliminary, supplemental,
shut-in royalty opinions and division order title opinions) and other direct
charges as provided in Exhibit "C" shall be borne by the Drilling Parties in the
proportion that the interest of each Drilling Party bears to the total interest
of all Drilling Parties as such interests appear in Exhibit "A."

         Each party shall be responsible for securing curative matter and
pooling amendments or agreements required in connection with Leases or Oil and
Gas Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communication agreements as well as the conduct of hearings before governmental
agencies for the securing of spacing or pooling orders or any other orders
necessary or appropriate to the conduct of operations hereunder. This shall not
prevent any party from appearing on its own behalf at such hearings. Costs
incurred by Operator, including fees paid to outside attorneys, which are
associated with hearings before governmental agencies, and which costs are
necessary and proper for the activities contemplated under this agreement, shall
be direct charges to the joint account and shall not be covered by the
administrative overhead charges in Exhibit "C."

         No well shall be drilled on the Contract Area until after (1) the title
to the Drillsite or Drilling Unit, if appropriate, has been examined as above
provided, and (2) the title has been approved by the examining attorney or title
has been accepted by Operator.

B.       LOSS OR FAILURE OF TITLE:

         1. Other Losses: All losses of Leases or Interests committed to this
agreement, shall be joint losses and shall be borne by all parties in proportion
to their interests shown on Exhibit "A." This shall include but not be limited
to the loss of any Lease or Interest through failure to develop or because
express or implied covenants have not been performed (other than performance
which requires only the payment of money), and the loss of any Lease by
expiration at the end of its primary term if it is not renewed or extended.
There shall be no readjustment of interests in the remaining portion of the
Contract Area on account of any joint loss.



                                      -5-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989


                                   ARTICLE V.

                                    OPERATOR

A.       DESIGNATION AND RESPONSIBILITIES OF OPERATOR:

         __________________________________________ shall be the Operator of the
Contract Area, and shall conduct and direct and have full control of all
operations on the Contract Area as permitted and required by, and within the
limits of this agreement. In its performance of services hereunder for the
Non-Operators, Operator shall be an independent contractor not subject to the
control or direction of the Non-Operators except as to the type of operation to
be undertaken in accordance with the election procedures contained in this
agreement. Operator shall not be deemed, or hold itself out as, the agent of the
Non-Operators with authority to bind them to any obligation or liability assumed
or incurred by Operator as to any third party. Operator shall conduct its
activities under this agreement as a reasonable prudent operator, in a good and
workmanlike manner, with due diligence and dispatch, in accordance with good
oilfield practice, and in compliance with applicable law and regulation, but in
no event shall it have any liability as Operator to the other parties for losses
sustained or liabilities incurred except such as may result from gross
negligence or willful misconduct.

B.       RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:

         1. Resignation or Removal of Operator: Operator may resign at any time
by giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, or is no longer capable of serving as Operator, Operator shall
be deemed to have resigned without any action by Non-Operators, except the
selection of a successor. Operator may be removed only for good cause by the
affirmative vote of Non-Operators owning a majority interest based on ownership
as shown on Exhibit "A" remaining after excluding the voting interest of
Operator; such vote shall not be deemed effective until a written notice has
been delivered to the Operator by a Non-Operator detailing the alleged default
and Operator has failed to cure the default within thirty (30) days from its
receipt of the notice or, if the default concerns an operation then being
conducted, within forty-eight (48) hours of its receipt of the notice. For
purposes hereof, "good cause" shall mean not only gross negligence or willful
misconduct but also the material breach of or inability to meet the standards of
operation contained in Article V.A. or material failure or inability to perform
its obligations under this agreement.

         Subject to Article VII.D.1., such resignation or removal shall not
become effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator. A change of a corporate
name or structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation or other affiliated entity shall not
be the basis for removal of Operator.

         2. Selection of Successor Operator: Upon the resignation or removal of
Operator under any provision of this agreement, a successor Operator shall be
selected by the parties. The successor Operator shall be selected from the
parties owning an interest in the Contract Area at the time such successor
Operator is selected. The successor Operator shall be selected by the
affirmative vote of two (2) or more parties owning a majority interest based on
ownership as shown on Exhibit "A;" provided, however, if an Operator which has
been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator



                                      -6-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

shall be selected by the affirmative vote of the party or parties owning a
majority interest based on ownership as shown on Exhibit "A" remaining after
excluding the voting interest of the Operator that was removed or resigned. The
former Operator shall promptly deliver to the successor Operator all records and
data relating to the operations conducted by the former Operator to the extent
such records and data are not already in the possession of the successor
operator. Any cost of obtaining or copying the former Operator's records and
data shall be charged to the joint account.

         3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any action
by Non-Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit "A."
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit "A."

C.       EMPLOYEES AND CONTRACTORS:

         The number of employees or contracts used by Operator in conducting
operations hereunder, their selection, and the hours of labor and the
compensation for services performed shall be determined by Operator, and all
such employees or contractors shall be the employees or contractors of Operator.

D.       RIGHTS AND DUTIES OF OPERATOR:

         1. Competitive Rates and Use of Affiliates: All wells drilled on the
Contract Area shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall not
exceed the prevailing rates in the area and the rate of such charges shall be
agreed upon by the parties in writing before drilling operating are commenced,
and such work shall be performed by Operator under the same terms and conditions
as are customary and usual in the area in contracts of independent contractors
who are doing work of a similar nature. All work performed or materials supplied
by affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with customs
and standards prevailing in the industry.

         2. Discharge of Joint Account Obligations: Except as herein otherwise
specifically provided, Operator shall promptly pay and discharge expenses
incurred in the development and operation of the Contract Area pursuant to this
agreement and shall charge each of the parties hereto with their respective
proportionate shares upon the expense basis provided in Exhibit "C." Operator
shall keep an accurate record of the joint account hereunder, showing expenses
incurred and charges and credits made and received.

         3. Protection from Liens: Operator shall pay, or cause to be paid, as
and when they become due and payable all accounts of contractors and suppliers
and wages and salaries for services rendered or



                                      -7-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

performed, and for materials supplied on, to or in respect of the Contract Area
or any operations for the joint account thereof, and shall keep the Contract
Area free from liens and encumbrances resulting therefrom except for those
resulting from a bona fide dispute as to services rendered or materials
supplied.

         4. Custody of Funds: Operator shall hold for the account of the
Non-Operators any funds of the Non-Operators advanced or paid to the Operator,
either for the conduct of operations hereunder or as a result of the sale of
production from the Contract Area, and such funds shall remain the funds of the
Non-Operators on whose account they are advanced or paid until used for their
intended purpose or otherwise delivered to the Non-Operators or applied toward
the payment of debts as provided in Article VII.B. Nothing in this paragraph
shall be construed to establish a fiduciary relationship between Operator and
Non-Operators for any purpose other than to account for Non-Operator funds as
herein specifically provided. Nothing in this paragraph shall require the
maintenance by Operator of separate accounts for the funds of Non-Operators
unless the parties otherwise specifically agree.

         5. Access to Contract Area and Records: Operator shall, except as
otherwise provided herein, permit each Non-Operator or its duly authorized
representative, at the Non-Operator's sole risk and cost, full and free access
at all reasonable times to all operations of every kind and character being
conducted for the joint account on the Contract Area and to the records of
operations conducted thereon or production therefrom, including Operator's books
and records relating thereto. Such access rights shall not be exercised in a
manner interfering with Operator's conduct of an operation hereunder and shall
not obligate Operator to furnish any geologic or geophysical data of an
interpretive nature unless the cost of preparation of such interpretive data was
charged to the joint account. Operator will furnish to each Non-Operator upon
request copies of any and all reports and information obtained by Operator in
connection with production and related items, including, without limitation,
meter and chart reports, production purchaser statements, run tickets and
monthly gauge reports, but excluding purchase contracts and pricing information
to the extent not applicable to the production of the Non-Operator seeking the
information. Any audit of Operator's records relating to amounts expended and
the appropriateness of such expenditures shall be conducted in accordance with
the audit protocol specified in Exhibit "C."

         6. Filing and Furnishing Governmental Reports: Operator will file, and
upon written request promptly furnish copies to each requesting Non-Operator not
in default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies or
authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.

         7. Drilling and Testing Operations: The following provisions shall
apply to each well drilled hereunder, including but not limited to the Initial
Well:

                  (a) Operator will promptly advise Non-Operators of the date on
which the well is spudded, or the date on which drilling operations are
commenced.

                  (b) Operator will send to Non-Operators such reports, test
results and notices regarding the progress of operations on the well as the
Non-Operators shall reasonably request, including, but not limited to, daily
drilling reports, completion reports, and well logs.

                  (c) Operator shall adequately test all Zones encountered which
may reasonably be expected to be capable of producing Oil and Gas in paying
quantities as a result of examination of the electric log or any other logs or
cores or tests conducted hereunder.



                                      -8-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         8. Cost Estimates: Upon request of any Consenting Party, Operator shall
furnish estimates of current and cumulative costs incurred for the joint account
at reasonable intervals during the conduct of any operation pursuant to this
agreement. Operator shall not be held liable for errors in such estimates so
long as the estimates are made in good faith.

         9. Insurance: At all times while operations are conducted hereunder,
Operator shall comply with the workers compensation law of the state where the
operations are being conducted; provided, however, that Operator may be a
self-insurer for liability under said compensation laws in which event the only
charge that shall be made to the joint account shall be as provided in Exhibit
"C." Operator shall also carry or provide insurance for the benefit of the joint
account of the parties as outlined in Exhibit "D" attached hereto and made a
part hereof. Operator shall require all contractors engaged in work on or for
the Contract Area to comply with the workers compensation law of the state where
the operations are being conducted and to maintain such other insurance as
Operator may require.

         In the event automobile liability insurance is specified in said
Exhibit "D," or subsequently receives the approval of the parties, not direct
charge shall be made by Operator for premiums paid for such insurance for
Operators's automotive equipment.

                                   ARTICLE VI.

                            DRILLING AND DEVELOPMENT


A.       SUBSEQUENT OPERATIONS:

         1. Proposed Operations: If any party hereto should desire to drill any
well on the Contract Area other than the Initial Well, or if any party should
desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a
well no longer capable of producing in paying quantities in which such party has
not otherwise relinquished its interest in the proposed objective Zone under
this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Recomplete or Plug Back such a well shall give written notice of the proposed
operation to the parties who have not otherwise relinquished their interest in
such objective Zone under this agreement and to all other parties in the case of
a proposal for Sidetracking or Deepening, specifying the work to be performed,
the location, proposed depth, objective Zone and the estimated cost of the
operation. The parties to whom such a notice is delivered shall have thirty (30)
days after receipt of the notice within which to notify the party proposing to
do the work whether they elect to participate in the cost of the proposed
operation. If a drilling rig is on location, notice of a proposal to Rework,
Sidetrack, Recomplete, Plug Back or Deepen may be given by telephone and the
response period shall be limited to forty-eight (48) hours, exclusive of
Saturday, Sunday and legal holidays. Failure of a party to whom such notice is
delivered to reply within the period above fixed shall constitute an election by
that party not to participate in the cost of the proposed operation. Any
proposal by a party to conduct an operation conflicting with the operation
initially proposed shall be delivered to all parties within the time and in the
manner provided in Article VI.A.6.

         If all parties to whom such notice is delivered elect to participate in
such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced with the time period
hereafter set forth, and Operator shall, no later than ninety (90) days after
expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the forty-eight (48) hour period when a
drilling rig is on location, as the case may be), actually commence the proposed
operation and thereafter complete it with due diligence at the risk and expense
of the parties participating therein; provided,



                                      -9-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

however, said commencement date may be extended upon written notice of same by
Operator to the other parties, for a period of up to thirty (30) additional days
if, in the sole opinion of Operator, such additional time is reasonably
necessary to obtain permits from governmental authorities, surface rights
(including rights-of- way) or appropriate drilling equipment, or to complete
title examination or curative matter required for title approval or acceptance.
If the actual operation has not been commenced within the time provided
(including any extension thereof as specifically permitted herein or in the
force majeure provisions of Article XI) and if any party hereto still desires to
conduct said operation, written notice proposing same must be resubmitted to the
other parties in accordance herewith as if no prior proposal had been made.
Those parties that did not participate in the drilling of a well for which a
proposal to Deepen or Sidetrack is made hereunder shall, if such parties desire
to participate in the proposed Deepening or Sidetracking operation, reimburse
the Drilling Parties in accordance with article VI.A.4. in the event of a
Deepening operation and in accordance with Article VI.a.5. in the event of a
Sidetracking operation.

         2. Operations by Less Than All Parties:

                  (a) Determination of Participation. If any party to whom such
notice is delivered as provided in Article VI.A.1. or VI.B.1. (Option No. 2)
elects not to participate in the proposed operation, then, in order to be
entitled to the benefits of this Article, the party or parties giving the notice
and such other parties as shall elect to participate in the operation shall, no
later than ninety (90) days after the expiration of the notice period of thirty
(30) days (or as promptly as practicable after the expiration of the forty-eight
(48) hour period when a drilling rig is on location, as the case may be)
actually commence the proposed operation and complete it with due diligence.
Operator shall perform all work for the account of the Consenting Parties;
provided, however, if no drilling rig or other equipment is on location, and if
Operator is a Non-Consenting Party, the Consenting Parties shall either: (i)
request Operator to perform the work required by such proposed operation for the
account of the Consenting Parties, or (ii) designated one of the Consenting
Parties as Operator to perform such work. The rights and duties granted to and
imposed upon the Operator under this agreement are granted to and imposed upon
the party designated as Operator for an operation in which the original Operator
is a Non-Consenting Party. Consenting Parties, when conducting operations on the
Contract Area pursuant to this Article VI.A.2., shall comply with all terms and
conditions of this agreement.

         If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise all Parties of the total interest of the parties approving such operation
and its recommendation as to whether the Consenting Parties should proceed with
the operation as proposed. Each Consenting Party, within forty-eight (48) hours
(exclusive of Saturday, Sunday and legal holidays) after delivery of such
notice, shall advise the proposing party of its desire to (i) limit
participation to such party's interest as shown on Exhibit "A" or (ii) carry
only its proportionate part (determined by dividing such party's interest in the
Contract Area by the interests of all Consenting Parties in the Contract Area)
of Non-Consenting Parties' interests, or (iii) carry its proportionate part
(determined as provided in(ii)) of Non-Consenting Parties' interest together
with all or a portion of its proportionate part of any Non- Consenting Parties'
interests that any Consenting Party did not elect to take. Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall be deemed
to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election, may
withdraw such proposal if there if less than 100% participation and shall notify
all parties of such decision within ten(10) days, or within twenty-four (24)
hours if a drilling rig is on location, following expiration of the applicable
response period. If 100% subscription to the proposed operation is obtained, the
proposing party shall



                                      -10-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

promptly notify the Consenting Parties of their proportionate interests in the
operation and the party serving as Operator shall commence such operation within
the period provided in Article VI.A.1., subject to the same extension right as
provided therein.

                  (b) Relinquishment of Interest for Non-Participation. The
entire cost and risk of conducting such operations shall be borne by the
Consenting Parties in the proportions they have elected to bear same under the
terms of the preceding paragraph. Consenting Parties shall keep the leasehold
estates involved in such operations free and clear of all liens and encumbrances
of every kind created by or arising from the operations of the Consenting
Parties. If such an operation results in a dry hole, then subject to Articles
VI.A.6. and VI.D.3, the Consenting Parties shall plug and abandon the well and
restore the surface location at their sole cost, risk and expense; provided,
however, that those Non-Consenting Parties that participated in the drilling,
Deepening or Sidetracking of the well shall remain liable for, and shall pay,
their proportionate shares of the cost of plugging and abandoning the well and
restoring the surface location insofar only as those costs were not increased by
the subsequent operations of the Consenting Parties. If any well drilled,
Reworked, Sidetracked, Deepened, Recompleted or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or Gas
in paying quantities, the Consenting Parties shall Complete and equip the well
to produce at their sole cost and risk, and the well shall then be turned over
to Operator (if the Operator did not conduct the operation) and shall be
operated by it at the expense and for the account of the Consenting Parties.
Upon commencement of operations for the drilling, Reworking, Sidetracking,
Recompleting, Deepening or Plugging Back of any such well by Consenting Parties
in accordance with the provisions of this Article, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties, and the Consenting
Parties shall own and be entitled to receive, in proportion to their respective
interests, all of such Non-Consenting Party's interest in the well and share of
production therefrom or, the case of a Reworking, Sidetracking, Deepening,
Recompleting or Plugging Back, or a Completion pursuant to a Article VI.B.1.
Option No. 2, all of such Non-Consenting Party's interest in the production
obtained from the operation in which the Non-Consenting Party did not elect to
participate. Such relinquishment shall be effective until the proceeds of the
sale of such share, calculated at the well, or market value thereof if such
share is not sold (after deducting applicable ad valorem, production, severance,
and excise taxes, royalty, overriding royalty and other interests not excepted
by Article III.C. payable out of or measured by the production from such well
accruing with respect to such interest until it reverts), shall equal the total
of the following:

                           (i) 400% of each such Non-Consenting Party's share of
the cost of any newly acquired surface equipment beyond the wellhead connections
(including but not limited to stock tanks, separators, treaters, pumping
equipment and piping), plus 100% of each such Non-Consenting Party's share of
the cost of operation of the well commencing with first production and
continuing until each such Non- Consenting Party's relinquished interest shall
revert to it under other provisions of this Article, it being agreed that each
Non-Consenting Party's share of such costs and equipment will be that interest
which would have been chargeable to such Non-Consenting Party had it
participated in the well from the beginning of the operations; and

                           (ii) 400% of (a) that portion of the costs and
expenses of drilling, Reworking, Sidetracking, Deepening, Plugging Back,
testing, Completing and Recompleting, after deducting any cash contributions
received under Article VIII.C., and of (b) that portion of the cost of newly
acquired equipment in the well (to and including the wellhead connections),
which would have been chargeable to such Non- Consenting Party if it had
participated therein.



                                      -11-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         Notwithstanding anything to contrary in this Article VI.A., if the well
does not reach the deepest objective Zone described in the notice proposing the
well for reasons other than the encountering of granite or practically
impenetrable substance or other condition in the hole rendering further
operations impracticable, Operator shall give notice thereof to each
Non-Consenting Party who submitted or voted for an alternative proposal under
Article VI.A.6. to drill the well to a shallower Zone than the deepest objective
Zone proposed in the notice under which the well was drilled, and each such
Non-Consenting Party shall have the option to participate in the initial
proposed Completion of the well by paying its share of the cost of drilling the
well to its actual depth, calculated in the manner provided in Article
VI.A.4.(a). If any such Non-Consenting Party does not elect to participate in
the first Completion proposed for such well, the relinquishment provisions of
this Article VI.B.2. (b) shall apply to such party's interest.

                  (c) Reworking, Recompleting or Plugging Back. An election not
to participate in the drilling, Sidetracking or Deepening of a well shall be
deemed an election not to participate in any Reworking or Plugging Back
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non- Consenting Party's recoupment
amount. Similarly, an election not to participate in the Completing or
Recompleting of a well shall be deemed an election not to participate in any
Reworking operation proposed in such a well, or portion thereof, to which the
initial non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
amount. Any such Reworking, Recompleting or Plugging Back operation conducted
during the recoupment period shall be deemed part of the cost of operation of
said well and there shall be added to the sums to be recouped by the Consenting
Parties 400% of that portion of the costs of operation of said well and there
shall be added to the sums to be recouped by the Consenting Parties 400% of that
portion of the costs of the Reworking, Recompleting or Plugging Back operation
which would have been chargeable to such Non-Consenting Party had it
participated therein. If such a Reworking, Recompleting or Plugging Back
operation is proposed during such recoupment period, the provisions of this
Article VI.A. shall be applicable as between said Consenting Parties in said
well.

                  (d) Recoupment Matters. During the period of time Consenting
Parties are entitled to receive Non-Consenting Party's share of production, or
the proceeds therefrom, Consenting Parties shall be responsible for the payment
of all ad valorem, production, severance, excise, gathering and other taxes, and
all royalty, overriding royalty and other burdens applicable to Non-Consenting
Party's share of production not excepted by Article III.C.

         In the case of any Reworking, Sidetracking, Plugging Back, Recompleting
or Deepening operation, the Consenting Parties shall be permitted to use, free
of cost, all casing, tubing and other equipment in the well, but the ownership
of all such equipment shall remain unchanged; and upon abandonment of a well
after such Reworking, Sidetracking, Plugging Back, Recompleting or Deepening,
the Consenting Parties shall account for all such equipment to the owners
thereof, with each party receiving its proportionate part in kind or in value,
less cost of salvage.

         Within ninety (90) days after the completion of any operations under
this Article, the party conducting the operations for the Consenting Parties
shall furnish each Non-Consenting Party with an inventory of the equipment in
and connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
in the operations for the Consenting Parties shall furnish



                                      -12-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

the Non-Consenting Parties with an itemized statement of all costs and
liabilities incurred in the operation of the well, together with a statement of
the quantity of Oil and Gas produced from it and the amount of proceeds realized
from the sale of the well's working interest production during the preceding
month. In determining the quantity of Oil and Gas produced during any month,
Consenting Parties shall use industry accepted methods such as but not limited
to metering or periodic well tests. Any amount realized from the sale or other
disposition of equipment newly acquired in connection with any such operation
which would have been owned by a Non-Consenting Party had it participated
therein shall be credited against the total unreturned costs of the work done
and of the equipment purchased in determining when the interest of such
Non-Consenting Party shall revert to it as above provided; and if there is a
credit balance, it shall be paid to such Non-Consenting Party.

         If and when the Consenting Parties recover from a Non-Consenting
Party's relinquished interest the amounts provided for above, the relinquished
interests of such Non-Consenting Party shall automatically revert to it as of
7:00 a.m. on the day following the day on which such recoupment occurs, and,
from and after such reversion, such Non-Consenting Party shall own the same
interest in such well, the material and equipment in or pertaining thereto, and
the production therefrom as such Non-consenting Party would have been entitled
to had it participated in the drilling, Sidetracking, Reworking, Deepening,
Recompleting or Plugging Back of said well. Thereafter, such Non-Consenting
Party shall be charged with and shall pay its proportionate part of the further
costs of the operation of said well in accordance with the terms of this
agreement and Exhibit "C" attached hereto.

         3. Stand-By Costs: When a well has been drilled or Deepened has reached
its authorized depth and all tests have been completed and the results thereof
furnished to the parties, or when operations on the well have been otherwise
terminated pursuant to Article VI.E., stand-by costs incurred pending response
to a party's notice proposing a Reworking, Sidetracking, Deepening, Plugging
Back or Completing operation in such a well (including the period required under
Article VI.A.6 to resolve competing proposals) shall be charged and borne as
part of the drilling or Deepening operation just completed. Stand-by costs
subsequent to all parties responding, or expiration of the response time
permitted, whichever first occurs, and prior to agreements as to the
participating interest of all Consenting Parties pursuant to the terms of the
second grammatical paragraph of Article VI.A.2.(a), shall be charged to and
borne as part of the proposed operation, but if the proposal is subsequently
withdrawn because of insufficient participation, such stand-by costs shall be
allocated between the Consenting Parties in the proportion each Consenting
Party's interest as shown on Exhibit "A" bears to the total interest as shown on
Exhibit "A" of all Consenting Parties.

         In the event that notice for a Sidetracking operation is given while
the drilling rig to be utilized is on location, any party may request and
receive up to five (5) additional days after expiration of the forty-eight hour
response period specified in Article VI.A.1. within which to respond by paying
for all stand-by costs and other costs incurred during such extended response
period; Operator may require such party to pay the estimated stand-by time in
advance as a condition to extending the response period. If more than one party
elects to take such additional time to respond to the notice, standby costs
shall be allocated between the parties taking additional time to respond on a
day-to-day basis in the proportion each electing party's interest as shown on
Exhibit "A" bears to the total interest as shown on Exhibit "A" of all the
electing parties.

         4. Deepening. If less than all the parties elect to participate in a
drilling, Sidetracking, or Deepening operation proposed pursuant to Article
VI.A.1, the interest relinquished by the Non-Consenting Parties to the
Consenting Parties under Article VI.A.2. shall relate only and be limited to the
lesser of (i) the total depth actually drilled or (ii) the objective depth or
Zone of which the parties were given notice under Article VI.A.1. plus any
deeper zone as may be encountered in drilling to such additional depth as is
drilled



                                      -13-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

to enable completion in the objective depth or zone ("Initial Objective"). Such
well shall not be Deepened beyond the Initial Objective without first complying
with this Article to afford the Non-Consenting Parties the opportunity to
participate in the Deepening operation.

         In the event any Consenting Party desires to drill or Deepen a
Non-Consent Well to a depth below the Initial Objective, such party shall give
notice thereof, complying with the requirements of Article VI.A.1, to all
parties (including Non-Consenting Parties). Thereupon, Articles VI.A.1. and 2.
shall apply and all parties receiving such notice shall have the right to
participate or not participate in the Deepening of such well pursuant to said
Articles VI.A.1 and 2. If a Deepening operation is approved pursuant to such
provisions, and if any Non-Consenting Party elects to participate in the
Deepening operation, such Non-Consenting party shall pay or make reimbursement
(as the case may be) of the following costs and expenses:

                  (a) If the proposal to Deepen is made prior to the Completion
of such well as a well capable of producing in paying quantities, such
Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the case
may be) that share of costs and expenses incurred in connection with the
drilling of said well from the surface to the Initial Objective which
Non-Consenting Party would have paid had such Non- Consenting Party agreed to
participate therein, plus the Non-Consenting Party's share of the cost of
Deepening and of participating in any further operations on the well in
accordance with the other provisions of this Agreement; provided, however, all
costs for testing and Completion or attempted Completion of the well incurred by
Consenting Parties prior to the point of actual operations to Deepen beyond the
Initial Objective shall be for the sole account of Consenting Parties.

                  (b) If the proposal is made for a Non-Consent Well that has
been previously Completed as a well capable of producing in paying quantities,
but is no longer capable of producing in paying quantities, such Non-Consenting
Party shall pay (or reimburse Consenting Parties for, as the case may be) its
proportionate share of all costs of drilling, Completing, and equipping said
well from the surface to the Initial Objective, calculated in the manner
provided in paragraph (a) above. The Non-Consenting Party shall also pay its
proportionate share of all costs of re-entering said well. The Non-Consenting
Parties' proportionate part (based on the percentage of such well Non-Consenting
Party would have owned had it previously participated in such Non-Consent Well)
of the costs of salvable materials and equipment remaining in the hole and
salvable surface equipment used in connection with such well shall be determined
in accordance with Exhibit "C".

         The foregoing shall not imply a right of any Consenting Party to
propose any Deepening for a Non- Consent Well prior to the drilling of such well
to its Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.E.

         5. Sidetracking: Any party having the right to participate in a
proposed Sidetracking operation that does not own an interest in the affected
wellbore at the time of the notice shall, upon electing to participate, tender
to the wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore to
be utilized as follows:

                  (a) If the proposal is for Sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the initial
drilling of the well down to the depth at which the Sidetracking operation is
initiated.

                  (b) If the proposal is for Sidetracking a well which has
previously produced, reimbursement shall be on the basis of such party's
proportionate share of drilling and equipping costs incurred



                                      -14-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

in the initial drilling of the well down to the depth at which the Sidetracking
operation is conducted, calculated in the manner described in Article VI.A.4(b)
above. Such party's proportionate share of the cost of the well's salvable
materials and equipment down to the depth at which the Sidetracking operation is
initiated shall be determined in accordance with the provisions of Exhibit "C."

         6. Order of Preference of Operations. Except as otherwise specially
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
hours, exclusive of Saturday, Sunday, and legal holidays, from delivery of the
initial proposal, if a drilling rig is on location for the well on which such
operation is to be conducted, to deliver to all parties entitled to participate
in the proposed operation such party's alternative proposal, such alternate
proposal to contain the same information required to be included in the initial
proposal. Each party receiving such proposals shall elect by delivery of notice
to Operator within five (5) days after expiration of the proposal period or
within twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays)
if a drilling rig is on location for the well that is the subject of the
proposals, to participate in one of the competing proposals. Any party not
electing within the time required shall be deemed not to have voted. The
proposal receiving the vote of parties owning the largest aggregate percentage
interest of the parties voting shall have priority over all other competing
proposals; in the case of a tie vote, the initial proposal shall prevail.
Operator shall deliver notice of such results to all parties entitled to
participate in the operation within five (5) days after expiration of the
election period (or within twenty-four (24) hours, exclusive of Saturday, Sunday
and legal holidays, if a drilling rig is on location). Each party shall then
have two (2) days (or twenty-four (24) hours if a rig is on location) from
receipt of such notice to elect by delivery of notice to Operator to participate
in such operation or to relinquish interest in the affected well pursuant to the
provisions of Article VI.A.2.; failure by a party to deliver notice within such
period shall be deemed an election not to participate in the prevailing
proposal.

         7. Conformity to Spacing Pattern: Notwithstanding the provisions of
this Article VI.A.2., it is agreed that no wells shall be proposed to be drilled
to or Completed in or produced from a Zone from which a well located elsewhere
on the Contract Area is producing, unless such well conforms to the
then-existing well spacing pattern for such Zone.

         8. Paying Wells: No party shall conduct any Reworking, Deepening,
Plugging Back, Completion, Recompletion, or Sidetracking operation under this
agreement with respect to any well then capable of producing in paying
quantities except with the consent of all parties that have not relinquished
interests in the well at the time of such operation.

B.       COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:

         1. Completion: Without the consent of all parties, no well shall be
drilled, Deepened or Sidetracked, except any well drilled, Deepened or
Sidetracked pursuant to the provisions of Article VI.A.2. of this agreement.
Consent to the drilling, Deepening or Sidetracking shall include:

         [X] Option No. 1: All necessary expenditures for the drilling,
Deepening or Sidetracking, testing, Completing and equipping of the well,
including necessary tankage and/or surface facilities.

         [ ] Option No. 2: All necessary expenditures for the drilling,
Deepening or Sidetracking and testing of the well. When such well has reached
its authorized depth, and all logs, cores and other tests have been completed,
and the results thereof furnished to the parties, Operator shall give immediate
notice to the



                                      -15-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

Non-Operators having the right to participate in a Completion attempt whether or
not Operator recommends attempting to Complete the well, together with
Operator's AFE for Completion costs if not previously provided. The parties
receiving such notice shall have forty-eight (48) hours (exclusive of Saturday,
Sunday and legal holidays) in which to elect by delivery of notice to Operator
to participate in a recommended Completion attempt or to make a Completion
proposal with an accompanying AFE. Operator shall deliver any such Completion
proposal, or any Completion proposal conflicting with Operator's proposal, to
the other parties entitled to participate in such Completion in accordance with
the procedures specified in Article VI.B.6. Election to participate in a
Completion attempt shall include consent to all necessary expenditures for the
Completing and equipping of such well, including necessary tankage and/or
surface facilities but excluding any stimulation operation not contained on the
Completion AFE. Failure of any party receiving such notice to reply within the
period above fixed shall constitute an election by that party not to participate
in the cost of the Completion attempt; provided, that Article VI.A.6. shall
control in the case of conflicting Completion proposals. If one or more, but
less than all of the parties, elect to attempt a Completion, the provisions of
Article VI.A.2. hereof (the phrase "Reworking, Sidetracking, Deepening,
Recompleting or Plugging Back" as contained in Article VI.A.2. shall be deemed
to include "Completing") shall apply to the operations thereafter conducted by
less than all parties; provided, however, that Article VI.A.2. shall apply
separately to each separate Completion or Recompletion attempt undertaken
hereunder, and an election to become a Non- Consenting Party as to one
Completion or Recompletion attempt shall not prevent a party from becoming a
Consenting Party in subsequent Completion or Recompletion attempts regardless
whether the Consenting Parties as to earlier Completions or Recompletions have
recouped their costs pursuant to Article VI.A.2.; provided further, that any
recoupment of costs by a Consenting Party shall be made solely from the
production attributable to the Zone in which the Completion attempt is made.
Election by a previous Non-Consenting Party to participate in a subsequent
Completion or Recompletion attempt shall require such party to pay its
proportionate share of the cost of salvable materials and equipment installed in
the well pursuant to the previous Completion or Recompletion attempt, insofar
and only insofar as such materials and equipment benefit the Zone in which such
party participates in a Completion attempt.

         2. Rework, Recomplete or Plug Back: No well shall be Reworked,
Recompleted or Plugged Back except a well Reworked, Recompleted, or Plugged Back
pursuant to the provisions of Article VI.A.2. of this agreement. Consent to the
Reworking, Recompleting or Plugging Back of a well shall include all necessary
expenditures in conducting such operations and Completing and equipping of said
well, including necessary tankage and/or surface facilities.

C.       OTHER OPERATIONS:

         Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Seventy-Five Thousand Dollars ($75,000.00)
except in connection with the drilling, Sidetracking, Reworking, Deepening,
Completing, Recompleting or Plugging Back of a well that has been previously
authorized by or pursuant to this agreement; provided, however, that, in case of
explosion, fire, flood or other sudden emergency, whether of the same or
different nature, Operator may take such steps and incur such expenses as in its
opinion are required to deal with the emergency to safeguard life and property
but Operator, as promptly as possible, shall report the emergency to the other
parties. If Operator prepares an AFE for its own use, Operator shall furnish any
Non-Operator so requesting an information copy thereof for any single project in
excess of Fifty Thousand Dollars ($50,000.00). Any party who has not
relinquished its interest in a well share have the right to propose that
Operator perform repair work or undertake the installation of artificial lift
equipment or ancillary production facilities such as salt water disposal wells
or to conduct additional work with respect to a well drilled hereunder or other
similar project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be



                                      -16-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.C. (except in connection with an operation required to be proposed
under Articles VI.A.1. or VI.B.1. Option No. 2, which shall be governed
exclusively by those Articles). Operator shall deliver such proposal to all
parties entitled to participate therein. If within thirty (30) days thereof
Operator secures the written consent of any party or parties owning at least 50%
of the interests of the parties entitled to participate in such operation, each
party having the right to participate in such project shall be bound by the
terms of such proposal and shall be obligated to pay its proportionate share of
the costs of the proposed project as if it had consented to such project
pursuant to the terms of the proposal.

D.       ABANDONMENT OF WELLS:

         1. Abandonment of Dry Holes: Except for any well drilled or Deepened
pursuant to Article VI.A.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be plugged and abandoned without the consent of all parties. Should
Operator, after diligent effort, be unable to contact any party, or should any
party fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday
and legal holidays) after delivery of notice of the proposal to plug and abandon
such well, such party shall be deemed to have consented to the proposed
abandonment. All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or Deepening such well. Any party who
objects to plugging and abandoning such well by notice delivered to Operator
within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays)
after delivery of notice of the proposed plugging shall take over the well as of
the end of such forty-eight (48) hour notice period and conduct further
operations in search of Oil and/or Gas subject to the provisions of Article
VI.A.; failure of such party to provide proof reasonably satisfactory to
Operator of its financial capability to conduct such operations or take over the
well within such period or thereafter to conduct operations on such well or plug
and abandon such well shall entitle Operator to retain or take possession of the
well and plug and abandon the well. The party taking over the well shall
indemnify Operator (if Operator is an abandoning party) and the other abandoning
parties against liability for any further operations conducted on such well
except for the costs of plugging and abandoning the well and restoring the
surface, for which the abandoning parties shall remain proportionately liable.

         2. Abandonment of Wells That Have Produced: Except for any well in
which a Non-Consent operation has been conducted hereunder for which the
Consenting Parties have not been fully reimbursed as herein provided, any well
which has been completed as a producer shall not be plugged and abandoned
without the consent of all parties. If all parties consent to such abandonment,
the well shall be plugged and abandoned in accordance with applicable
regulations and at the cost, risk and expense of all the parties hereto. Failure
of a party to reply within sixty (60) days of delivery of notice of proposed
abandonment shall be deemed an election to consent to the proposal. If, within
sixty (60) days after delivery of notice of the proposed abandonment of any
well, all parties do not agree to the abandonment of such well, those wishing to
continue its operation from the Zone then open to production shall be obligated
to take over the well as of the expiration of the applicable notice period and
shall indemnify Operator (if Operator is an abandoning party) and the other
abandoning parties against liability for any further operations on the well
conducted by such parties. Failure of such party or parties to provide proof
reasonably satisfactory to Operator of their financial capability to conduct
such operations or to take over the well within the required period or
thereafter to conduct operations on such well shall entitle Operator to retain
or take possession of such well and plug and abandon the well.

         Parties taking over a well as provided herein shall tender to each of
the other parties its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of Exhibit
"C," less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and



                                      -17-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

restoring the surface; provided, however, that in the event the estimated
plugging and abandoning and surface restoration costs and the estimated cost of
salvaging are higher than the value of the well's salvable material and
equipment, each of the abandoning parties shall tender to the parties continuing
operations their proportionate shares of the estimated excess cost. Each
abandoning party shall assign to the non-abandoning parties, without warranty,
express or implied, as to title or as to quantity, or fitness for use of the
equipment and material, all of its interest in the wellbore of the well and
related equipment, together with its interest in the Leasehold insofar and only
insofar as such Leasehold covers the right to obtain production from that
wellbore in the Zone then open to production. If the interest of the abandoning
party is or includes an Oil and Gas Interest, such party shall execute and
deliver to the non-abandoning party or parties an oil and gas lease, limited to
the wellbore and the Zone then open to production, for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced from the Zone covered
thereby, such lease to be on the form attached as Exhibit "B." The assignments
or leases so limited shall encompass the Drilling Unit upon which the well is
located. The payments by, and the assignments or leases to, the assignees shall
be in a ratio based upon the relationship of their respective percentage of
participation in the Contract Area to the aggregate of the percentages of
participation in the Contract Area of all assignees. There shall be no
readjustment of interests in the remaining portions of the Contract Area.

         Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
Zone then open other than the royalties retained in any lease made under the
terms of this Article. Upon request, Operator shall continue to operate the
assigned well for the account of the non-abandoning parties at the rates and
charges contemplated by this agreement, plus any additional cost and charges
which may arise as the result of the separate ownership of the assigned well.
Upon proposed abandonment of the producing Zone assigned or leased, the assignor
or lessor shall then have the option to repurchase its prior interest in the
well (using the same valuation formula) and participate in further operations
therein subject to the provisions hereof.

         3. Abandonment of Non-Consent Operations: The provisions of Article
VI.D.1. or VI.D.2. above shall be applicable as between Consenting Parties in
the event of the proposed abandonment of any well excepted from said Articles;
provided, however, no well shall be permanently plugged and abandoned unless and
until all parties having the right to conduct further operations therein have
been notified of the proposed abandonment and afforded the opportunity to elect
to take over the well in accordance with the provisions of this Article VI.D.;
and provided further, that Non-Consenting Parties who own an interest in a
portion of the well shall pay their proportionate shares of abandonment and
surface restoration costs for such well as provided in Article VI.A.2(b).

E.       TERMINATION OF OPERATIONS:

         Upon the commencement of an operation for the drilling, Reworking,
Sidetracking, Plugging Back, Deepening, testing, Completion or plugging of a
well, including but not limited to the Initial Well, such operation shall not be
terminated without consent of parties bearing 75% of the costs of such
operation; provided, however, that in the event granite or other practically
impenetrable substance or condition in the hole is encountered which renders
further operations impractical, Operator may discontinue operations and give
notice of such condition in the manner provided in Article VI.A.1 and the
provisions of Article VI.A. or VI.D. shall thereafter apply to such operation,
as appropriate.



                                      -18-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

F.       TAKING PRODUCTION IN KIND:

         [X]      Option No. 1: GAS BALANCING AGREEMENT ATTACHED

                           Each party shall take in kind or separately dispose
                  of its proportionate share of all Oil and Gas produced from
                  the Contract Area, exclusive of production which may be used
                  in development and producing operations and in preparing and
                  treating Oil and Gas for marketing purposes and production
                  unavoidably lost. Any extra expenditure incurred in the taking
                  in kind or separate disposition by any party of its
                  proportionate share of the production shall be borne by such
                  party. Any party taking its share of production in kind shall
                  be required to pay for only its proportionate share of such
                  part of Operator's surface facilities which it uses.

                           Each party shall execute such division orders and
                  contracts as may be necessary for the sale of its interest in
                  production from the Contract Area, and except as provided in
                  Article VII.A., shall be entitled to receive payment directly
                  from the purchaser thereof for its share of all production.

                           If any party fails to make the arrangements necessary
                  to take in kind or separately dispose of its proportionate
                  share of the Oil produced from the Contract Area, Operator
                  shall have the right, subject to the revocation at will by the
                  party owning it, but not the obligation to purchase such Oil
                  or sell it to others at any time and from time to time, for
                  the account of the non-taking party. Any such purchase or sale
                  by Operator may be terminated by Operator upon at least ten
                  (10) days written notice to the owner of said production and
                  shall be subject always to the right of the owner of the
                  production upon at least ten (10) days written notice to
                  Operator to exercise at any time its right to take in kind, or
                  separately dispose of, its share of all Oil not previously
                  delivered to a purchaser. Any purchase or sale by Operator of
                  any other party's share of Oil shall be only for such
                  reasonable periods of time as are consistent with the minimum
                  needs of the industry under the particular circumstances, but
                  in no event for a period in excess of one (1) year.

                           Any such sale by Operator shall be in a manner
                  commercially reasonable under the circumstances but Operator
                  shall have no duty to share any existing market or to obtain a
                  price equal to that received under any existing market. The
                  sale or delivery by Operator of a non-taking party's share of
                  Oil under the terms of any existing contract of Operator shall
                  not give the non-taking party any interest in or make the
                  non-taking party a party to said contract. No purchase shall
                  be made by Operator without first giving the non-taking party
                  at least ten (10) days written notice of such intended
                  purchase and the price to be paid or the pricing basis to be
                  used.

                           All parties shall give timely written notice to
                  Operator of their Gas marketing arrangements for the following
                  month, excluding price, and shall notify Operator immediately
                  in the event of a change in such arrangements. Operator shall
                  maintain records of all marketing arrangements, and of volumes
                  actually sold or transported, which records shall be made
                  available to Non-Operators upon reasonable request.

                           In the event one or more parties' separate
                  disposition of its share of the Gas causes split-stream
                  deliveries to separate pipelines and/or deliveries which on a
                  day-to-day basis for



                                      -19-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                  any reason are not exactly equal to a party's respective
                  proportionate share of total Gas sales to be allocated to it,
                  the balancing or accounting between the parties shall be in
                  accordance with any Gas balancing agreement between the
                  parties hereto, whether such an agreement is attached as
                  Exhibit "E" or is a separate agreement. Operator shall give
                  notice to all parties of the first sales of Gas from any well
                  under this agreement.

         [ ]      Option No. 2: NO GAS BALANCING AGREEMENT:

                           Each party shall take in kind or separately dispose
                  of its proportionate share of all Oil and Gas produced from
                  the Contract Area, exclusive of production which may be used
                  in development and producing operations and in preparing and
                  treating Oil and Gas for marketing purposes and production
                  unavoidably lost. Any extra expenditure incurred in the taking
                  in kind or separate disposition by any party of its
                  proportionate share of the production shall be borne by such
                  party. Any party taking its share of production in kind shall
                  be required to pay for only its proportionate share of such
                  part of Operator's surface facilities which it uses.

                           Each party shall execute such division orders and
                  contracts as may be necessary for the sale of its interest in
                  production from the Contract Area, and, except as provided in
                  Article VII.A., shall be entitled to receive payment directly
                  from the purchaser thereof for its share of all production.

                           If any party fails to make the arrangements necessary
                  to take in kind or separately dispose of its proportionate
                  share of the Oil and/or Gas produced from the Contract Area,
                  Operator shall have the right, subject to the revocation at
                  will by the party owning it, but not the obligation, to
                  purchase such Oil and/or Gas or sell it to others at any time
                  and from time to time, for the account of the non-taking
                  party. Any such purchase or sale by Operator may be terminated
                  by Operator upon at least ten (10) days written notice to the
                  owner of said production and shall be subject always to the
                  right of the owner of the production upon at least ten (10)
                  days written notice to Operator to exercise its right to take
                  in kind, or separately dispose of, its share of all Oil and/or
                  Gas not previously delivered to a purchaser; provided,
                  however, that the effective date of any such revocation may be
                  deferred at Operator's election for a period not to exceed
                  ninety (90) days if Operator has committed such production to
                  a purchase contract having a term extending beyond such ten
                  (10) day period. Any purchase or sale by Operator of any other
                  party's share of Oil and/or Gas shall be only for such
                  reasonable periods of time as are consistent with the minimum
                  needs of the industry under the particular circumstances, but
                  in no event for a period in excess of one (1) year.

                           Any such sale by Operator shall be in a manner
                  commercially reasonable under the circumstances, but Operator
                  shall have no duty to share any existing market or
                  transportation arrangement or to obtain a price or
                  transportation fee equal to that received under any existing
                  market or transportation arrangement. The sale or delivery by
                  Operator of a non-taking party's share of production under the
                  terms of any existing contract of Operator shall not give the
                  non-taking party any interest in or make the non-taking party
                  a party to said contract. No purchase of Oil and Gas and no
                  sale of Gas shall be made by Operator without first giving the
                  non-taking party ten days written notice of such intended
                  purchase or sale and the price to be paid or the pricing basis
                  to be used. Operator shall give notice to all parties of the
                  first sale of Gas from any well under this Agreement.



                                      -20-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                           All parties shall give timely written notice to
                  Operator of their Gas marketing arrangements for the following
                  month, excluding price, and shall notify to Operator
                  immediately in the event of a change in such arrangements.
                  Operator shall maintain records of all marketing arrangements,
                  and of volumes actually sold or transported, which records
                  shall be made available to Non-Operators upon reasonable
                  request.

                                  ARTICLE VII.

                      EXPENDITURES AND LIABILITY OF PARTIES

A.       LIABILITY OF PARTIES:

         The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally, and no party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership, joint venture, agency relationship or
association, or to render the parties liable as partners, co-venturers, or
principals. In their relations with each other under this agreement, the parties
shall not be considered fiduciaries or to have established a confidential
relationship but rather shall be free to act on an arm's-length basis in
accordance with their own respective self-interest, subject, however, to the
obligation of the parties to act in good faith in their dealings with each other
with respect to activities hereunder.

B.       LIENS AND SECURITY INTERESTS:

         Each party grants to the other parties hereto a lien upon any interest
it now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas
Interests in the Contract Area, and a security interest and/or purchase money
security interest in any interest it now owns or hereafter acquires in the
personal property and fixtures on or used or obtained for use in connection
therewith, to secure performance of all of its obligations under this agreement
including but not limited to payment of expense, interest and fees, the proper
disbursement of all monies paid hereunder, the assignment or relinquishment of
interest in Oil and Gas Leases as required hereunder, and the proper performance
of operations hereunder. Such lien and security interest granted by each party
hereto shall include such party's leasehold interests, working interests,
operating rights, and royalty and overriding royalty interests in the Contract
Area now owned or hereafter acquired and in lands pooled or unitized therewith
or otherwise becoming subject to this agreement, the Oil and Gas when extracted
therefrom and equipment situated thereon or used or obtained for use in
connection therewith (including, without limitation, all wells, tools, and
tubular goods), and accounts (including, without limitation, accounts arising
from gas imbalances or from the sale of Oil and/or Gas at the wellhead),
contract rights, inventory and general intangibles relating thereto or arising
therefrom, and all proceeds and products of the foregoing.

         To perfect the lien and security agreement provided herein, each party
hereto shall execute and acknowledge the recording supplement and/or any
financing statement prepared and submitted by any party hereto in conjunction
herewith or at any time following execution hereof, and Operator is authorized
to file this agreement or the recording supplement executed herewith as a lien
or mortgage in the applicable real estate records and as a financing statement
with the proper officer under the Uniform Commercial Code in the state in which
the Contract Area is situated and such other states as Operator shall deem
appropriate to perfect the security interest granted hereunder. Any party may
file this agreement, the recording supplement executed



                                      -21-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

herewith, or such other documents as it deems necessary as a lien or mortgage in
the applicable real estate records and/or a financing statement with the proper
officer under the Uniform Commercial Code.

         Each party represents and warrants to the other parties hereto that the
lien and security interest granted by such party to the other parties shall be a
first and prior lien, and each party hereby agrees to maintain the priority of
said lien and security interest against all persons acquiring an interest in Oil
and Gas Leases and Interests covered by this agreement by, through or under such
party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by this Article VII.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or after such interest is acquired.

         To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they shall
be entitled to exercise the rights and remedies of a secured party under the
Code. The bringing of a suit and the obtaining of judgment by a party for the
secured indebtedness shall not be deemed an election of remedies or otherwise
affect the lien rights or security interest as security for the payment thereof.
In addition, upon default by any party in the payment of its share of expenses,
interests or fees, or upon the improper use of funds by the Operator, the other
parties shall have the right, without prejudice to other rights or remedies, to
collect from the purchaser the proceeds from the sale of such defaulting party's
share of Oil and Gas until the amount owed by such party, plus interest as
provided in "Exhibit C," has been received, and shall have the right to offset
the amount owed against the proceeds from the sale of such defaulting party's
share of Oil and Gas. All purchasers of production may rely on a notification of
default from the non-defaulting party or parties stating the amount due as a
result of the default, and all parties waive any recourse available against
purchasers for releasing production proceeds as provided in this paragraph.

         If any party fails to pay its share of cost within sixty (60) days
after rendition of a statement therefor by Operator, the non-defaulting parties,
including Operator, shall, upon request by Operator, pay the unpaid amount in
the proportion that the interest of each such party bears to the interest of all
such parties. The amount paid by each party so paying its share of the unpaid
amount shall be secured by the liens and security rights described in Article
VII.B., and each paying party may independently pursue any remedy available
hereunder or otherwise.

         If any party does not perform all of its obligations hereunder, and the
failure to perform subjects such party to foreclosure or execution proceedings
pursuant to the provisions of this agreement, to the extent allowed by governing
law, the defaulting party waives any available right of redemption from and
after the date of judgment, any required valuation or appraisement of the
mortgaged or secured property prior to sale, any available right to stay
execution or to require a marshaling of assets and any required bond in the
event a receiver is appointed. In addition, to the extent permitted by
applicable law, each party hereby grants to the other parties a power of sale as
to any property that is subject to the lien and security rights granted
hereunder, such power to be exercised in the manner provided by applicable law
or otherwise in a commercially reasonable manner and upon reasonable notice.

         Each party agrees that the other parties shall be entitled to utilize
the provisions of Oil and Gas lien law or other lien law of any state in which
the Contract Area is situated to enforce the obligations of each party
hereunder. Without limiting the generality of the foregoing, to the extent
permitted by applicable law, Non- Operators agree that Operator may invoke or
utilize the mechanics' or materialmen's lien law of the state in



                                      -22-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

which the Contract Area is situated in order to secure the payment to Operator
of any sum due hereunder for services performed or materials supplied by
Operator.

C.       ADVANCES:

         Operator, at its election, shall have the right from time to time to
demand and receive from one or more of the other parties payment in advance of
their respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of such
estimated expense, together with an invoice for its share thereof. Each such
statement and invoice for the payment in advance of estimated expense shall be
submitted on or before the 20th day of the next preceding month. Each party
shall pay to Operator its proportionate share of such estimate within fifteen
(15) days after such estimate and invoice is received. If any party fails to pay
its share of said estimate within said time, the amount due shall bear interest
as provided in Exhibit "C" until paid. Proper adjustment shall be made monthly
between advances and actual expense to the end that each party shall bear and
pay its proportionate share of actual expenses incurred, and no more.

D.       DEFAULTS AND REMEDIES

         If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C. or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the remedies
provided in Article VII.B. or elsewhere in this agreement, the remedies
specified below shall be applicable. For purposes of this Article VII.D., all
notices and elections shall be delivered only by Operator, except that Operator
shall deliver any such notice and election requested by a non-defaulting
Non-Operator, and when Operator is the party in default, the applicable notices
and elections can be delivered by any Non-Operator. Election of any one or more
of the following remedies shall not preclude the subsequent use of any other
remedy specified below or otherwise available to a no-defaulting party.

         1. Suspension of Rights: Any party may deliver to the party in default
a Notice of Default, which shall specify the default, specify the action to be
taken to cure the default, and specify that failure to take such action will
result in the exercise of one or more of the remedies provided in this Article.
If the default is not cured within thirty (30) days of the delivery of such
Notice of Default, all of the rights of the defaulting party granted by this
agreement may upon notice be suspended until the default is cured, without
prejudice to the right of the non-defaulting party or parties to continue to
enforce the obligations of the defaulting party previously accrued or thereafter
accruing under this agreement. If Operator is the party in default, the Non-
Operators shall have in addition the right, by vote of Non-Operators owning a
majority in interest in the Contract Area after excluding the voting interest of
Operator, to appoint a new Operator effective immediately. The rights of a
defaulting party that may be suspended hereunder at the election of the
non-defaulting parties shall include, without limitation, the right to receive
information as to any operation conducted hereunder during the period of such
default, the right to elect to participate in an operation proposed under
Article VI.A. of this agreement, the right to participate in an operation being
conducted under this agreement even if the party has previously elected to
participate in such operation, and the right to receive proceeds of production
from any well subject to this agreement.

         2. Suit for Damages: Non-defaulting parties or Operator for the benefit
of non-defaulting parties may sue (at joint account expense) to collect the
amounts in default, plus interest accruing on the amounts recovered from the
date of default until the date of collection at the rate specified in Exhibit
"C" attached



                                      -23-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

hereto. Nothing herein shall prevent any party from suing any defaulting party
to collect consequential damages accruing to such party as a result of the
default.

         3. Deemed Non-Consent: The non-defaulting party may deliver a written
Notice of Non-Consent Election to the defaulting party at any time after the
expiration of the thirty-day cure period following delivery of the Notice of
Default, in which event if the billing is for the drilling of a new well or the
Plugging Back, Sidetracking, Reworking or Deepening of a well which is to be or
has been plugged as a dry hole, or for the Completion or Recompletion of any
well, the defaulting party will be conclusively deemed to have elected not to
participate in the operation and to be a Non-Consenting Party with respect
thereto under Article VI.A. or VI.B., as the case may be, to the extent of the
costs unpaid by such party, notwithstanding any election to participate
theretofore made. If election is made to proceed under this provision, then the
non-defaulting parties may not elect to sue for the unpaid amount pursuant to
Article VII.D.2.

         Until the delivery of such Notice of Non-Consent Election to the
defaulting party, such party shall have the right to cure its default by paying
its unpaid share of costs plus interest at the rate set forth in Exhibit "C,"
provided, however, such payment shall not prejudice the rights of the
non-defaulting parties to pursue remedies for damages incurred by the
non-defaulting parties as a result of the default. Any interest relinquished
pursuant to this Article VII.D.3. shall be offered to the non-defaulting parties
in proportion to their interests, and the non-defaulting parties electing to
participate in the ownership of such interest shall be required to contribute
their shares of the defaulted amount upon their election to participate therein.

         4. Advance Payment: If a default is not cured within thirty (30) days
of the delivery of a Notice of Default, Operator, or Non-Operators if Operator
is the defaulting party, may thereafter require advance payment from the
defaulting party of such defaulting party's anticipated share of any item of
expense for which Operator, or Non-Operators, as the case may be, would be
entitled to reimbursement under any provision of this agreement, whether or not
such expense was the subject of the previous default. Such right includes, but
is not limited to, the right to require advance payment for the estimated costs
of drilling a well or Completion of a well as to which an election to
participate in drilling or Completion has been made. If the defaulting party
fails to pay the required advance payment, the non-defaulting parties may pursue
any of the remedies provided in this Article VII.D. or any other default remedy
provided elsewhere in this agreement. Any excess of funds advanced remaining
when the operation is completed and all costs have been paid shall be promptly
returned to the advancing party.

         5. Costs and Attorneys' Fees: In the event any party is required to
bring legal proceedings to enforce any financial obligation of a party
hereunder, the prevailing party in such action shall be entitled to recover all
court costs, costs of collection, and a reasonable attorney's fee, which the
lien provided for herein shall also secure.

E.       RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:

         Rentals, shut-in well payments and minimum royalties which may be
required under them terms of any lease shall be paid by the party or parties who
subjected such lease to this agreement at its or their expense. In the event two
or more parties own and have contributed interests in the same lease to this
agreement, such parties may designate one of such parties to make said payments
for and on behalf of all such parties. Any party may request, and shall be
entitled to receive, proper evidence of all such payments. In the event of
failure to make proper payment of any rental, shut-in well payment or minimum
royalty through mistake or oversight where such payment is required to continue
the lease in force, any loss which results from such non-payment shall be borne
in accordance with the provisions of Article IV.B.1.



                                      -24-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         Operator shall notify Non-Operators of the anticipated completion of a
shut-in well, or the shutting in or return to production of a producing well, at
least five (5) days (excluding Saturday, Sunday and legal holidays) prior to
taking such action, or at the earliest opportunity permitted by circumstances,
but assumes no liability for failure to do so. In the event of failure by
Operator to so notify Non-Operators, the loss of any lease contributed hereto by
Non-Operators for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article
IV.B.1.

F.       TAXES:

         Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on Leases and Oil and Gas Interests contributed by such
Non- Operator. If the assessed valuation of any Lease is reduced by reason of
its being subject to outstanding excess royalties, overriding royalties or
production payments, the reduction in ad valorem taxes resulting therefrom shall
inure to the benefit of the owner or owners of such Lease, and Operator shall
adjust the charge to such owner or owners so as to reflect the benefit of such
reduction. If the ad valorem taxes are based in whole or in part upon separate
valuations of each party's working interest, then notwithstanding anything to
the contrary herein, charges to the joint account shall be made and paid by the
parties hereto in accordance with the tax value generated by each party's
working interest. Operator shall bill the other parties for their proportionate
shares of all tax payments in the manner provided in Exhibit "C."

         If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C."

         Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes imposed upon or with respect to the production
or handling of such party's share of Oil and Gas produced under the terms of
this agreement.

                                  ARTICLE VIII.

                ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

A.       SURRENDER OF LEASES:

         The Leases covered by this agreement, insofar as they embrace acreage
in the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.

         However, should any party desire to surrender its interest in any Lease
or in any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply



                                      -25-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

within said 30-day period shall constitute a consent to the surrender of the
Leases described in the notice. If all parties do not agree or consent thereto,
the party desiring to surrender shall assign, without express or implied
warranty of title, all of its interest in such Lease, or portion thereof, and
any well, material and equipment which may be located thereon and any rights in
production thereafter secured, to the parties not consenting to such surrender.
If the interest of the assigning party is or includes an Oil and Gas Interest,
the assigning party shall execute and deliver to the party or parties not
consenting to such surrender an oil and gas lease covering such Oil and Gas
Interest for a term of one (1) year and so long thereafter as Oil and/or Gas is
produced from the land covered thereby, such lease to be on the form attached
hereto as Exhibit "B." Upon such assignment or lease, the assigning party shall
be relieved from all obligations thereafter accruing, but not theretofore
accrued, with respect to the interest assigned or leased and the operation of
any well attributable thereto, and the assigning party shall have no further
interest in the assigned or leased premises and its equipment and production
other than the royalties retained in any lease made under the terms of this
Article. The party assignee or lessee shall pay to the party assignor or lessor
the reasonable salvage value of the latter's interest in any well's salvable
materials and equipment attributable to the assigned or leased acreage. The
value of all salvable materials and equipment shall be determined in accordance
with the provisions of Exhibit "C," less the estimated cost of salvaging and the
estimated cost of plugging and abandoning and restoring the surface. If such
value is less than such costs, then the party assignor or lessor shall pay to
the party assignee or lessee the amount of such deficit. If the assignment or
lease is in favor of more than one party, the interest shall be shared by such
parties in the proportions that the interest of each bears to the total interest
of all such parties. If the interest of the parties to whom the assignment is to
be made varies according to depth, then the interest assigned shall similarly
reflect such variances.

         Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as it
was immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed subject to an Operating Agreement in the
form of this agreement.

B.       RENEWAL OR EXTENSION OF LEASES:

         If any party secures a renewal or replacement of an Oil and Gas Lease
or Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interests
held at the time by the parties in the Contract Area. Each party who
participates in the purchase of a renewal or replacement Lease shall be given an
assignment of its proportionate interest therein by the acquiring party.

         If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties who
elect to participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate of
the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated in
Exhibit "A," but any renewal or replacement Lease in



                                      -26-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

which less than all parties elect to participate shall not be subject to this
agreement but shall be deemed subject to a separate Operating Agreement in the
form of this agreement.

         If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or replacement
Leases and their right to receive an assignment of interest shall also reflect
such depth variances.

         The provisions of this Article shall apply to renewal or replacement
Leases whether they are for the entire interest covered by the expiring Lease or
cover only a portion of its area or an interest therein. Any renewal or
replacement Lease taken before the expiration of its predecessor Lease, or taken
or contracted for or becoming effective within six (6) months after the
expiration of the existing Lease, shall be subject to this provision so long as
this agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.

         The provisions in this Article shall also be applicable to extensions
of Oil and Gas Leases.

C.       ACREAGE OR CASH CONTRIBUTIONS:

         While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost of
such drilling or other operation. If the contribution be in the form of acreage,
the party to whom the contribution is made shall promptly tender an assignment
of the acreage, without warranty of title, to the Drilling Parties in the
proportions said Drilling Parties shared the cost of drilling the well. Such
acreage shall become a separate Contract Area and, to the extent possible, be
governed by provisions identical to this agreement. Each party shall promptly
notify all other parties of any acreage or cash contributions it may obtain in
support of any well or any other operation on the Contract Area. The above
provisions shall also be applicable to optional rights to earn acreage outside
the Contract Area which are in support of well drilled inside the Contract Area.

         If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.

D.       ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:

         For the purpose of maintaining uniformity of ownership in the Contract
Area in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production covered by this agreement no party shall sell, encumber, transfer or
make other disposition of its interest in the Oil and Gas Leases and Oil and Gas
Interests embraced within the Contract Area or in wells, equipment and
production unless such disposition covers either:

         1. the entire interest of the party in all Oil and Gas Leases, Oil and
Gas Interests, wells, equipment and production; or

         2. an equal undivided percent of the party's present interest in all
Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production in
the Contract Area.



                                      -27-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         Every sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties, and any transferee of an
ownership interest in any Oil and Gas Lease or Interest shall be deemed a party
to this agreement as to the interest conveyed from and after the effective date
of the transfer of ownership; provided, however, that the other parties shall
not be required to recognize any such sale, encumbrance, transfer or other
disposition for any purpose hereunder until thirty (30) days after they have
received a copy of the instrument of transfer or other satisfactory evidence
thereof in writing from the transferor or transferee. No assignment or other
disposition of interest by a party shall relieve such party of obligations
previously incurred by such party hereunder with respect to the interest
transferred, including without limitation the obligation of a party to pay all
costs attributable to an operation conducted hereunder in which such party has
agreed to participate prior to making such assignment, and the lien and security
interest granted by Article VII.B. shall continue to burden the interest
transferred to secure payment of any such obligations.

         If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such co-owners
to appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the Oil and Gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.

E.       WAIVER OF RIGHTS TO PARTITION:

         If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severally its undivided interest therein.


                                   ARTICLE IX.

                         INTERNAL REVENUE CODE ELECTION

         If, for federal income tax purposes, this agreement and the operations
hereunder are regarded as a partnership, and if the parties have not otherwise
agreed to form a tax partnership pursuant to Exhibit "G" or other agreement
between them, each party thereby affected elects to be excluded from the
application of all of the provisions of Subchapter "K," Chapter 1, Subtitle "A,"
of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and
authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to execute on behalf of each
party hereby affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States or the Federal Internal Revenue
Service, including specifically, but not by way of limitation, all of the
returns, statements, and the data required by Treasury Regulations Section
1.761. Should there be any requirement that each party hereby affected give
further evidence of this election, each such party shall execute such documents
and furnish such other evidence as may be required by the Federal Internal
Revenue Service or as may be necessary to evidence this election. No such party
shall give any notices or take any other action inconsistent with the election
made hereby. If any present or future income tax laws of the state or states in
which the Contract Area is located or any future income tax laws of the United
States contain provisions similar to those in Subchapter "K," Chapter I,
Subtitle "A," of the Code, under which an election similar to that provided by
Section 761 of the Code is



                                      -28-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

permitted, each party hereby affected shall make such election as may be
permitted or required by such laws. In making the foregoing election, each such
party states that the income derived by such party from operations hereunder can
be adequately determined without the computation of partnership taxable income.

                                   ARTICLE X.

                               CLAIMS AND LAWSUITS

         Operator may settle any single uninsured third party damage claim or
suit arising from operations hereunder if the expenditure does not exceed
Seventy-Five Thousand Dollars ($75,000.00) and if the payment is in complete
settlement of such claim or suit. If the amount required for settlement exceeds
the above amount, the parties hereto shall assume and take over the further
handling of the claim or suit, unless such authority is delegated to Operator.
All costs and expenses of handling, settling, or otherwise discharging such
claim or suit shall be at the joint expense of the parties participating in the
operation from which the claim or suit arises. If a claim is made against any
party or if any party is sued on account of any matter arising from operations
hereunder over which such individual has no control because of the rights given
Operator by this agreement, such party shall immediately notify all other
parties, and the claim or suite shall be treated as any other claim or suit
involving operations hereunder.

                                   ARTICLE XI.

                                  FORCE MAJEURE

         If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
indemnify or make money payments or furnish security, that party shall give to
all other parties prompt written notice of the force majeure with reasonably
full particulars concerning it; thereupon, the obligations of the party giving
the notice, so far as they are affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure. The term
"force majeure," as here employed, shall mean an act of God, strike, lockout, or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightning, fire, storm, flood or other act of nature, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the control of the party
claiming suspension.

         The affected party shall use all reasonable diligence to remove the
force majeure situation as quickly as practicable. The requirement that any
force majeure shall be remedied with all reasonable dispatch shall not require
the settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; however all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.

                                  ARTICLE XII.

                                     NOTICES

         All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall be
in writing and delivered in person or by United States mail, courier service,
telegram, telex, telecopier or any other form of facsimile, postage or charges
prepaid, and addressed to such parties at the addresses listed on Exhibit "A."
All telephone or oral notices permitted by this



                                      -29-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

agreement shall be confirmed immediately thereafter by written notice. The
originating notice given under any provision hereof shall be deemed delivered
only when received by the party to whom such notice is directed, and the time
for such party to deliver any notice in response thereto shall run from the date
the originating notice is received. "Receipt" for purposes of this agreement
with respect to written notice delivered hereunder shall be actual delivery of
the notice to the address of the party to be notified specified in accordance
with this agreement, or to the telecopy, facsimile or telex machine of such
party. The second or any responsive notice shall be deemed delivered when
deposited in the United States mail or at the office of the courier or telegraph
service, or upon transmittal by telex, telecopy or facsimile, or when personally
delivered to the party to be notified, provided, that when response is required
within 24 or 48 hours, such response shall be given orally or by telephone,
telex, telecopy or other facsimile within such period. Each party shall have the
right to change its address at any time, and from time to time, by giving
written notice thereof to all other parties. If a party is not available to
receive notice orally or by telephone when a party attempts to deliver a notice
required to be delivered within 24 or 48 hours, the notice may be delivered in
writing by any other method specified herein and shall be deemed delivered in
the same manner provided above for any responsive notice.

                                  ARTICLE XIII.

                                TERM OF AGREEMENT

         This agreement shall remain in full force and effect as to the Oil and
Gas Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.

         [X]      Option No. 1: So long as any of the Oil and Gas Leases subject
                  to this agreement remain or are continued in force as to any
                  part of the Contract Area, whether by production, extension,
                  renewal or otherwise.

         [ ]      Option No. 2: In the event the well described in Article
                  VI.A., or any subsequent well drilled under any provision of
                  this agreement, results in the Completion of a well as a well
                  capable of production of Oil and/or Gas in paying quantities,
                  this agreement shall continue in force so long as any such
                  well is capable of production, and for an additional period of
                  _____________ days thereafter; provided, however, if, prior to
                  the expiration of such additional period, one or more of the
                  parties hereto are engaged in drilling, Reworking, Deepening,
                  Sidetracking, Plugging Back, testing or attempting to Complete
                  or Re-complete a well or wells hereunder, this agreement shall
                  continue in force until such operations have been completed
                  and if production results therefrom, this agreement shall
                  continue in force as provided herein. In the event the well
                  descried in Article VI.A., or any subsequent well drilled
                  hereunder, results in a dry hole, and no other well is capable
                  of producing Oil and/or Gas from the Contract Area, this
                  agreement shall terminate unless drilling, Deepening,
                  Sidetracking, Completing, Recompleting, Plugging Back or
                  Reworking operations are commenced within _____________days
                  from the date of abandonment of said well. "Abandonment" for
                  such purposes shall mean either (i) a decision by all parties
                  not to conduct any further operations on the well or (ii) the
                  elapse of 180 days from the conduct of any operations on the
                  well, whichever first occurs.

         The termination of this agreement shall not relieve any party hereto
from any expense, liability or other obligation or any remedy therefor which has
accrued or attached prior to the date of such termination.



                                      -30-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         Upon termination of this agreement and the satisfaction of all
obligations hereunder, in the event a memorandum of this Operating Agreement has
been filed of record, Operator is authorized to file of record in all necessary
recording offices a notice of termination, and each party hereto agrees to
execute such a notice of termination as to Operator's interest, upon request of
Operator, if Operator has satisfied all its financial obligations.

                                  ARTICLE XIV.

                      COMPLIANCE WITH LAWS AND REGULATIONS

A.       LAWS, REGULATIONS AND ORDERS:

         This agreement shall be subject to the applicable laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations and
orders.

B.       GOVERNING LAW:

         This agreement and all matters pertaining hereto, including but not
limited to matters of performance, non-performance, breach, remedies,
procedures, rights, duties, and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state of
Texas shall govern.

C.       REGULATORY AGENCIES:

         Nothing herein contained shall grant, or be construed to grant,
Operator the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production of
wells, on tracts offsetting or adjacent to the Contract Area.

         With respect to the operations hereunder, Non-Operators agree to
release Operator from any and all losses, damages, injuries, claims and causes
of action arising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or Federal Energy Regulatory Commission or
predecessor or successor agencies to the extent such interpretation or
application was made in good faith and does not constitute gross negligence.
Each Non-Operator further agrees to reimburse Operator for such Non-Operator's
share of production or any refund, fine, levy or other governmental sanction
that Operator may be required to pay as a result of such an incorrect
interpretation or application, together with interest and penalties thereon
owing by Operator as a result of such incorrect interpretation or application.

                                   ARTICLE XV.

                                  MISCELLANEOUS

A.       EXECUTION:

         This agreement shall be binding upon each Non-Operator when this
agreement or a counterpart thereof has been executed by such Non-Operator and
Operator notwithstanding that this agreement is not then or



                                      -31-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

thereafter executed by all of the parties to which it is tendered or which are
listed on Exhibit "A" as owning an interest in the Contract Area or which own,
in fact, an interest n the Contract Area. Operator may, however, by written
notice to all Non-Operators who have become bound by this agreement as
aforesaid, given at any time prior to the actual spud date of the Initial Well
terminate this agreement if Operator in its sole discretion determines that
there is insufficient participation to justify commencement of drilling
operations. In the event of such a termination by Operator, all further
obligations of the parties hereunder shall cease as of such termination. In the
event any Non-Operator has advanced or prepaid any share of drilling or other
costs hereunder, all sums so advanced shall be returned to such Non-Operator
without interest. In the event Operator proceeds with drilling operations for
the Initial Well without the execution hereof by all persons listed on Exhibit
"A" as having a current working interest in such well, Operators shall indemnify
Non-Operators with respect to all costs incurred for the Initial Well which
would have been charged to such person under this agreement if such person had
executed the same and Operator shall receive all revenues which would have been
received by such person under this agreement if such person had executed the
same.

B.       SUCCESSORS AND ASSIGNS:

         This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, devisees, legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the Contract Area.

C.       COUNTERPARTS:

         This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.

D.       SEVERABILITY:

         For the purposes of assuming or rejecting this agreement as an
executory contract pursuant to federal bankruptcy laws, this agreement shall not
be severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.

                                  ARTICLE XVI.

                                OTHER PROVISIONS

         Notwithstanding anything contained herein to the contrary:

A. Should it be necessary to conduct hearings before governmental agencies for
the securing of spacing or pooling orders, or for certifying new gas, the costs
attributable to such hearings as well as fees paid attorneys and witnesses,
shall be borne by the Drilling Parties in the proportion that the interest of
each Drilling Party bears to the total interest of all Drilling Parties as such
interests appear in Exhibit "A".

B. In addition to Article VII.C. and D., Operator shall have the right, at its
discretion, to require prepayment of all costs, including dry hole costs
completion costs, recompletion costs or costs associated with remedial work,
based on an Authority for Expenditure for any well drilled on the Contract Area.
Failure by



                                      -32-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

any party to remit its proportionate part of the above referenced prepayment to
Operator in the manner within the time period requested shall be deemed an
election by such party not to participate in the cost of the proposed operation
thereafter, the proposed operation shall be conducted under Article VI.A.2. of
this Agreement.

C. The proceeds from the sale of all hydrocarbons produced, saved and sold shall
be paid to Operator by all purchasing companies purchasing such hydrocarbons and
by the execution of this Agreement, the Non- Operators covenant and agree to
save all purchasing companies harmless from any and all liability by reason of
paying any such proceeds to Operator. Further, Non-Operators authorize and
direct Operator to deduct from their proportionate share of such sales all Lease
Operating Expenses and other expenses owed to Operator provided for under the
terms of this Agreement and remit the balance from such sale to Non-Operators.

D. This Agreement shall be construed in accordance with and governed by the laws
of the State of Texas, and all sums payable hereunder to Operator shall be paid
at P.O. Box 7698, Tyler, Texas 75711.

E. In the event that any party shall subsequently create against its interests
any additional royalty, overriding royalty, production payment, or other burden
or charge, the party which subsequently creates any such additional burden or
charge shall hold the other parties to this Agreement harmless from such
additional burdens or charges, and shall satisfy and discharge such burdens and
charges out of its own funds. As security for the performance of the obligations
created by this paragraph, the parties entitled to be held harmless shall have a
lien to secure the performance of the obligations created by this paragraph.
Such lien shall exist upon the interest to be owned by the party charged with
performing such obligation.

F. No party shall exercise any right of partition of the Contract Area or sale
thereof in lieu of partition during the term of this Agreement.



                                      -33-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         IN WITNESSES WHEREOF, this agreement shall be effective as of the
______ day of _____________, 19___.



ATTEST OR WITNESS:                          OPERATOR


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                                  NON-OPERATORS



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                                      -34-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989


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----------------------------------          ------------------------------------
                                            Type or print name



                                            Title
                                                 -------------------------------


                                            Date
                                                --------------------------------



                                            Tax ID or S.S. No.
                                                              ------------------



                                      -35-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                 ACKNOWLEDGMENTS



         Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state will depend upon the statutes of that state.



Individual acknowledgment:



State of                  )
        ------------------



                           )        ss.



County of                  )



         This instrument was acknowledged before me on



                                       by
---------------------------------------  ---------------------------------------




(Seal, if any)


                                         ---------------------------------------


                                         Title (and Rank)
                                                         -----------------------


                                         My commission expires:
                                                               -----------------



                                      -36-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989



Acknowledgment in representative capacity:



State of                   )



                           )        ss.



County of                  )



         This instrument was acknowledged before me on



                                      by                                      as
--------------------------------------  --------------------------------------



                            of                                                 .
----------------------------  -------------------------------------------------




(Seal, if any)
                                         ---------------------------------------


                                         Title (and Rank)
                                                         -----------------------


                                         My commission expires:
                                                               -----------------



                                      -37-
<PAGE>

                                   EXHIBIT "A"





Attached to and made a part of that certain Operating Agreement dated
____________________, between ____________________, as Operator, and
____________________, as Non-Operator.





                        (TO BE COMPLETED AT A LATER DATE)







                               END OF EXHIBIT "A"



                                       A-1
<PAGE>

                                   EXHIBIT "B"



Producer's 88 - (Producer's Revised 1972)                Printed and for sale by
(New Mexico) Form 342P                        Hall-Peerbough Prom, Roswell, N.M.

                                 OIL & GAS LEASE



         THIS AGREEMENT made this _____________ day of _____________, 19____,
between ________________________________________________________________________
________________________________________________________________________________
___________________________________________________ of _________________________
                                                         (Post Office Address)

herein called lessor (whether one or more) and ____________________, lessee:

         1. Lessor, in consideration of TEN AND OTHER DOLLARS in hand paid,
receipt of which is here acknowledged, and of the royalties herein provided and
of the agreements of the lessor herein contained, hereby grants, leases and lets
exclusively unto lessee for the purpose of investigating, exploring, properties,
drilling, and operating for and producing oil and gas, injecting gas, waters,
other fluids, and air into subsurface strata, laying pipe lines, storing oil,
building banks, roadways, telephone lines, and other structures and things
thereon to produce, save, take care of, treat, process, store and transport said
minerals ,the following described land in ____________________ County, New
Mexico, to-wit:

         For the purposes of calculating the rental payments herein provided
for, said land is estimated to comprise _____________ acres, whether it actually
comprises more or less.

         2. Subject to the other provisions herein contained, this lease shall
remain in force for a term of ______ years from this date (called "primary
term"), and as long thereafter as oil, gas or other mineral is produced from
said land or land with which said land is pooled.

         3. The royalties to be paid by lessee are: (a) on oil, and on other
liquid hydrocarbons saved at the well, of that produced and saved from said
land, same to be delivered at the wells or to the credit of lessor in the pipe
line to which the wells may be connected; (b) on gas, including casinghead gas
or other gaseous substance produced from said land used off the premises or used
in the manufacture or gasoline or other products, the market value at the well
of _____________ of the gas used, provided that on gas sold on or off the
premises the royalty shall be _____________ of the amount realize from such
sale; (c) and at any time when this lease is not validated by other provision
thereof and there is a gas and/or condensate well on said land, or land pooled
therewith, but gas and/or condensate is not being so sold or used and such well
is shut in, either before or after production therefrom, then on or before 90
days after said well is shut in, and thereafter at annual intervals, lessee may
pay or tender an advance annual shut-in royalty equal to the amount of delay



                                       B-1
<PAGE>

rentals provided for in this lease for the acreage then held under this lease by
the party making such payment or tender, and so long as said shut-in royalty is
paid or tendered this lease shall not terminate and it will be considered under
all clauses hereof that gas is being produced from the leased premises in paying
quantities. Each such payment shall be paid or tendered to the party or parties
who at the time of such payment would be entitled to receive the royalties which
would be paid under this lease if the well were in fact producing, or be paid or
tendered to the credit of such party or parties in the depository bank and in
the manner hereinafter provided for the payment of rentals. The amount realized
from the sale of gas on or off the premises shall be the price established by
the gas sales contract entered into in good faith by Lessee and gas purchaser
for such term and under such conditions as are customary in the industry.
"Price" shall mean the net amount received by Lessee after giving effect to
applicable regulatory orders and after application of any applicable price
adjustments specified in such contract or regulation orders. In the event Lessee
compresses, treats, purifies, or dehydrates such gas (whether on or off the
leased premises) or transports gas off the leased premises, Lessee in computing
royalty hereunder may deduct from such price a reasonable charge for each of
such functions performed.

         4. If operations for drilling are not commenced on said land or on land
pooled therewith on or before one (1) year from this date, this lease shall
terminate as to both parties, unless on or before one (1) year from this date
lessee shall pay or tender to the lessor a rental of $____________________ which
shall cover the privilege of deferring commencement of such operations for a
period of twelve (12) months. In like manner and upon like payments or tenders,
annually, the commencement of said operations may be further deferred for
successive periods of twelve (12) months each during the primary term. Payment
or tender may be made to the lessor or to the credit of the lessor in the
____________________ Bank at ____________________, which bank, or any successor
thereof, shall continue to be the agent for the lessor and lessor's heirs and
assigns. If such bank (or any successor bank) shall fail, liquidate, or be
succeeded by another bank, or for any reason shall fail or refuse to accept
rental, lessee shall not be held in default until thirty (30) days after lessor
shall deliver to lessee a recordable instrument making provision for another
acceptable method of payment or tender, and any depository charge is a liability
of the lessor. The payment or tender of rental may be made by check or draft of
lessee, mailed or delivered to said bank or lessor, or any lessor if more than
one, on or before the rental paying date. Any timely payment or tender of rental
or shut-in royalty which is made in a bona fide attempt to make proper payment,
but which is erroneous in whole or in part as to parties, amounts, or
depositories shall nevertheless be sufficient to prevent termination of this
lease in the same manner as though a proper payment had been made; provided,
however, lessee shall correct such error within thirty (30) days after lessee
has received written notice thereof by certified mail from lessor together with
such instruments as are necessary to enable lessee to make proper payment.

         5. Lessee is hereby granted the right and power, from time to time, to
pool or combine, this lease, the land covered by it or any part or horizon
thereof with any other land, lease, leases, mineral estates or parts thereof for
the production of oil or gas. Units pooled hereunder shall not exceed the
standard proration unit fixed by law or by the New Mexico Oil Conservation
Commission or by other lawful authority for the pool or area in which said land
is situated, plus a tolerance of 10%. Lessee shall file written unit
designations in the county in which the premises are located and such units may
be designated from time to time and either before or after the completion of
wells. Drilling operations on or production from any part of any such unit shall
be considered for all purposes, except the payment of royalty, as operations
conducted upon or production from the land described in this lease. There shall
be allocated to the land covered by this lease included in any such unit that
portion of the total production of pooled minerals from wells in the unit, after
deducting any used in lease or unit operations, which the number of surface
acres in the land covered by this lease included in the unit bears to the total
number of surface acres in the unit. The production so allocated shall be
considered for all purposes, including the payment or delivery of royalty, to be
the entire production of pooled minerals from the portion of said land covered
hereby and included in said unit in the same manner as though produced from



                                       B-2
<PAGE>

said land under the terms of this lease. Any pooled unit designated by lessee,
as provided herein, may be dissolved by lessee by recording an appropriate
instrument in the County where the land is situated at any time after the
completion of a dry hole or the cessation of production on said unit.

         6. If prior to the discovery of oil or gas hereunder, lessee should
drill and abandon a dry hole or holes hereunder, or if after discovery of oil or
gas the production thereof should cease for any cause, this lease shall not
terminate if lessee commences working or additional drilling operations within
60 days thereafter and diligently prosecutes the same, or (if it be within the
primary term) commences or resumes the payment or tender of rentals or commences
operations for drilling or reworking on or before the rental paying date next
ensuing after the expiration of three months from date of abandonment of said
dry hole or holes or the cessation of production. If at the expiration of the
primary term oil or gas is not being lessee is then engaged in operations for
drilling or reworking of any well, this lease shall remain in force so long as
such operations are diligently prosecuted with no Cessation of more than 60
consecutive days. If during the drilling or reworking of any well under this
paragraph, lessee loses or junks the hole or well and after diligent efforts in
good faith is unable to complete said operations then within 30 days after the
abandonment of said operations lessee may commence another well and drill the
same with due diligence. If any drilling, additional drilling, or reworking
operations hereunder result in production, then this lease shall remain in full
force so long thereafter as oil or gas is produced hereunder.

         7. Lessee shall have free use of oil, gas and water from said land,
except water from lessor's wells and tanks, for all operations hereunder, and
the royalty shall be computed after deducting any so used. Lessee shall have the
right at any time during or after the expiration of this lease to remove all
property and fixtures placed by lessee on said land, including the right to draw
and remove all casing. When required by lessor, lessee will bury all pipe lines
on cultivated lands below ordinary plow depth, and no well shall be drilled
within two hundred feet (200 ft.) of any residence or bam now on said land
without lessor's consent. Lessor shall have the privilege, at his risk and
expense, of using gas from any gas well on said land for stoves and inside
lights in the principal dwelling thereon, out of any surplus gas not needed for
operations hereunder.

         8. The rights of either party hereunder may be assigned in whole or in
part and the provisions hereof shall extend to the heirs, executors,
administrators, successors and assigns; but no change or division in the
ownership of the land, or in the ownership of or right to receive rentals,
royalties or payments, however accomplished shall operate to enlarge the
obligations or diminish the rights of lessee; and no such change or division
shall be binding upon lessee for any purpose until 30 days after lessee has been
furnished by certified mail at lessee's principal place of business with
acceptable instruments or certified copies thereof constituting the chain of
title from the original lessor. If any such change in ownership occurs through
the death of the owner, lessee may pay or tender any rentals, royalties or
payments to the credit of the deceased or his estate in the depository bank
until such time as lessee has been furnished with evidence satisfactory to
lessee as to the persons entitled to such sums. In the event of an assignment of
this lease as to a segregated portion of said land, the rentals payable
hereunder shall be apportioned as between the several leasehold owners ratably
according to the surface area of each, and default in rental payment by one
shall not affect the rights of other leasehold owners hereunder. An assignment
of this lease, in whole or in part, shall, to the extent of such assignment,
relieve and discharge lessee of any obligations hereunder, and, if lessee or
assignee of part or parts hereof shall fail to make default in the payment of
the proportionate part of the rentals due from such lessee or assignee or fail
to comply with any other provision of such lease, such default shall not affect
this lease in so far as it covers a part of said lands upon which lessee or any
assignee thereof shall so comply or make such payments. Rentals as used in this
paragraph shall also include shut-in royalty.

         9. Should lessee be prevented from complying with any express or
implied covenant of this lease, or from conducting drilling or reworking
operations hereunder, or from producing oil or gas hereunder by



                                       B-3
<PAGE>

reason of scarcity or inability to obtain or use equipment or material, or by
operation of force majeure, or by any Federal or state law or any order, rule or
regulation of governmental authority, then while so prevented, lessee's duty
shall be suspended, and lessee shall not be liable for failure to comply
therewith; and this lease shall be extended while and so long as lessee is
prevented by any such cause from conducting drilling or reworking operations on
or from producing oil or gas hereunder; and the time while lessee is so
prevented shall not be counted against lessee, anything in this lease to the
contrary notwithstanding.

         10. Lessor hereby warrants and agrees to defend the title to said land,
and agrees that lessee, at its option, may discharge any tax, mortgage, or other
lien upon said land, and in the event lessee does so, it shall be subrogated to
such lien with the right to enforce same and apply rentals and royalties
accruing hereunder toward satisfying same. Without impairment of lessee's rights
under the warranty, if this lease covers a less interest in the oil or gas in
all or any part of said land than the entire and undivided fee simple estate
(whether lessor's interest is herein specified or not) then the royalties,
shut-in royalty, rental, and other payments, if any, securing from any part as
to which this lease covers less than such full interest, shall be paid only in
the proportion which the interest therein, if any, covered by this lease, bears
to the whole and undivided fee simple estate therein. Should any one or more of
the parties named above as lessors fail to execute this lease, it shall
nevertheless be binding upon the party or parties executing the same.

         11. Lessee, its/his successors, heirs and assigns, shall have the right
at any time to surrender this lease, in whole or in part, to lessor or his
heirs, successors, and assigns by delivering or mailing a release thereof to the
lessor, or by placing a release thereof of record in the county in which said
land is situated; thereupon lessee shall be relieved from all obligations,
expressed or implied, of this agreement as to acreage so surrendered, and
thereafter the rentals and shut-in royalty payable hereunder shall be reduced in
the proportion that the acreage covered hereby is reduced by said release or
releases.

         Executed the day and year first above written.



                                       B-4
<PAGE>

                                   EXHIBIT "C"





Attached to and made a part of that certain Operating Agreement dated
_____________, ______, between ____________________, as Operator and
____________________, as Non-Operators.



                              ACCOUNTING PROCEDURE




                              I. GENERAL PROVISIONS



1.       DEFINITIONS


         "Property" shall mean the real and personal property subject to the
         Agreement to which this Accounting Procedure is attached.


         "Operations" shall mean any and all operations and activities necessary
         or proper for the acquisition, development, operation, protection and
         maintenance of the Property and the Affiliated Program.


         "Joint Account" shall mean the account showing the charges and credits
         accruing because of the Operations and which are to be shared by the
         Parties according to their pro rata interests.


         "Operator" shall mean the Party designated to conduct the Operations.


         "Non-Operators" shall mean the Parties other than the Operator.


         "Parties" shall mean Operator and Non-Operators.



                                       C-1
<PAGE>

         "First-level supervisors" shall mean those employees whose primary
         function in Operations is the direct supervision of other employees,
         service companies, drilling rigs, contract labor, and other personnel
         directly employed on the Property in a field operating capacity.


         "Technical Employees" shall mean those employees having special
         drilling, engineering, geological, production or other professional
         skills, and whose primary function in Operations is the handling of
         specific operating conditions and problems for the benefit of the
         Property.


         "Personal Expenses" shall mean travel, meals, lodging, and other
         reasonable reimbursable expenses of Operator's employees.


         "Material" shall mean personal property, equipment or supplies acquired
         or held for use on the Property.


         "Controllable Material" shall be defined as Material which is
         ordinarily so classified and controlled by Operator in the conduct of
         its Operations.


2.       STATEMENT AND BILLINGS


         Operator shall bill Non-Operators on or before the last day of each
         month for their proportionate share of costs and expenses for the
         preceding month. Such bills will be accompanied by statements of all
         charges and credits to the Joint Account, summarized by appropriate
         classifications indicative of the nature thereof.


3.       ADVANCES AND PAYMENTS BY ADMINISTRATORS


         A.       Unless otherwise provided for in the Agreement, the Operator
                  may require the Non-Operators to advance their share of
                  estimated cash outlay for the succeeding month's operation
                  within fifteen (15) days after receipt of the billing or by
                  the first day of the month for which the advance is required,
                  whichever is later. Operator shall adjust each monthly billing
                  to reflect advances received from the Non-Operators.



                                       C-2
<PAGE>

         B.       Each Non-Operator shall pay to Operator in Smith County, Texas
                  its proportion of all bills within fifteen (15) days after
                  receipt. If payment is not made within such time, the unpaid
                  balance shall bear interest monthly at a rate of one and
                  one-half percent (l1/2%) per month or the maximum contract
                  rate permitted by the applicable usury laws in the state in
                  which the Property is located, whichever is the lesser, plus
                  attorney's fees, court costs, and other costs in connection
                  with the collection of unpaid amounts.


4.       ADJUSTMENTS


         Payment of any such bills shall not prejudice the right of any
         Non-Operator to protest or question the correctness thereof; provided
         however, all bills and statements rendered to Non-Operators by Operator
         during any calendar year shall conclusively be presumed to be true and
         correct after twenty-four (24) months following the end of any such
         calendar year, unless within the said twenty-four (24) month period a
         Non-Operator takes written exception thereto and makes claim on
         Operator for adjustment. No adjustment favorable to Operator shall be
         made unless it is made within the same prescribed period. The
         provisions of this paragraph shall not prevent adjustments resulting
         from a physical inventory of Controllable Material as provided for in
         Section V.


5.       AUDITS


         A.       A Non-Operator, upon notice in writing to Operator and all
                  other Non-Operators, shall have the right to audit Operator's
                  accounts and records relating to the Joint Account for any
                  calendar year within the twenty-four (24) month period
                  following the end of such calendar year; provided, however,
                  the making of an audit shall not extend the time for the
                  taking of written exception to and the adjustment of accounts
                  as provided for in Paragraph 4 of this Section I. Where there
                  are two or more Non-Operators, the Non-Operators shall make
                  every reasonable effort to conduct a joint audit in a manner
                  which will result in a minimum of inconvenience to the
                  Operator. Operator shall bear no portion of the Non-Operator's
                  audit cost incurred under this paragraph. The audits shall not
                  be conducted more than once each year without prior approval
                  of Operator, except upon the resignation or removal of the
                  Operator, and shall be made at the expense of those
                  Non-Operators approving such audit.


         B.       The Operator shall reply in writing to an audit report within
                  180 days after receipt of such report.



                                       C-3
<PAGE>

6.       APPROVAL BY NON-OPERATORS


         Where an approval or other agreement of Non-Operators is expressly
         required under other sections of this Accounting Procedure and if the
         agreement to which this Accounting Procedure is attached contains no
         contrary provisions in regard thereto, Operator shall notify all
         Non-Operators of the Operator's proposal and the agreement or approval
         of a majority in interest of the Non-Operators shall be controlling on
         all Non-Operators.


                               II. DIRECT CHARGES


Operator shall charge the Joint Account with the following items:


1.       ECOLOGICAL AND ENVIRONMENTAL


         Costs incurred for the benefit of the Property as a result of
         governmental or regulatory requirements to satisfy environmental
         considerations applicable to the Operations. Such costs may include
         surveys of an ecological or archaeological nature and pollution control
         procedures as required by applicable laws and regulations.


2.       RENTALS AND ROYALTIES


         Lease rentals and royalties paid by Operator for the Operations.


3.       LABOR


         Salaries, wages, benefits and related expenses shall be charged an a
         day-rate basis (recomputed within a reasonable periodic time period)
         for:



                                       C-4
<PAGE>

         A.       (1)      Operator's employees directly employed on the
                           Property in the conduct of Operations.


                  (2)      First-level supervisors in the field.


                  (3)      Technical employees directly employed on the
                           Property.


                  (4)      Technical employees either temporarily or permanently
                           assigned to and directly employed in the Operations
                           of the Property.


         B.       Operator's cost of holiday, vacation, sickness and disability
                  benefits and other customary allowances paid to the employees
                  whose salaries and wages are chargeable to the Joint Account
                  under Paragraph 3A of this Section II. Cost under this
                  Paragraph 3B may be charged on a "when and as paid basis" or
                  by "percentage assessment" on the amount of salaries and wages
                  chargeable to the Joint Account under Paragraph 3A of this
                  Section II. If percentage assessment is used, the rate shall
                  be based on the Operator's cost experience.


         C.       Expenditures or contributions made pursuant to assessments
                  imposed by governmental authority which are applicable to
                  Operator's labor cost of salaries and wages chargeable to the
                  Joint Account under Paragraphs 3A of this Section II.


         D.       Personal expenses of those employees whose salaries and wages
                  are chargeable to the Joint Account under Paragraph 3A of this
                  Section II.


         E.       Operator's current costs of established plans for employees'
                  group life insurance, hospitalization, pension, retirement,
                  stock purchase, thrift, bonus, and other benefit plans of a
                  like nature, applicable to Operator's labor cost chargeable to
                  the Joint Account under Paragraphs 3A of this Section II shall
                  be Operator's actual cost not to exceed the percent most
                  recently recommended by the Council of Petroleum Accountants
                  Societies.



                                       C-5
<PAGE>

4.       MATERIAL


         Material purchased or furnished by Operator for use on the Property as
         provided under Section IV. Only such Material shall be purchased for or
         transferred to the Property as may be required for immediate use and is
         reasonably practical and consistent with efficient and economical
         operations. The accumulation of surplus stocks shall be avoided.


5.       TRANSPORTATION


         Transportation of employees and Material necessary for the Operations,
         not previously charged as a part of day-rate basis.


6.       SERVICES


         The cost of contract services and utilities procured from outside
         sources including without limitation auditing and taxation services,
         engineering consultant services including engineers, geologists and
         landmen, and services in connection with matters before or involving
         government agencies or regulatory bodies.


7.       EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR


         A.       Operator shall charge the Joint Account for use of Operator
                  owned equipment and facilities at rates commensurate with
                  costs of ownership and operation. Such rates shall include
                  costs of maintenance, repairs, other operating expense,
                  insurance, taxes, depreciation, and interest on gross
                  investment less accumulated depreciation not to exceed twelve
                  percent (12%) per annum. Such rates shall not exceed average
                  commercial rates currently prevailing in the immediate area of
                  the Property.


         B.       In lieu of charges in Paragraph 7A above, Operator may elect
                  to use average commercial rates prevailing in the immediate
                  area of the Property. For automotive equipment, Operator may
                  elect to use rates published by the Petroleum Motor Transport
                  Association.



                                       C-6
<PAGE>

8.       DAMAGES AND LOSSES TO PROPERTY


         All costs or expenses necessary for the repair or replacement of
         Property made necessary because of damages or losses incurred by fire,
         flood, storm, theft, accident, or other cause, except those resulting
         from Operator's gross negligence or willful misconduct. Operator shall
         furnish Non-Operators written notice of damages or losses incurred as
         soon as practicable after a report thereof has been received by
         Operator.


9.       LEGAL EXPENSE


         All costs and expenses of handling, investigating, and settling
         litigation or claims arising by reason of the Operations or necessary
         to protect or recover the Property, including, but not limited to,
         attorney's fees, court costs, cost of investigation or procuring
         evidence and amounts paid in settlement or satisfaction of any such
         litigation or claims. All costs and expenses necessary for title work,
         division order title opinions, transfer orders, deeds, assignments and
         conveyances which affect title to the oil and gas estate. All costs and
         expenses related to curative matters and representation before
         regulatory or governmental agencies.


10.      TAXES


         All taxes of every kind and nature assessed or levied upon or in
         connection with the Property, the operation thereof, or the production
         therefrom, and which taxes have been paid by the Operator for the
         benefit of the Parties. If the ad valorem taxes are based in whole or
         in part upon separate valuations of each party's working interest, then
         notwithstanding anything to the contrary herein, charges to the Joint
         Account shall be made and paid by the Parties hereto in accordance with
         the tax value generated by each party's working interest.


11.      INSURANCE


         Net premiums paid for insurance provided for the Operations for the
         projection of the Parties. In the event Operations are conducted in a
         state in which Operator may act as self-insurer for Worker's
         Compensation and/or Employer's Liability under the respective state's
         laws, Operator may, at its election, include the risk under its
         self-insurance program and in that event, Operator shall include a
         charge at Operator's cost not to exceed manual rates.



                                       C-7
<PAGE>

12.      ABANDONMENT AND RECLAMATION


         Costs incurred for abandonment of the Property, including costs
         required by governmental or other regulatory authority.


13.      COMMUNICATIONS


         Cost of acquiring, leasing, installing, operating, repairing and
         maintaining communication systems, including radio and microwave
         facilities directly serving the Property. In the event communication
         facilities/systems serving the Property are Operator owned, charges to
         the Joint Account shall be made as provided in Paragraph 7 of this
         Section II.


14.      ADDITIONAL SERVICES


         The cost of all additional services provided by the Operator or by
         third parties relating to the Operations, whether direct or indirect,
         including without limitation accounting, engineering, land and
         administrative services. Such charges to the Joint Account will include
         without limitation salaries and benefits of Operator's personnel;
         automotive and travel; office rental; utilities; the cost of
         furnishing, maintaining, operating or otherwise securing the use of
         office equipment, furniture, machines, computers, and other physical
         equipment and facilities; Amounts paid to outside parties for
         additional services; an allocable part of General and Administrative
         Expenses and other indirect cost and all other cost and expense related
         to the performance of these additional services.


15.      OTHER EXPENDITURES


         Any other expenditure not covered or dealt with in the foregoing
         provisions of this Section II or in Section III, and which is incurred
         by the Operator for the necessary and proper conduct of the Operations.



                                       C-8
<PAGE>

                              III. INDIRECT CHARGES


1.       OVERHEAD - DRILLING AND PRODUCING OPERATIONS


         Overhead - Fixed Rate Basis


         (1)      Operator shall charge the Joint Account at the following rates
                  per well per month:


                  Drilling Well Rate:           $7,420.00

                  Producing Well Rate:          $  780.00


         (2)      Application of Overhead - Fixed Rate Basis shall be as
                  follows:


                  (a)      Drilling Well Rate


                           1)       Charges for onshore drilling wells shall
                                    begin on the date well is spudded and
                                    terminate on the date of completion or
                                    abandonment.


                           2)       Charges for wells undergoing any type of
                                    workover or recompletion for a period of
                                    five (5) consecutive workdays or more shall
                                    be made at the drilling well rate. Such
                                    charges shall be applied for the period from
                                    date workover operations, with rig, commence
                                    through date of rig release, except that no
                                    charge shall be made during suspension of
                                    operations for fifteen (15) or more
                                    consecutive days.


                  (b)      Producing Well Rates



                                       C-9
<PAGE>

                           1)       An active well either produced or injected
                                    into for any portion of the month shall be
                                    considered as a one-well charge for the
                                    entire month.


                           2)       Each active completion in a multi-completed
                                    well in which production is not commingled
                                    down hole shall be considered as a one-well
                                    charge providing each completion is
                                    considered a separate well by the governing
                                    regulatory authority.


                           3)       An inactive gas well shut in because of
                                    overproduction or failure of purchaser to
                                    take the production shall be considered as a
                                    one-well charge providing the gas well is
                                    directly connected to a permanent sales
                                    outlet.


                           4)       A one-well charge may be made for the month
                                    in which plugging and abandonment operations
                                    are completed on any well.


                           5)       Each facility serving the Operations other
                                    than a well shall count as a well for this
                                    purpose, such as compressor or dehydration
                                    facilities, or other facilities for
                                    producing (including secondary recovery)
                                    operations or for treating, handling or
                                    marketing production.


                           6)       All other inactive wells (including but not
                                    limited to inactive wells covered by unit
                                    allowable, ____________________ lease
                                    allowable, transferred allowable, etc.)
                                    shall not qualify for an overhead charge.


         (3)      The well rates shall be adjusted as of the first day of April,
                  2001, and each year on the first day of April thereafter. The
                  adjustment shall be computed by multiplying the rate currently
                  in use by the percentage increase or decrease in the average
                  weekly earnings of Crude Petroleum and Gas Production Workers
                  for the last calendar year compared to the calendar year
                  preceding as show by the index of average weekly earnings of
                  Crude Petroleum and Gas Fields Production Workers as published
                  by the United States Department of Labor, Bureau of Labor
                  Statistics, or the equivalent Canadian index as published by
                  Statistics Canada, as applicable. The adjusted rates shall be
                  the rates currently in use, plus or minus the computed
                  adjustment.



                                      C-10
<PAGE>

2.       OVERHEAD - MAJOR CONSTRUCTION


         To compensate Operator for overhead costs incurred in the construction
         and installation of fixed assets, the expansion of fixed assets, and
         any other project clearly discernible as a fixed asset required for the
         development and operation of the Property, Operator shall either
         negotiate a rate prior to the beginning of construction, or shall
         charge the Joint Account for overhead based on the following rates for
         any Major Construction project in excess of $25,000.


         A.       Five percent (5%) of first $100,000 or total cost if less;
                  plus


         B.       Three percent (3%) of costs in excess of $100,000 but less
                  than $1,000,000; plus


         C.       Two percent (2%) of costs in excess of $1,000,000.


         Total cost shall mean the gross cost of any one project. For the
         purpose of this paragraph, the component parts of a single project
         shall not be treated separately and the cost of drilling and workover
         wells and artificial lift equipment shall be excluded.


3.       CATASTROPHE OVERHEAD


         To compensate Operator for overhead costs incurred in the event of
         expenditures resulting from a single occurrence due to oil spill,
         blowout, explosion, fire, storm, hurricane, or other catastrophes as
         agreed to by the Parties, which are necessary to restore the Property
         to the equivalent condition that existed prior to the event causing the
         expenditures, Operator shall either negotiate a rate prior to charging
         the Joint Account or shall charge the Joint Account for overhead based
         on the following rates:


         A.       Five percent (5%) of total costs through $100,000; plus


         B.       Three percent (3%) of costs in excess of $100,000 but less
                  than $1,000,000; plus



                                      C-11
<PAGE>

         C.       Two percent (2%) of costs in excess of $1,000,000.


         Expenditures subject to the overheads above will not be reduced by
         insurance recoveries, and no other overhead provisions of this Section
         III shall apply.


4.       PROSPECT SCREENING AND EVALUATION


         The General and Administrative Expenses incurred by the Operator in the
         screening, evaluation and acquisition of Prospects. Such charge shall
         be based on an allocation system which is in accordance with generally
         accepted accounting principles.


5.       GENERAL AND ADMINISTRATIVE EXPENSE


         Operator shall charge the Non-Operators for General and Administrative
         Expenses allocated to the Program or Partnership in accordance with
         generally accepted accounting principles.


6.       AMENDMENT OF RATES


         The Overhead rates provided for in this Section III may be amended from
         time to time only by mutual agreement between the Parties hereto if, in
         practice, the rates are found to be insufficient or excessive.


                     IV. PRICING OF JOINT ACCOUNT MATERIAL -

                      PURCHASES, TRANSFERS AND DISPOSITIONS



Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Property.
Operator shall provide all Material for use on the Property; however, at
Operator's option, such Material may be supplied by the Non-Operator. Operator
shall make timely disposition of idle and/or surplus Material, such disposal
being made either through sale to Operator or Non-Operator, division in kind, or
sale to outsiders. Operator may purchase, but shall be under no



                                      C-12
<PAGE>

obligation to purchase, the interest of Non-Operators in surplus Material. The
disposal of surplus Controllable Material not purchased by the Operator shall be
for the highest price offered and where possible Operator shall obtain bids from
two or more parties.


1.       PURCHASES


         Material purchased shall be charged at the price paid by Operator after
         _____________ deduction of all discounts received. In case of Material
         found to be defective or returned to vendor for any other reasons,
         credit shall be passed to the Joint Account when adjustment has been
         received by the Operator.


2.       TRANSFERS AND DISPOSITIONS


         Material furnished to the Property and Material transferred from the
         Property or disposed of by the Operator, unless otherwise agreed to by
         the Parties, shall be priced on the following basis exclusive of cash
         discounts:


         A.       New Material (Condition "A")


                  Material shall be priced at the current replacement cost of
                  the same kind of Material, effective at date of movement.


         B.       Good Used Material (Condition "B")


                  Material in sound and serviceable condition and suitable for
                  reuse without reconditioning:


                  (1)      Material moved to the Property


                           At seventy-five percent (75%) of current new price,
                           as determined by Paragraph A.



                                      C-13
<PAGE>

                  (2)      Material used on and moved from the Property


                           (a)      At seventy-five percent (75%) of current new
                                    price, as determined by Paragraph A, if
                                    Material was originally charged to the Joint
                                    Account as new Material or


                           (b)      At sixty-five percent (65%) of current now
                                    price, as determined by Paragraph A, if
                                    Material was originally charged to the Joint
                                    Account as used Material.


                  (3)      Material not used on and moved from the Property


                           At seventy-five percent (75%) of current now price as
                           determined by Paragraph A.


                           The cost of reconditioning, if any, shall be absorbed
                           by the transferring property.


         C.       Other Used Material


                  (1)      Condition "C"


                           Material which is not in sound and serviceable
                           condition and not suitable for its original function
                           until after reconditioning shall be priced at fifty
                           percent (50%) of current new price as determined by
                           Paragraph A. The cost of reconditioning shall be
                           charged to the receiving property, provided Condition
                           "C" value plus cost of reconditioning does not exceed
                           Condition "B" value.



                                      C-14
<PAGE>

                  (2)      Condition "D"


                           Material, excluding junk, no longer suitable for its
                           original purpose, but usable for some other purpose
                           shall be priced on a basis commensurate with its use.
                           Operator may dispose of Condition "D" Material under
                           procedures normally used by Operator without prior
                           approval of Non-Operators.


                  (3)      Condition "E"


                           Junk shall be priced at prevailing prices. Operator
                           may dispose of Condition "E" Material under
                           procedures normally utilized by operator without
                           prior approval of Non-Operators.


         D.       Obsolete Material


                  Material is serviceable and usable for its original function
                  but condition and/or value of such Material is not equivalent
                  to that which would justify a price provided above may be
                  specifically priced as agreed to by the Parties. Such price
                  should result in the Joint Account being charged with the
                  value of the service rendered by such Material.


3.       WARRANTY OF MATERIAL FURNISHED BY OPERATOR


         Operator does not warrant the Material furnished. In case of defective
         Material, credit shall not be passed to the Joint Account until
         adjustment has been received by Operator from the manufacturers or
         their agents.


                                 V. INVENTORIES

The Operator shall maintain detailed records of Controllable Material. At
reasonable intervals, inventories shall be taken by the Operator. Adjustments
resulting from the reconciliation of a physical inventory shall be made within
six months following the taking of the inventory. Special inventories may be
taken by the Non- Operators at their expense in accordance with Paragraph 5 of
Section I.



                                      C-15
<PAGE>

                                   EXHIBIT "D"




Attached to and made a part of that certain Operating Agreement dated
_____________, between ____________________, as Operator, and
____________________, et al, as Non-Operator.


                                    INSURANCE


At all times during the conduct of operations hereunder, Operator shall maintain
in force the following insurance, at the expense of and for the benefit of the
joint account:


1.       Workmen's Compensation Insurance


         A.       Statutory Workmen's Compensation coverage to include all areas
                  involved in operations covered under this contract.


         B.       Employers liability with a limit of $500,000 each accident.


2.       Comprehensive General Liability Insurance (CGL)


         A.       Standard Comprehensive General, conditions including coverage
                  for products/completed operations.


         B.       Contractual Liability insuring contracts between Mewbourne Oil
                  Company and their contractors; covering assumed tort
                  liability.



                                       D-1
<PAGE>

         C.       Limits of Liability:


<Table>
<S>                                                                                                      <C>
                  General Aggregate Limit                                                                $2,000,000


                  Products and Completed Operations Aggregate Limit                                      $1,000,000


                  Personal and Advertising Injury Limit                                                  $1,000,000


                  Each Occurrence Limit                                                                  $1,000,000
</Table>


3.       Aircraft and Automobile Liability Insurance


         A.       Standard Comprehensive form including all owned, non-owned and
                  hired automobile equipment.


<Table>
<S>                                                                                           <C>
         B.       Limits of Liability:                                                                   $1,000,000

                                                                                              Combined Single Limit
</Table>


         C.       If the Operator will use Owned, Hired or Non-owned Aircraft:


<Table>
<S>                                                                                           <C>
                  Aircraft Public Liability Insurance                                                   $25,000,000

                                                                                              Combined Single Limit
</Table>



                                       D-2
<PAGE>

4.       Contractors and Subcontractors


         Operator agrees to use its best efforts to assure that its contractors
         and subcontractors also comply with the insurance requirements listed
         in paragraphs 1-3 above and that certain contractors and subcontractors
         engaged in higher risk activities carry appropriate insurance coverage.


5.       Umbrella Policy


         In addition to paragraphs 1-3 above, Operator also carries $50,000,000
         in Excess Umbrella Liability policies.


6.       Operator's Extra Expense Insurance


         Operator will carry Operator's Extra Expense Insurance covering costs
         of well control, clean up, and redrilling, with a limit per occurrence
         of $3,000,000 for well depths of 1-10,000' and $10,000,000 for well
         depths over 10,000'.


7.       Additional Insurance


         In addition to the above referenced types of insurance coverage,
         Operator may, but is not required to, carry additional types of
         insurance coverage including, but not limited to, various types of
         additional excess umbrella liability, public property damage, oil lease
         property, pollution or contamination, or similar coverage. The actual
         premiums paid for all insurance shall be charged on a pro-rata basis to
         the Joint account of the parties hereto.


8.       Other Provisions


         Any liability, loss, damage claim or expense resulting from accidents
         or occurrences not covered by insurance of the character referred to
         above or in excess of the insurance actually carried under the



                                       D-3
<PAGE>

         above provisions, shall be borne by the parties hereto in the
         proportions in which they own in the unit area. In the event Operator
         is unable to procure and maintain any of the insurance enumerated
         above, Operator shall promptly give written notice thereof to the other
         parties and in such event, resulting loss, damage, claim and expense
         shall be borne by the parties hereto proportion to their respective
         interests in the unit area. Such notice shall also constitute a waiver
         of the requirement that Operator procure and maintain the insurance
         which is the subject of notice.



                                       D-4
<PAGE>

                                   EXHIBIT "E"



ATTACHED to that certain Operating Agreement dated ____________________, between
____________________ as Operator, and ____________________, as Non-Operator.




                             GAS BALANCING AGREEMENT

                             FOR GAS WELL PRODUCTION




         DURING the period or periods when any party hereto has no market for,
or its purchaser is unable to take or if any party fails to take its share of
gas, the other parties shall be entitled to produce each month one hundred
percent of the allowable gas production assigned to the Unit Area by the
appropriate governmental entity having jurisdiction, and each of such parties
shall have the right to take all or any part of its prorata share. All parties
hereto shall share in and own the condensate recovered at the surface in
accordance with their respective interest, but each party taking such gas shall
own all of the gas delivered to its purchaser. Each party unable to market its
share of the gas produced shall be credited with gas in storage equal to its
share of the gas produced, less its share of gas used in lease operations,
vented or lost. Operator shall maintain a current account of the gas balance
between the parties and shall furnish all parties hereto monthly statements
showing the total quantity of gas produced, used in lease operations, vented or
lost, and the total quantity of condensate recovered.


         AFTER notice to Operator, any party may begin taking or delivering its
share of the gas produced. In addition to its share, each party, until it has
recovered its gas in storage and balanced its gas account, shall be entitled to
take or deliver a volume of gas equal to fifty (50%) percent of each
overproduced party's share of gas produced. If more than one party is entitled
to the additional gas produced, they shall divide such additional gas in
accordance with Unit participation.


         IN, the event production of gas permanently ceases prior to the time
that the accounts of the parties have been balanced, a complete balancing shall
be accomplished by a money settlement. Such settlement shall be based on the
price or prices received by each over-produced party, less taxes, for its share
of the overproduced gas, without interest.



                                       E-1
<PAGE>

         AT all times while gas is produced from the Unit Area, each party shall
make appropriate settlement of all royalties, overriding royalty interest, and
other payments out of or in lieu of production for which it is responsible, as
if each party were taking or delivering to a purchaser its share, and its share
only, of such gas production. Each party hereto agrees to hold each other party
harmless from any and all claims for royalty payments asserted by royalty owners
to whom each party is accountable.


         THE provisions of this agreement shall be separately applicable to each
reservoir to the end that production from one reservoir in a gas well may not be
utilized for the purpose of balancing underproduction from other reservoirs.





                                 END EXHIBIT "E"



                                       E-2