<PAGE>

                                                                   EXHIBIT 10.12


                             SETTLEMENT AGREEMENT
                             --------------------

     This Settlement Agreement is entered into this 3rd day of May, 2000, to be
effective as of the 14th day of February, 2000, between and among Larry D.
Hartzog ("Hartzog"), Roger Graham ("Graham"), Michael C. Black and Michael C.
Black, Trustee of the Michael C. Black Revocable Trust (collectively, "Black"),
Anthony "Skeeter" Lasuzzo ("Lasuzzo"), Frank Harrison ("Harrison"), Richard R.
Dunning and Dunning Family Limited Partnership, an Oklahoma limited partnership
(collectively, "Dunning"), INDCO L.L.C., an Oklahoma limited liability company
("INDCO"), Indian Oil Company, an Oklahoma corporation ("Indian"), and Cibola
Corporation, a Wyoming corporation ("Cibola Wyoming").

                                   RECITALS:

     A.   Indian is a privately-held corporation which engages in oil and gas
exploration, development and production, primarily in Oklahoma.

     B.   Indian is participating in a transaction (the "Combination
Transaction") pursuant to which Canaan Energy Corporation is proposing to
combine eight private limited partnerships, Indian, and another entity into a
new publicly-traded oil and gas company.  As part of the Combination
Transaction, it has been required that Indian settle certain claims and
contingent liabilities and satisfy certain debts.  The Combination Transaction
will be effected pursuant to a Plan of Combination in substantially the form
attached as Exhibit "A" (the "Plan of Combination").

     C.   Harrison and Lasuzzo were employed by Indian on March 1, 1997 and, as
an integral and valuable part of the compensation they were to receive from
Indian for such employment, they allege that they were to be granted certain
options to acquire common stock of Indian.  These stock options were, in fact,
never granted.  On March 5, 1999, their employment was terminated by Indian and
they allege that they then became entitled to receive certain severance
benefits, as of that date, including the agreement to fulfill Indian's
previously existing alleged obligation to compensate them for their employment
by granting them stock options to acquire shares of Indian common stock and the
right to be assigned a certain portion of an interest now owned by INDCO
(previously owned by Indian) in the Elk City Agreement, as more fully described
in Section 1(d) below.  Various claims and controversies have arisen between
Harrison and Lasuzzo, on the one hand, and Indian and INDCO, on the other hand,
since the March 5, 1999 termination as to the nature, extent and amount of the
said stock options, interests, other severance benefits and entitlements to be
paid to Harrison and Lasuzzo by Indian with regard to and as of the termination
of
<PAGE>

their employment by Indian (collectively, the "Severance Claims"). Except as
otherwise specifically provided in Section 6 below, Lasuzzo, Harrison and Indian
have now agreed to completely compromise and settle all claims and disputes
between them (including the Severance Claims) by issuing to each of Harrison and
Lasuzzo certain shares of Indian common stock effective as of April 1, 1999, the
date on which Lasuzzo and Harrison allege they were originally entitled to
receive them, and by INDCO assigning to each of Harrison and Lasuzzo interests
in the Elk City Agreement, in the amounts and subject to the terms and
conditions set forth in this Settlement Agreement, in exchange for the full and
complete release by Harrison and Lasuzzo, respectively, except as otherwise
specifically provided in Section 6 below, of all of their Claims (including the
Severance Claims).  Indian has denied that either Harrison or Lasuzzo is
entitled to any options in Indian, any interest in the Elk City Agreement, or
any interest in INDCO.

     D.   Indian has executed promissory notes payable to Hartzog, Black and
Dunning, all dated January 20, 1993.  The total amount outstanding under the
promissory note payable to Hartzog (the "Hartzog Note") as of the Closing Date
is estimated to be $473,295.18; the total amount outstanding under the
promissory note payable to Black (the "Black Note") as of the Closing Date is
estimated to be $401,612.48; and the total amount outstanding under the
promissory note payable to Dunning (the "Dunning Note") as of the Closing Date
is estimated to be $1,405,514.57.  The parties intend for this Settlement
Agreement to memorialize the manner in which the Hartzog Note, the Black Note
and the Dunning Note are being fully satisfied.

     E.   Indian has executed one or more promissory notes payable to Cibola
Wyoming (the "Cibola Wyoming Notes"). The total amount outstanding under the
Cibola Wyoming Notes as of the Closing Date is estimated to be $1,456,863.78.
The parties intend for this Settlement Agreement to memorialize the manner in
which the Cibola Wyoming Notes are being fully satisfied.

     F.   Immediately prior to the date of this Settlement Agreement, on
Indian's corporate records, prior to giving effect to the claims addressed by
this Settlement Agreement, there were 65,643 shares of Indian common stock
outstanding and owned of record as follows:  Dunning (31,140 shares); Hartzog
(12,475 shares); Graham (9,360 shares); Black (9,385 shares); and Lasuzzo (3,283
shares).

     G.   The parties desire to settle and compromise in the manner set forth
herein all of the claims described herein, including,

                                       2
<PAGE>

without limitation, the Severance Claims, and, except as otherwise specifically
provided in Section 6 below, also (i) any and all other claims, demands, causes
of action, damages or claims of liability of whatsoever kind or nature relating
in any way to the ownership of Indian; (ii) any rights to acquire any ownership
interests in Indian; (iii) any rights with respect to any amounts owed by
Indian; and (iv) any rights with respect to the South Elk City Prospect or the
Elk City Agreement described in Section 1(d) below, or any other assets of
Indian or INDCO (collectively, the "Claims"), and, except as otherwise
specifically provided in Section 6 below, also to generally release any and all
claims or causes of action of any kind or nature now existing, whether known or
unknown, between and among each of the parties to this Settlement Agreement.

     NOW, THEREFORE, in consideration of the foregoing recitals, the covenants
and agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, mutually agree as follows:

     1.   Cash Severance Payment; Issuance of Indian Common Stock and Transfer
          --------------------------------------------------------------------
of Interests in Elk City Agreement to Harrison and Lasuzzo.
----------------------------------------------------------

          (a) In  complete settlement, satisfaction and release of any and all
     Severance Claims, effective as of April 1, 1999, and/or, except to the
     extent expressly otherwise provided in Section 6 below, any other Claims or
     causes of action which Harrison or Lasuzzo may have against any of the
     other parties hereto, and of any Claims or causes of action which any of
     the other parties hereto may have against Harrison or Lasuzzo, as the case
     may be, Indian and INDCO agree to pay, issue, assign and convey to Harrison
     and Lasuzzo, respectively, the cash, shares of Indian common stock and
     interests in the Elk City Agreement which are described below in Sections
     1(b), 1(c) and 1(d), respectively.

          (b) Indian shall pay to each of Harrison and Lasuzzo on the closing
     date hereunder (i.e., the date this Settlement Agreement is fully executed
     by all of the parties hereto; hereinafter referred to as the "Closing
     Date") the sum of Five Thousand and No/100 Dollars ($5,000.00) each in the
     form of a certified corporate check.

          (c) Indian shall issue to each of Harrison and Lasuzzo on the Closing
     Date hereunder Three Thousand Three Hundred

                                       3
<PAGE>

     Eighty-Five (3,385) shares of Indian common stock (collectively, the "H&L
     Stock"), free and clear of all liens and encumbrances and of all transfer
     restrictions thereon (except those imposed under Indian's certificate of
     incorporation or bylaws or those necessitated by applicable federal and
     state securities law). The share certificates issued by Indian to Harrison
     and Lasuzzo hereunder shall each be dated April 1, 1999, the effective date
     of complete settlement and compromise of the Severance Claims. Indian
     further covenants and agrees that Indian will, if required by the Internal
     Revenue Code and applicable regulations thereunder, prepare and present to
     Harrison and Lasuzzo on the Closing Date an Internal Revenue Service Form
     1099-DIV with regard to this issuance of Indian common stock to Harrison
     and Lasuzzo in payment of the Severance Claims, which shall reflect an
     amount equal to the value of stock to be so issued to them, that is based
     on the value of that stock, as of April 1, 1999, the effective date of the
     payment of the Severance Claims to them. Indian agrees, if required by the
     Internal Revenue Code and applicable regulations thereunder, to immediately
     thereafter file with the appropriate office of the Internal Revenue Service
     the said 1099-DIV, in the same form and substance as presented to Harrison
     and Lasuzzo on the Closing Date, provided they have fully executed this
     Settlement Agreement at such time. Indian agrees that, if it is not
     required by the Internal Revenue Code or applicable regulations thereunder
     to file such a Form 1099-DIV with regard to the issuance of H&L Stock,
     Indian will notify Harrison and Lasuzzo in writing on or before the Closing
     Date of the value of the H&L Stock as of April 1, 1999. Indian, Harrison
     and Lasuzzo covenant and agree that April 1, 1999 shall be date on which
     the H&L Stock is valued by them for all purposes under this Settlement
     Agreement. Indian will use its best efforts to ensure that, pursuant to the
     Plan of Combination, each holder of shares of Indian common stock issued
     and outstanding immediately prior to the Combination Transaction will
     receive his or its proportionate share of the total shares, rounded to the
     nearest whole share, of Canaan Energy Corporation common stock allocated to
     Indian based on Indian's exchange value as described in the prospectus with
     respect to the Combination Transaction.

          (d) INDCO shall transfer and assign to each of Harrison and Lasuzzo on
     the Closing Date 5.16% of the interest owned by INDCO in the Oil & Gas
     Leasehold Acquisition and Drilling Agreement South Elk City Prospect, dated
     September 1, 1999 (the "Elk City Agreement").  This assignment of 5.16% of


                                       4
<PAGE>

     INDCO's interest in the Elk City Agreement to each of Harrison and Lasuzzo
     (collectively, the "H&L Elk City Interests") on the Closing Date shall be
     accomplished pursuant to an assignment to be in form and substance mutually
     acceptable to Harrison, Lasuzzo and INDCO; provided, however, that INDCO,
     Harrison and Lasuzzo each acknowledge and agree that the said assignment of
     the H&L Elk City Interests shall be made on an "AS IS" and "WHERE IS"
     basis, with no representations or warranties of any kind being made by
     INDCO to them with respect to the Elk City Agreement or the South Elk City
     Prospect.  Harrison and Lasuzzo further agree (i) that the H&L Elk City
     Interests shall be subject to all of the assignment obligations and to all
     other obligations contained in the Elk City Agreement and (ii) to assume
     and be liable for all obligations of the H&L Elk City Interests.  To the
     knowledge of Lasuzzo and Harrison, the H&L Elk City Interests will,
     immediately following the Combination Transaction, be free and clear of all
     liens, charges, encumbrances and claims of third parties, except (i) as set
     forth in the Elk City Agreement or (ii) as filed of record.

          (e) Harrison and Lasuzzo further agree, acknowledge and consent to the
     following: (i) that they have, except as set forth in Section 1(d) of this
     Agreement, no claim of any kind concerning the "excluded assets," which are
     described on Exhibit "B" attached hereto listing all of the excluded assets
     that were denominated as such in that certain Asset Purchase Agreement,
     dated October 1, 1999, between INDCO and Indian; (ii) that they are not
     entitled to any interest whatsoever in INDCO; (iii) the sale of such
     "excluded assets" by Indian to INDCO and the amount of consideration paid
     for such "excluded assets", including the form of such consideration; and
     (iv) that Indian shall have no liability to Harrison or Lasuzzo arising out
     of the contents of the Form 1099-DIV described above (or, if not filed
     because the minimum threshold for filing was not met, the failure to file
     such informational return), and Harrison and Lasuzzo shall hold harmless
     and indemnify Indian from any liabilities, costs, expenses, interest or
     penalties that Indian may incur to any person, entity, or governmental
     agency arising out of the contents of such 1099-DIV.  Without in any way
     limiting the generality of the foregoing, Harrison and Lasuzzo acknowledge
     that Dunning, Hartzog, Black and Graham were distributed all Internal
     Revenue Code Section 29 tax credits of Indian in proportion those
     shareholders' relative ownership of Indian as of January 1, 1999 (i.e.,
     Dunning Family Limited Partnership - 49.94%, Larry D. Hartzog - 20.00%,
     Michael C. Black, Trustee of the

                                       5
<PAGE>

     Michael C. Black Revocable Trust - 15.05%, and Roger Graham -15.01%) and
     that Lasuzzo and Harrison had and have no right to share in such Section 29
     tax credits.

     2.   Debts to Hartzog, Dunning and Black.
          -----------------------------------

          (a) Dunning agrees to contribute the Dunning Note, and all
     indebtedness represented thereby, to the capital of Indian.  Hartzog agrees
     to contribute the Hartzog Note, and all indebtedness represented thereby,
     to the capital of Indian.  No shares of common stock of Indian or any other
     consideration will be paid to Hartzog or Dunning as a result of such
     capital contributions.

          (b) Indian agrees to issue to Black One Thousand Eighty-Two (1,082)
     shares of Indian common stock.  Such issuance shall be made
     contemporaneously with the contributions of stock required by Section 4
     below.  Such common stock shall be free and clear of all liens or
     encumbrances and of all transfer restrictions thereon (except those imposed
     under Indian's certificate of incorporation or bylaws or those necessitated
     by applicable federal and state securities laws). Such issuance of common
     stock is for partial payment of the Black Note, which now constitutes an
     obligation of Indian to Black of approximately $400,000.  Indian and Black
     agree that, for purposes of this Section 2(b) only, such common stock which
     is to be issued to Black has a fair market value of $200,000.  Black agrees
     to forgive the balance of the indebtedness under the Black Note.

     3.   Debt to Cibola Wyoming.  Cibola Wyoming agrees to forgive the Cibola
          ----------------------
Wyoming Notes and all indebtedness represented thereby. Cibola Wyoming agrees
that the Cibola Wyoming Notes represent the only indebtedness of any type owed
by Indian to Cibola Wyoming.

     4.   Contributions of Common Stock.  To satisfy the obligation to issue the
          -----------------------------
shares of Indian common stock described above (without changing the total number
of issued and outstanding shares of Indian common stock), certain parties have
agreed to contribute certain shares of their Indian common stock to Indian.
Accordingly, each of the parties listed below agrees to contribute the indicated
number of shares of Indian common stock to Indian as of the Closing Date:

                                       6
<PAGE>

                                        Number of Shares of Indian
                                        Common Stock to be Contributed
Name of Shareholder                     to Indian
-------------------------------------------------------------------------
Dunning Family Limited                                 7,268
Partnership
D. Hartzog                                               255
Roger Graham                                             191
Frank Harrison                                            69
Anthony "Skeeter" Lasuzzo                                 69


The parties who are contributing common stock to Indian under this Section 4
(referred to, along with Michael C. Black, Trustee of the Michael C. Black
Revocable Trust, as the "Shareholders") each hereby severally represents and
warrants to Indian that (i) he or it possesses good and marketable title to his
or its shares, free and clear of all liens, pledges, options, trusts, voting
trusts, security interests, claims, contract restrictions and encumbrances of
any nature or kind; (ii) he or it has sought independent counsel, and neither
Indian nor Indian's counsel, Hartzog Conger & Cason, has advised him or it, as
to the tax consequences of the transactions contemplated by this Settlement
Agreement; and (iii) except for the debts described in Section 2 (and, as to
Lasuzzo, except for amounts owed under the Consulting Agreement and the
Overriding Royalty Interest Agreement described in Section 6 below), there are
no debts owed by Indian to him or it.

     5.   Ownership of Indian.
          -------------------

          (a) The Shareholders and Indian agree that as of the Closing Date (and
     after the stock issuances described in Sections 1 and 2 and the capital
     contributions described in Section 4) the only capital stock outstanding of
     Indian is common stock, and the issued and outstanding shares of common
     stock of Indian will be owned as follows:


                                       Number
                                       of              Ownership
Shareholder                            Shares          Percent
-------------------------------------------------------------------------
Dunning Family Limited                 23,872          36.37%
PartnershipLarry D. Hartzog            12,220          18.62%
Roger Graham                            9,169          13.97%

                                       7
<PAGE>

                                       Number
                                       of              Ownership
Shareholder                            Shares          Percent
-------------------------------------------------------------------------
Michael C. Black, Trustee of           10,467           15.94%
the Michael C. Black Trust
Anthony "Skeeter" Lasuzzo               6,599           10.05%
Frank Harrison                          3,316            5.05%
                      TOTAL            65,643          100.00%



Except as otherwise specifically provided in the Plan of Combination, the Stock
Rights Certificate or the Dunning/Lasuzzo Letter Agreement referenced in Section
6 below and except as set forth in Indian's certificate of incorporation and
bylaws, the Shareholders and Indian further agree that, immediately following
the Closing Date, there will be no outstanding subscriptions, contracts,
convertible or exchangeable securities, options, warrants, calls, instruments,
rights, documents or agreements of any kind binding upon Indian granting to any
of the parties hereto or any other person or entity any rights to purchase or
acquire any issued or unissued shares of Indian's capital stock or any other
securities of Indian; provided, however, that the Shareholders and Indian
acknowledge that INDCO may be entitled to receive, immediately prior to the
Combination Transaction, shares of Indian common stock as set forth in Section
13(b) below.

          (b) Each Shareholder agrees to be bound by the restrictions on his or
     its Indian common stock as set forth in Indian's certificate of
     incorporation and bylaws.

          (c) Other than as required by or contemplated by this Settlement
     Agreement, Indian shall not issue any shares of its common stock until
     after May 15, 2000. After May 15, 2000, notwithstanding anything to the
     contrary in this Settlement Agreement, and without limiting the authority
     of the board of directors as set forth in Indian's certificate of
     incorporation, Indian's board of directors shall, as permitted by Indian's
     certificate of incorporation, have the right and authority to issue or sell
     shares of Indian's capital stock, at any time and from time to time, for
     fair and adequate consideration as it determines using its good faith
     judgment, and no Shareholder, whether by virtue of this Settlement
     Agreement or otherwise, shall have any right to require prior approval of
     such stock issuances or sales or have any preemptive rights or rights of
     first refusal; provided,

                                       8
<PAGE>

     however, that Lasuzzo may have certain rights with respect to additional
     stock issuances as set forth in the Stock Rights Certificate described in
     Section 6 below. Each Shareholder acknowledges that such issuances of
     common stock will result in each Shareholder's ownership percentage as set
     forth in Section 5(a) being adjusted.

     6.   Release.  Except as otherwise provided in Section 6 below, each of
          -------
Indian, INDCO, Hartzog, Graham, Black, Lasuzzo, Harrison, and Dunning, for and
on behalf of himself or itself and his or its respective successors, assigns,
heirs, agents and attorneys, hereby generally releases, acquits and forever
discharges all of the other parties hereto, and their respective affiliates,
principals, owners, successors, assigns, officers, directors, shareholders,
partners, managers, members, fiduciaries, employees, agents and attorneys
(collectively, the "Released Parties"), from any and all  claims (including
without limitation, the Claims and any and all claims, causes of action,
demands, damages or claims of liability asserted or that could have been
asserted with respect to (i) any debts of any kind owed by Indian or by any
other party hereto to the Releasing Party,  or (ii) any other claim of any kind
or nature, i.e., contractual or tort, as between any of the Released Parties
which arose prior to the date of this Settlement Agreement) irrespective of
whether such  claims or causes of action are known or unknown, legal or
equitable, contingent or matured, or joint or several.

     It is expressly provided, however, any provision of this Settlement
Agreement to the contrary notwithstanding, including, without limitation, this
Section 6, nothing herein is intended to waive, release, discharge, or in any
way modify or otherwise affect in any manner any rights, benefits or
entitlements that (i) Dunning, Hartzog, Graham or Black may have as members or
managers of INDCO or Dunning, Hartzog, Graham, Black or INDCO may have under the
Operating Agreement of INDCO; (ii) Dunning, Hartzog or Black may have as
officers, directors, or shareholders of Cibola Wyoming; (iii) except as
otherwise specifically provided herein, any rights that any of the parties
hereto may hereafter have pursuant to the Combination Transaction (except that
the Shareholders intend to and have agreed to waive and release certain rights
as described in Section 12 below);  (iv) Lasuzzo, Indian, or Dunning may have to
fully enforce any or all of the terms, conditions and obligations set forth in:
(w) that certain Consulting Agreement made and entered into by and between
Lasuzzo and Indian dated April 1, 1999; (x) that certain Stock Rights
Certificate granted by Indian to Lasuzzo dated April 1, 1999 (except that
Lasuzzo does intend to and hereby waives any antidilution or other rights he may
have under

                                       9
<PAGE>

the Stock Rights Certificate but only insofar as such rights would be triggered
as a result of stock issuances under Sections 1(c) and 2(b) of this Settlement
Agreement); (y) that certain letter agreement by and between Dunning and Lasuzzo
dated September 29, 1999, creating and granting certain stock option rights in
Dunning's Indian common stock to Lasuzzo (the "Dunning/Lasuzzo Letter
Agreement"), and (z) that certain Overriding Royalty Interest Agreement by and
between Lasuzzo and Indian dated February 12, 1999 (which is referenced as an
existing burden on the leasehold in the Elk City Agreement and has already been
assigned to Lasuzzo); (v) Indian or INDCO may have under the promissory notes
described in Section 13 below or under that certain Asset Purchase Agreement,
dated October 1, 1999, with respect to the excluded assets; or (vi) Dunning may
have if the Combination Transaction is not consummated to receive $200,000 from
Indian for services rendered by Dunning to Indian prior to the date of this
Settlement Agreement. Further, nothing in this Section 6 shall be deemed to
waive the right of each of the Released Parties to fully enforce all of the
terms, conditions and obligations set forth in this Settlement Agreement against
any or all of the other parties to this Settlement Agreement. The terms of this
Section 6 shall survive the execution of this Settlement Agreement.

     7.   Waiver of Rights of First Refusal, etc.  Indian hereby waives,
          --------------------------------------
releases and extinguishes any rights of first refusal that may arise or be
triggered under or by Indian's certificate of incorporation or bylaws or
otherwise as a result of (i) the common stock contributions and/or issuances
contemplated by this Settlement Agreement or (ii) the transfer by Dunning to
Lasuzzo of certain of Dunning's shares of Indian's common stock pursuant to the
Dunning/Lasuzzo Letter Agreement referenced above.  Except for the options
granted to Lasuzzo by Dunning to acquire certain of Dunning's shares of Indian
common stock pursuant to the terms and conditions of the Dunning/Lasuzzo Letter
Agreement referenced above, each Shareholder hereby waives, releases and
extinguishes any and all rights and options which such Shareholder has or may
have to purchase shares from Indian or shares held by any other Shareholder or
to require Indian or any other Shareholder to first offer to sell shares to
Indian or such Shareholder, including any rights as may be contained in Indian's
certificate of incorporation or bylaws, or in any agreement between or among the
Shareholders, third parties or Indian, that may arise or be triggered as a
result of (i) the common stock contributions and/or issuances contemplated by
this Settlement Agreement or (ii) the transfer of common stock contemplated by
the Dunning/Lasuzzo Letter Agreement.

                                       10
<PAGE>

     8.   Representations and Warranties by all Parties.  Each party severally
          ---------------------------------------------
represents and warrants to the other parties as follows:

          (a) Each party has full power, capacity and authority to execute and
     deliver this Settlement Agreement.  The execution and delivery of this
     Settlement Agreement has been duly authorized, if necessary, by such party,
     and no other action on the part of such party is necessary to authorize the
     transactions contemplated hereby.  This Settlement Agreement has been duly
     executed and delivered by such party and constitutes the valid and legally
     binding agreement of such party, enforceable against such party in
     accordance with its terms.

          (b) Neither the execution and delivery of this Settlement Agreement
     nor the consummation of the transactions contemplated hereby will violate,
     conflict with or result in a breach of or constitute a default (or an event
     which, with the giving of notice or lapse of time, or both, would
     constitute a default) under any of the terms, conditions or provisions of
     any agreement, indenture, or instrument to which such party is a party or
     by which any of his or its properties or assets are bound, or result in the
     violation of any order, judgment or decree of any court or governmental
     agency having jurisdiction over such party.

          (c) No Claim or any other claim described in Section 6, or any part
     thereof, has been assigned to any person or entity.

     9.   Representations and Warranties of Indian to Certain Parties.  Indian
          -----------------------------------------------------------
represents and warrants to Harrison, Lasuzzo and Black as follows:

          (a) As of the date of this Settlement Agreement, there are Sixty-Five
     Thousand Six Hundred Forty-Three (65,643) shares of the common stock of
     Indian issued and outstanding, which constitute all of the issued and
     outstanding capital stock of Indian.

          (b) The shares of H&L Stock to be issued to Harrison and Lasuzzo on
     the Closing Date in consummation of the settlement of the Severance Claim
     and in fulfillment of the terms and conditions of this Settlement Agreement
     and the shares of common stock to be issued to Black are duly authorized
     and, when issued in accordance with the terms of this Settlement

                                       11
<PAGE>

     Agreement on the Closing Date, will be validly issued, fully paid and non-
     assessable and are free and clear of any liens, encumbrances or transfer
     restrictions thereon, other than imposed under the Plan of Combination or
     under Indian's certificate of incorporation or bylaws or those required to
     comply with applicable federal or state securities laws.

     10.  Representations of Harrison, Lasuzzo and Black to Indian. Harrison,
          --------------------------------------------------------
Lasuzzo and Black each hereby acknowledge, represent and warrant to Indian as
follows:

          (a) The shares of common stock to be issued to Harrison, Lasuzzo and
     Black pursuant to this Settlement Agreement will not be registered under
     the Securities Act of 1933, or any applicable state securities laws.

          (b) Such shares of common stock will be issued to Harrison, Lasuzzo
     and Black in reliance upon the exemption from registration contained in
     Section 4(2) of the Securities Act of 1933 and similar provisions of state
     securities laws, and will be so acquired by them for investment purposes
     only and not with a view to, or in connection with, a distribution thereof.

          (c) Any certificates evidencing shares of common stock issued
     hereunder shall contain legends in substantially the following form:

          THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
          ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
          THE SECURITIES ACT OF 1933 (THE "ACT") OR THE SECURITIES
          LAWS OF ANY STATE. THE SECURITIES MAY NOT BE SOLD OR
          OTHERWISE TRANSFERRED UNLESS THE SALE OF THE SECURITIES IS
          REGISTERED UNDER THE ACT AND ALL APPLICABLE STATE SECURITIES
          LAWS, OR UNLESS SUCH SALE IS EXEMPT FROM THE REGISTRATION
          REQUIREMENTS OF THE ACT AND ALL APPLICABLE STATE SECURITIES
          LAWS AND THE COMPANY IS PROVIDED WITH AN OPINION OF COUNSEL
          AND OTHER EVIDENCE AS MAY BE SATISFACTORY TO THE COMPANY TO
          THE EFFECT THAT SUCH TRANSFER WILL NOT BE IN VIOLATION OF
          THE ACT AND APPLICABLE STATE SECURITIES LAWS.

          THE SHARES REPRESENTED BY THIS CERTIFICATE ARE TRANSFERABLE
          ONLY IN ACCORDANCE WITH THE PROVISIONS OF ARTICLE THIRTEENTH
          OF THE

                                       12
<PAGE>

          COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
          AND SECTION 6.3 OF THE COMPANY'S AMENDED AND RESTATED BYLAWS
          (AS THE SAME MAY BE AMENDED FROM TIME TO TIME) WHICH AMONG
          OTHER THINGS RESTRICT THE TRANSFER OF THESE SHARES.

     11.  Representations of INDCO to Harrison and Lasuzzo.  INDCO hereby
          ------------------------------------------------
represents and warrants to Harrison and Lasuzzo as follows:

          (a) INDCO has full right and authority to set over, transfer and
     assign the H&L Elk City Interests to Harrison and Lasuzzo pursuant to this
     Settlement Agreement without the necessity of obtaining the prior consent
     of any third party, or any governmental entity, to such assignment.  The
     H&L Elk City Interests will, immediately following the Combination
     Transaction, be free and clear of all liens, charges, encumbrances, and
     claims of third parties known to INDCO or restrictions thereon, except (i)
     as set forth in the Elk City Agreement or (ii) as filed of record.  INDCO,
     to date, has performed in all material respects its obligations under, and
     is not aware of any material breaches or defaults by any party thereto, of
     the Elk City Agreement.

          (b) The copy of the Elk City Agreement attached hereto as Exhibit "C"
     is a true, complete and correct copy of the Elk City Agreement and there
     have not been any amendments, modifications or supplements to the Elk City
     Agreement, other than those reflected in Exhibit "C."

     12.  Shareholders Agreement.  Each Shareholder covenants and agrees with
          ----------------------
each of the other Shareholders that (i) if the Combination Transactions are
approved, he or it will enter into the shareholder's agreement required by
Canaan Energy Corporation in the form included with Exhibit "A" (except Roger
Graham and Frank Harrison shall not be required to enter into the shareholder's
agreement) and (ii) he or it will not exercise or demand any dissenters' and/or
appraisal rights with respect to the Combination Transaction or the Plan of
Combination.  Each Shareholder recognizes and acknowledges that, by agreeing to
the provisions of this Section 12, he or it is waiving certain rights under the
Oklahoma General Corporation Act.

     13.  Treatment of Certain Promissory Notes.
          -------------------------------------

          (a) Indian, INDCO and the Shareholders hereby make reference to (i)
     that certain Promissory Note (Revolving),

                                       13
<PAGE>

     dated October 1, 1999, of Indian to INDCO in the original principal amount
     of $500,000.00 (the "INDCO Note") and (ii) those certain Promissory Notes,
     dated October 1, 1999, of INDCO to Indian in the original principal amounts
     of $1,005,122.84 and $83,132.45 (such notes of INDCO to Indian are
     collectively referred to as the "Indian Notes"). INDCO, Indian and the
     Shareholders agree that the Indian Notes, for accounting purposes, shall be
     treated in the Combination Transaction as reductions in equity, shall not
     be repaid by INDCO, shall be distributed to Hartzog, Graham, Black, and
     Dunning in proportion to their relative ownership interests of Indian as
     set forth in the last sentence of Section 1(e) above, and shall then
     immediately be contributed by Hartzog, Graham, Black and Dunning to INDCO.
     Harrison and Lasuzzo consent to the foregoing and to such distributions and
     agree that they shall have no right to participate or share in such
     distributions.

          (b) Indian, INDCO and the Shareholders further agree that the INDCO
     Note (and the additional amounts, if any, advanced by INDCO to Indian after
     the date hereof) will either be (i) paid in full by Indian prior to the
     Combination Transaction or assumed by or paid by Canaan Energy Corporation
     as of or after the Combination Transaction or (ii) contributed to the
     capital of Indian.  If the INDCO Note (plus the additional amount, if any,
     advanced by INDCO to Indian after the date hereof) is contributed to the
     capital of Indian, then INDCO shall be entitled to and shall be issued that
     number of shares of Indian common stock determined using the following
     formula:

                                N /   EV-N
                                    ----------
                                        X

     where,

     N equals the total amount owed under the INDCO Note (plus the additional
     amount, if any, advanced by INDCO to Indian after the date hereof);

     EV equals the estimated exchange value of Indian as set forth in the S-4
     Registration Statement with regard to the Combination Transaction; and

     X equals the total number of issued and outstanding shares of Indian common
     stock immediately prior to the contribution of the INDCO Note (and the
     additional amounts, if any, advanced by INDCO to Indian after the date
     hereof).

                                       14
<PAGE>

          Each Shareholder acknowledges that, as a result of such issuance of
     common stock to INDCO, each Shareholder's ownership percent as set forth in
     Section 5(a) will be adjusted.

          Lasuzzo further agrees that any common stock issued pursuant to and in
     compliance with this Section 13(b) shall be conclusively deemed to be
     issued at a price per share equal to or greater than its fair market value
     for purposes of Section 2 of the Stock Rights Certificate described in
     Section 6 above.

     14.  Consent of Members of INDCO.  Dunning, Hartzog, Black and Graham,
          ---------------------------
constituting all of the members of INDCO, hereby consent to and approve of this
Settlement Agreement and all transactions required herein, and hereby authorize
and direct Dunning, as the sole manager of INDCO, to execute and deliver this
Settlement Agreement and perform on behalf of INDCO all acts required by INDCO
hereunder.

     15.  Consent of Directors of Indian.  Dunning, Hartzog, Black and Graham,
          ------------------------------
constituting all of directors of Indian, hereby consent to and approve of this
Settlement Agreement, the Plan of Combination, the Combination Transaction, and
all transactions required herein, and hereby authorize and direct either Richard
R. Dunning, as Chief Executive Officer of Indian, or John K. Penton, as
Executive Vice President of Indian, to execute and deliver this Settlement
Agreement and perform on behalf of Indian all acts required by Indian.

     16.  No Admissions; Effective Date.  Except as otherwise specifically
          -----------------------------
provided in Section 6 above, this Settlement Agreement is entered into in
connection with the compromise and settlement of all pending controversies
arising in connection with or relating to the Claims, to include, without
limitation, the Severance Claims. The promises and covenants herein are not, and
shall not be construed as, an admission or acknowledgment on the part of any
party hereto of any liability, wrongdoing, merit or lack thereof, in connection
with any Claim. The terms and conditions of this Settlement Agreement shall not
be binding, or be deemed a waiver of any right, remedy or Claim, including,
without limitation, the Severance Claims, until (i) this Settlement Agreement
has been duly executed by all parties hereto; (ii) all of the terms and
conditions set forth herein have been fully satisfied; and (iii) all of the
cash, the H&L Stock, the H&L Elk City Interests, the common stock to be issued
to Black, all of the stock contributions and all of the note contributions
required to be made, executed and delivered to or by the respective parties
hereto, pursuant to the

                                       15
<PAGE>

terms of this Settlement Agreement, have been fully and satisfactorily made,
issued, assigned, conveyed and performed in the manner required by the terms of
this Settlement Agreement on or before the Closing Date.

     17.  Entire Agreement.  This Settlement Agreement constitutes the entire
          ----------------
agreement among the parties and supersedes any prior agreements relating to the
subject matter hereof.  No agreements or understandings have been made by the
parties hereto other than those set forth in this Settlement Agreement.

     18.  Governing Law.  This Settlement Agreement shall be governed by and
          -------------
interpreted in accordance with the laws and decisions of the State of Oklahoma.

     19.  Severability.  If any provision of this Settlement Agreement, or its
          ------------
application to any person, party or circumstance, is held invalid, the remainder
of this Settlement Agreement and its application to all other persons, parties
and circumstances shall not be affected adversely thereby unless the provision
or provisions held invalid or inapplicable will, if not enforced, substantially
impair the benefits and fairness of the remaining terms of this Settlement
Agreement.

     20.  Attorney Fees.  Each party hereto shall bear his or its own costs and
          -------------
attorneys' fees incurred in connection with the negotiation and consummation of
the matters described in this Settlement Agreement.

     21.  Breach.  Should any party breach any one or more of the terms and
          ------
conditions of this Settlement Agreement, the opposing party or parties shall be
entitled, at their option, to take such action as they may deem necessary to
specifically enforce the performance of the terms of this Settlement Agreement.
Alternatively, the non-breaching party or parties shall also be entitled to
recover  any and all damages incurred by them as a result of any such breach.
In either event, the prevailing party in any such action brought to enforce the
performance of this Settlement Agreement, or to recover damages for the breach
thereof, shall also be entitled to recover all of their costs and their
reasonable attorneys' fees incurred by such prevailing party or parties in the
bringing of any such action(s).

     22.  Binding Agreement.  This Settlement Agreement shall be binding upon
          -----------------
and inure to the benefit of the parties hereto and their respective successors
and assigns.

                                       16
<PAGE>

     23.  Further Assurances.  Each party hereby agrees to execute such
          ------------------
additional documents, instruments and writings as any other party may deem
reasonably necessary, proper, required, desirable or convenient for the purpose
of fully effectuating the terms and provisions of this Settlement Agreement.

     24.  No Assignment.     No party may assign, convey, transfer, delegate, or
          -------------
encumber any right, interest, or duty arising hereby or created herein without
the express prior written consent of the other parties.

     25.  Counterparts.  This Settlement Agreement may be executed in any number
          ------------
of separate counterparts, and each such counterpart shall for all purposes be
deemed to be an original.  All such counterparts shall together constitute one
and the same agreement.

     26.  Due Investigation; Counsel Advice.  The parties hereto declare that
          ---------------------------------
they have read and reviewed this Settlement Agreement and fully understand its
terms.  The parties hereto acknowledge that they are aware that (i) they may
hereafter discover facts in addition to or different from those which they know
or believe to be true with respect to the subject matter of this Settlement
Agreement and (ii) the Combination Transaction may or may not occur, but that it
is their intention hereby to fully and finally

                     [The remainder of this page has been
                           intentionally left blank]

                                       17
<PAGE>

settle and release all Claims and causes of action between them singularly
and/or collectively, except to the extent otherwise specifically provided in
Section 6 above. The parties hereto further acknowledge that they have been
fully advised by their counsel of all pertinent legal rights and/or obligations
and that they have entered into this Settlement Agreement freely and
voluntarily.

     27.  Confidentiality.  Each party hereto consents to the filing of this
          ---------------
Settlement Agreement as an exhibit to the registration statement in connection
with the Combination Transaction.

     IN WITNESS WHEREOF, the undersigned have executed this Settlement Agreement
as of the date set forth above.

"Hartzog"                     /s/ Larry D. Hartzog
                              -----------------------------------------
                              Larry D. Hartzog


"Graham"                      /s/ Roger Graham
                              -----------------------------------------
                              Roger Graham



"Black"                       /s/ Michael C. Black
                              -----------------------------------------
                              Michael C. Black


                              /s/ Michael C. Black
                              -----------------------------------------
                              Michael C. Black, Trustee of the
                              Michael C. Black Revocable Trust


"Lasuzzo"                     /s/ Anthony Lasuzzo
                              -----------------------------------------
                              Anthony "Skeeter" Lasuzzo


"Harrison"                    /s/ Frank Harrison
                              -----------------------------------------
                              Frank Harrison

                                       18
<PAGE>

"Dunning"                     /s/ Richard R. Dunning
                              --------------------------------------------
                              Richard R. Dunning


                              DUNNING FAMILY LIMITED PARTNERSHIP

                              By:   DUNNING MANAGEMENT, L.L.C.,
                                    General Partner


                                    By:  /s/ Richard R. Dunning
                                         ---------------------------------
                                         Richard R. Dunning, Manager


"INDCO"                       INDCO L.L.C., an Oklahoma limited
                              liability company


                              By:   /s/ Richard R. Dunning
                                    --------------------------------------
                                    Richard R. Dunning, Manager


"Indian"                      INDIAN OIL COMPANY, an Oklahoma corporation


                              By:   /s/ John K. Penton
                                    ---------------------------------------
                                    John K. Penton, Executive Vice
                                    President

                                       19
<PAGE>

"Cibola Wyoming"              CIBOLA CORPORATION, a Wyoming corporation


                              By:   /s/ Michael C. Black
                                    -----------------------------------------
                                    Michael C. Black, President



Agreed to solely for purposes of
any required consents and/or waivers
under the terms of the Plan of Combination
or the Coral/Indian Merger Agreement
dated February 15, 1999, as amended:

CANAAN ENERGY CORPORATION


By:  /s/ Leo E. Woodard
     -----------------------------------
     Leo E. Woodard, Chairman and CEO

CORAL RESERVES, INC.


By:  /s/ Leo E. Woodard
     -----------------------------------
     Leo E. Woodard, Chairman and CEO

CORAL RESERVES ENERGY CORPORATION


By:  /s/ Leo E. Woodard
     -----------------------------------
     Leo E. Woodard, Chairman and CEO

                                       20