Exhibit
10.1


 


 


 


Option
Agreement


By
and Between


TEXCAL
ENERGY SOUTH TEXAS, L.P.


(“Optionor”)


and


DENBURY
ONSHORE, LLC


(“Optionee”)


dated


November
1, 2006


 















 


 


TABLE
OF CONTENTS


	
   

  	
   

  	
   

  	
   

  	
  Page

  
	
  ARTICLE 1

  	
   

  	
  DEFINITIONS

  	
   

  	
  1

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 2

  	
   

  	
  OPTION TO PURCHASE

  	
   

  	
  13

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.1

  	
   

  	
  Option
  to Purchase

  	
   

  	
  13

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.2

  	
   

  	
  Term
  of Option

  	
   

  	
  14

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.3

  	
   

  	
  Initial Term
  Installments

  	
   

  	
  14

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.4

  	
   

  	
  Exercise of
  Option to Purchase

  	
   

  	
  14

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.5

  	
   

  	
  Payment for Assets

  	
   

  	
  14

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.6

  	
   

  	
  Closing

  	
   

  	
  16

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2.7

  	
   

  	
  Development
  Plan and Capital Expenditure Commitment

  	
   

  	
  16

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 3

  	
   

  	
  OPERATIONS

  	
   

  	
  17

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.1

  	
   

  	
  Operations of
  Hastings Field Prior to Exercise of Option

  	
   

  	
  17

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.2

  	
   

  	
  Operations
  After Option Exercise

  	
   

  	
  18

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.3

  	
   

  	
  Simultaneous
  Use of Surface

  	
   

  	
  18

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 4

  	
   

  	
  OPTIONOR’S
  REPRESENTATIONS AND WARRANTIES

  	
   

  	
  19

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 5

  	
   

  	
  OPTIONEE’S
  REPRESENTATIONS AND WARRANTIES

  	
   

  	
  21

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 6

  	
   

  	
  ACCESS TO
  INFORMATION AND INSPECTIONS

  	
   

  	
  22

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.1

  	
   

  	
  Title
  Files

  	
   

  	
  22

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.2

  	
   

  	
  Other
  Files

  	
   

  	
  22

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.3

  	
   

  	
  Confidentiality
  Agreement

  	
   

  	
  23

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.4

  	
   

  	
  Inspections

  	
   

  	
  23

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.5

  	
   

  	
  No Warranty or
  Representation on Optionor’s Information

  	
   

  	
  24

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  6.6

  	
   

  	
  Amendments to
  Exhibits

  	
   

  	
  24

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 7

  	
   

  	
  ENVIRONMENTAL
  MATTERS AND ADJUSTMENTS

  	
   

  	
  24

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.1

  	
   

  	
  Investigation

  	
   

  	
  24

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.2

  	
   

  	
  Waiver
  of Defects

  	
   

  	
  25

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.3

  	
   

  	
  Remedy
  

  	
   

  	
  25

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.4

  	
   

  	
  Default
  Basket

  	
   

  	
  25

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  7.5

  	
   

  	
  Closing

  	
   

  	
  26

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 8

  	
   

  	
  TITLE DEFECTS
  AND ADJUSTMENTS

  	
   

  	
  26

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.1

  	
   

  	
  Existing Title;
  Definitions

  	
   

  	
  26

  



 



 i
 






 



 


	
  8.2

  	
   

  	
  Notice of Title
  Defects

  	
   

  	
  29

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.3

  	
   

  	
  Title Defect
  Adjustment

  	
   

  	
  30

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.4

  	
   

  	
  Environmental
  Defect and Title Defect Values

  	
   

  	
  31

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  8.5

  	
   

  	
  Title
  Warranty

  	
   

  	
  32

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 9

  	
   

  	
  PREFERENTIAL
  PURCHASE RIGHTS AND CONSENTS OF THIRD PARTIES

  	
   

  	
  33

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  9.1

  	
   

  	
  Actions and Consents

  	
   

  	
  33

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 10

  	
   

  	
  COVENANTS OF
  OPTIONOR AND OPTIONEE

  	
   

  	
  34

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.1

  	
   

  	
  Covenants of
  Optionor Pending Closing

  	
   

  	
  34

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.2

  	
   

  	
  Limitations on
  Optionor’s Covenants Pending Closing

  	
   

  	
  35

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.3

  	
   

  	
  Covenents of
  Optionee Following Exercise of Option

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.4

  	
   

  	
  Hastings Field
  Call on CO2

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.5

  	
   

  	
  Ownership
  of CO2

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10.6

  	
   

  	
  Environmental
  Liabilities Related to Events and Activities Occuring Prior to October 1,
  2004

  	
   

  	
  36

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 11

  	
   

  	
  CLOSING CONDITIONS

  	
   

  	
  37

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11.1

  	
   

  	
  Optionor’s
  Closing Conditions

  	
   

  	
  37

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  11.2

  	
   

  	
  Optionee’s
  Closing Conditions

  	
   

  	
  37

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 12

  	
   

  	
  CLOSING

  	
   

  	
  38

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.1

  	
   

  	
  Closing

  	
   

  	
  38

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.2

  	
   

  	
  Optionor’s
  Closing Obligations

  	
   

  	
  38

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.3

  	
   

  	
  Optionee’s
  Closing Obligations

  	
   

  	
  39

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.4

  	
   

  	
  Joint Closing
  Obligations

  	
   

  	
  39

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  12.5

  	
   

  	
  Final
  Settlement/Purchase Price Adjustments

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 13

  	
   

  	
  LIMITATIONS ON
  WARRANTIES AND REMEDIES

  	
   

  	
  41

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 14

  	
   

  	
  CASUALTY LOSS
  AND CONDEMNATION

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 15

  	
   

  	
  DEFAULT AND
  REMEDIES

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  15.1

  	
   

  	
  Optionor’s Remedies

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  15.2

  	
   

  	
  Optionee’s Remedies

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  15.3

  	
   

  	
  Effect of Termination

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 16

  	
   

  	
  ASSUMPTION AND
  INDEMNITY

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16.1

  	
   

  	
  Asumed
  Obligations; Pre-Closing Liabilities

  	
   

  	
  42

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16.2

  	
   

  	
  Optionee’s Indemnity

  	
   

  	
  43

  



 



 ii
 






 



 


	
  16.3

  	
   

  	
  Optionor’s Indemnity

  	
   

  	
  43

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16.4

  	
   

  	
  Negligence

  	
   

  	
  44

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16.5

  	
   

  	
  Broker or Finder’s Fee

  	
   

  	
  44

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16.6

  	
   

  	
  Threshold and
  Maximum Amounts

  	
   

  	
  44

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  16.7

  	
   

  	
  Claim
  Procedures

  	
   

  	
  44

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 17

  	
   

  	
  GAS IMBALANCES

  	
   

  	
  45

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 18

  	
   

  	
  PREFERENTIAL
  RIGHT TO PURCHASE AND AREA OF MUTUAL INTEREST PROVISION

  	
   

  	
  46

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  18.1

  	
   

  	
  Preferential
  Right to Purchase

  	
   

  	
  46

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  18.2

  	
   

  	
  Area of Mutual
  Interest Provision

  	
   

  	
  47

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE 19

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  49

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.1

  	
   

  	
  Receivables
  and other Excluded Funds

  	
   

  	
  49

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.2

  	
   

  	
  Public Announcements

  	
   

  	
  49

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.3

  	
   

  	
  Filing and
  Recording of Assignments, etc

  	
   

  	
  50

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.4

  	
   

  	
  Further
  Assurances and Records

  	
   

  	
  50

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.5

  	
   

  	
  Notices

  	
   

  	
  51

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.6

  	
   

  	
  Incidental Expenses

  	
   

  	
  52

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.7

  	
   

  	
  Waiver

  	
   

  	
  52

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.8

  	
   

  	
  Binding Effect;
  Assignment

  	
   

  	
  53

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.9

  	
   

  	
  Taxes

  	
   

  	
  53

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.10

  	
   

  	
  Audits

  	
   

  	
  54

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.11

  	
   

  	
  Governing
  Law

  	
   

  	
  54

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.12

  	
   

  	
  Mediation and
  Arbitration

  	
   

  	
  54

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.13

  	
   

  	
  Entire Agreement

  	
   

  	
  54

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.14

  	
   

  	
  Severability

  	
   

  	
  54

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.15

  	
   

  	
  Exhibits

  	
   

  	
  55

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.16

  	
   

  	
  Survival

  	
   

  	
  55

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.17

  	
   

  	
  Subsequent
  Adjustments

  	
   

  	
  55

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.18

  	
   

  	
  Counterparts

  	
   

  	
  55

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.19

  	
   

  	
  Subrogation

  	
   

  	
  55

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.20

  	
   

  	
  Suspended Monies

  	
   

  	
  56

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  19.21

  	
   

  	
  Optionee as Operator

  	
   

  	
  56

  



 


 


 



 iii














 


OPTION
AGREEMENT


                This
Option Agreement (“Agreement”), dated as of 
November 1, 2006, is by and between TexCal Energy South Texas,
L.P. whose address is
1021 Main Street, Suite 2500, Houston, Texas 77002 (“Optionor”), and Denbury Onshore, LLC, whose address is
5100 Tennyson Parkway, Suite 1200, Plano, Texas 75024 (“Optionee”).  Optionor and Optionee are sometimes together
referred to herein as “Parties”.


R E C I T A L S


                WHEREAS,
Optionor owns certain oil and gas leasehold interests and related assets more
fully described on the exhibits hereto; and


                WHEREAS,
Optionor desires to grant, and Optionee desires to acquire, the right and
option to purchase these interests and related assets on the terms and
conditions hereinafter provided;


                NOW,
THEREFORE, in consideration of the mutual covenants and agreements hereinafter
set forth, Optionor and Optionee hereby agree as follows:


ARTICLE 1. - DEFINITIONS


1.1.         “Acquiring
Party” has the meaning specified in Section
18.2(b).


1.2.         “Agreement”
shall mean this Option Agreement between Optionor and Optionee.


1.3.         “Agreement
Effective Time” shall mean 7:00 a.m., Central Standard Time,
on November 1, 2006.


1.4.        
“Area of Mutual Interest” has the meaning specified in Section 18.2(a)


1.5.         “Asset
Operating Expense” has the meaning specified in Section 2.5(b)(i)(3).


1.6.         “Asset
Payout Amount” has the meaning specified in Section
1.26(d)(4).


1.7.         “Assets”
shall mean the following described assets and properties (except to the extent
constituting Excluded Assets):


(a)           the
Leases;


(b)           the
Personal Property and Incidental Rights;


(c)           the
Inventory Hydrocarbons;


 



 1














 


(d)           the West Hastings Unit; and


(e)           the East Hastings Field.


1.8.         “Assumed Obligations”
shall mean with respect to the Assets:


(a)           all Environmental Obligations or
Liabilities (i) related to, or arising from, events first occurring after
the Exercise Effective Time, and (ii) related to, or arising from, events
first occurring or in existence prior to October 1, 2004, to the extent and as
set out in Section 10.6;


(b)           all obligations with respect to gas
production, sales or, subject to Article 17,
processing imbalances with third parties;


(c)           all liabilities, duties, and
obligations that arise out of the ownership, operation or use of the Assets
after the Exercise Effective Time, other than Environmental Obligations or
Liabilities, including, but not limited to, all liabilities, duties, and
obligations, express or implied, imposed upon Optionor herein under the
provisions of the Leases and any and all assignments, subleases, farmout
agreements, assignments of overriding royalty, joint operating agreements, easements,
rights-of-way, and all other contracts, agreements and instruments affecting
the Leases, or the premises covered thereby, whether recorded or unrecorded,
and under all applicable laws, rules, regulations, orders and ordinances,
excluding the claims and suits set forth in Exhibit
“H” and any claims or suits identified in the Option Exercise Notice
which relate to liabilities incurred after the Agreement Effective Time and
prior to Closing.


1.9.         “Capital Costs” has the meaning specified in
the definition of Excluded Assets.


1.10.       “Cash Payment” has the
meaning specified in Section 2.5.


1.11.       “Casualty Loss” has the meaning specified in
Article 14.


1.12.       “Claims” has the
meaning specified in Sections 16.2.


1.13.       “Closing” has the
meaning specified in Section 12.1.


1.14.       “Closing Date” has the meaning specified in Section 12.1


1.15.       “Conditions Precedent” has
the meaning specified in Section 2.1.


1.16.       “Consents” has the
meaning specified in Section 9.1(b)


1.17.       “Cure Period” has the
meaning specified in Section  8.3(a)


1.18.       “D&M” has the
meaning specified in Section 2.5(b)


1.19.       “D&M Report” has
the meaning specified in Section 2.5(b)



 2
 






 



 


1.20.       “Defensible Title”,
subject to and except for the Permitted Encumbrances has the meaning specified
in Section 8.1(a).


1.21.       “Designated Interest” shall
mean: (i) as to the West Hastings Unit, a working interest of 89.33682% and a
net revenue interest of 78.94105%; (ii) as to the East Hastings Field, a
working interest of 100% and a net revenue interest of 87.5%; (iii) as to a
Lease in the West Hastings Unit, the working interest and net revenue interest
set forth for such Lease in Exhibit “C”;
(iv) as to a Lease in the East Hastings Field, the working interest and net
revenue interest set forth for such Lease in Exhibit
“C”; as to a well in the West Hastings Unit, the working interest
and net revenue interest set forth for such well in Exhibit “B-1”; as to a well in the East Hastings Field, the
working interest and net revenue interest set forth for such well in Exhibit “B-2”; and, as to any other Asset,
the ownership interest of Optionor in such Asset to be conveyed to Optionee, less and except the Optionor’s reserved
overriding royalty interest as set forth in Section
1.27(a).  If following the
Agreement Effective  and prior to the
Option Exercise Date Optionor acquires additional interests in the Hastings
Field, the Designated Interests shall be adjusted to reflect such
acquisitions(s).  The Designated
Interests for all of the above Assets are referred to collectively as the “Designated
Interests.”


1.22.       “Development Plan” has
the meaning set forth in Section 2.7.


1.23.       “Environmental Defect Notice Date” has
the meaning set forth in Section  7.1.


1.24.       “Environmental or Title Defect Value” has
the meaning set forth in Section  8.4.


1.25.       “East Hastings Field” shall
refer to those lands falling within the geographic outline depicted on the plat
in Exhibit “D-1”.


1.26.       “Environmental Defect”
shall mean: (i) a condition or activity with respect to an Asset that is in
material violation, or reasonably likely to materially violate, any federal,
state or local statute, or any rule, order, ruling or regulation entered,
issued or made by any court, administrative agency, or other governmental body
or entity, federal, state, or local, or any arbitrator (“Environmental Law”), or surface or mineral
lease obligation relating to natural resources, conservation, the environment,
or the emission, release, storage, treatment, disposal, transportation,
handling or management of industrial or solid waste, hazardous waste, hazardous
or toxic substances, chemicals or pollutants, petroleum, including crude oil,
natural gas, natural gas liquids, or liquefied natural gas, and any wastes
associated with the exploration and production of oil and gas (“Regulated Substances”); or (ii) the
presence of Regulated Substances in the soil, groundwater, or surface water in,
on, at or under an Asset in any manner or quantity which is required to be
remediated by Environmental Law or by any applicable action or guidance levels
or other standards published by any governmental agency with jurisdiction over
the Assets, or by a surface or mineral lease obligation.  Optionee and Optionor agree that for a
condition to be in violation of any statute or regulation it 



 3
 






 



 


shall not be necessary that Optionor shall be under
notice of violation from a federal or state regulatory agency or lessor.


The Parties agree and acknowledge that Optionee will
be provided an opportunity to examine the Assets for potential naturally occurring
radioactive materials (“NORM”), and any potential obligations with respect to
NORM and that the presence of NORM on any of the Assets, except with respect to
inactive wells, facilities, pipelines and other equipment, may not be raised by
Optionee as the subject of an Environmental Defect.


1.27.       “Environmental Law”
shall be as defined in Section 1.26 above.


1.28.       “Environmental Obligations or Liabilities”
shall mean all liabilities, obligations, expenses (including, without
limitation, all attorneys’ fees), fines, penalties, costs, claims, suits or
damages (including natural resource damages) of any nature, associated with the
Assets, and attributable to or resulting from: 
(i) pollution or contamination of soil, groundwater or air, on, in or
under the Assets or lands in the vicinity thereof, and any other contamination
of or adverse effect upon the environment, (ii) underground injection
activities and waste disposal, (iii) clean-up responses, remedial, control or
compliance costs, including the required cleanup or remediation of spills,
pits, lakes, ponds, or lagoons, including any subsurface or surface pollution
caused by such spills, pits, lakes, ponds, or lagoons, (iv) noncompliance with
applicable land use, permitting, surface disturbance, licensing or notification
requirements, including those in a surface or mineral lease, whether an express
or implied obligation, (v) all obligations, whether pursuant to an
Environmental Law or a surface or mineral lease obligation, whether express or
implied, for plugging, replugging and abandoning any wells, the restoration of
any well sites, tank battery sites and gas plant sites, and any other surface
locations or sites, the proper removal, disposal and abandonment of any wastes
or fixtures, and the proper capping and burying of all flow lines, which are
included in the Assets; (vi) violation of any federal, state or local
Environmental Law or land use law, or surface or mineral lease obligation,
whether an express or implied obligation, and (vii) any other violation which
could qualify as an Environmental Defect. 
Notwithstanding anything to the contrary set forth in, or implied by,
this Section 1.28 “Environmental
Obligations or Liabilities” does not include (i) personal injury or wrongful
death occurring prior to the Exercise Effective Time or (ii) offsite waste
disposal occurring prior to the Exercise Effective Time.


1.29.       “Excluded Assets” shall
mean the following:


(a)           an overriding royalty interest from
the Exercise Effective Time in production from the Assets equal to an undivided
two percent of eight-eighths (2% of 8/8ths), which overriding royalty interest
shall be reserved by Optionor.  Said
reserved overriding royalty interest shall be free of (i) any and all costs and
expenses associated with the exploration, production or operation of wells
producing the Assets, and (ii) post production costs associated with removing
CO2 from the production stream,  and
shall be paid in the same manner as provided for with respect to lessors.  In the event Optionor exercises its option to
receive the Reversionary Interest set forth in Section 



 4
 






 



 


1.29(d) below, then
Optionor’s Reversionary Interest will bear its proportionate share of the
reserved overriding royalty interest.


(b)           all interests in the surface estate
in Hastings Field Lands, including but not limited to those described in Exhibits “A-5” and “A-6”;


(c)           all of Optionor’s leasehold, fee
mineral and royalty interests in the Hastings Field, as such interests relate
to horizons above the top of, and below the base of, the Frio Zone.


(d)           a reversionary working interest of an
undivided twenty-five percent (25%) in and to the Assets assigned hereunder,
(the “Reversionary Interest”), at such time as the Optionee has achieved
Payout.  “Payout” shall mean that point
in time when Optionee has received from Net Revenues from the Assets an amount
equal hundred percent (100%) of the sum of Operating Costs plus the  Payout Amount plus (ii) one hundred thirty
percent (130%) of all Capital Costs expended to conduct enhanced recovery
operations on the Assets.  It being the
intent of the Parties that the Optionor shall convey to Optionee at Closing the
Designated Interest (less Optionor’s reserved overriding royalty interest) as
to the Assets, subject to the Optionor’s Reversionary Interests.  Optionor’s Reversionary Interests as set
forth above will be proportionately adjusted 
Optionee’s actual working interest and/or net revenue interest,
respectively, acquired by virtue of this Agreement.  Subject to Optionor’s post Payout election as
provided in Section 1.26(d)(11) below, Optionor’s Reversionary Interests shall
automatically revert to the Optionor once Payout has been achieved, without any
further action on the part of the Optionor. 
Optionor’s Reversionary Interests will be effective on the first day of
the month next succeeding the point in time in which Payout has occurred.  Within thirty (30) days after Payout has
occurred, and subject to Optionor’s right to reject reversion, Optionee shall
provide Optionor with an Assignment of the Optionor’s Reversionary Interests,
which will be free and clear of all liens and encumbrances of any kind and
shall be substantially in the form of the Assignment and Conveyance attached
hereto as Exhibit “I”.


Calculation of
Payout and Optionor’s Reversionary Interests shall be subject to the following
additional terms and provisions:


(1)           As used herein, “Net Revenues” shall
mean with respect to the Assets, gross revenues from the Designated Interest
share of production from the Assets  from
and after the Exercise Effective Time less any applicable federal, state and
local taxes (including excise, production, severance, sales, and ad valorem
taxes, but excluding any income based taxes) and less payments from gross
revenues attributable to Optionor’s reserved overriding royalty interest, and
any other overriding royalty interests, production payments, net profit
interest and similar interests or burdens of record against the Assets existing
as of the Agreement Effective Time and paid after the Exercise Effective Time.



 5
 






 



 


(2)           As used herein, “Operating Costs”
shall mean with respect to the Assets from and after the Exercise Effective
Time,  the Designated Interest share of
(i) operating costs and expenses (including administrative overhead charges)
for the operation of wells, facilities, equipment and flowlines located on
and/or used in conjunction with the Assets, actually incurred and expended by
Optionee and/or the Operator and charged to the joint account by Optionee
and/or the Operator, as set forth in the Accounting Procedure of the West
Hastings Unit Operating Agreement or the applicable operating agreement for any
East Hastings Field wells (in the event there is no applicable operating
agreement, the Accounting Procedure of the West Hastings Unit Operating
Agreement shall be utilized) and (ii) CO2 Costs.


(3)           As used herein, “Capital Costs” shall
mean with respect to the Assets, the Designated Interest share of all capital
costs actually incurred and expended by the Operator for enhanced oil recovery
operations and charged to the joint account by Optionee and/or the Operator
from and after the Exercise Effective Date, including for the construction of
facilities, field development, conversion of wells for injection purposes,
drilling, completion, reworking, recompletion of wells, construction of
flowlines located on and/or used in conjunction with such Assets, and such
other costs as are incurred under the Development Plan and credited towards the
Required Cumulative Capital Expenditure Amounts provided in Section 2.7(a) below.


(4)           As used herein, “Asset Payout Amount”
shall mean the sum of the predicted “annual future net revenue” (as such terms
are currently used by D&M in the reserve report prepared for Optionor dated
July 31, 2006)  for the first four years
following the Exercise Effective Time, 
as shown in the D&M Report used to determine the Purchase Price for
the Assets.


(5)           As used herein, “CO2 Costs” shall
mean the direct cost of acquiring (commodity cost) and delivering
(transportation cost) CO2 to the Assets.


(i)            transportation costs (before and
after Payout) shall be (x) the actual costs on a per mcf basis charged by
unaffiliated third party transporters, or (y) in the event Optionee owns the
pipeline transporting CO2 to the Assets, a per mcf fee not to exceed the amount
necessary to amortize the actual cost of constructing and operating that
portion of the line on which the CO2 is transported to  the Assets, based on a capacity throughput of
400 MMcf/d over a twenty (20) year period, at a discount rate of six hundred
fifty basis points over the one year LIBOR (if the one year LIBOR is five and
one-half percent (5.5%) the discount rate used to amortize the pipeline would
be 12%), but in no event shall  discount
rate be less than 12%.


(ii)           commodity costs (before and after
Payout) shall be the lower of (x) the average direct cost of CO2 in Optionee’s
or third party’s pipeline from which CO2 is acquired for the Assets and (y) the
lowest price 



 6
 






 



 


charged for CO2
by Optionee in sales to third party users or consumers in Texas.  In no event shall the average cost per mcf of
CO2 delivered to the Assets exceed one percent (1%) of the average NYMEX oil
closing price per barrel during the month of delivery; provided the foregoing
cap on CO2 prices shall never be less than $.30 per mcf. A “mcf” of CO2 shall
be 1000 cubic feet of CO2 at standard conditions.  Optionee shall deliver CO2 to the Assets at a
pipeline pressure of not less than 1100 psi.


(iii)          Any
CO2 charged to the and used by Optionee for any purpose other than with respect
to the development of the shall be credited as Net Revenues at the same cost
that the CO2 is charged as provided above.


(6)           Costs associated with building,
owning, operating and maintaining CO2 pipelines used by Optionee to deliver CO2
to the Hastings Field shall not be considered Capital Costs or Operating Costs
for purposes of determining Payout.  Nor
shall such costs be considered in computing Required Cumulative Capital
Expenditure Amounts. Nothwithstanding the foregoing, actual  transportation costs incurred in transporting
CO2 to the Hastings Field, as set forth in
Section 1.29(d)(5)(i) shall be considered for purposes of
determining Payout.


(7)           Optionor’s Reversionary Interests in
the Assets, after it reverts, shall be subject to the terms and provisions of
the West Hastings Unit Operating Agreement and/or any other applicable
agreements.  After such Reversionary
Interests revert to Optionor, Optionor shall be liable for and shall assume and
pay its proportionate working interest share of all subsequent costs associated
with its working interest attributable to the reverted and reassigned
interests, including capital costs.


(8)           If for any reason Optionor desires
not to accept the Reversionary Interests provided for in this Section  (d), and the obligations and liabilities
associated with such Reversionary Interests, Optionor may decline to accept
such Interests by notifying Optionee in writing on or before   () days after Optionor is notified, in
writing, of the effective date of reversion. 
After receipt of such a notice, Optionor’s right to the Reversionary
Interests will terminate effective as of the date of the reversion.


(9)           Prior to Payout, Optionee shall
provide to Optionor (i) on a monthly basis operating reports covering revenues,
operating expenses, capital expenditures, production and injection volumes and
product prices received; and (ii) a quarterly statement (with all supporting
documentation) identifying the status of Payout; and (iii) Optionee shall
further provide Optionor with quarterly reports including historical and
prospective technical information relating to the Assets including, but not
limited to injection and production data on a field and well basis, well logs,
cores, tests and any other data necessary for Optionor to perform its own
technical analysis; and (iv) the right to request an annual technical
presentation to be presented to Optionor by the appropriate technical 



 7
 






 



 


staff of Optionee.  Optionor shall have the right to conduct an
annual audit of the accounts and records of Optionee (at a mutually convenient
time during Assignor’s normal business hours and in accordance with the Council
of Petroleum Accountants Society guidelines and practices for audits by working
interest owners) to verify the accounting for Payout. Such audits may be
performed by Optionor directly or through an independent accounting firm of its
choice, but in each case at the Optionor’s sole cost and expense.  Notwithstanding the above, all Payout
accounting by Optionee during any calendar year shall conclusively be presumed
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, Optionor
takes written exception thereto and makes claim on Optionee for adjustments.


(e)           (i) all trade credits, accounts
receivable, notes receivable and other receivables attributable to Optionor’s
interest in the Assets with respect to any period of time prior to the Exercise
Effective Time; (ii) all deposits, cash, checks in process of collection, cash
equivalents and funds attributable to Optionor’s interest in the Assets with
respect to any period of time prior to the Exercise Effective Time; and (iii)
all proceeds, benefits, income or revenues accruing with respect to the Subject
Acreage prior to the Exercise Effective Time;


(f)            all corporate, financial, and tax
records of Optionor; however, Optionee shall be entitled to receive copies of
any tax records which directly relate to any Assumed Obligations, or which are
necessary for Optionee’s ownership, administration, or operation of the Assets;


(g)           all claims and causes of action of
Optionor arising from acts, omissions or events, or damage to or destruction of
the Assets, occurring prior to the Exercise Effective Time; provided, however,
Optionor shall transfer to Optionee all claims and causes of action of Optionor
against prior owners of the Assets or third parties for Environmental
Obligations or Liabilities that are not Retained Environmental Obligations or Liabilities;


(h)           except as otherwise provided in Section 14 all rights, titles, claims and
interests of Optionor relating to the Assets prior to the Exercise Effective
Time (i) under any policy or agreement of insurance or indemnity; (ii) under
any bond; or (iii) to any insurance or condemnation proceeds or awards;


(i)            all Hydrocarbons produced from or
attributable to the Assets with respect to all periods prior to the Exercise
Effective Time, together with all proceeds from or of such Hydrocarbons, except
the Inventory Hydrocarbons and the unsold inventory of gas plant products, if
any, attributable to the Leases as of the Exercise Effective Time;


(j)            claims of Optionor for refund of or
loss carry forwards with respect to production, windfall profit, severance, ad
valorem or any other taxes attributable to any period prior to the Exercise
Effective Time, or income or franchise taxes;



 8
 






 



 


(k)           all amounts due or payable to
Optionor as adjustments or refunds under any contracts or agreements (including
take-or-pay claims) affecting the Assets with respect to any period prior to
the Exercise Effective Time;


(l)            all amounts due or payable to
Optionor as adjustments to insurance premiums related to the Assets with
respect to any period prior to the Exercise Effective Time;


(m)          all proceeds, benefits, income or
revenues accruing (and any security or other deposits made) with respect to the
Assets, and all accounts receivable attributable to the Assets, prior to the
Exercise Effective Time; and


(n)           all of Optionor’s intellectual
property, including, but not limited to, proprietary computer software,
patents, trade secrets, copyrights, names, marks and logos.


(o)           all depths above the top and below
the base of the Frio Zone.


1.30.        “Exercise
Effective Time” has
the meaning specified” shall be defined in Section
2.4.


1.31.       “Final Settlement” has
the meaning specified in Section 12.5


1.32.       “Final Settlement Statement” has the meaning
specified in Section 12.5.


1.33.       “Frio Zone” means the
stratigraphic interval or its correlative equivalent between the depths of
5,390 feet and 6,840 feet in the Amoco Production Company L.F. McKibben A-6
located on the McKibben “A” Lease of the HT&B Survey 29, Brazoria County,
Texas as defined on the Dual Induction-Electric-Lateralog-Sonic Logs run on
November 6, 15, 26, and 28, 1977.


1.34.       “Hastings Field” shall
refer, collectively, to the East Hastings Field and the West Hastings Unit.


1.35.       “Hydrocarbons” shall
mean crude oil, natural gas (including CO2), casinghead gas, condensate, sulphur, natural gas
liquids and other liquid or gaseous hydrocarbons, and shall also refer to all
other minerals of every kind and character which may be covered by or included
in the Leases and Assets.


1.36.       “Indemnified
Party” has the meaning set forth in Section 16.7.


1.37.       “Indemnifying Party”
has the meaning set forth in Section 16.7.


1.38.       “Initial
Option Payment” has the
meaning specified in Section 2.3 (a)


1.39.       “Inventory
Hydrocarbons” shall mean all
merchantable oil and condensate (for oil or liquids in storage tanks, being
only that oil or liquids physically above the top of the inlet connection into
such tanks) produced from or attributable to 



 9
 






 



 


the Leases prior to the Exercise
Effective Time which have not been sold by Optionor and are in storage at the
Exercise Effective Time.


1.40.       “Leases” shall mean, except to the extent constituting
Excluded Assets, any and all interests owned by Optionor, including but without
limitation those set forth on Exhibits “A-1”,
“A-2”, “A-3” and “A-4”, or which Optionor is entitled to receive by
reason of any participation, joint venture, farmin, farmout, joint operating
agreement, unitization agreement, or other agreement, in and to the oil, gas
and/or mineral leases, permits, licenses, concessions, leasehold estates, royalty
interests, overriding royalty interests, net revenue interests, executory
interests, net profit interests, working interests, reversionary interests,
mineral interests, and any other interests of Optionor in Hydrocarbons, in the
West Hastings Unit, in the West Hastings Unit Lands, and in East Hastings
Field, it being the intent hereof that the leases, properties and interests and
the legal descriptions and depth limitations set forth on Exhibits “A-1” through “A-4”, inclusive, or
in instruments described in Exhibits “A-1”
through “A-4”, inclusive, if any, are for information only and the
term “Leases” includes all of Optionor’s right, title and interest in the above
described Hydrocarbon interests in the West Hastings Unit, in the West Hastings
Unit Lands, and in the East Hastings Field, other than the Excluded Assets,
including but not limited to those described on Exhibits “A-1” through “A-4”, inclusive, or in instruments
described in Exhibits “A-1” through “A-4”,
inclusive, even though such interests may be incorrectly described in Exhibits “A-1” through “A-4”, inclusive, or
omitted from Exhibits “A-1” through “A-4”,
inclusive.


1.41.       “mcf” has the meaning specified in the definition of
Excluded Assets.


1.42.       “Net Proved
Reserves” has the meaning
specified in Section 2.5(b)(i)(1)


1.43.       “Net
Revenues” has the meaning
specified in the definition of Excluded Assets.


1.44.       “NORM” has the meaning set forth in the definition of
Environmental Defects.


1.45.       “Oil and Gas
Interest” has the meaning
specified in Section 18.2(g).


1.46.       “Oil and Gas
Interests” has the meaning
specified in Section 18.2(b) and 18.2(h).


1.47.       “Operating
Costs” has the meaning
specified in the definition of Excluded Assets.


1.48.        “Option
Exercise Date” has the
meaning specified in Section  2.4


1.49.       “Option
Exercise Notice” has the
meaning given in Section 2.4 .


1.50.       “Option to
Purchase” has the meaning
specified in Section  2.1.


1.51.       “Option Year” has the meaning specified in Section 2.2.



 10
 






 



 


1.52.       “Optionee” has the meaning specified in the Preamble.


1.53.       “Optionee’s
Credits” has the meaning
specified in Section 12.5(b).


1.54.       “Optionor” has the meaning specified in the Preamble.


1.55.       “Optionor’s
Credits” has the meaning
specified in Section 12.5(a).


1.56.       “Participating
Party” has the meaning
specified in Section 18.2(f).


1.57.       “Parties” has the meaning specified in the Preamble.


1.58.       “Payout” shall be as defined in the definition of Excluded
Assets.


1.59.       “Permitted
Encumbrances” shall mean
specified in Section 8.1(c).


1.60.       “Personal Property
and Incidental Rights” shall
mean all right, title and interest of Optionor in and to or derived from the
following insofar as the same do not constitute Excluded Assets and are
attributable to, appurtenant to, incidental to, or used for the operation of
the Leases:


(a)           all easements, rights-of-way, surface
leases, permits, licenses, servitudes or other interests relating to the use of
the surface, including but not limited to those described in Exhibits “A-5,” “A-6,” “A-7,” and “A-8”, or
in instruments described in Exhibits “A-5,” “A-6,”
“A-7,” and “A-8”;


(b)           all wells, including but not limited
to those listed in Exhibits “B-1” and “B-2”
attached hereto, whether or not such wells are active or inactive, along with
all equipment and other personal property, inventory, spare parts, tools,
fixtures, pipelines, dehydration facilities, platforms, tank batteries,
appurtenances, and improvements situated upon the Leases as of the Exercise
Effective Time and used or held for use in connection with the development or
operation of the Leases or the production, treatment, storage, compression,
processing or transportation of Hydrocarbons from or in the wells or Leases;


(c)           all unit agreements, orders and
decisions of state and federal regulatory authorities establishing units, joint
operating agreements, enhanced recovery and injection agreements, farmout
agreements and farmin agreements, options, drilling agreements, exploration
agreements, assignments of operating rights, working interests, subleases and
rights above or below certain footage depths or geological formations, to the
extent same is attributable to the Assets, as of the Exercise Effective Time,
including but not limited to those described on Exhibits “F-1” and “F-2”;


(d)           all contracts, agreements, and title
instruments to the extent attributable to and affecting the Assets in existence
at Closing, including all Hydrocarbon sales, purchase, gathering,
transportation, treating, marketing, exchange, processing, disposal and
fractionating contracts, joint operating agreements, including but not limited
to those described on Exhibits “F-1” and “F-2”;
and


 



 11














 


(e)           copies of all lease files, land
files, well files, production records, division order files (including
paysheets and supporting files), abstracts, title opinions, and contract files,
insofar as the same are directly related to the Leases; including, without
limitation, all geological, information and data, to the extent that such data
is not subject to any third party restrictions, but excluding Optionor’s
proprietary interpretations of same, subject to the provisions of Section 6.1.


1.61.       “Proved
Reserves” shall mean the
reserves attributable to the interest being evaluated based on the definition
of “proved oil and gas reserves” as set forth in Rule 4-10 of Regulation S-X of
the Securities and Exchange Act of 1934, as amended; provided that Hydrocarbon
prices and operating costs set forth in section 2.5 shall be used in such
determination.


1.62.       “Preferential
Purchase Rights” has the
meaning specified in Section 9.1(b).


1.63.       “Purchase
Price” has the meaning
specified in Section 2.5.


1.64.       “Receiving
Party” has the meaning
specified in Section 18.1(a).


1.65.       “Regulated
Substances” has the meaning
specified in the definition of Environmental Defects.


1.66.       “Required
Cumulative Capital Expenditure Amounts” has the meaning specified in Section
2.7(b).


1.67.       “Retained
Environmental Obligations or Liabilities” shall mean, any Environmental Obligations or
Liabilities of any nature (i) related to the Excluded Assets, and (ii) related
to, or arising from, events first occurring or in existence prior to October 1,
2004, to the extent and as set out in Section 10.6.


Notwithstanding
anything herein to the contrary, Retained Environmental Obligations or
Liabilities shall not include any Environmental Obligations or Liabilities that
(a) relate to NORM, or (b) relate to the plugging and abandonment of the wells
in the Hastings Field existing at the Exercise Effective Time and any related
surface restoration of these well sites, or (c) resulted from or relate to an
activity or a condition on or regarding the Assets first occurring after the
Exercise Effective Time .


1.68.       “Retained
Obligations” shall mean all
liabilities, duties, and obligations that arise out of the ownership, operation
or use of the Assets prior to the Exercise Effective Time,  other than Environmental Obligations or
Liabilities but including, without limitation, all liabilities, duties, and
obligations, express or implied, imposed upon Optionor herein under the
provisions of the Leases and any and all assignments, subleases, farmout
agreements, assignments of overriding royalty, joint operating agreements,
easements, rights-of-way, and all other contracts, agreements and instruments
affecting the Leases, or the premises covered thereby, whether recorded or
unrecorded, and under all applicable laws, rules, regulations, orders and
ordinances, except for those specifically included in the definition of “Assumed
Obligations.”


 



 12
 






 



 


1.69.                     “Reversionary Interest” has the meaning specified in the definition of
Excluded Assets.


1.69.                     “Residual Asset Reserve Value” has the meaning specified in Section 2.5(b)(ii)(3).


1.70.                     “Selling Party” has the meaning specified in Section
18.1(a).


1.71.                     “Shortage Payment” has the meaning specified in Section
2.7(b).


1.72.                     “Third Party Interests” has the meaning specified in Section 9.1(c).


1.73.                     “Title Defect” has the meaning specified in Section
8.1(b).


1.74.                     “Title Defect Notice Date” has the meaning specified in Section 8.2.


1.75.                     “Volumetric Production Payment” has the meaning specified in Section 2.5.


1.76.       “West
Hastings Unit” shall be as
described in and governed by Unit Agreement, West Hastings Unit, Brazoria and
Galveston Counties, dated July 24, 1984, Pageas amended, and as depicted on the
plat in Exhibit “D-1”.  Those lands located within the aerial
boundaries of the West Hastings Unit are referred to as the “West Hastings Unit
Lands.”  Exhibit “D-1” also depicts the unit tracts within the West
Hastings Unit.  The ownership of these
unit tracts and the participation factors for these tracts in the Unit are set
forth in Exhibit “C”.


1.77.       “West
Hastings Unit Lands” has the
meaning specified in the definition of West Hastings Unit.


1.78.       “West
Hastings Unit Operating Agreement” shall mean that certain unit operating agreement dated December 20, 1984,
covering the West Hastings Unit, as may be amended, and which is attached
hereto as Exhibit “E.”


ARTICLE 2. -
OPTION TO PURCHASE


2.1.         Option
to Purchase.  Subject to the terms and conditions of this Agreement and the satisfaction
of the Conditions Precedent on or before December 1, 2006, Optionor does hereby
grant and convey unto Optionee the right and option to purchase the Assets
according to the terms and provisions set forth below (the “Option to Purchase”).
As used herein, the term “Conditions Precedent” mean (a) with respect to Optionor,
the receipt by Optionor of the written consent and approval of the lenders
under Optionor’s revolving credit facility to the grant of this Option to
Purchase and the transactions contemplated hereby, on terms satisfactory to
Optionor and (b) with respect to Optionee, confirmation by Optionee that there
are no material Title Defects 



 13
 






 



 


and Environmental Defects associated with the
Assets.  If the Conditions Precedent have
not been satisfied or waived by December 1, 2006 this Agreement shall automatically
terminate and neither party shall have any further obligation hereunder.


 


Each
Party shall notify the other in writing on or before November 30, 2006 whether
or not the Conditions(s) Precedent for that party have been satisfied.


2.2.         Term
of Option.  The initial
term of the Option to Purchase shall commence on the Agreement Effective Time
and end October 31, 2009.  The initial
option payment, subject to the Conditions Precedent, shall be paid by Optionee
on or before December 1, 2006. Optionee may extend the term of the Option to
Purchase beyond October 31, 2009 on a year by year basis (i.e., through the
anniversary date, October 31, of the following year), by, on or before each
anniversary date, paying Optionor the sum of thirty million dollars ($30,000,000.00).  The maximum term of the Option to Purchase
shall be ten (10) years (i.e., ending October 31, 2016).  Each year the Option to Purchase is in effect
is hereinafter referred to as an “Option Year”.


2.3.         Initial
Term Installments.  The consideration for the initial
term of the Option to Purchase shall be fifty million dollars ($50,000,000)
paid by Optionee to Optionor by wire transfer in the following installments:


(a)           Thirty-seven and one-half million
dollars ($37,500,000.00) on or before December 1, 2006;


(b)           Seven and one-half million dollars
($7,500,000.00) on or before November 1, 2007; and


(c)           Five million dollars ($5,000,000.00)
on or before November 1, 2008.


2.4.         Exercise
of Option to Purchase.  During the term of the Option to
Purchase, Optionee may exercise its Option to Purchase by giving notice of its
exercise of said Option to Purchase (“Option Exercise Notice”) as provided
herein.  The Option Exercise Notice shall
be made utilizing the form of Option Exercise Notice attached hereto as Exhibit “G” and shall be given on or before
September 1 of any year during the term of this Option and shall be deemed
exercised as of November 1 of such year (the “Option Exercise Date”).  Without Optionor’s written consent, no Option
Exercise Notice may be given prior to September 1, 2008.  The effective date for the purchase of the
Assets shall be 7:00 a.m., Central Standard Time, on January 1 following such
Option Exercise Date (“Exercise Effective Time”).  Optionee’s right to utilize the Asset shall
be effective as of the Exercise Effective Time.


2.5.         Payment
for Assets.  The consideration due Optionor by Optionee for the purchase of the Assets
(the “Purchase Price”) shall be either (i) a cash payment (“Cash Payment”), or
(ii) a volumetric production payment (“Volumetric Production Payment”), to be
determined as set forth below.


(a)           Optionor and Optionee shall have
until the end of the month of November following an Option Exercise Date to
negotiate and agree upon, based upon the 



 14
 






 



 


remaining amount and value of Net Proved Reserves attributable to the
Assets, the Cash Payment amount to be paid by Optionee or the terms of the
Volumetric Production Payment to be conveyed to Optionor, with respect to the
Assets.


(b)           In the event Optionor and Optionee
are unable to agree as provided under Section 2.5(a), above, then, on or before
December 1 of such year, either Party may request that DeGolyer and MacNaughton
(“D&M”) furnish the Parties with a report (the “D&M Report”) setting
forth the following:


(i)            A Cash Payment amount equal to the
present value of Net Proved Reserves, determined as follows:


(1)           D&M’s estimate of
Net Proved Reserves for the Assets as of the end of the year in which the option
is exercised (as utilized herein, “Net Proved Reserves” shall refer to Proved
Reserves, net to the Designated Interest, i.e., the applicable net revenue
interest, and after further deducting Optionor’s retained overriding royalty
interest);


(2)           Pricing based upon a
five (5) year forward strip as determined on the last trading day  of the oil futures contracts on the NYMEX for
the year in which the option is exercised, with prices for year six (6) and
beyond based on the average NYMEX price for the fifth year of the strip;


(3)           Operating expenses for
the calculation of the Cash Payment shall be based upon a review and average of
Optionor’s operating expenses attributable to the Assets for twelve (12) months
prior to the Exercise Effective Time on a dollar per BOE basis (“Asset
Operating Expense”); and


(4)           A net present value
discount rate of ten (10%) percent.


(ii)           The following Volumetric Production
Payment terms:


(1)           Net Proved Reserve
volume schedule for the  Assets for the
ten (10) years following the Exercise Effective Time;


(2)           The Asset Operating
Expense; and


(3)           The Residual Asset
Reserve Value for the Proved Reserves attributable to time periods after said
ten (10) year period, calculated in the same manner as provided under Section
2.5(b)(i), above,  and paid in a lump
sum.


Both Parties may furnish D&M with any data and
information they feel pertinent to the determination.  D&M shall deliver the D&M Report to
both Parties no later than January 15 of the calendar year following the Option
Exercise Date.  D&M’s determinations
on the above shall be final and nonappealable. 
In the event D&M is not in existence at the time the Option Exercise
Notice is given, the successor company to D&M shall be utilized, and should
no successor company exist, then the Parties shall agree on an 



 15
 






 



 


independent reserve analysis company to make the
above determinations in lieu of D&M.


(c)           Optionor shall have () days after
receipt of the D&M Report to notify Optionee of its election whether to
receive a Cash Payment or a Volumetric Production Payment.  In the event Optionor fails to elect within
said time period, Optionor shall be deemed to have elected to receive a Cash
Payment.


2.6.         Closing.  The closing of the purchase of the Assets shall occur at ‘s offices on January 31 of the
calendar year following the Option Exercise Date (or the next business day, if
such January 31 falls on a weekend or legal holiday) or such other time and
place as may be agreed upon by the Parties. 
At such  Closing, (i) Optionor
shall execute an Assignment and Conveyance in the form substantially the same
as the form attached as Exhibit “I”,
and (ii) depending upon Optionor’s election, Optionee shall either pay the Cash
Payment or execute an Assignment of Volumetric Production Payment in
substantially the same form as the form attached as Exhibit “J”.


2.7.         Development Plan and Capital
Expenditure Commitment.


(a)           In the event Optionee exercises its
option to purchase the Assets, contemporaneous with Optionee’s option exercise,
Optionee shall (i) submit to Optionor a development plan for the CO2 flood of
the West Hastings Unit (the “Development Plan”), which plan shall include
various milestones including completion of a pipeline connecting the Jackson
Dome Field in Mississippi to the Hastings Field via Donaldsonville, or other
pipeline or alternative delivery system that would result in a lower CO2 cost
to the Hastings Field, a framework for spending the Required Cumulative Capital
Expenditure Amounts, and the commencement of CO2 injection in the West Hastings
Unit and (ii) commit to spend one hundred seventy-eight million six hundred
seventy four thousand dollars ($178,674,000.00) of cumulative capital
expenditures (the “Required Cumulative Capital Expenditure Amounts”) as
outlined in the Development Plan for field development and facilities for
enhanced production operations in the West Hastings Unit.  Optionee shall spend the Required Cumulative
Capital Expenditures Amounts on or before the Commitment Dates set forth below:





	
  “Commitment Date”
By end of Calendar Year

  	
   

  	
  “Required Cumulative Capital

  Expenditure Amount”

  	
   

  
	
  1

  	
   

  	
  $

  	
  26,801,000

  	
   

  
	
  2

  	
   

  	
  $

  	
  71,469,000

  	
   

  
	
  3

  	
   

  	
  $

  	
  107,204,000

  	
   

  
	
  4

  	
   

  	
  $

  	
  142,939,000

  	
   

  
	
  5

  	
   

  	
  $

  	
  178,674,000

  	
   

  






 


Year 1 shall begin with the Exercise Effective
Time.   If the Optionee spends in excess
of one hundred seventy-eight million six hundred seventy four thousand dollars
($178,674,000.00) prior to the end of Year 5, the development obligation has
been fulfilled.



 16
 






 



 


(b)           In the event Optionee fails to spend
the Required Cumulative Capital Expenditure Amount by the Commitment Dates set
forth in (a) above, Optionee shall pay Optionor a cash payment equal to ten
percent, (10.0%) of the difference between (i) the Required Cumulative Capital
Expenditure Amount for the applicable Commitment Date and (ii) the cumulative
capital expenditures actually expended by Optionee from the Closing Date
through such applicable Commitment Date (hereinafter referred to as the “Shortage Payment”).   Said Shortage Payment shall be paid by
Optionee to Optionor within thirty (30) days after each Commitment Date.


(c)           If Optionee is not injecting at least
an average of 50 mmcf/day of CO2 (total of purchased plus recycled) in the West
Hastings Unit (“Minimum Injection Rate”), which gas shall be delivered to the
Hastings Field via the Donaldsonville to Hastings pipeline or other pipeline or
alternative delivery system that would result 
in a lower CO2 cost to the Hastings Field, for the 90 day period
preceding the third anniversary of the Exercise Effective Time, Optionee shall,
within 30 days of such third anniversary, either (i) relinquish its rights to
initiate (or continue) tertiary operations and reassign to Optionor all Assets
previously assigned to Optionee, for the value of such Assets at that time
based on the methodology outlined in Section 2.5, except the NPV discount rate
described in Section 2.5(b)(i)(4) shall be twenty percent (20%) rather than ten
percent (10%), or (ii) begin making additional Shortage Payments to Optionor in
an amount equal to twenty million dollars ($20,000,000.00) less Shortage
Payments paid during that year pursuant to Section 2.7(b) for the first year,
and thirty million dollars ($30,000,000.00) less Shortage Payments paid during
that year pursuant to Section 2.7(b) per year thereafter until the CO2
injection in the Hasting Field equals or exceeds the Minimum Injection
Rate.  If Optionee elects to relinquish
its rights as set forth herein and Optionor accepts such relinquishment,
Optionee shall have no further rights or obligations with respect to the Assets.  Notwithstanding the relinquishment option
described in this Section 2.7(c), 
Optionor shall have the option to reject such relinquishment, in which
case Optionee shall retain the Assets and the Shortage Payment shall be deemed
waived for that year and the Minimum Injection Rate requirement will be
deferred until the next anniversary of the Exercise Effective Time.


ARTICLE 3. -
OPERATIONS


3.1.         Operations
of Hastings Field Prior to Option Exercise.  Prior to the Exercise Effective
Time Optionor agrees (i) to act as a reasonable prudent operator, (ii) during
the term the Option to Purchase is in effect, not to undertake any tertiary
operations, including, but not limited to CO2 flooding, fire flooding, polymer
flooding, miscible or non-miscible gas flooding other than CO2, high pressure
air injection, steam flooding or microbial injection, and (iii) during the term
the Option to Purchase is in effect, to notify Optionee in writing at least
sixty (60) days prior to the lapse of any Leases which Optionor does not intend
to maintain.  As to any Leases under “(iii)”
above, Optionee shall have the right and option within ten (10) days after
receipt of said notice to elect to obtain Optionor’s interest in any such
Leases at no cost to Optionor so that Optionee may attempt to maintain any such
Leases.  Any costs expended by



 17
 






 



 


Optionee to maintain any such Leases shall be included in the costs for
purposes of calculating Payout and not be subject to the provisions of Section 18.2.


3.2.         Operations After Option Exercise


(a)           In the event Optionee
exercises its Option to Purchase, Optionor shall use its reasonable efforts to
have Optionee appointed as Operator of West Hastings Unit, both under the West
Hastings Unit Operating Agreement and with the appropriate regulatory or
administrative agencies.  In the event Optionor
is not able to secure the formal appointment of Optionee as Operator for the
West Hastings Unit, then Optionor and Optionee shall cooperate and enter into
such contractual relationship as is necessary or shall otherwise allow Optionee
to conduct its Development Plan and conduct all other operations Optionee could
otherwise conduct as Operator in the Hastings Field.


(b)           In the event the
Optionee exercises its Option to Purchase the Assets, the Parties shall execute
a Joint Operating Agreement covering the East Hastings Field and any lands
located outside the West Hasting Unit. 
The Joint Operating Agreement shall be in substantially the same form as
set forth in Exhibit “Q.”


(c)            In no event shall the Optionor in any
manner be liable for or incur any costs or expenses associated with the CO2
operations of the Optionee until such time as Optionor has accepted its
Reversionary Interest.


3.3.             Simultaneous
Use of Surface-Option to Purchase.


(a)                In the event Optionee exercises
its Option to Purchase, Optionee shall have (i) the right to use all easements
and surface rights of Optionor in the Hastings Field acquired from third
parties or resulting from its ownership of the Leases, and (ii) the right to
use Optionor’s surface and surface estate rights in lands in which Optionor
owns all of the surface fee estate or an undivided interest in the surface fee
estate (“Optionor’s Surface Estate Lands”), so long as (i) Optionee’s use is
reasonably necessary for its operations and activities with respect to the Assets
and (ii) Optionee’s use does not conflict with Optionor activities existing as
of the Exercise Effective Time.  After
Optionee’s exercise of its Option to Purchase, Optionor shall be entitled to
new uses of all surface rights and interests in the Hastings Field, so long as
such new use does not conflict with current or reasonably anticipated future
use by Optionee.   For the purposes of
this Section 3.3, surface or surface estate rights shall also mean and include all
rights appurtenant to the surface estate, including, but not limited to, rights
to drill water wells, salt water disposal wells and injection wells.


(b)               Subject to the provision of
subsection (a) above, after Optionee’s exercise of its Option to Purchase,
Optionee shall be entitled to such easements, rights-of-way, and other uses of
the surface of Optionor’s Surface Estate Lands in conjunction with Optionee’s
operations and activities related to the operation of  the Assets as Optionee, acting as a
reasonably prudent operator, deems necessary and appropriate.  Optionee shall pay Optionor for the
following, and only the following, usages of Optionor’s Surface Estate Lands
(all other usages being without cost to Optionee), and 



 18
 






 



 


in the amounts stated: (i) new roads-$1.25 per linear rod; (ii) drill site
locations, including areas for drill site pad, pits, and other
equipment-$1500.00 per acre.


(c)               Subject to the prior usage
restrictions in subsection (a) above, after Optionee’s exercise of its Option
to Purchase and for a period of five (5) years after the applicable initial
Exercise Effective Date, Optionee shall also have the right to purchase from
Optionor up to twenty (20) acres of surface estate, selected by Optionee, out
of Optionor’s Surface Estate Lands, to be used for a central plant facility,
for a purchase price of $1,500.00 per acre.


(d)               Optionor and Optionee agree to
execute any instruments or other documents as may be reasonably requested in
order to vest in Optionee the rights and interests provided for in this Section 3.3.


ARTICLE 4.-
OPTIONOR’S REPRESENTATIONS AND WARRANTIES


                Optionor
represents and warrants to Optionee as of the date hereof, that:


(a)           Optionor is a limited partnership
duly organized, validly existing, and in good standing under the laws of the
State of Texas, and is duly qualified to carry on its business in Texas;


(b)           Optionor has all requisite power and
authority to carry on its business as presently conducted, to enter into this
Agreement and the other documents and agreements contemplated hereby, and to
perform its obligations under this Agreement and the other documents and
agreements contemplated hereby. Effective as of the date hereof the
consummation of the transactions contemplated by this Agreement do not and will
not violate, nor be in conflict with, any provision of its governing documents
or any agreement or instrument to which it is a party or by which it is bound
(except as set forth hereinbelow and in any provision contained in agreements
customary in the oil and gas industry relating to (1) the Preferential Purchase
Rights (defined below) as to all or any portion of the Assets; (2) required
consents to transfer and related provisions; (3) maintenance of uniform
interest provisions; and (4) any other third-party approvals or consents
contemplated herein), or any judgment, decree, order, statute, rule, or
regulation applicable to Optionor;


(c)           This Agreement, and all documents and
instruments required hereunder to be executed and delivered by Optionor
constitute legal, valid and binding obligations of Optionor in accordance with
its respective terms, subject to applicable bankruptcy and other similar laws
of general application with respect to creditors;


(d)           There are no bankruptcy,
reorganization or receivership proceedings pending, being contemplated by, or
to the actual knowledge of Optionor threatened against Optionor;


(e)           The execution, delivery and
performance of this Agreement, and the transaction contemplated hereunder have
been duly and validly authorized by all requisite authorizing action, corporate,
partnership or otherwise, on the part of Optionor.



 19
 






 



 


(f)            Optionor has not incurred any
obligation or liability, contingent or otherwise, for brokers’ or finders’ fees
in connection with this Agreement or the transaction provided herein;


(g)           Other than as set forth in Exhibit “H”, to the best of Optionor’s
knowledge, there are no claims, investigations, demands, actions, suits, or
administrative, legal or arbitration proceedings (including condemnation,
expropriation, or forfeiture proceedings) pending, or to the best of Optionor’s
knowledge, threatened, against Optionor or any of its affiliates, or any Asset:
(i) seeking to prevent the consummation of the transactions contemplated
hereby, or (ii) which, individually or in the aggregate, would materially and
adversely affect the Assets.


(h)           Optionor has not intentionally or
willfully misrepresented or omitted any material information requested by
Optionee in writing about the Assets;


(i)            Subject to satisfaction of the
Condition Precedent, the granting of the Option to Purchase and the transfer of
the Assets to Optionee contemplated hereby does not violate any covenants or
restrictions imposed on Optionor by any bank or other financial institution in
connection with a mortgage or other instrument, and will not result in the
creation or imposition of a lien on any portion of the Assets;


(j)            Except as disclosed by Optionor in
writing, if Optionor is the operator of an Asset, to the best of Optionor’s
knowledge, it is in material compliance with all laws, rules, regulations and
orders pertaining to such Assets, including Environmental Laws;


(k)           Except as disclosed by Optionor in
writing, if Optionor is the operator of an Asset, to the best of Optionor’s
knowledge, it has all governmental permits necessary for the operation of the
Asset and is not in material default under any permit, license or agreement
relating to the operation and maintenance of the Assets;


(l)            Except as set forth on Exhibit “K”, there are no waivers, consents
to assign, approvals or similar rights owned by third parties and required in
connection with granting of the Option to Purchase or the conveyance of the
Assets from Optionor to Optionee;


(m)          Except as set forth on Exhibit “K”, , there are no rights of first
refusal, preferential rights, preemptive rights or contracts, or other
commitments or understandings of a similar nature to which Optionor is a party
or to which the Assets are subject;


(n)           No Hydrocarbons produced or to be
produced from the Leases are subject to any oil or gas sales contracts other
than those identified on Exhibits “F-1” and “F-2”
and, no third party has any call upon, option to purchase, dedication rights or
similar rights with respect to the Hydrocarbons produced to be produced from
Optionor’s interest in the Leases;


(o)           Other than as set forth in Exhibit “H”, to the best of Optionor’s
knowledge there are no claims, investigations, demands, actions, suits, or
administrative, legal or 



 20
 






 



 


arbitration proceedings (including condemnation, expropriation, or
forfeiture proceedings) pending, or to the best of Optionor’s knowledge
threatened, against Optionor or any of its affiliates seeking to prevent the
consummation of the transactions contemplated hereby; and


(p)           Except as set forth on Exhibit “L”, there are no oil or gas production
imbalances with respect to the Leases;


The above representations and
warranties by Optionor shall be continuing in nature during the term of this
Agreement or as otherwise provided, and Optionor shall notify Optionee of any
material change with respect thereto.


ARTICLE 5. -
OPTIONEE’S REPRESENTATIONS AND WARRANTIES


                Optionee
represents and warrants to Optionor as of the date hereof that:


(a)           Optionee is a limited liability
company duly organized, validly existing, and in good standing under the laws
of the state of Delaware, and is duly qualified to carry on its business in
Texas;


(b)           Optionee has all requisite power and
authority to carry on its business as presently conducted, to enter into this
Agreement and the other documents and agreements contemplated hereby, and to
perform its obligations under this Agreement and the other documents and
agreements contemplated hereby.  This
Agreement and the consummation of the transactions contemplated by this Agreement
do not and will not violate, nor be in conflict with, any provision of Optionee’s
articles of incorporation, partnership agreement(s), by-laws or governing
documents or any agreement or instrument to which it is a party or by which it
is bound, or any judgment, decree, order, statute, rule, or regulation
applicable to Optionee;


(c)           the execution, delivery and
performance of this Agreement and the transactions contemplated hereunder have
been duly and validly authorized by all requisite authorizing action,
corporate, partnership or otherwise, on the part of Optionee;


(d)           this Agreement, and all documents and
instruments required hereunder to be executed and delivered by Optionee at
Closing, constitute legal, valid and binding obligations of Optionee in
accordance with their respective terms, subject to applicable bankruptcy and
other similar laws of general application with respect to creditors;


(e)           there are no bankruptcy,
reorganization or receivership proceedings pending, being contemplated by, or
to the actual knowledge of Optionee threatened against Optionee;


(f)            Optionee has not incurred any
obligation or liability, contingent or otherwise, for brokers’ or finders’ fees
in connection with this Agreement or the transaction provided herein;


 



 21














 


 


(g)           Optionee is an experienced and
knowledgeable investor and operator in the oil and gas business.  Prior to entering into this Agreement,
Optionee was advised by and has relied solely on its own expertise and legal,
tax, reservoir engineering, accounting, and other professional counsel
concerning this Agreement, the Assets and the value thereof;


(h)           Other than as set forth in Exhibit “H”, to the best of Optionee’s
knowledge, there are no claims, investigations, demands, actions, suits, or
administrative, legal or arbitration proceedings (including condemnation,
expropriation, or forfeiture proceedings) pending, or to the best of Optionee’s
knowledge, threatened, against Optionee or any of its affiliates, or any Asset:
seeking to prevent the consummation of the transactions contemplated hereby.


(i)            Optionee has the financial resources
to close the transaction contemplated by this Agreement, whether by third party
financing or otherwise; and


(j)            Optionee acknowledges the existence
of the claims and suits described in Exhibit “H”
and that these claims and suits are Permitted Encumbrances as set forth in Section 8.1(c).  Optionee further acknowledges that Optionee
has, or by Closing will have, legal counsel of its choice fully review those
claims and suits identified on Exhibit “H”.


The above representations and warranties by Optionee shall be
continuing in nature during the term of this Agreement or as otherwise
provided, and Optionee shall notify Optionor of any material change with
respect thereof.


ARTICLE 6. - ACCESS TO INFORMATION
AND INSPECTIONS


6.1.         Title
Files.


Promptly after the execution of this Agreement and
during the term of this Agreement, Optionor shall permit Optionee and its
representatives at reasonable times during normal business hours to examine, in
Optionor’s offices at their actual location, all abstracts of title, title
opinions, title files, ownership maps, lease files, assignments, division
orders, payout statements, title curative, other title materials and agreements
pertaining to the Assets by Optionee, within a reasonable period of time,
insofar as the same may now or in the future be in existence and in the
possession of Optionor.  No warranty of
any kind is made by Optionor as to the information so supplied, and Optionee
agrees that any conclusions drawn therefrom are the result of its own
independent review and judgment. 
Optionee shall be entitled to copies of all files related to the Assets
other than files containing privileged communications or attorney work product.


6.2.         Other
Files.


Promptly after the execution of this Agreement and
during the term of this Agreement, Optionor shall permit Optionee and its
representatives at reasonable times during normal business hours to examine, in
Optionor’s offices at their actual location, 



 22
 






 



all production, well, regulatory, engineering and
geological information, accounting information, environmental information,
inspections and reports, and other information, files, books, records, and data
pertaining to the Assets as requested by Optionee, insofar as the same may now
or in the future be in existence and in the possession of Optionor, excepting
economic evaluations and Optionor’s proprietary interpretations of same,
reserve reports and any such information that is subject to confidentiality
agreements or to the attorney/client and work product privileges.  No warranty of any kind is made by Optionor
as to the information so supplied, and Optionee agrees that any conclusions
drawn therefrom are the result of its own independent review and judgment.  Optionee shall be entitled to copies of all
files related to the Assets other than files containing privileged
communications or attorney work product.


6.3          Confidentiality Agreement.


All information made available to Optionee pursuant to
Article 6 shall be maintained
confidential by Optionee until the Closing Date. The information protected by
such confidentiality obligation does not include any information that (i) at
the time of disclosure is generally available to and known by the public (other
than as a result of a disclosure by Optionee), or which after such disclosure
comes into the public domain through no fault of Optionee or its
representatives, or (ii) is or was available to Optionee on a nonconfidential
basis, or (iii) is already known to Optionee on a nonconfidential basis, as
evidenced by Optionee’s written records, at the time of its disclosure by
Optionor to Optionee.  Optionee may
disclose the information or portions thereof to those employees, agents or
representatives of Optionee who need to know such information for the purpose
of assisting Optionee in connection with its performance of this Agreement,
including to D&M, or its successor or replacement, for the purposes of Section 2.5 of this Agreement. Further, in
the event that Optionee is requested or required (by deposition, interrogatory,
request for documents, subpoena, civil investigative demand or similar process)
to disclose any of the information, Optionee shall provide Optionor with prompt
written notice of such request or requirement, so that Optionor may seek such
protective order or other appropriate remedy as it may desire.  Optionee shall further take reasonable steps
to ensure that Optionee’s employees, consultants and agents comply with the
provisions of this Section 6.3.  Notwithstanding the foregoing, nothing
contained within this Section 6.3
shall preclude either the Optionor or Optionee from disclosing its internal
reports, analyses, compilations, studies or evaluations based upon information
that is generally known or available in the public domain.


6.4.         Inspections.


Promptly after the execution of this Agreement and
during the term of this Agreement, Optionor, subject to any necessary
third-party operator approval, shall permit Optionee and its representatives at
reasonable times and at their sole risk, cost and expense, to conduct
reasonable inspections of the Assets for all purposes, including any
Environmental Defects.



 23
 






 



 


6.5.         No
Warranty or Representation on Optionor’s Information.


EXCEPT AS SET FORTH IN THIS AGREEMENT, OPTIONOR MAKES
NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE
ACCURACY, COMPLETENESS, OR MATERIALITY OF THE INFORMATION, RECORDS, AND DATA
NOW, HERETOFORE, OR HEREAFTER MADE AVAILABLE TO OPTIONEE IN CONNECTION WITH THE
ASSETS OR THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY DESCRIPTION OF THE
ASSETS, QUALITY OR QUANTITY OF HYDROCARBON RESERVES, IF ANY, PRODUCTION RATES,
RECOMPLETION OPPORTUNITIES, DECLINE RATES, GAS BALANCING INFORMATION,
ALLOWABLES OR OTHER REGULATORY MATTERS, POTENTIAL FOR PRODUCTION OF
HYDROCARBONS FROM THE ASSETS, OR ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM
ANY OTHER MATERIAL FURNISHED TO OPTIONEE BY OPTIONOR.  ANY AND ALL SUCH DATA, INFORMATION AND MATERIAL
FURNISHED BY OPTIONOR IS PROVIDED AS A CONVENIENCE ONLY AND ANY RELIANCE ON OR
USE OF SAME IS AT OPTIONEE’S SOLE RISK.


6.6.         Amendments
to Exhibits.


Optionor and Optionee acknowledge that Optionee’s
inspection of Optionor’s records and files, or further review by Optionor,
prior to Closing may indicate that some or all of the Exhibits attached to this
Agreement were not complete or entirely correct at the time of execution of
this Agreement.  Accordingly, Optionor
and Optionee agree to revise and amend the Exhibits, as needed, so that they
will be complete and accurate for any Closing 
and shall be given effect as if made on the Closing Date.  It is understood, however, that such
revisions or amendments shall not otherwise be taken into account in giving
effect to any representations, rights, options, conditions, covenants and
obligations of the Parties contained in this Agreement as originally executed
and shall not be used to negate any representation or covenant previously made.


ARTICLE 7. - ENVIRONMENTAL MATTERS
AND ADJUSTMENTS


7.1.         Investigation.


Prior to December
1, 2006, Optionee shall have the right, at reasonable times during normal
business hours, to conduct its investigation into the status of the physical
and environmental condition of the Assets. 
Upon payment of the initial option payment described in Section 2.3(a), Optionee accepts the
physical and environmental condition of the Assets existing as of the Agreement
Effective Time.  Subsequent to the
execution of this Agreement, during the month of November following the Option
Exercise Date, Optionee shall have the right, at reasonable times during normal
business hours, to conduct further investigation into the status of the
physical and environmental condition of the Assets. If, in the course of
conducting such investigation, Optionee discovers that any Asset is subject to
a material Environmental Defect not existing as of the Agreement Effective
Time, Optionee may raise such Environmental Defect in the 



 24
 






 



manner set forth below.  For
purposes hereof, the term “material” shall mean that the Optionee’s good faith
estimate, supported by documentation, of the cost of remediating any single
Environmental Defect, or the net reduction in value of the Asset affected by
such Defect, whichever is lesser, exceeds fifty thousand dollars ($50,000.00),
the Parties agreeing that such amount will be a per Asset deductible rather
than a threshold.  No later than 5:00
p.m. Central Standard Time on December 1st following the Option Exercise Date (the “Environmental
Defect Notice Date”), Optionee shall notify Optionor in writing specifying such
Environmental Defects, if any, the Assets affected thereby, and Optionee’s good
faith estimate of the costs of remediating such Defects, or the net reduction
in value of the Assets affected by such Defects, whichever is lesser, together
with supporting documentation.  Optionor
may, but shall be under no obligation to, correct at its own cost and expense
such Defects on or before the Closing Date, in which case there shall be no
reduction to the Cash Payment, nor any payment by Optionor to Optionee.  Prior to Closing, Optionee shall treat all
information regarding any environmental conditions as confidential, whether
material or not, and shall not make any contact with any governmental authority
or third party regarding same without the prior written consent of Optionor
unless required by law.


7.2.         Waiver
of Defects.


If Optionee fails
to notify Optionor prior to or on the Environmental Defect Notice Date, of any
Environmental Defects, all defects, whether known or unknown, will be deemed
waived for purposes of adjustments pursuant to this Article 7, the Parties shall proceed with the Closing,
Optionor shall be under no obligation to correct the defects, and Optionee
shall assume the risks, liability and obligations associated with such defects,
unless such defects constitute Retained Environmental Obligations or
Liabilities of Optionor.


7.3.         Remedy.


In the event any
Environmental Defect, for which notice has been timely given as provided
hereinabove, remains uncured as of the Closing, Optionor, at its sole option,
shall, (i) agree to cure or remediate any Defect within a reasonable time after
Closing and without any reduction or offset to any Cash Payment in a manner
acceptable to both Parties, or (ii) reduce the Cash Payment by the amount of
the Environmental Defect Value as determined pursuant to Section 8.4, and subject to application of
the fifty thousand dollars ($50,000.00) deductible in Section 7.1; or (iii) if the Purchase Price
does not consist of a Cash Payment (but rather a Volumetric Production
Payment), pay Optionee at the Closing the amount of the Environmental Defect
Value as determined pursuant to Section 8.4,
and subject to application of the fifty thousand dollars ($50,000.00)
deductible.


7.4.         Default
Basket.


The Parties agree
that adjustments to the Purchase Price under this Article 7 and Article 8
shall only occur to the extent that the aggregate Environmental Defects and
Title Defects, collectively, exceed two hundred fifty thousand dollars
($250,000.00) 



 25
 






 



(the “Aggregate Defect Basket”) after taking the applicable materiality
deductible into account.  For the
avoidance of doubt and by way of example only, if there are a total of two (2)
Environmental Defects of two  hundred
thousand dollars ($200,000.00) and one hundred fifty thousand dollars
($150,000.00) and two (2) Title Defects of seventy five  thousand dollars ($75,000.00) and five
thousand dollars ($5,000.00), the total adjustment would be twenty five  thousand dollars ($25,000.00) [being one
hundred fifty thousand dollars ($150,000.00) for Environmental Defect #1, plus
one hundred thousand dollars ($100,000.00) for Environmental Defect #2, plus
twenty five thousand dollars ($25,000.00) for Title Defect #1 and zero ($0) for
Title Defect #2, minus two  hundred fifty
thousand dollars ($250,000.00) for the Aggregate Defect Basket].


7.5.         Closing.


In the event any
adjustment to the Cash Payment or payment by Optionor to Optionee is made due
to an Environmental Defect raised by Optionee, the Parties shall proceed with
the Closing, Optionor shall be under no obligation to correct the Defect, and
the Defect shall become an Assumed Obligation of Optionee.


ARTICLE 8. - TITLE DEFECTS AND
ADJUSTMENTS


8.1.         Existing
Title; Definitions.


Upon
payment of the initial option payment as set forth in Section 2.3(a), Optionee
accepts title to the Assets as it exists as of the Agreement Effective Time,
subject to its right to examine issues related to defects to title arising or
occuring during the time after the Agreement Effective Time until the Closing
Date, as set forth below.


For
purposes hereof, the terms set forth below shall have the meanings assigned
thereto.


(a)           “Defensible
Title”, subject to and except for the Permitted Encumbrances means:


(1)           Such
title held by Optionor and reflected by appropriate documentation properly
filed in the official records of the jurisdiction in which the Lease or Leases
are located that (a) as to the Leases, entitles Optionor and will entitle
Optionee, after Closing, to own and receive and retain the Designated Interests
(subject to the Excluded Assets) in such Leases, without suspension, reduction
or termination, excluding Permitted Encumbrances; (b) as to wells, entitles
Optionor and will entitle Optionee, after Closing, to own and receive and
retain the Designated Interests (subject to the Excluded Assets) in such wells,
without suspension, reduction or termination, excluding Permitted Encumbrances;
(c) as to the West Hastings Unit and East Hastings Field, obligates Optionor,
and will obligate Optionee after Closing, to bear 89.33682% of the costs and
expenses relating to the maintenance, development and operation of such West
Hastings Unit and 100% as to the East Hastings Field;  



 26
 






 



(d) as to the West Hastings Unit, reflects the ownership and unit
participation of the tracts within the unit area as set forth in Exhibit “C”; (e) the Leases and wells are
free and clear of any liens, claims or encumbrances of any kind or character as
of the Closing, except Permitted Encumbrances; and (f) is not encumbered by
any  default by Optionor incurred after
the Agreement Effective Time under a material provision of any Lease, Unit
Operating Agreement, or other contract or agreement affecting the Leases;


(2)           As
to personal property included in the Assets, title to such property is free and
clear of any liens, claims or encumbrances of any kind or character as of
Closing, except Permitted Encumbrances; and


(3)           As
to all other Assets, (a) such Assets are free and clear of any liens, claims or
encumbrances of any kind or character incurred after the Agreement Effective
Time as of Closing except for Permitted Encumbrances; and (b) the Optionor is
not in default under a material provision of any Lease, operating agreement, or
other contract or agreement affecting such Assets.


(b)           “Title Defect” shall mean (i) any
matter which causes Optionor to have less than Defensible Title to any of the
Assets as of the Closing Date, or (ii) any matter that causes one or more of
the following statements to be untrue as of the Closing Date, except for
Permitted Encumbrances and matters in existence at, or occurring prior to, the
Agreement Effective Time:


(1)           Optionor
has not received written notice from any governmental authority or any other
person (including employees) claiming any material violation of any law, rule,
regulation, ordinance, order, decision or decree of any governmental authority
with respect to the such Assets.


(2)           Optionor,
or the Operator of an Asset, has complied in all material respects with the
provisions and requirements of all orders, regulations and rules issued or
promulgated by governmental authorities having jurisdiction with respect to
such Assets and has filed for and obtained all material governmental
certificates, permits and other authorizations necessary for Optionor’s current
operation of such Assets other than permits, consents and authorizations
required for the sale and transfer of such Assets to Optionee;


(3)           Optionor
has not materially defaulted or materially violated any agreement to which
Optionor is a party or any obligation to which Optionor is bound affecting or
pertaining to such Assets other than as disclosed hereunder or on any exhibit
attached hereto;


(4)           The
Leases included within such Assets are in full force and effect; and



 27
 






 



 


(5)           All
taxes, rentals, royalties, operating costs and expenses, and other costs and
expenses related to such Assets which are due from or are the responsibility of
Optionor have been paid.


(c)           “Permitted
Encumbrances” shall mean any of the following matters:


(1)           defects
in the early chain of title consisting of failure to recite marital status or
the omission of succession or heirship proceedings;


(2)           defects
or irregularities arising out of uncancelled mortgages, judgments or liens, the
inscriptions of which, on their face, have expired as a matter of law prior to
the Effective Time, or prior unreleased oil and gas leases which, on their
face, expired more than ten (10) years prior to the Agreement Effective Time
and have not been maintained in force and effect by production or operations
pursuant to the terms of such leases;


(3)           tax
liens and operator’s liens for amounts not yet due and payable, or those that
are being contested in good faith by Optionor in the ordinary course of
business;


(4)           to
the extent any of the following do not materially diminish the value of, or
impair the conduct of operations on, any of the Assets and do not impair
Optionor’s right to receive the revenues attributable thereto:  (i) easements, rights-of-way, servitudes,
permits, surface leases and other rights in respect of surface operations,
pipelines, grazing, hunting, fishing, logging, canals, ditches, lakes,
reservoirs or the like, (ii) easements for streets, alleys, highways,
pipelines, telephone lines, power lines, railways and other similar
rights-of-way, on, over or in respect of property owned or leased by Optionor
or over which Optionor owns rights of way, easements, permits or licenses, and
(iii) the terms and conditions of all leases, agreements, orders, instruments
and documents pertaining to the Assets;


(5)           all
lessors’ royalties, overriding royalties, net profits interests, carried
interest, production payments, reversionary interests and other burdens on or
deductions from the proceeds of production if the net cumulative effect of such
burdens or deductions does not reduce the net revenue interest of Optionor in
any well affected thereby to the extent that Optionor will not be able to
deliver to Optionee at Closing, the Designated Interests in production (net
revenue interests);


(6)           preferential
rights to purchase and required third party consents to assignments and similar
agreements with respect to which waivers or consents are obtained from the
appropriate parties, or the appropriate time period for asserting the rights
has expired without an exercise of the rights prior to the Closing Date;



 28
 






 



 


(7)           all
rights to consent by, required notices to, filings with, or other actions by
governmental entities and tribal authorities in connection with the sale or
conveyance of oil and gas leases or interests if they are customarily obtained
subsequent to the sale or conveyance;


(8)           defects
or irregularities of title arising out of events or transactions which have
been barred by limitations or by acquisitive or liberative prescription;


(9)           any
encumbrance or other matter having an aggregate adverse effect on the value of
the Assets of less than fifty thousand dollars ($50,000), the Parties agreeing
that such amount will be a per Asset deductible rather than a threshold;


(10)         rights
reserved to or vested in any municipality or governmental, statutory or public
authority to control or regulate any of the Assets in any manner, and all
applicable laws, rules and orders of governmental authority; and


(11)         any
encumbrance or other matter (whether or not constituting a Title Defect)
expressly waived in writing by Optionee or listed on Exhibit “H”.


(12)    liens
related to Optionor’s bank indebtedness which will be released at Closing.


(13)    any
matters which would otherwise constitute Title Defects that existed as of the
Agreement Effective Date.


8.2.         Notice of Title Defects.


No later than 5:00
p.m. Central Standard Time on December 1st following the Option Exercise Date (a “Title Defect Notice Date”), Optionee may
provide Optionor written notice of any Title Defect along with a description of
those matters which, in Optionee’s reasonable opinion, constitute Title Defects
and setting forth in detail Optionee’s calculation of the value for each Title
Defect determined pursuant to Section 8.4.  Optionor may elect, at its sole cost and
expense, but without obligation, to cure all or any portion of such Title
Defects prior to Closing, in a manner acceptable to both Parties, in which case
no reduction or offset in any Cash Payment, or payment by Optionor to Optionee,
shall be made.  Optionee’s failure to
deliver to Optionor such notice on or before the Title Defect Notice Date shall
be deemed a waiver by Optionee of all Title Defects with respect to the Assets,
known or unknown, that Optionor does not have notice of from Optionee on such
date.  Any defect or deficiency
concerning Optionor’s title to the Assets not asserted by Optionee in a Title
Defect Notice on or prior to the Title Defect Notice Date shall be deemed
waived by Optionee for purposes of any adjustment to the Cash Payment or
payment by Optionor to Optionee, the Parties shall proceed with Closing,
Optionor shall be under no obligation to correct the defects, and Optionee
shall assume the risks, liability and obligations associated with 



 29
 






 



such defects.  However, such waiver shall not effect or
impair the warranties of Optionor set forth in Section 8.5 or the indemnity obligations of Optionor as set
forth in Article 16.


8.3.         Title Defect Adjustment.


(a)           In the event any Title Defect, for which
notice has been timely given as provided hereinabove, remains uncured as of
Closing, Optionor shall have the opportunity to cure, until sixty (60) days
after Closing (“Cure Period”),
such Title Defect.  In the alternative,
Optionor may elect to (i) indemnify Optionee against any damages, claims or
expenses that may arise out of such Title Defect, subject to the provisions of Section 8.3(c) below, with no reduction in
the Cash Payment or payment to Optionee; or (ii) reduce the Cash Payment by an
amount equal to the Title Defect Value as determined pursuant to Section 8.4, and subject to application of
the fifty thousand dollars ($50,000.00) deductible described in Section 8.1(c) (9); or, (iii) if the
Purchase Price does not consist of a Cash Payment (but rather a volumetric
production payment), pay Optionee at Closing the amount of the Title Defect
Value as determined pursuant to Section 8.4,
and subject to application of the fifty thousand dollars ($50,000.00)
deductible.  Should Optionor elect
alternative “(i)” (indemnity) or “(ii)” (price reduction) or “(iii)” (payment
to Optionee) in this Section 8.3(a),
those Assets affected by the Title Defect shall be transferred to Optionee at
Closing.


(b)           If Optionor elects to attempt to cure
a Title Defect after Closing, the Closing with respect to the portion of the
Assets affected by such Title Defect will proceed along with all other Assets
as provided in this Agreement.  If
Optionor fails or refuses to cure any Title Defect prior to the expiration of
the Cure Period, Optionor shall notify Optionee in writing of such failure or
refusal promptly upon the expiration of the Cure Period.  In this event, Optionee shall within seven
(7) days after receipt by Optionee of Notice from Optionor of such failure or
refusal to cure any such Title Defect, pay Optionee an amount equal to the
subject Title Defect Value.  In the event
that any such property is retained by Optionor and such property has been
receiving revenue, without complaint, for a period in excess of two (2) years,
then Optionee agrees (i) not to take any action to interfere with such revenue
stream, and (ii) to the extent that Optionee becomes payor of such revenue, to
pay Optionor such revenue upon receipt of an indemnity agreement from Optionor.


(c)           The following provisions shall apply
to an election by Optionor under Section
8.3(a)(i) to indemnify Optionee with regard to such Title Defect:


(1)           Optionor’s
indemnity shall be limited to a period of two (2) years from the Effective
Time.


(2)           In
no event shall Optionor’s indemnity exceed the amount of the Title Defect Value
as determined under Section 8.4
hereof.


(3)           Optionor’s
indemnity shall be freely transferable by Optionee to its successors and
assigns of the Assets affected by such Title Defect, including 



 30
 






 



without limitation, any lender to Optionee and any purchaser of such
Assets, whether directly from Optionee or through any foreclosure proceeding;
and


(4)           If
the Title Defect Value, as determined under Section
8.4 hereof, individually or in the aggregate, for one or more Title
Defects to be covered by the Optionor’s indemnity exceeds two hundred fifty
thousand dollars ($250,000.00) (after application of the appropriate
deductible(s) provided for in Section
8.1(c)(9), Optionor shall have no right under the second sentence of
Section 8.3(a)(iii) to indemnify
Optionee with regard to such Title Defects without Optionee’s consent.


(d)           In the event any adjustment to the
Cash Payment, or payment by Optionor to Optionee, is made due to a Title Defect
raised by Optionee, the Parties shall proceed with Closing, Optionor shall be
under no obligation to correct the Title Defect, and such Title Defect shall
become an Assumed Obligation of Optionor.


8.4.         Environmental Defect and Title
Defect Values. 


Upon
timely delivery of notice of an Environmental or Title Defect, Optionee and
Optionor shall use their best efforts to agree on the validity and value of the
claim for the purpose of making any adjustment to the Purchase Price based on
the provisions herein (“Environmental or
Title Defect Value”).  In
determining the Value of an Environmental or Title Defect, it is the intent of
the Parties to include, to the extent possible, only that portion of the lands,
Leases and wells, or other Assets, whether an undivided interest, separate
interest or otherwise, materially and adversely affected by the Defect.  The following guidelines shall be followed by
the Parties in establishing the Value of any Environmental or Title Defect for
the purpose of adjusting a Cash Payment or establishing an amount to be paid by
Optionor to Optionee for such a Defect if (a) the validity of the claim is
agreed to by the Parties, (b) proper notice has been timely given, and (c)
subject to (i) application of the appropriate deductibles as set forth in this
Agreement for Environmental Defects and Title Defects:


(a)           If the Title Defect is based on a
difference in net revenue interest or expense interest from the Designated
Interests for the affected property, then the Title Defect Value shall be the
amount of the reduction or increase as the case may be.


(b)           If the Environmental or Title Defect
is liquidated in amount (for example, but not limited to, a lien, encumbrance,
charge or penalty), then the Defect Value shall be the lesser of (1) the sum
necessary to be paid to the obligee to remove the Defect from the property, or
(2) the decrease in the fair market value of the Asset as a result of the
Defect.


(c)           If the Environmental or Title Defect
represents an obligation or burden upon the affected property for which the
economic detriment is not liquidated but can be estimated with reasonable
certainty as agreed to by the Parties, the Defect Value shall be the sum
necessary to compensate Optionee at Closing for the adverse economic effect
which the Environmental or Title Defect will have on the affected
property.  This 



 31
 






 



sum shall be the
lesser of (1) the cost of remediating the Defect, or (2) the decrease in the
fair market value of the Asset as a result of the Defect.  The fair market value determination shall be
made by the Parties in good faith taking into account all relevant factors,
including, but not limited to, the following:


(1)           the
value of the Leases, lands, wells and other Assets affected by the
Environmental or Title Defect;


(2)           the
productive status of the affected Asset (i.e., proved developed producing,
etc.) and the present value of the future income expected to be produced
therefrom;


(3)           if
the Title Defect represents only a possibility of title failure, the
probability that such failure will occur; and


(4)           the
economic effect of the Environmental or Title Defect.


(d)           If the Value of the Environmental or
Title Defect cannot be determined using the above guidelines, and if the
Parties cannot otherwise agree on the amount of an adjustment to the Cash
Payment or payment by Optionor to Optionee, or if the validity of the claim as
to an Environmental or Title Defect cannot be agreed upon, then the Closing
shall nevertheless include the Asset(s) affected thereby.  If the validity of the claim is in dispute,
there shall be no adjustment to the Cash Payment or a payment by Optionor to
Optionee at Closing.  If the value of the
claim is in dispute, the Cash Payment or payment by Optionor to Optionee at
Closing shall be adjusted by an amount being the average of Optionor’s and
Optionee’s good faith estimates of the value thereof.  In either case, Optionor and Optionee shall
each have the right, exercisable within ninety (90) days after the Closing
Date, to refer the disputed matter to mediation and arbitration in accordance
with the dispute resolution procedures set forth in Exhibit “P.” After the expiration of said ninety (90) day
period the right to refer the matter to mediation and arbitration shall
terminate.  Subject to the terms of Exhibit “P”, the decision of the arbitrator
regarding any Environmental or Title Defect Dispute shall be final as between
the Parties.


8.5.         Title Warranty.


OPTIONOR
SHALL CONVEY OPTIONOR’S INTERESTS IN AND TO THE ASSETS TO OPTIONEE AS PROVIDED
IN THE FORM OF CONVEYANCE, ASSIGNMENT AND BILL OF SALE ATTACHED AS EXHIBIT “I” HERETO.  THE CONVEYANCE, ASSIGNMENT AND BILL OF SALE
SHALL BE MADE WITHOUT WARRANTY OF TITLE, EITHER EXPRESS, IMPLIED, STATUTORY OR
OTHERWISE, AND WITHOUT RECOURSE, EVEN AS TO THE RETURN OF THE PURCHASE PRICE OR
OTHER CONSIDERATION (EXCEPT AS SPECIFICALLY PROVIDED HEREIN), EXCEPT THAT
OPTIONOR SHALL WARRANT TITLE TO THE ASSETS AGAINST ALL CLAIMS, LIENS, BURDENS
AND ENCUMBRANCES ARISING BY, THROUGH OR UNDER OPTIONOR, BUT NOT OTHERWISE AND
NOT WITH RESPECT TO ANY IMPAIRMENT OR FAILURE OF TITLE RELATED TO ANY 



 32
 






 



LACK OF
PRODUCTION IN PAYING QUANTITIES.  THE
CONVEYANCE, ASSIGNMENT AND BILL OF SALE SHALL BE MADE WITH FULL SUBSTITUTION
AND SUBROGATION TO OPTIONEE IN AND TO ALL COVENANTS AND WARRANTIES BY OTHERS
HERETOFORE GIVEN OR MADE TO OPTIONOR WITH RESPECT TO THE ASSETS.


IMBALANCES
WITH RESPECT TO OIL OR NATURAL GAS ARE GOVERNED BY ARTICLE 17 HEREOF.  THE PARTIES AGREE THAT THE EXISTENCE OF ANY
SUCH IMBALANCES SHALL NOT BE DEEMED A TITLE DEFECT.


ARTICLE 9. - PREFERENTIAL PURCHASE RIGHTS 

AND CONSENTS OF THIRD PARTIES


9.1.         Actions
and Consents.


(a)           Optionor and Optionee agree that each
shall use all reasonable efforts to take or cause to be taken all such action
as may be necessary to consummate and make effective the transaction provided
in this Agreement and to assure that it will not be under any material
corporate, legal, or contractual restriction that could prohibit or delay the
timely consummation of such transaction.


(b)           Prior to the execution of this
Agreement, Optionor and Optionee will satisfy themselves that the execution of
this Agreement will not in and of itself trigger (i) any preferential rights to
purchase, or any rights of first refusal to purchase, any of the Assets (“Preferential
Purchase Rights”), or (ii) any rights of consent or approval to the Agreement
or transactions contemplated by the Agreement (“Consents”).  In the event that Optionor and Optionee
determine before or after the execution of this Agreement that a Preferential
Purchase Right or Consent is triggered by the execution of this Agreement, they
will endeavor to obtain a waiver of such right, or such consent, as applicable,
and failing which, will negotiate an agreed upon reduction or reimbursement of
the initial installment of the consideration for the initial term of the Option
to Purchase payable upon execution of this Agreement.


(c)           Promptly after the Option Exercise
Date, Optionor shall notify all holders of Preferential Purchase Rights and
Consents of such terms and conditions of this Agreement to which the holders of
such rights are entitled.  Optionor shall
promptly notify Optionee if any Preferential Purchase Rights are exercised, any
consents or approvals denied, or if the requisite period has elapsed without
said rights having been exercised or consents or approvals having been
received.  If prior to Closing, any such
Preferential Purchase Rights are timely and properly exercised, or Optionor is
unable to obtain a necessary consent or approval prior to Closing, the interest
or part thereof so affected shall be treated in the same manner as an uncured
Title Defect.  If any additional
Preferential Purchase Rights are discovered after Closing, or if a third party
Preferential Purchase Rights holder alleges improper notice, then Optionee
agrees to cooperate with Optionor in giving effect to any such valid third
party Preferential Purchase Rights.  In
the event any such valid third party preferential purchase rights are


 



 33














 


 


validly exercised
after Closing, Optionee’s sole remedy against Optionor shall be payment by
Optionor to Optionee of the value of that portion of the Assets on which such
rights are exercised and lost by Optionee to such third party determined in the
same manner as a Title Defect Value.


(d)           With respect to any portion of the
Assets for which a Preferential Purchase Right has not been asserted prior to
Closing, or a consent or other approval to assign has not been granted and for
which the time for election to exercise such Preferential Purchase Right or to
grant such consent has not expired, the Closing with respect to the portion of
the Assets subject to such outstanding obligations will nevertheless proceed
along with the Closing of other Assets as provided in this Agreement.  In the event that within ninety (90) days
after Closing any such Preferential Purchase Right is not waived or consent or
approval is not obtained or the time for election to purchase or to deliver a
consent or approval does not pass (such that under the applicable documents,
Optionor may not sell the affected third party interest to Optionee), then
Optionee shall reassign same to Optionor and Optionor will promptly pay to
Optionee the value of such third party interests.


ARTICLE 10. - COVENANTS OF OPTIONOR
AND OPTIONEE


10.1.       Covenants
of Optionor Pending Closing.


(a)           From and after the date of execution
of this Agreement and until Closing, and subject to Section 10.2 and the constraints of applicable operating and
other agreements, Optionor shall operate, manage, and administer the Assets as
a reasonable and prudent operator and in a good and workmanlike manner
consistent with its past practices, and shall carry on its business with
respect to the Assets in substantially the same manner as before execution of
this Agreement.  Prior to Closing,
Optionor shall use all commercially reasonable efforts to preserve in full
force and effect all Leases, operating agreements, easements, rights-of-way,
permits, licenses, and agreements which relate to the Assets in which Optionor
owns an interest, and shall perform all material obligations of Optionor in or
under all such agreements relating to the Assets; provided, however, Optionee’s
sole remedy for Optionor’s breach of its obligations under this Section 11.1(a) shall be limited to the
relative amount of the Purchase Price the parties agree should be allocated to
that portion of the Assets affected by such breach, and if the parties cannot
agree, the matter shall be submitted to mediation and arbitration procedures
set forth in Exhibit “P” Optionor
shall, except for emergency action taken in the face of serious risk to life,
property, or the environment (1) submit to Optionee, for prior written
approval, all proposed contracts, agreements or amendments to contracts
relating to the Assets to the extent same could be binding upon Optionee’s
exercise of its Option to Purchase; (2) submit to Optionee, for Optionee’s
information, all AFE’s relating to the Assets in excess of One Hundred Thousand
Dollars ($100,000.00); (3) consult with, inform, and advise Optionee regarding
all material matters concerning the operation, management, and administration
of the Assets; (4) notify Optionee of any written voting under any 



 34
 






 



operating, unit,
joint venture, partnership or similar agreement relating to the Assets; and (5)
not approve or elect to go nonconsent as to any proposed well or plug and
abandon or agree to plug and abandon any well without Optionee’s prior written
approval.  On any matter requiring
Optionee’s approval under this Section
11.1(a), Optionee shall respond within five (5) days to Optionor’s
request for approval and failure of Optionee to respond to Optionor’s request
for approval within such time shall release Optionor from the obligation to
obtain Optionee’s approval before proceeding on such matter.  With respect to emergency actions taken by
Optionor in the face of serious risk to life, property, or the environment,
without prior approval of Optionee pursuant to the provisions above, Optionor
will advise Optionee of its actions as promptly as reasonably possible and
consult with Optionee as to any further related actions.


(b)           From and after the date of execution
of this Agreement until this Option terminates, Optionor may not enter into any
agreement, or amend, supplement or change any existing agreement that would
have a material adverse effect on Optionee’s option rights hereunder, without
Optionee’s consent, which consent shall not be unreasonably withheld.


(c)           Optionor shall promptly notify Optionee
of any suit, lessor demand action, or other proceeding before any court,
arbitrator, or governmental agency and any cause of action which pertains to
the Assets or which reasonably would be expected to result in material
impairment or loss of Optionor’s interest in any portion of the Assets or which
might hinder or impede the operation of the Assets in any material respect.


(d)           Except for Permitted Encumbrances,
Optionor shall not alienate, encumber, transfer, abandon or release any of the
Assets during the term of this Agreement without the prior written consent of
Optionee.


(e)           Subject to the terms and conditions
of this Agreement, Optionor will use commercially reasonable efforts to cause
(a) its respective representations and warranties set forth in this Agreement
to be true and correct on and as of the Closing Date except to the extent such
representations and warranties expressly relate to an earlier date, and (b) all
of the conditions precedent to the obligations of the other Party (to the extent
they are within the control of Optionor) to be satisfied on or prior to each
Closing Date.


10.2.       Limitations
on Optionor’s Covenants Pending Closing.


To the
extent Optionor is not the operator of any of the Assets, the obligations of
Optionor in Section 10.1
concerning operations or activities which normally or pursuant to existing
contracts are carried out or performed by the operator, shall be construed to
require only that Optionor use all commercially reasonable efforts (without
being obligated to incur any expense or institute any cause of action) to cause
the operator of such Assets to take such actions or render such performance as
would a reasonable prudent operator and within the constraints of the
applicable operating agreements and 



 35
 






 



other applicable
agreements.


10.3.                     Covenants
of Optionee Following Exercise of Option.


Optionee
shall act as a reasonable prudent operator in delivering CO2 to the Assets in a
timely manner and in sufficient quantities to efficiently conduct operations to
enhance oil production, under the terms of this Agreement, including but not
limited to, Sections 1.26(d)(2), 1.26(d)(3) and 1.26(d)(5).


10.4.                     Hastings
Field Call on CO2.


The
Assets shall have first call on the CO2 in Optionee’s pipeline proposed to be
constructed from a point near Donaldsonville, Louisiana to the Hastings Field,
up to a maximum of 200 MMcf/d for so long as the Hastings Field requires 200
MMcf/d of additional CO2 above then existing recycle volumes.  The call on CO2 shall be based on 8 MMcf/d
times the toal number of CO2 injectors until such time as the total number of
injectors times 8 MMcf/d exceed 200 MMcf/d. 
Optionor agrees that the call on CO2 is based on the assumption that
individual injection wells will inject on average 8 MMcf/d per well.  If the actual average injection rate is lower
than 8 MMcf/d, the 200 MMcf/d call on CO2 shall be adjusted downward based on
the actual average injection rate divided by 8 MMcf/d.  This call is on CO2 from whatever source in
Optionee’s pipeline, but is not a call on any particular source of CO2.


10.5.         Ownership
of CO2.


All
CO2 injected into the Hastings Field for which the working interest owners are
charged shall be owned by the working interest owners proportionate to their
ownership interest in the West Hastings Unit or the East Hastings Field, as the
case may be.


10.6.       Environmental Liabilities Related to Events and Activities
occurring prior to October 1, 2004.


Notwithstanding anything to the contrary contained
herein, Optionor and Optionee agree that from and after the Exercise Effective
Date all Environmental Obligations and Liabilities related to, or arising from,
events or conditions first occurring prior to October 1, 2004, shall be shared
equally between Optionor and Optionee and their respective successors and
assigns.  The provisions of Section 16.6
and Section 16.7 shall apply to any claim for shared payment under this Section
10.6, except that Optionor and Optionee shall each have equal rights to
participate in the defense of all Environmental Obligations and Liabilities
subject to this Section 10.6 and no third-party claim in respect of such
Environmental Obligations and Liabilities shall be compromised or settled
without the prior written consent of both Optionor and Optionee, which consent
shall not be unreasonably withheld or delayed.



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ARTICLE 11. - CLOSING CONDITIONS


11.1.       Optionor’s
Closing Conditions.


The obligations of
Optionor under this Agreement are subject, at the option of Optionor, to the
satisfaction, at or prior to Closing, of the following conditions:


(a)           all representations and warranties of
Optionee contained in this Agreement shall be true and accurate in all material
respects at and as of Closing as if such representations and warranties were
made at and as of Closing, and Optionee shall have performed, satisfied and
complied in all material respects with all agreements and covenants required by
this Agreement to be performed, satisfied and complied with by Optionee at or
prior to Closing;


(b)           the execution, delivery, and performance
of this Agreement and the transactions contemplated thereby have been duly and
validly authorized by all necessary action, corporate, partnership or
otherwise, on the part of Optionee, and an officer’s certificate of Optionee
confirming the same;


(c)           all necessary consents of and filings
with any state or federal governmental authority or agency relating to the
consummation of the transactions contemplated by this Agreement shall have been
obtained, accomplished or waived, except to the extent that such consents and
filings are normally obtained, accomplished or waived after Closing; and


(d)           as of the Closing Date, no suit,
action or other proceeding (excluding any such matter initiated by Optionor)
shall be pending or threatened before any court or governmental agency seeking
to restrain Optionor or prohibit the Closing or seeking damages against
Optionor as a result of the consummation of this Agreement.


11.2.       Optionee’s
Closing Conditions.


The obligations of
Optionee under this Agreement are subject, at the option of Optionee, to the
satisfaction, at or prior to Closing, of the following conditions:


(a)           all representations and warranties of
Optionor contained in this Agreement shall be true, accurate in all material
respects at and as of Closing as if such representations and warranties were
made at and as of Closing, and Optionor shall have performed, satisfied and
complied in all material respects with all agreements and covenants required by
this Agreement to be performed, satisfied and complied with by Optionor at or
prior to Closing;


(b)           the execution, delivery, and
performance of this Agreement and the transactions contemplated thereby have
been duly and validly authorized by all necessary action, corporate,
partnership or otherwise, on the part of Optionor, and an officer’s certificate
of Optionor confirming the same;



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(c)           all necessary consents of and filings
with any state or federal governmental authority or agency relating to the
consummation of the transactions contemplated by this Agreement shall have been
obtained, accomplished or waived, except to the extent that such consents and
filings are normally obtained, accomplished or waived after Closing; and


(d)           as of the Closing Date, no suit,
action or other proceeding (excluding any such matter initiated by Optionee)
shall be pending or threatened before any court or governmental agency seeking
to restrain Optionee or prohibit the Closing or seeking damages against
Optionee as a result of the consummation of this Agreement.


ARTICLE 12.- CLOSING


12.1.       Closing.


The closing of the
purchase of the Assets following the exercise of the option granted herein (the
“Closing”) shall be held at the
offices of Optionee on the date provided in Section
2.6 above, or at such earlier date or place as the Parties may agree
in writing (herein called “Closing Date”).  Time is of the essence and the Closing Date
shall not be extended unless by written agreement of the Parties.  On or before five (5) business days prior to
Closing, Buyer and Seller shall use their best efforts to provide each other
copies of all closing documents.


12.2.       Optionor’s
Closing Obligations.


At Closing Optionor shall
deliver to Optionee the following:


(a)           the Assignment and Conveyance
substantially in the form attached hereto as Exhibit
“I” and such other documents as may be reasonably necessary to
convey all of Optionor’s interest in the Assets to Optionee in accordance with
the provisions hereof ;


(b)           a non-foreign affidavit executed by
Optionor in the form attached as Exhibit “M”;


(c)           appropriate regulatory forms
appointing Optionee as the operator for those Assets which Optionor operates;


(d)           copies of all third-party waivers,
consents, approvals, permits and actions obtained;


(e)           subject to existing operating
agreements and Optionor’s rights to continued use and access as set forth in Section 3.3, exclusive possession of the
Assets;


(f)            letters-in-lieu of transfer orders
in form acceptable to Optionor and Optionee;



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(g)           a Reporting and Accounting Memorandum
executed by Optionor in the form attached as Exhibit
“N”; and


(h)           releases of all mortgages, liens and
similar encumbrances burdening the Assets in form and substance reasonably
satisfactory to Optionee.


12.3.       Optionee’s
Closing Obligations.


At Closing, (i) Optionor
shall execute an Assignment and Conveyance, the form of which shall be
substantially the same as the form attached hereto as Exhibit “I”, and (ii) depending upon
Optionor’s election, Optionee shall either pay the Cash Payment or execute an
Assignment of Volumetric Production Payment, the form of which shall be
substantially the same as the form attached hereto as Exhibit “J”.


12.4.       Joint
Closing Obligations.


Both Parties at Closing
shall execute a Settlement Statement evidencing any amount actually wire
transferred or the Volumetric Production Payment assigned and all adjustments
to the consideration taken into account at Closing.  All events of the Closing shall each be
deemed to have occurred simultaneously with the other, regardless of when
actually occurring, and each shall be a condition precedent to the other.


12.5.       Final
Settlement/Purchase Price Adjustments.


Within one hundred twenty
(120) days after Closing, Optionor shall provide to Optionee, for Optionee’s
concurrence, an accounting (the “Final Settlement Statement”) of the actual
amounts of Optionor’s and Optionee’s Credits for the adjustments set out in
this Section 12.5.  Optionee shall have the right for thirty (30)
days after receipt of the Final Settlement Statement to audit and take
exceptions to such adjustments.  The
Parties shall attempt to resolve any disagreements on a best efforts
basis.   Those credits agreed upon by
Optionee and Optionor shall be netted and the final settlement shall be paid as
directed in writing by the receiving party, on final adjustment by the party
owing it (the “Final Settlement”).


The Purchase Price shall
be adjusted as follows:


(a)           The Purchase Price shall be adjusted
upward by the following (“Optionor’s Credits”):


(1)           the value of (i) all Inventory
Hydrocarbons attributable to the Assets, such value to be based upon the
existing contract price for crude oil in effect as of the Effective Time, less
severance taxes, transportation fees and other fees deducted by the purchaser
of such oil, such oil to be measured at the Exercise Effective Time by the
operators of the Assets; and (ii) the value of all of Optionor’s unsold
inventory of gas plant products, if any, attributable to the Assets at the
Effective Time valued in the same manner as if such products had been sold
under the contract then in existence between Optionor and the 



 39
 






 



purchaser of
such products or, if there is no such contract, valued in the same manner as if
said products had been sold at the posted price in the field for said products;


(2)           the amount of all production expenses,
operating expenses and all expenditures attributable to the operation of the
Assets after the Exercise Effective Time and accrued by Optionor prior to
Closing Date in accordance with generally accepted accounting principles and Section 11.1;


(3)           an amount equal to the sum of any
upward adjustments provided elsewhere in this Agreement applicable to the
Assets; and


(4)           any other amount agreed upon by
Optionor and Optionee in writing prior to Closing.


(b)           The Purchase Price shall be adjusted
downward by the following (“Optionee’s Credits”):


(1)           the total collected sales value of
all Hydrocarbons sold by the Optionor after the Exercise Effective Time which
are attributable to the Assets, and any other monies collected by the Optionor
with respect to the ownership of the Assets after the Exercise Effective Time,
but excepting interest income.


(2)           the amount of all unpaid ad valorem,
property, production, excise, severance and similar taxes and assessments (but
not including income taxes), which taxes and assessments become due and payable
or accrue to the Assets prior to the Exercise Effective Time, which amount
shall, where possible, be computed based upon the tax rate and values
applicable to the tax period in question; otherwise, the amount of the adjustment
under this paragraph shall be computed based upon such taxes assessed against
the applicable portion of the Assets for the immediately preceding tax period
just ended;


(3)           an amount equal to the sum of any
downward adjustments provided elsewhere in this Agreement; and


(4)           any other amount agreed upon by
Optionor and Optionee in writing prior to Closing.


(c)           Optionor shall prepare and deliver to
Optionee, at least five business days prior to Closing, Optionor’s estimate of
the adjusted Purchase Price to be paid at Closing, together with a preliminary
statement setting forth Optionor’s estimate of the amount of each adjustment to
the Purchase Price to be made pursuant to this Section 12.5.  The
Parties shall negotiate in good faith and attempt to agree on such estimated
adjustments prior to Closing.  In the
event any estimated adjustment amounts are not agreed upon prior to Closing,
the estimate of the adjusted Purchase Price for purposes of Closing shall be
calculated based on Optionor’s and Optionee’s agreed upon estimated adjustments
and Optionor’s good faith estimate of any disputed amounts (and 



 40
 






 



any such disputes
shall be resolved by the Parties in connection with the resolution of the Final
Settlement Statement).


(d)           In the event the Purchase Price is
not a Cash Payment, but is in the form of a Volumetric Production Payment, any
and all adjustments in the Purchase Price shall be made and payable in cash.


ARTICLE 13. - LIMITATIONS ON
WARRANTIES AND REMEDIES


THE EXPRESS REPRESENTATIONS AND
WARRANTIES OF OPTIONOR CONTAINED IN THIS AGREEMENT ARE EXCLUSIVE AND ARE IN
LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED OR
STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY REPRESENTATION OR WARRANTY WITH
RESPECT TO THE QUALITY, QUANTITY OR VOLUME OF THE RESERVES, IF ANY, OF OIL, GAS
OR OTHER HYDROCARBONS IN OR UNDER THE LEASES, OR THE ENVIRONMENTAL CONDITION OF
THE ASSETS.  THE ITEMS OF PERSONAL
PROPERTY, EQUIPMENT, IMPROVEMENTS, FIXTURES AND APPURTENANCES CONVEYED AS PART
OF THE ASSETS ARE SOLD HEREUNDER “AS IS, WHERE IS, AND WITH ALL FAULTS” AND NO
WARRANTIES OR REPRESENTATIONS OF ANY KIND OR CHARACTER, EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF QUALITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE OR CONDITION, ARE GIVEN BY OR ON BEHALF OF OPTIONOR.  IT IS UNDERSTOOD AND AGREED THAT PRIOR TO
CLOSING OPTIONEE SHALL HAVE INSPECTED THE ASSETS FOR ALL PURPOSES AND HAS
SATISFIED ITSELF AS TO THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE
AND SUBSURFACE, AND THAT OPTIONEE ACCEPTS SAME IN ITS “AS IS, WHERE IS AND WITH
ALL FAULTS” CONDITION.  OPTIONEE HEREBY
WAIVES ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
CONDITION, OR CONFORMITY TO SAMPLES.


ARTICLE 14. - CASUALTY LOSS AND
CONDEMNATION


If, prior to Closing, all or any material portion of
the Assets is destroyed by fire or other casualty or if any material portion of
the Assets shall be taken by condemnation or under the right of eminent domain
(all of which are herein called “Casualty Loss” and limited to property damage
or taking only), Optionee and Optionor must agree prior to Closing either that
(i) If the value of the Casualty Loss is in dispute, the Cash Payment or
payment by Optionor to Optionee at Closing shall be adjusted by an amount equal
to the average of Optionor’s and Optionee’s good faith estimates of the value
of the Casualty Loss, or (ii)  Optionee
shall proceed with the purchase of such Assets, notwithstanding any such
destruction or taking (without reduction of the Purchase Price)in which case
Optionor shall pay, at Closing, to Optionee all sums paid to Optionor by third
parties by reason of the destruction or taking of such Assets and 



 41
 






 



shall assign, transfer and set over unto Optionee all
insurance proceeds received by Optionor as well as all of the right, title and
interest of Optionor in and to any claims, causes of action, unpaid proceeds or
other payments from third parties arising out of such destruction or taking. In
either case, Optionor and Optionee shall each have the right, exercisable
within ninety (90) days after the Closing Date, to refer the disputed matter to
mediation and arbitration in accordance with the dispute resolution procedures
set forth in Exhibit “P”. After
the expiration of said ninety (90) day period the right to refer the matter to
mediation and arbitration shall terminate. 
Prior to Closing, Optionor shall not voluntarily compromise, settle or
adjust any amounts payable by reason of any Casualty Loss without first
obtaining the written consent of Optionee, which consent shall not be
unreasonably withheld.


ARTICLE 15. - DEFAULT AND REMEDIES


15.1.       Optionor’s
Remedies.


Upon failure of Optionee
to timely make the payments described in Section
2.3, or to materially comply with other material terms contained in
the Agreement, Optionor, at its sole discretion, and in addition to any other
remedies it may have at law or equity, may (i) enforce specific performance, or
(ii) terminate this Agreement and retain any and all previous payments made
hereunder.


15.2.       Optionee’s
Remedies.


Upon failure of Optionor
to materially comply with all material terms contained in this Agreement,
Optionee, at its sole option and in addition to any other remedies it may have
at law or equity, may (i) enforce specific performance, or (ii) terminate this
Agreement.


15.3.       Effect
of Termination.


In the event of
termination of this Agreement under this Article
15, the transaction shall not close and neither Optionee nor
Optionor shall have any further obligations, remedies, liabilities, rights or
duties to the other hereunder, except as expressly provided herein.


ARTICLE 16. - ASSUMPTION AND
INDEMNITY


16.1.       Assumed
Obligations; Pre-Closing Liabilities.


Upon and after Closing,
Optionee shall own the Assets, together with all the rights, duties,
obligations, and liabilities accruing with respect thereto, including the
Assumed Obligations and Optionee’s indemnity obligations hereunder.  Optionee agrees to assume and pay, perform,
fulfill and discharge all Assumed Obligations and Optionee’s indemnity
obligations.  Optionor agrees to retain
and pay, perform, fulfill and discharge all Retained Obligations, and Optionor’s
indemnity obligations.



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16.2.       Optionee’s
Indemnity.


OPTIONEE
AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONOR AND OPTIONOR’S EMPLOYEES,
OFFICERS AND DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS,
LOSSES, DAMAGES, PUNITIVE DAMAGES, COSTS, EXPENSES, CAUSES OF ACTION OR
JUDGMENTS OF ANY KIND OR CHARACTER INCLUDING, WITHOUT LIMITATION, ANY INTEREST,
PENALTY, REASONABLE ATTORNEYS’ FEES AND OTHER COSTS AND EXPENSES INCURRED IN
CONNECTION THEREWITH OR THE DEFENSE THEREOF (COLLECTIVELY THE “CLAIMS”), WITH
RESPECT TO ALL LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES
AND OBLIGATIONS CAUSED BY, RELATED TO, ATTRIBUTABLE TO, OR ARISING OUT OF THE
ASSUMED OBLIGATIONS.


IN ADDITION TO THE FOREGOING,
OPTIONEE AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONOR AND OPTIONOR’S
EMPLOYEES, OFFICERS AND DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS,
DEMANDS, LOSSES, DAMAGES, PUNITIVE DAMAGES, COSTS, EXPENSES, CAUSES OF ACTION
OR JUDGMENTS OF ANY KIND OR CHARACTER INCLUDING, WITHOUT LIMITATION, ANY
INTEREST, PENALTY, REASONABLE ATTORNEYS’ FEES AND OTHER COSTS AND EXPENSES
INCURRED IN CONNECTION THEREWITH OR THE DEFENSE THEREOF (COLLECTIVELY THE “CLAIMS”),
WITH RESPECT TO ALL LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED
LIABILITIES AND OBLIGATIONS CAUSED BY, RELATED TO, ATTRIBUTABLE TO, OR ARISING
OUT OF OPTIONEE’S OPERATIONS AS TO THE ASSETS AS OF THE EXERCISE EFFECTIVE
TIME.


16.3        Optionor’s Indemnity.


OPTIONOR
AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONEE AND OPTIONEE’S EMPLOYEES,
OFFICERS AND DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS WITH
RESPECT TO ALL LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES
AND OBLIGATIONS CAUSED BY, RELATED TO, ATTRIBUTABLE TO, OR ARISING OUT OF (A)
THE RETAINED OBLIGATIONS and (B) TO THE EXTENT NOT ACCOUNTED FOR IN THE
CALCULATION OF THE PURCHASE PRICE PURSUANT TO SECTION 2.5, ENVIRONMENTAL
OBLIGATIONS AND LIABILITIES THAT FIRST AROSE FROM  OR OUT OF EVENTS OR CONDITIONS FIRST
OCCURRING BETWEEN OCTOBER 1, 2004 AND THE EXERCISE EFFECTIVE DATE.


IN ADDITION TO THE FOREGOING,
OPTIONOR AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONEE AND OPTIONEE’S
EMPLOYEES, OFFICERS AND DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS,
DEMANDS, LOSSES, DAMAGES, PUNITIVE DAMAGES, COSTS, EXPENSES, CAUSES OF ACTION
OR JUDGMENTS OF ANY KIND OR CHARACTER INCLUDING, WITHOUT LIMITATION, ANY
INTEREST, PENALTY, REASONABLE ATTORNEYS’ FEES AND OTHER COSTS AND EXPENSES
INCURRED IN 



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CONNECTION
THEREWITH OR THE DEFENSE THEREOF (COLLECTIVELY THE “CLAIMS”), WITH RESPECT TO
ALL LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES AND
OBLIGATIONS (IN EITHER CASE, OTHER THAN ENVIRONMENTAL OBLIGATIONS AND
LIABILITIES ASSUMED BY OPTIONEE PURSUANT TO SECTION 10.6) CAUSED BY, RELATED
TO, ATTRIBUTABLE TO, OR ARISING OUT OF OPTIONOR’S OPERATIONS AS TO THE ASSETS
PRIOR TO THE  EXERCISE EFFECTIVE TIME.


16.4.       Negligence.


THE
INDEMNIFICATION, RELEASE AND ASSUMPTION PROVISIONS PROVIDED FOR IN THIS
AGREEMENT SHALL BE APPLICABLE WHETHER OR NOT THE LOSSES, COSTS, EXPENSES AND
DAMAGES IN QUESTION AROSE SOLELY OR IN PART FROM THE ACTIVE, PASSIVE,
COMPARATIVE, OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF THE
PARTIES HERETO.


16.5        Broker or Finder’s Fee.


Each party hereby agrees
to indemnify and hold the other harmless from and against any claim for a
brokerage or finder’s fee or commission in connection with this Agreement or
the transactions contemplated by this Agreement to the extent such claim arises
from or is attributable to the actions of such indemnifying party, including,
without limitation, any and all losses, damages, punitive damages, attorneys’
fees, costs and expenses of any kind or character arising out of or incurred in
connection with any such claim or defending against the same.


16.6        Threshold and Maximum Amounts.


No claim may be made
against an Indemnifying Party pursuant to this Article 16 unless, and only to
the extent that, the aggregate amount of all Claims exceeds $100,000.  The maximum aggregate liability of an
Indemnifying Party under this Article 16 shall be an amount equal to the
Purchase Price.


16.7                        Claim Procedures.


Each Person entitled to
indemnification under this Article 16 (the “Indemnified Party”) shall give written notice setting forth in
reasonable detail the basis of any Claim to the Party required to provide
indemnification (the “Indemnifying
Party”) promptly, but not later than fifteen (15) days, after such
Indemnified Party becomes aware of a Claim or receives written notice of any
Claim asserted by any person who is not a Party (or a successor to a Party) to
this Agreement (a “Third-Party Claim”)
that is or may give rise to an indemnification claim; provided that the failure of the
Indemnified Party to give notice as provided in this Section 16.7 shall not
relieve any Indemnifying Party of its obligations under Section 16.7, except to
the extent that such failure prejudices the rights of any such Indemnifying
Party.  The Indemnifying Party may elect
to assume the defense of any Third-Party Claim or any litigation resulting
therefrom; provided that counsel
for the Indemnifying Party, who shall in such case conduct the 



 44
 






 



defense of such claim, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld), and the
Indemnified Party may participate in such defense at the Indemnified Party’s
expense, and may retain counsel of its choice at its own expense; provided further that the Indemnified
Party shall have the right to employ, at the Indemnifying Party’s expense, one
firm of counsel of its choice, to represent the Indemnified Party if, in the
Indemnified Party’s reasonable judgment, there exists a conflict of interest
between the Indemnified Party and the Indemnifying Party, or if the
Indemnifying Party (1) elects not to defend, compromise or settle a Third-Party
Claim, (2) fails to notify the Indemnified Party within ten (10) Business Days
of its election to defend after receipt of written notice of such Third-Party
Claim, or (3) having timely elected to defend a Third-Party Claim, fails
adequately to prosecute or pursue such defense, then in each case the
Indemnified Party may defend such Third-Party Claim on behalf of and for the
account and risk of the Indemnifying Party. 
The Indemnifying Party, in the defense of any Third-Party Claim, shall
not, except with the prior written approval of the Indemnified Party, consent
to entry of any judgment or entry into any settlement that does not include as
an unconditional term thereof the giving by the claimant or plaintiff to the
Indemnified Party of a release from all liability with respect thereto.  The Indemnified Party shall not settle or
compromise any such claim without the prior written approval of the
Indemnifying Party, which approval shall not be unreasonably withheld.  The Indemnified Party shall make its
employees available and furnish such information regarding itself or the Claim
in question as the Indemnifying Party may reasonably request in writing and as
shall reasonably be required in connection with the defense of a Third-Party
Claim.


ARTICLE 17. - GAS IMBALANCES


Optionor and Optionee
will use their best efforts to update (to the Exercise Effective Time) the gas
imbalance volume amounts listed on Exhibit “L.”  If, prior to the Final Settlement Date,
either party hereto notifies the other party hereto that the volumes set forth
in Exhibit “L” are incorrect, then
Optionee or Optionor will pay the other at the Final Settlement, as
appropriate, an amount equal to the NYMEX price at the end of the month in
which the variance occurs, per net mmbtu variance from the net imbalance shown
on Exhibit “L.”  Subject to such adjustment on the Final
Settlement Date, as of the Closing Optionee agrees to assume any liability and
obligation for gas production imbalances (whether over or under) attributable
to the Assets.  Except as set forth in
this Article 17, in assuming this
liability at Closing, Optionee shall not be obligated to make any additional
payment over the Purchase Price to Optionor, and Optionor shall not be
obligated to refund any of said price to reimburse Optionee for any
over-balances existing at the time of sale.


 



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ARTICLE 18. -
PREFERENTIAL RIGHT TO PURCHASE 

AND AREA OF MUTUAL
INTEREST PROVISION


18.1        Preferential Right to Purchase.


This Agreement is also made
expressly subject to a preferential right to Purchase, the terms and conditions
of which are as follows:


(a)               In the event Optionor or Optionee
receives a bona fide offer from a third party to purchase all or a part of the
interests of Optionor (reserved overriding royalty interest, Volumetric
Production Payment (if any) or reversionary working interest, before or after
reversion) or Optionee (the “Selling Party”)
in the West Hastings Unit, the West Hastings Unit Lands or the Hastings Field
lands, or other jointly owned lands within the Area of Mutual Interest
(including interests hereafter owned or acquired), and once the Selling Party
and a proposed transferee have fully negotiated the principal terms and
conditions of a transfer (which principal terms shall include all material
terms and conditions necessary for a purchaser to make an informed decision including,
but not necessarily limited to, price, timing, scope, character and description
of the interests to be transferred, agreed indemnities, reservations and
exclusions), Selling Party shall disclose such principal terms and conditions
in detail to the other party to this Agreement (the “Receiving Party”) in a written notice.  Receiving Party shall have the right to
acquire the interest proposed to be transferred from the Selling Party on the
same terms and conditions agreed to by the proposed transferee if, within ten
(10) Days after receipt of Selling Party’s written notice, the Receiving Party
delivers to the Selling Party a counter-notification that Receiving Party
accepts the agreed upon terms and conditions of the transfer without
reservations or conditions.  If the
Receiving Party does not deliver such counter-notification, the transfer to the
proposed transferee may be made, subject to the provisions of this Agreement,
under terms and conditions no more favorable to the transferee than those set
forth in the notice to Receiving Party, provided that the transfer shall be
concluded within one hundred eighty (180) days from the date of Optionee’s
receipt of Selling Party’s written notice. 
In the event the proposed sale of the interest to a third party is
timely consummated, the preferential right to purchase shall no longer attach
to the interest transferred to the third party. 
In the event the proposed sale of the interest to the third party is not
consummated, then the preferential right to purchase such interest shall be
reinstated as to any future offers to purchase the interest.


(b)               In the event Selling Party’s
proposed transfer of part or all of its interest in the West Hastings Unit, the
West Hastings Unit Lands or the Hastings Field lands, or other jointly owned
lands within the Area of Mutual Interest, involves consideration other than
cash or involves other properties included in a wider asset sale transaction
(package deal), then the interest to be assigned by Selling Party (or part thereof)
shall be allocated a reasonable and justifiable cash value in the notification
to Receiving Party.  Receiving Party may
satisfy the requirements of this Article 18.1
by agreeing to pay such cash value in lieu of the consideration payable in the
third-party offer.



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(c)                The preferential right to
purchase shall be applicable to any transfer of all or a portion of either
Parties’ interest in the West Hastings Unit, the West Hastings Unit Lands or
the Hastings Field lands, or other jointly owned lands within the Area of
Mutual Interest, including the transfer of the reserved overriding royalty
interest and/or the Reversionary Interest, whether directly or indirectly by
assignment, merger, consolidation, or sale of stock, or other conveyance, other
than such transfers that are made to (i) an affiliate, subsidiary, or parent
company existing as of the date of this Agreement or (ii) a new affiliated
entity created after the date of this Agreement for the express purpose of
forming a master limited partnership, which master limited partnership is
controlled by the new affiliate, Venoco, Inc. or Denbury Resources Inc. for a
minimum of twelve (12) months following the transfer.


(d)                A sale or merger involving
Optionor’s parent, Venoco, Inc., or the sale of all or substantially all of
Venoco’s assets through merger, business combination or other transaction,
including transactions involving Optionor are hereby expressly excluded from
the terms of this Article 18.
Likewise, a sale or merger involving Optionee’s parent, Denbury Resources Inc.,
or the sale of all or substantially all of Denbury Resources Inc.’s assets
through merger, business combination or other transaction, including
transactions involving Optionee are hereby expressly excluded from the terms of
this Article 18.


18.2.           Area of Mutual Interest Provision.


(a)   The Parties hereby agree to the
establishment of an Area of Mutual Interest which shall encompass all of those
lands within the area outlined in blue on the plat attached hereto as Exhibit “O”,  and which are more fully described on Exhibit “O-1” hereto, which area shall hereinafter sometimes
be referred to as an “Area of Mutual Interest”.


If, after the Agreement Effective Time, either party to this Agreement (“Acquiring Party”) acquires either an oil
and gas lease or mineral interest (or any interest therein), royalty interest,
or an option to acquire an oil and gas lease, or any other oil and/or gas
interest covering lands lying within the Area of Mutual Interest, including
oil, gas and mineral leases acquired pursuant to the exercise of any options
(all of the foregoing hereinafter sometimes being referred to as “Oil and Gas Interests”), or if the
Acquiring Party enters into any type of agreement by which an Oil and Gas
Interest may be acquired or otherwise earned by conducting drilling, seismic,
or other operations on the lands lying within the Area of Mutual Interest, then
the Acquiring Party shall promptly notify the other party of such acquisition
or such agreement.  If either party to
this Agreement acquires an Oil and Gas Interest covering lands within the
geographical confines of the Area of Mutual Interest, the other party shall
have the right to participate in any such acquisition of such Oil and Gas
Interest as set forth below.  If, after
the Effective Time of this Agreement, additional parties acquire an interest
from the original Parties in the Area of Mutual Interest, in the event not all
parties elect to participate in an acquisition, then any such non-participating
party’s interests shall be offered in writing to the other participating
parties in the proportions that their ownership interests in the Area of Mutual
Interest at the time of the acquisition bear to the total of the 



 47
 






 



ownership
interests of all participating parties in the acquisition.  In the event any acquired Oil and Gas
Interest includes lands within and outside the Area of Mutual Interest, the
entire Oil and Gas Interest shall be included within the AMI.


(b)           The notification provided for in
Paragraph (b) above shall contain all available title information and copies of
leases, agreements by which the Oil and Gas Interest may be acquired, and all
other pertinent instruments and information regarding the proposed
acquisition.  It shall also describe in
detail the cost and expense of such acquisition and any other obligation that
may be incurred pursuant thereto.


(c)           If the acquisition requires drilling,
seismic, or other operations on the lands lying within the Area of Mutual
Interest, the election of a party to participate in such operations shall
constitute an election to participate in the agreement governing such
operations, to the extent necessary to acquire the interest.  No party shall be required to make such an
election more than sixty (60) days or less than thirty (30) days prior to the
commencement of initial operations.


(d)           To receive an assignment of its
proportionate share of the Oil and Gas Interest acquired as a result of
conducting drilling, seismic, or other operations on the Area of Mutual
Interest, a Participating Party must have:


(1)           Participated in all
operations necessary for the acquisition of the Oil and Gas Interest, and also
must have paid all costs and expenses incurred in connection therewith;


(2)           Participated in any
previous drilling, seismic, or other operations that were necessary or were a
condition precedent to the operations resulting in the acquisition of the Oil
and Gas Interest; and


(3)           Participated in
accordance with the terms, provisions, covenants, and conditions of the
agreements governing the acquisition of an Oil and Gas Interest.


(e)               If drilling, seismic, or other
operations are not required to acquire the Oil and Gas Interest, the party
entitled to receive notice set forth in Section
18.2(b) shall have thirty (30) days from receipt of written notice
thereof in which to elect to participate in such acquisition as set forth
hereinbelow and in Section 18.2(h).  Failure to give written notice to the
Acquiring Party of its election, as specified herein, shall constitute an
election not to participate.  If a party
elects to participate in such acquisition as set forth herein, such party (“Participating Party”) shall reimburse the
Acquiring Party for its proportionate share of the costs thereof within fifteen
(15) days of receipt of an invoice from the Acquiring Party setting forth in
detail the cost and expense of such acquisition.  The Acquiring Party shall, within thirty (30)
days after receipt of payment from a Participating Party, assign to the Participating
Party the Participating Party’s proportionate interest in the acquisition,
subject to any applicable burdens on such Participating Party’s interest in the
acquisition.



 48
 






 



 


(f)                All Participating Parties shall
be entitled to participate in any acquisition within the Area of Mutual
Interest on a ground floor basis and subject to no additional burdens placed on
an acquisition by the Acquiring Party. For purposes of this Agreement the
Optionor’s interest in the Area of Mutual Interest shall be twenty-five percent
(25%) and Optionee’s interest seventy-five percent (75%).


(g)           In the event the Parties acquire any
Oil and Gas Interest within the Area of Mutual Interest prior to the Exercise
Effective Time, then any Oil and Gas Interest acquired by the Optionor shall be
included in the Designated Interests to be acquired by the Optionee and shall
be valued and conveyed in accordance with the terms of this Agreement.  Additionally, should the Optionee acquire any
Oil and Gas Interest in the Area of Mutual Interest and elect not to exercise
its Option to Purchase the Assets, Optionee shall give Optionor the right to
acquire any such acquired Oil and Gas Interest at its offered cost as set forth
hereinabove.


(h)               For purposes of this Section 18.2, the term “Oil and Gas Interest” shall also include
surface rights or interests (including easements, rights-of-way, and surface
ownership) in lands lying within the Area of Mutual Interest, and options to
acquire such surface rights or interests, and any surface rights or interests
acquired pursuant to the exercise of any options. Notwithstanding the
foregoing, Optionor and Optionee specifically exclude from this Area of Mutual
Interest any surface rights or interests (including easements, rights-of-way,
and surface ownership) acquired by Optionee for the sole purpose of
constructing and operating a CO2 pipeline to deliver CO2 to the Hastings Field.


(i)                The terms of this Section 18.2. shall remain in full force
and effect covering the lands lying within the Area of Mutual Interest for a
period of ten (10) years commencing from the Agreement Effective Time, unless
extended for an additional period or terminated earlier by written agreement of
the Parties.


ARTICLE 19. -
MISCELLANEOUS


19.1.       Receivables and other Excluded Funds.


Optionee shall be under no
obligation to collect on behalf of Optionor any receivables or other funds
included in the Excluded Assets and described in Section 1.29(e) above. 
With respect to receivables, Optionee shall be free to treat the
interests of any party with a delinquent receivable in any manner deemed
appropriate by Optionee.


19.2.       Public Announcements.


Each Party hereto may publicly
disclose information with respect to the transaction contemplated by this
Agreement (i) to any state or federal governmental authority or agency to the
extent required by applicable law or by any applicable rules, regulations or
orders of any governmental authority or agency having jurisdiction; or (ii) as
may be necessary to comply with disclosure requirements of the Securities and 



 49
 






 



Exchange Commission and the New York
Stock Exchange or other recognized exchange and any other applicable securities
laws.


19.3.       Filing and Recording of Assignments,
etc.


Optionee shall be solely responsible
for all filings and the prompt recording of assignments and other documents
related to the Assets and for all fees connected therewith, including the fees
charged by any regulatory authority in connection with the change of operator,
and Optionee shall furnish certified copies of all such filed and/or recorded
documents to Optionor within ten (10) days of Optionee’s receipt of the
recorded instruments.  Optionor shall not
be responsible for any loss to Optionee because of Optionee’s failure to file
or record documents correctly or promptly. 
Optionee shall not be responsible for any loss to Optionor because of
Optionor’s failure to record this document correctly or promptly.  Optionee shall promptly file all appropriate
forms, declarations or bonds with federal and state agencies relative to its
assumption of operations and Optionor shall cooperate with Optionee in
connection with such filings.


19.4.       Further Assurances and Records.


(a)           Each of the Parties will execute,
acknowledge and deliver to the other such further instruments, and take such
other action, as may be reasonably requested in order to more effectively
assure to said party all of the respective properties, rights, titles,
interests, estates, and privileges intended to be assigned, delivered or
inuring to the benefit of such party in consummation of the transactions contemplated
hereby.  Without limiting the foregoing,
in the event Exhibits “A-1” through “A-4”,
inclusive, incorrectly or insufficiently describes or references or omits the
description of a property or interest intended to be conveyed hereby as
described in Sections 1.34
(Leases) or 1.54 (Personal
Property) above, Optionor agrees to, within twenty (20) days of Optionor’s
receipt of Optionee’s written request, together with supporting documentation
satisfactory to Optionor, correct such Exhibit and/or execute an amended
assignment or other appropriate instruments necessary to transfer the property
or interest intended to be conveyed hereby to Optionee.


(b)           Optionee agrees to maintain the files
and records of Optionor that are acquired pursuant to this Agreement for seven
(7) years after the Closing.  Optionee
shall provide Optionor and its representatives reasonable access to and the
right to copy such files and records for the purposes of (i) preparing and
delivering any accounting provided for under this Agreement and adjusting,
prorating and settling the charges and credits provided for in this Agreement;
(ii) complying with any law, rule or regulation affecting Optionor’s interest
in the Assets prior to the Closing Date; (iii) preparing any audit of the books
and records of any third party relating to Optionor’s interest in the Assets
prior to the Closing Date, or responding to any audit prepared by such third
parties; (iv) preparing tax returns; (v) responding to or disputing any tax
audit; or (vi) asserting, defending or otherwise dealing with any claim or
dispute under this Agreement or as to the Assets.



 50
 






 



 


(c)           Optionor agrees that within thirty
(30) days after Closing or within thirty (30) days after operations are
actually transferred of record with the Texas Railroad Commission, whichever is
later, it will remove or cause to be removed its signs and the names and marks
used by Optionor and all variations and derivatives thereof and logos relating
thereto from the Assets and will not thereafter make any use whatsoever of such
names, marks and logos.


(d)           Optionor agrees to continue to use
all reasonable efforts, but without any obligation to incur any cost or expense
in connection therewith, and to cooperate with Optionee’s efforts to obtain for
Optionee (i) access to files, records and data relating to the Assets in the
possession of third parties; and (ii) access to wells constituting a part of
the Assets operated by third parties for purposes of inspecting same.


(e)           Optionee shall comply with all
current and subsequently amended applicable laws, ordinances, rules, and
regulations applicable to the Assets and shall promptly obtain and maintain all
permits required by governmental authorities in connection with the Assets.


19.5.       Notices.


Except as otherwise expressly
provided herein, all communications required or permitted under this Agreement
shall be in writing and may be given by personal delivery, facsimile, US mail
(postage prepaid), or commercial delivery service, and any communication
hereunder shall be deemed to have been duly given and received when actually
delivered to the address of the Parties to be notified as set forth below and
addressed as follows:


If to Optionor, as follows:


	
  

  	
  TexCal Energy South Texas L.P.

  	
   

  
	
   

  	
  c/o Venoco, Inc.

  	
   

  
	
   

  	
  370 17th Street

  	
   

  
	
   

  	
  Suite 2950

  	
   

  
	
   

  	
  Denver, Colorado 80202

  	
   

  
	
   

  	
  Attention:

  	
  William Schneider

  
	
   

  	
   

  	
  President

  
	
   

  	
  Telephone:

  	
  (303) 626-831

  
	
   

  	
  Facsimile:

  	
  (303) 626-8315

  
				



 


with
copies to:


 


	
  

  	
  TexCal Energy South Texas L.P.

  	
   

  
	
   

  	
  1020 Main Street, Suite 2500

  	
   

  
	
   

  	
  Houston, Texas 77002

  	
   

  
	
   

  	
  Attention:

  	
  Jeffrey T. Janik

  
	
   

  	
   

  	
  Senior Vice President

  
	
   

  	
  Telephone:

  	
  (713) 533-4000

  
				




 51
 






 



 


	
  

  	
  Facsimile:

  	
  (713) 533-4060

  



 


and


 


	
  

  	
  Venoco, Inc.

  	
   

  
	
   

  	
  6267 Carpinteria Ave.

  	
   

  
	
   

  	
  Carpinteria, CA 93013

  	
   

  
	
   

  	
  Attention:

  	
  General Counsel

  
	
   

  	
  Telephone:

  	
  (805) 745-2253

  
	
   

  	
  Facsimile:

  	
  (805) 745-1816

  
				



 


If to Optionee, as follows:


 


	
  

  	
  Denbury Onshore, LLC

  	
   

  
	
   

  	
  5100 Tennyson Parkway

  	
   

  
	
   

  	
  Suite 1200

  	
   

  
	
   

  	
  Plano, Texas 75024

  	
   

  
	
   

  	
  Attention:

  	
  Ray Dubuisson

  
	
   

  	
   

  	
  Vice President-Land

  
	
   

  	
  Telephone:

  	
  (972)-673-2044

  
	
   

  	
  Facsimile:

  	
  (972)-673-2299

  
				



 


Provided, however, that any notice required or
permitted under this Agreement will be effective if given verbally within the
time provided, so long as such verbal notice is followed by written notice
thereof in the manner provided herein within twenty-four (24) hours following
the end of such time period.  Any party
may, by written notice so delivered to the other, change the address to which
delivery shall thereafter be made.


19.6.       Incidental Expenses.


Optionee shall bear and pay (i) all
state or local government sales, transfer, gross proceeds, or similar taxes
incident to or caused by the transfer of any of the Assets to Optionee, (ii)
all documentary, transfer and other state and local government taxes incident
to the transfer of any of the Assets to Optionee; and (iii) all filing,
recording or registration fees for any assignment or conveyance delivered
hereunder.  Each party shall bear its own
respective expenses incurred in connection with the negotiation and closing of
this transaction, including it own consultants’ fees, attorneys’ fees,
accountants’ fees, and other similar costs and expenses.


19.7.       Waiver.


Any of the terms, provisions,
covenants, representations, warranties or conditions hereof may be waived only
by a written instrument executed by the party waiving compliance.  Except as otherwise expressly provided in
this Agreement, the failure of any party at any time or times to require
performance of any provision hereof shall in no manner affect such party’s
right to enforce the same.  No waiver by
any party of any condition, or of the breach of any term, provision, covenant,
representation or warranty contained in this Agreement, whether by conduct or
otherwise, in any one or 



 52
 






 



more instances, shall be deemed to
be or construed as a further or continuing waiver of any such condition or
breach or a waiver of any other condition or of the breach of any other term,
provision, covenant, representation or warranty.


19.8.       Binding Effect; Assignment.


All the terms, provisions,
covenants, obligations, indemnities, representations, warranties and conditions
of this Agreement shall be covenants running with the land and shall inure to
the benefit of, and be binding upon, and shall be enforceable by, the parties
hereto and their respective successors and assigns.  The rights of Optionee under this Agreement
to acquire the Assets are personal and this Agreement may not be assigned or
transferred by Optionee to any other party, firm, corporation or other entity,
without the prior, express and written consent of Optionor, and such consent
may be withheld for any reason, including convenience.  Any attempt to assign this Agreement by
Optionee over the objection or without the express written consent of the Optionor
shall be absolutely void.  Optionor may
condition its consent to assign this Agreement on Optionee providing Optionor
with an appropriate guarantee of its assignee’s performance.  Any subsequent transfer of this Agreement or
of all or any part of the Assets shall be made expressly subject to the terms
and provisions of this Agreement.


19.9.       Taxes.


(a)           Optionor and Optionee agree that this
transaction may be subject to the reporting requirement of Section 1060 of the
Internal Revenue Code of 1986, as amended, and that, therefore, IRS Form 8594,
Asset Acquisition Statement, will be filed for this transaction.  The Parties will confer and cooperate in the
preparation and filing of their respective forms to reflect a consistent
reporting of the agreed upon allocation.


(b)           Optionor shall be responsible for all
state, local and federal property, ad valorem, excise, and severance taxes
attributable to or arising from the ownership or operation of the Assets prior
to the Exercise Effective Time.  Optionee
shall be responsible for all property and severance taxes attributable to or
arising from the ownership or operation of the Assets after the Exercise
Effective Time.  Any party which pays
such taxes for the other party shall be entitled to prompt reimbursement upon
evidence of such payment.  Each party
shall be responsible for its own federal and state income taxes, if any, as may
result from this transaction.


(c)           If this transaction is determined to
result in state sales or transfer taxes, Optionee shall be solely responsible
for any and all such taxes due on the Assets acquired by Optionee by virtue of
this transaction.  If Optionee is
assessed such taxes, Optionee shall promptly remit same to the taxing
authority.  If Optionor is assessed such
taxes, Optionee shall reimburse Optionor for any such taxes paid by Optionor to
the taxing authority.



 53
 






 



 


19.10.     Audits.


It is expressly understood and
agreed that Optionor retains its right to receive its proportionate share of
the proceeds from any audits relating to activities prior to the Exercise
Effective Time, and Optionor shall likewise pay its share of any costs
attributable to the period prior to the Effective Time resulting from any such
audits.


19.11.     Governing Law.


THIS AGREEMENT SHALL BE GOVERNED,
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS OTHERWISE APPLICABLE TO SUCH
DETERMINATIONS.


19.12.     Mediation and Arbitration.


The Parties stipulate and agree that any and all claims and/or
controversies arising between Optionor and Optionee which relate to and arise
out of this Agreement shall be resolved in accordance with the mediation and
arbitration procedures set forth in Exhibit “P.”  The prevailing party in any legal proceeding
or arbitration may be entitled to recover all arbitration costs and reasonable
attorneys’ fees from the non-prevailing party, as determined by the arbitrators
in accordance with the procedures set forth in Exhibit “P.”


19.13.     Entire Agreement.


This Agreement, including the
Exhibits attached hereto, embodies the entire agreement between the Parties and
replaces and supersedes all prior agreements, arrangements and understandings
related to the subject matter hereof, whether written or oral.  No other agreement, statement, or promise
made by any party, or to any employee, officer or agent of any party, which is
not contained in this Agreement shall be binding or valid.  This Agreement may be supplemented, altered,
amended, modified or revoked by a writing only, signed by the Parties
hereto.  The headings herein are for
convenience only and shall have no significance in the interpretation
hereof.  The Parties stipulate and agree
that this Agreement shall be deemed and considered for all purposes, as
prepared through the joint efforts of the Parties, and shall not be construed
against one party or the other as a result of the preparation, submittal or
other event of negotiation, drafting or execution thereof.  It is understood and agreed that there shall
be no third-party beneficiary of this Agreement, and that the provisions hereof
do not impart enforceable rights in anyone who is not a direct, initial party
hereto.


19.14.     Severability.


If any provision of this Agreement
is found by a court of competent jurisdiction to be invalid or unenforceable,
that provision will be deemed modified to the extent necessary to make it valid
and enforceable, and if it cannot be so modified, it 



 54
 






 



shall be deemed deleted and the
remainder of the Agreement shall continue and remain in full force and effect.


19.15.     Exhibits.


All Exhibits attached to this
Agreement, and the terms of those Exhibits which are referred to in this
Agreement, are made a part hereof and incorporated herein by reference.


19.16.     Survival.


Unless otherwise
specifically provided in this Agreement, all of the representations,
warranties, indemnities, covenants and agreements of or by the Parties hereto
shall survive the execution and delivery of the each Conveyance, Assignment and
Bill of Sale.  Additionally, those
provisions set forth in Section 6.3 shall survive the execution and delivery of
the Conveyance, Assignment and Bill of Sale, and shall be deemed as between the
Parties, there successors and assigns to be covenants running with the land.


19.17.     Subsequent Adjustments.


Regardless of the date set for the Final
Settlement, Optionee and Optionor agree that their intent is to allow for the
earliest practical forwarding of revenue and reimbursement of expenses between
them, and Optionor and Optionee recognize that either may receive funds or pay
expenses after the Final Settlement Date which are properly the property or
obligation of the other.  Therefore, upon
receipt of net proceeds or payment of net expenses due to or payable by the
other party hereto, whichever occurs first, Optionor or Optionee, as the case
may be, shall submit a statement to the other party hereto showing the relevant
items of income and expense with supporting documentation. Payment of any net
amount due by Optionor or Optionee, as the case may be, on the basis thereof
shall be made within ten (10) days of receipt of the statement.


19.18.     Counterparts.


This Agreement may be executed in
any number of counterparts, and each and every counterpart shall be deemed for
all purposes one (1) agreement.


19.19.     Subrogation.


To the fullest extent allowed by law
and the applicable agreements with third parties, Optionor grants Optionee a
right of subrogation in all claims or rights Optionor may have against third
parties to the extent they relate to the Assumed Obligations.



 55
 






 



 


19.20.     Suspended Monies.


At
Closing, Optionor shall deliver to Optionee the monies held in suspense by
Optionor for the account of third parties, or relate to a title dispute or
question as to ownership, along with any documentation in Optionor’s possession
or available to Optionor in support of such suspended funds.  Any additional monies of this nature received
by Optionor after Closing shall be remitted to Optionee within one hundred
twenty (120) days after the Closing hereof. 
At Closing, Optionee shall assume the obligation for the payment of
these monies.


19.21.     Optionee as Operator.


After the Closing Date, Optionee shall operate, manage, and administer the
Assets as a reasonable prudent operator and in a good and workmanlike manner in
accordance with the West Hastings Unit Operating Agreement.  The Parties acknowledge that changes and
amendments to the West Hastings Unit Operating Agreement may become necessary
and required by both Parties and will be negotiated as needed.  These changes and amendments may be in the
form of changes and amendments to the existing West Hastings Unit Operating
Agreement, a new unit operating agreement, or a side letter agreement.


IN
WITNESS WHEREOF, the Parties have executed this Agreement as of the date first
above written.


	
   

  	
  TEXCAL ENERGY SOUTH TEXS, L.P.

  
	
   

  	
   

  	
  By: TEXCAL ENERGY (GP) LLC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William Schneider

  
	
   

  	
   

  	
  William Schneider

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  DENBURY ONSHORE, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ H. Raymond Dubuisson

  
	
   

  	
   

  	
  H. Raymond Dubuisson

  
	
   

  	
   

  	
  Vice President-Land

  



 



 56