REGISTRATION RIGHTS AGREEMENT


     This Registration Rights Agreement (this "Agreement") is entered into as of
the  Closing  Date  (as  defined herein) by and among Penn Octane Corporation, a
Delaware  corporation  (the  Company), and the person whose signature appears on
the  execution  pages  of this Agreement (together with its permitted successors
and  assigns,  the  "Investors").

     This  Agreement  is entered into pursuant to the Purchase Agreement between
the  Company  and  the  Investor  dated  as  of December 14, 1998 (the "Purchase
Agreement").  In  order  to  induce  the  Investor  to  enter  into the Purchase
Agreement,  the  Company has agreed to provide the registration rights set forth
in  this  Agreement.  The  execution  of  this  Agreement  by  the  Company is a
condition  to  the  closing  under  the  Purchase  Agreement.

     The  parties  hereby  agree  as  follows:

1.   Definitions
     -----------
     Capitalized  terms used herein without definition shall have the respective
meanings  set  forth  in the Purchase Agreement.  As used in this Agreement, the
following  terms  shall  have  the  following  meanings:

     Closing  Date:  The  date  on  which  the  Closing  occurs  pursuant to the
     --------------
Purchase  Agreement.

     Exchange  Act:  The  Securities  Exchange  Act of 1934, as amended, and the
     --------------
rules  and  regulations  of  the  Commission  promulgated  thereunder.

     Losses:  The  term  "Losses"  shall have the meaning set forth in Section 6
     ------
hereof.

     Prospectus:  The  prospectus  included  in  any  Registration  Statement
     -----------
(including,  without  limitation,  a  prospectus  that  discloses  information
previously  omitted from a prospectus filed as part of an effective registration
statement in reliance upon Securities Act Rule 430A), as amended or supplemented
by  any  prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by such Registration Statement and
all other amendments and supplements to the prospectus, including post-effective
amendments,  and  all  material  incorporated  by  reference  or  deemed  to  be
incorporated  by  reference  in  such  prospectus.

     Registrable  Securities:  All  shares  of Common Stock sold pursuant to the
     ------------------------
Purchase  Agreement, plus any Common Stock issued or issuable to the Investor in
respect  of  the  Warrant  Share  pursuant  to  any stock split, stock dividend,
recapitalization, or similar event.  The Warrants are not Registrable Securities
hereunder.  As  to any Registrable Securities, such securities shall cease to be
Registrable  Securities  when  (i)  a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such  securities  shall  have  been  disposed  of  pursuant  to  such  effective
registration  statement,  (ii)  such  securities  shall  have  been  distributed
pursuant  to  Rule  144  or  any  similar  provision  then  in  force, under the
Securities Act, (iii) such securities shall have been otherwise transferred, new

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certificates  or  other  evidences  of  ownership  for them not bearing a legend
restricting further transfer and not subject to any stop transfer order or other
restrictions on transfer shall have been delivered by the Company and subsequent
disposition  of  such securities shall not require registration or qualification
of such securities under the Securities Act or any state securities laws then in
force  or  (iv)  the  sale  of  such  securities by the Investor shall no longer
require  registration under the Securities Act or such securities shall cease to
be  outstanding.

     Registration  Expenses:  All reasonable expenses incurred by the Company in
     ----------------------
complying  with  Section  3  hereof, including all registration and filing fees,
printing  expenses,  fees and disbursements of counsel for the Company, and blue
sky  fees  and  expenses.

     Registration  Statement:  Any  registration  statement of the Company which
     ------------------------
covers  any  of  the  Registrable  Securities pursuant to the provisions of this
Agreement,  including  the  Prospectus,  amendments  and  supplements  to  such
registration  statement,  including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated reference in
such  registration  statement.

     Restricted  Securities:  The  Shares  and  the Warrant Shares upon original
     -----------------------
issuance thereof, and at all times subsequent thereto, until, in the case of any
such  security,  it  is  no longer required to bear the legend set forth on such
security  pursuant  to  the  terms  of  the security, the Purchase Agreement and
applicable  law.

     Rule  144:  Rule  144 under the Securities Act, as such Rule may be amended
     ----------
from  time  to  time, or any similar rule or regulation hereafter adopted by the
Commission  (excluding  Rule  144A).

2.   Securities  Subject  to  this  Agreement
     ----------------------------------------

     The  securities  entitled  to  the  benefits  of  this  Agreement  are  the
Registrable  Securities.

3.   Registration  Rights.
     ---------------------

     (a)  Demand Registration.
          -------------------

          (i)  The Investor,  or if the Investor  shall have assigned any of its
               rights to any permitted  successors  and assigns  hereunder,  the
               holders of a majority of the  Registrable  Securities may request
               that the Company register, and upon such request the Company will
               register,  all or part of the Registrable Securities (the "Demand
               Registration"),  subject  to the  terms  and  conditions  of this
               Agreement. The holders of Registrable Securities will be entitled
               to  request  one  Demand   Registration  which  may  be  a  shelf
               registration  relating to sales of proposed to be made by holders
               of  Registrable  Securities  pursuant to Rule 415 of the SEC. The
               request (a  "Registration  Request") for the Demand  Registration
               shall specify (a) the approximate number of shares of Registrable
               Securities

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<PAGE>
               requested  to be  registered  (but not less  than a  majority  of
               shares of the then  outstanding  number of shares of  Registrable
               Securities),  and (b) the intended method of distribution of such
               shares.  Within  ten  days  after  the  date of  sending  of such
               request,  the Company will give written  notice of such requested
               registration  to all other holders of  Registrable  of Securities
               and will include in such Registrable  Securities which holders of
               Registrable  Securities  request  the  Company  to  include  such
               registration  by written notice given to the Company with 15 days
               after the date of sending of the Company's notice.

          (ii) A registration  will count as the Demand  Registration if (a) the
               holders of  Registrable  Securities are able to register and sell
               at  least  seventy-five  percent  of the  Registrable  Securities
               requested  to  be  included  in  such   registration   or  (b)  a
               registration  statement  relating  to a  Demand  Registration  is
               prepared by the Company but prior to or after filing is withdrawn
               or  abandoned  at the request of the  holders of the  Registrable
               Securities to be covered by such  registration  statement  (other
               than as a result of a material  adverse  change to the Company or
               following  a  postponement  by the  Company  pursuant  to Section
               4(b)).

          (iii)The  Company may  include in any Demand  Registration  securities
               other than shares of Registrable  Securities and securities to be
               registered for offering and sale on behalf of the Company ("Other
               Securities"),  subject to compliance  with the provisions of this
               Section in the event any  limitation  is imposed on the number of
               securities  that may be  included  in such  registration.  If the
               managing  underwriter(s)  advise the  Company in writing  that in
               their opinion the number of shares of Registrable  Securities and
               Other Securities  desired to be included in such offering exceeds
               the  number  of  shares  of  Registrable   Securities  and  Other
               Securities,  if any,  which can be sold in an  orderly  manner in
               such offering within a price range acceptable to the holders of a
               majority  of  the  shares  of  Registrable  Securities  initially
               requesting  registration,   the  Company  will  include  in  such
               registration, prior to the inclusion of any Other Securities, the
               number  of  shares  of  Registrable  Securities  requested  to be
               included which in the opinion of such underwriters can be sold in
               an  orderly  manner  within  the  price  range of such  offering,
               allocated pro rata among the  respective  holders  thereof on the
               basis of the  number of shares of  Registrable  Securities  which
               each such  holder has  requested  the  Company to include in such
               registration.

          (iv) Selection of Underwriter. The holders of a majority of the shares
               ------------------------
               of Registrable  Securities to be included in a registration  will
               have the right to  designate  an  underwriter  to  co-manage  the
               offering being registered under the Demand registration,  subject
               to the Company's approval which will not be

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<PAGE>
               unreasonably  withheld or delayed. The Company will designate the
               lead-managing underwriter of the offering.

     (b)  "Piggy-Back" Registrations.
          --------------------------

          If  at  any  time  the  Company shall determine to register any of its
Common  Stock  under  the  Securities  Act,  whether in connection with a public
offering  by the Company, a public offering by shareholders, or both, including,
without  limitation,  by  means  of  any shelf registration pursuant to Rule 415
under  the  Securities  Act  or any similar rule or regulation, but other than a
Demand  Registration  or  a  registration  to  implement  an employee benefit or
dividend  reinvestment  plan,  the  Company  shall  promptly give written notice
thereof  to  the  Investor  who shall be the registered holder(s) of Registrable
Securities and shall use its reasonable efforts to effect the registration under
the  Securities  Act  of  such  Registrable  Securities as may be requested in a
writing  delivered  to  the  Company  within  30  days  after such notice by the
Investor as well as to include such Registrable Securities in any notifications,
registrations  or  qualifications under any state securities laws which shall be
made or obtained with respect to the securities being registered by the Company;
provided, however, that (a) any distribution of Registrable Securities pursu-ant
--------  -------
to  such  registration  shall be managed by the investment banking firm, if any,
managing  the distribution of the securities being offered by the Company on the
same  terms  as all other securities to be registered, and (b) the Company shall
not be required under this Section 3(b) to include Registrable Securities in any
registration  of  securities  if  the  Company  shall  have  been advised by the
investment  banking  firm managing the offering of the securities proposed to be
registered by the Company or others that the inclusion of Registrable Securities
in  such  offering  would  substantially interfere with the orderly sale of such
securities  which  the Company or others propose to register; provided, however,
that in making any determination under this subparagraph (b) as to the inclusion
of the Registrable Securities in any such offering, Registrable Securities shall
be  registered  on  a  pro-rata  basis with any other securities as to which the
Company  has  granted  or  may  in  the  future  grant  registration  rights.

     (c)  Registration Expenses.
          ----------------------

          All  expenses  of  any  registration  and  offering  of  Registrable
Securities  pursuant  to  this  Section  3  (including,  without  limitation,
registration  fees, and disbursements of the Company's counsel, fees for listing
the  Registrable  Securities  on any exchange on which similar securities of the
Company  are  listed  for  trading  or on the NASDAQ/AMEX Stock Market) shall be
borne  by  the  Company  provided,  however,  that  the  expenses  of any Demand
Registration made within one year of the date of this Agreement shall be paid by
the  holders of the Registrable Securities.  The Company shall pay underwrit-ing
discounts  or  commissions  payable  with respect to the sale of the Registrable
Securities,  the  fees and disbursements of the separate counsel for the holders
of  Registrable Securities and related transfer taxes in an aggregate amount not
to  exceed  $20,000.

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<PAGE>
4.   Registration Procedures.
     ------------------------

     (a) In connection with any registration  pursuant to Section 3 hereof,  the
Company will prepare and file with the SEC, a  Registration  Statement,  and any
amendments  and  supplements  thereto,  on any form for which the  Company  then
qualifies or which counsel for the Company shall deem  appropriate,  and use its
reasonable  best  efforts  to  cause  such  Registration   Statement  to  become
effective;  provided that before filing with the SEC a Registration Statement or
            --------
prospectus  or any  amendments  or  supplements  thereto,  the Company  will (i)
furnish to the Investor and counsel  selected by the Investor copies of all such
documents  proposed to be filed,  which  documents will be subject to the review
and comment by the Investor and such  counsel,  and (ii) notify the Investors of
any stop order issued or threatened by the SEC and take all  reasonable  actions
required to prevent the entry of such stop order or to remove it if entered. The
Company will also (i) promptly notify the Investor of the  effectiveness of such
Registration  Statement,  (ii) furnish to the Investor  such number of copies of
such  Registration  Statement,  and each amendment and supplement  thereto,  the
Prospectus  included in such Registration  Statement and such other documents as
the Investor may reasonably  request;  (iii) use its reasonable  best efforts to
register or qualify such securities to be registered under such other securities
or blue sky laws of such  jurisdictions  as any Purchaser  reasonably  requests;
(iv) use its  reasonable  best  efforts  to  cause  all  such  securities  to be
registered to be listed on each securities  exchange on which similar securities
issued by the Company are then  listed for trading or on the  NASDAQ/AMEX  Stock
market,  and to provide a transfer agent and registrar for such securities to be
registered no later than the effective date of such Registration Statement;  (v)
enter in to such customary  agreements  (including an underwriting  agreement in
customary  form)  and  take  all  such  other  actions  as the  Investor  or the
underwriters  retained by the Investor,  if any,  reasonably request in order to
expedite or facilitate  the  disposition  of such  securities to be  registered,
including  customary  indemnification;  and (vi)  otherwise  use its  reasonable
efforts to comply with all applicable  rules and  regulations of the SEC and the
states and make available to the Investor as soon as reasonably practicable (but
not more than  eighteen  months) after the  effective  date of the  registration
Statement,  an earnings statement that satisfies the provisions of Section 11(a)
of the  Securities  Act and the rules of the SEC  thereunder.  The Company shall
take all other actions reasonably  necessary or advisable to enable the Investor
to consummate the  disposition  of any  Registrable  Securities  pursuant to any
registration  Statement and to comply with the  Securities  Act and the Exchange
Act in connection  with any offer and sale of any  Registrable  Securities.  The
terms of this  Section 4 shall not  require  the Company to qualify as a foreign
corporation  or as a dealer in  securities  or to  execute  or file any  general
consent to service of process under the laws of any such  jurisdiction  where it
is not so subject.

     (b) In connection with any effective  Registration Statement filed pursuant
to  this  Agreement,   the  Company  will  immediately  notify  the  holders  of
Registrable  Securities registered pursuant to the Registration Statement of the
happening  of any event as a result of which the  Registration  Statement or any
Prospectus contains an untrue statement of a material fact or omits to state any
material fact required to be stated  therein or necessary to make the statements
therein not misleading in light of the  circumstances  then  existing,  and will
promptly prepare and furnish to the holders of Registrable Securities a

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<PAGE>
supplement or amendment to such prospectus so that the Registration Statement or
such  Prospectus will not contain an untrue statement of a material fact or omit
to  state  any  material fact required to be stated therein or necessary to make
the  statements  therein  not  misleading  in  light  of  the circumstances then
existing.  Notwithstanding  the  foregoing,  if  the  Company  determines in its
reasonable business judgment that an amendment or supplement to the Registration
Statement  or  any  such Prospectus would interfere with any material financing,
acquisition,  corporate  reorganization, or other material corporate transaction
or  development involving the Company, the Company may delay the preparation and
filing  of  such  amendment  or  supplement for a period of up to 60 days in the
aggregate  in  order  to  complete or make a public announcement with respect to
such  material  transaction or development (it being understood that the Company
shall  be  obligated  to extend the period of time it is required to maintain in
effect  any  such Registration Statement to take into account the period of time
that  such  holders  of  Registrable  Securities  are  unable  to  offer or sell
Registrable  Securities  by  reason  of  this  Section  4(c)).

5.   Holdback  Agreements.
     ---------------------

     (a)     Restrictions  on  Public Sale by Holders of Registrable Securities.
             ------------------------------------------------------------------
Each  holder  of Registrable Securities whose Registrable Securities are covered
by  a  Registration  Statement  filed  pursuant  to  Section 3 hereof agrees, if
requested  by  the  managing  underwriters  in  an underwritten offering (to the
extent  timely notified in writing by the Company or the managing underwriters),
not  to  effect  any public sale or distribution of securities of the Company of
any  class included in such Registration Statement, including a sale pursuant to
Rule  144  (except  as  part  of  such underwritten offering), during the 10-day
period  prior  to, and the 90-day period beginning on, the effective date of any
Registration  Statement.

     (b)     The  foregoing  provisions  shall  not  apply  to  any  holder  of
Registrable  Securities  if  such  holder  is prevented by applicable statute or
regulation  from  entering  into any such agreement; provided, however, that any
                                                     -----------------
such  holder  shall  undertake  in  its  request  to  participate  in  any  such
underwritten offering not to effect any public sale or distribution of the class
of Registrable Securities covered by such Registration Statement (except as part
of  such  underwritten  offering) during such period unless it has provided five
(5)  business  days  prior  written  notice  of such sale or distribution to the
managing  underwriter  or  underwriters.

6.   Indemnification
     ---------------

     (a)     Indemnification  by  Company.  The Company shall indemnify and hold
             ----------------------------
harmless,  to  the  full  extent  permitted  by  law, each holder of Registrable
Securities,  its  officers,  directors,  agents  and  employees, each person who
controls  such holder (within the meaning of Section 15 of the Securities Act or
Section  20  of the Exchange Act), and the partners, officers, directors, agents
or  employees  of  any  such  controlling  person,  from and against all losses,
claims,  damages,  liabilities,  costs  (including,  without  limitation,  all
reasonable  attorneys'  fees) and expenses (collectively, "Losses"), arising out
of  or  based  upon  any  untrue  statement  of a material fact contained in any
Registration  Statement, Prospectus or preliminary prospectus, or arising out of

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<PAGE>
or  based  upon any omission of a material fact required to be stated therein or
necessary  to  make  the  statements therein in light of the circumstances under
which  they  were  made  (in  the case of any Prospectus) not misleading, except
insofar  as  the same are based solely upon information furnished to the Company
by such holder for use therein; provided, however, that the Company shall not be
                                -----------------
liable  in  any  such  case to the extent that any such Loss arises out of or is
based upon an untrue statement or omission made in any preliminary prospectus or
Prospectus if (i) such holder failed to send or deliver a copy of the Prospectus
or  Prospectus  supplement with or prior to the delivery of written confirmation
of  the  sale  of  Registrable  Securities and (ii) the Prospectus or Prospectus
supplement  would  have  corrected  such  untrue  statement  or  omission.

     (b)     Indemnification by Holder of Registrable Securities.  In connection
             ---------------------------------------------------
with  any  Registration Statement in which a holder of Registrable Securities is
participating,  such  holder  of  Registrable  Securities  shall  furnish to the
Company  in  writing  such  information  concerning such holder and its proposed
disposition  of  Registrable  Securities  pursuant  to  such registration as the
Company  may  reasonably  request  for  use  in connection with any Registration
Statement  or  Prospectus.  Each  Investor shall indemnify and hold harmless, to
the  full  extent  permitted  by  law, the Company, and its officers, directors,
agents  and  employees, each person who controls the Company (within the meaning
of  Section  15 of the Securities Act or Section 20 of the Exchange Act) and the
officers,  directors,  agents  or employees of any such controlling person, from
and  against  all  Losses arising out of or based upon any untrue statement of a
material fact contained in any Registration Statement, Prospectus or preliminary
prospectus,  or  arising  out  of  or based upon any omission of a material fact
required  to  be  stated  therein or necessary to make the statements therein in
light  of  the  circumstances  under  which  they  were made (in the case of any
Prospectus)  not  misleading,  to  the extent, but only to the extent, that such
untrue  statement  or  omission  is contained in any information so furnished in
writing  by  such  holder to the Company for use in such Registration Statement,
Prospectus or preliminary prospectus.  Such indemnity shall remain in full force
and  effect  regardless of any investigation made by or on behalf of the Company
or any holder and any of their respective directors, officers, agents, employees
or  controlling  persons (within the meaning of Section 15 of the Securities Act
or  Section  20  of  the  Exchange  Act)  and shall survive the transfer of such
securities  by  such  holder.

     (c)     Conduct  of  Indemnification  Proceedings.  If  any  action  or
             ------------------------------------------
proceeding  (including  any  governmental  investigation  or  inquiry)  shall be
brought  or any claim shall be asserted against any person entitled to indemnity
hereunder (an "indemnified party"), such indemnified party shall promptly notify
the  party  from  which  such  indemnity is sought (the "indemnifying party") in
writing,  and the indemnifying party shall assume the defense thereof, including
the  employment  of counsel reasonably satisfactory to the indemnified party and
the  payment  of  all  fees and expenses incurred in connection with the defense
thereof.  All  such  fees and expenses (including any fees and expenses incurred
in  connection  with  investigating  or  preparing  to  defend  such  action  or
proceeding)  incurred by the indemnified party, shall be paid to the indemnified
party, as incurred, within 20 days of written notice thereof to the indemnifying
party;  provided,  however,  that  if,  in  accordance  with this Section 6, the
        ------------------
indemnifying  party  is  not  liable  to  the  indemnified  party, such fees and
expenses  shall  be  returned  promptly  to  the  indemnifying  party.  Any such
indemnified  party  shall  have the right to employ separate counsel in any such
action,  claim  or proceeding and to participate in the defense thereof, but the

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<PAGE>
fees and expenses of such counsel shall be the expense of such indemnified party
unless  (a) the indemnifying party has agreed to pay such fees and expenses, (b)
the  indemnifying party shall have failed promptly to assume the defense of such
action, claim or proceeding and to employ counsel reasonably satisfactory to the
indemnified  party  in  any  such  action, claim or proceeding, or (c) the named
parties  to  any  such  action,  claim  or  proceeding  (including any impleaded
parties)  include  both  such  indemnified party and the indemnifying party, and
such  indemnified party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or additional to
those  available  to  the indemnifying party (in which case, if such indemnified
party  notifies  the  indemnifying  party  in  writing  that it elects to employ
separate  counsel  at  the  expense  of the indemnifying party, the indemnifying
party  shall  not  have the right to assume the defense of such action, claim or
proceeding  on  behalf  of such indemnified party, it being understood, however,
that  the  indemnifying party shall not, in connection with any one such action,
claim  or  proceeding  or separate but substantially similar or related actions,
claims  or  proceedings in the same jurisdiction arising out of the same general
allegations  or circumstances, be liable for the reasonable fees and expenses of
more  than  one  separate  firm  of  attorneys  (together with appropriate local
counsel)  at  any time for all such indemnified parties hereunder, unless in the
opinion  of  counsel for such indemnified party a conflict of interest may exist
between  such  indemnified  party and any other of such indemnified parties with
respect  to  such  action,  claim or proceeding, in which event the indemnifying
party shall be obligated to pay the fees and expenses of such additional counsel
or  counsels).  No  indemnifying  party will consent to entry of any judgment or
enter  into  any  settlement  which  does  not  include as an unconditional term
thereof  the  release of such indemnified party from all liability in respect to
such  claim or litigation without the written consent (which consent will not be
unreasonably  withheld)  of  the  indemnified party.  No indemnified party shall
consent  to  entry  of  any  judgment  or enter into any set-tlement without the
written  consent  (which  consent  will  not  be  unreasonably  withheld) of the
indemnifying  party  from  which  indemnity  or  contribution  is  sought.

     (d)     Contribution.  If  the indemnification provided for in this Section
             ------------
6 from the indemnifying party is unavailable to an in-demnified party in respect
of  any  Losses, then each applicable indemnifying party in lieu of indemnifying
such  indemnified party hereunder shall contribute to the amount paid or payable
by  such  indemnified party as a result of such Losses, in such proportion as is
appropriate  to  reflect  the  relative  fault  of  the  indemnifying  party and
indemnified  party in connection with the actions, statements or omissions which
resulted  in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and the indemnified party shall be
determined  by reference to, among other things, whether any action in question,
including  any  untrue  statement  of  a material fact or omission of a material
fact,  has  been  taken  or made by, or relates to information supplied by, such
indemnifying  party  or  indemnified  party,  and  the parties' relative intent,
knowledge,  access  to  information  and  opportunity to correct or prevent such
action,  statement  or  omission.  The  amount  paid  or payable by a party as a
result  of any Losses shall be deemed to include, subject to the limitations set
forth  in  Section 6(c), any legal or other fees or expenses reasonably incurred
by  such  party  in  connection  with  any action, suit, claim, investigation or
proceeding.

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<PAGE>
     The  parties  hereto  agree  that  it  would  not  be just and equitable if
contribution  pursuant  to  this  Section  6(d)  were  determined  by  pro  rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No  person guilty of fraudulent misrepresentation (within the meaning of Section
11(f)  of  the Securities Act) shall be entitled to contribution from any person
who  was  not  guilty  of  such  fraudulent  misrepresentation.

7.   Rule  144
     ---------

     The  Company  shall  file  the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
Commission  thereunder,  and  will  take  such  further  action as any holder of
Registrable  Securities  may reasonably request, all to the extent required from
time  to  time  to  enable  such  holder  to sell Registrable Securities without
registration  under  the  Securities  Act within the limitation of the exemption
provided  by  Rule  144  or  Rule  144A.  Upon  the  request  of  any  holder of
Registrable  Securities,  the  Company  shall  deliver  to such holder a written
statement  as  to  whether  the  Company  has complied with such information and
requirements.  Notwithstanding the foregoing, nothing in this Section 7 shall be
deemed  to  require  the  Company  to  register  any of its securities under any
section  of  the  Exchange  Act.

8.   Underwritten  Registrations
     ---------------------------

     If  any of the Registrable Securities covered by any registration are to be
sold  in  an  underwritten offering, the investment banker or investment bankers
and  manager  or  managers that will administer the offering will be selected by
the  Company.  The Investor may not participate in any underwritten registration
hereunder  unless  the  Investor  (i) agrees to sell the  Investor's Registrable
Securities  on  the  basis provided in the underwriting arrangements approved by
the  Company,  and  (ii)  completes  and  executes all questionnaires, powers of
attorney,  indemnities,  underwriting  agreements  and  other documents required
under  the  terms  of  such  underwriting  arrangements.

9.   Miscellaneous
     -------------

     (a)     Amendments  and  Waivers.  The  provisions  of  this  Agreement,
             ------------------------
including  the  provisions  of  this  sentence,  may not be amended, modified or
supplemented,  and  waivers or consents to departures from the provisions hereof
may not be given unless the Company obtains the written consent of holders of at
least a majority of the then outstanding Registrable Securities affected by such
amendment,  modification or supplement.  Notwithstanding the foregoing, a waiver
or  consent  to depart from the provisions hereof with respect to a matter which
relates  exclusively  to  the  rights of holders of Registrable Securities whose
securi-ties  are  being sold pursuant to a Registration Statement and which does
not  directly  or  indirectly  affect  the  rights  of  holders  of  Registrable
Securities  whose  securities  are  not being sold pursuant to such Registration
Statement  may  be  given by holders of a majority of the Registrable Securities
being  sold  by  such  holders.

                                        9
<PAGE>
     (b)     Notices.  All  notices  and  other  communications  provided for or
             -------
permitted  hereunder  shall  be  made  in  writing  by hand-delivery, registered
first-class  mail,  next day air courier, telex, or telecopy: (i) if to a holder
of  Registrable  Securities, at the most current address given by such holder to
the  Company  in  accordance  with  the  provisions  of this Section 9(b), which
address  initially  is,  with  respect to the Investor, the address set forth in
Section B of the Purchase Agreement; and (ii) if to the Company, at 900 Veterans
Boulevard,  Suite  240, Redwood City California 94063, attention: Secretary, and
thereafter  at  such  other address, notice of which is given in accordance with
the  provisions  of  this  Section  8(b).

     All  such  notices  and  communications  shall  be deemed to have been duly
given:  when delivered by hand, if personally delivered; two business days after
being  deposited in the mail, postage prepaid, if mailed; one business day after
being  sent  by  next  day air courier; when answered back, if telexed; and when
receipt  acknowledged,  if  telecopied.

     (c)     Transfer of Registration Rights.  The rights granted to the holders
             -------------------------------
pursuant  to  this Agreement to cause the Company to register securities may not
be  assigned  or  otherwise transferred in any way other than to an Affiliate of
the  holder to whom the holder has transferred all or any part of the Warrant or
the  Amended  Note.

     (d)     Counterparts.  This  Agreement  may  be  executed  in any number of
             ------------
counterparts  by  the  parties  hereto,  each of which when so executed shall be
deemed  to  be  an original and all of which taken together shall constitute one
and  the  same  agreement.

     (e)     Headings.  The  headings  in  this Agreement are for convenience of
             --------
reference  only  and  shall  not  limit  or otherwise affect the meaning hereof.

     (f)     Governing  Law.  This  Agreement shall be governed by and construed
             ---------------
in  accordance  with  the  laws  of  the  State  of  New  York without regard to
principles  of  conflict  of  laws.

     (g)     Severability.  If  any  term, provision, covenant or restriction of
             ------------
this  Agreement is held by a court of competent jurisdiction to be invalid, void
or  unenforceable,  the  remainder  of  the  terms,  provisions,  covenants  and
restrictions set forth herein shall remain in full force and effect and shall in
no  way  be  affected, impaired or invalidated, and the parties hereto shall use
their  best  efforts to find and employ an alternative means to achieve the same
or  substantially  the same result as that contemplated by such term, provision,
covenant  or  restriction.  It  is  hereby  stipulated  and  declared  to be the
intention  of  the  parties  that  they would have executed the remaining terms,
provisions,  covenants  and restrictions without including any of such which may
be  hereafter  declared  invalid,  void  or  unenforceable.

     (h)     Entire  Agreement.  This Agreement is intended by the parties to be
             -----------------
a  final expression of their agreement and a complete and exclusive statement of
the  agreement and understanding of the parties hereto in respect of the subject
matter  contained  herein.  There  are no restrictions, promises, warranties nor

                                       10
<PAGE>
undertakings,  other  than those set forth or referred to herein with respect to
the  registration  rights  granted by the Company with respect to the securities
sold  pursuant  to  the Purchase Agreement.  This Agreement supersedes all prior
agreements  and  understandings between the parties with respect to such subject
matter.

     (i)     Attorneys' Fees.  If any action or proceeding is brought to enforce
             ----------------
any  provision  of  this  Agreement,  or  where  any provision hereof is validly
asserted  as  a  defense,  the  successful  party  shall  be entitled to recover
reasonable  attorneys'  fees in addition to its costs and expenses and any other
available  remedy.

     IN WITNESS WHEREOF, the parties have executed this agreement as of December
14,  1998.

                         PENN  OCTANE  CORPORATION



                         By:  ______________________________________
                              Ian  T.  Bothwell
                              Chief  Financial  Officer


                                       11
<PAGE>
IN  WITNESS WHEREOF, the parties have executed this agreement as of December 14,
1998.



                         KFP  Grand  Ltd.


                         By:  ____________________________________
                              Mahmood  Khimji
                              President


                                       12
<PAGE>

                                   SCHEDULE  I

Investors  and  Addresses
-------------------------

KFP Grand  Ltd.                                      Shares  Purchased:  500,000
545 E. John Carpenter Freeway, Suite 1400            Warrants:  300,000
Irving, Texas 75062
Attention: Mahmood Khimji
           President

with  a  copy  to:

Dudley  Murrey,  Esq.
Hughes  &  Luce,  L.L.P.
1717  Main  Street,  Suite  2800
Dallas,  Texas  75201

                                       1
<PAGE>