Exhibit
10.16


AMENDED
AND RESTATED OPERATING AGREEMENT


(Tennessee Operations)


THIS AMENDED AND RESTATED OPERATING AGREEMENT (the “Agreement”),
is executed this October        , 2007, but
is entered into effective January 5, 2007, by and between VINLAND ENERGY
OPERATIONS, LLC, hereinafter designated and referred to as “Operator,” and
ARIANA ENERGY, LLC (“AE”) and VINLAND ENERGY EASTERN, LLC (“VEE”), hereinafter
referred to as “Non-Operators.”


WITNESSETH


WHEREAS, the Non-Operators have entered into a
Participation Agreement, also effective January 5, 2007, pursuant to which they
have agreed to jointly develop certain oil and gas interests defined therein
and herein as the “AMI Interests”; and


WHEREAS, the Non-Operators desired to contract with
the Operator (which is an affiliate of VEE) to operate the Contract Area (as
defined herein) for their benefit and on the terms and conditions, and for the
compensation as set forth herein; and


WHEREAS, on or about April 18, 2007, the parties
entered into an Operating Agreement which was attached to and made a part of
the Participation Agreement (the “Original Agreement”); and


WHEREAS, the parties subsequently discovered several
typographical errors in the Original Agreement, and to correct those errors,
the parties desire to, and do hereby, amend and restate the Original Agreement
effective as of January 5, 2007, as provided herein.


NOW, THEREFORE, for and
in consideration of the mutual covenants contained herein, the sufficiency of
which consideration is hereby acknowledged, it is agreed as follows:


ARTICLE
I


DEFINITIONS


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


A.            The term “AE Proved
Undeveloped Oil and Gas Properties” or “AE PUD Properties” shall mean the properties
(and the strata therein) in which AE reserved a 40% working interest in that
certain assignment effective January 5, 2007, and which is attached hereto as
Exhibit “E.”


B.            The term “AE PUD
Interests” shall mean the 40% interest in the AE PUD Properties held by AE. A.


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



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D.            The terms “Area of
Mutual Interest” and “AMI” shall mean those certain areas outlined on the plats
attached hereto as Exhibits “A-1,”  “A-2,” “A-3,” “A-4”  and  “A-5.”


E.             The Term “AMI
Interests” shall mean the AE PUD Interests, the Vinland PUD Interests, and the
New AMI Leases.


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


G.            The term “Contract
Area” shall mean all of the lands and the AMI Interests intended to be
developed and operated for the production of Oil and Gas under this Agreement.


H.            The terms “Deepen” or “Deepening”
shall mean a single operation whereby a well is drilled to an objective Zone
below the deepest Zone in which the well was previously drilled, or below the
deepest Zone proposed in the associated AFE, whichever is the lesser.


I.              The terms “Drilling
Party,” “Drilling Parties” and “Consenting Party” shall mean a party or parties
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this Agreement.


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


K.            The term “Drillsite”
shall mean the oil and gas lease on which a proposed well is to be located.


L.             The term “New AMI
Leases” shall mean any oil, gas and mineral leases acquired by a party and
added to the AMI Interests pursuant to Section 2.1 of the Participation
Agreement.


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


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


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


P.             The term “Oil and Gas
Interest” or “Interests” shall mean the AMI Interests.


Q.            Unless the context
clearly indicates to the contrary, the terms “party” and “parties” shall mean
AE and VEE.



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


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


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


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


V.            The term “Vinland PUD
Interests” shall mean the 60% working interest in the AE PUD Properties
conveyed to Vinland in the assignment attached hereto as Exhibit “E.”


W.           The term “Zone” shall
mean a stratum or geologic horizon of earth containing or thought to contain a
common accumulation of Oil and Gas separately producible from any other common
accumulation of Oil and Gas.


Unless the context
otherwise clearly indicates, words used in the singular include the plural, the
word “person” includes natural and artificial persons, the plural includes the
singular, and any gender includes the masculine, feminine, and neuter.  Unless the context otherwise indicates, the
terms “parties” and “party” shall refer to the Non-Operators or one of them.


ARTICLE II


EXHIBITS


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


A.            Exhibit “A”shall
include the following information:


(1)           Description of lands
subject to this Agreement,


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


(3)           Parties to the
Agreement and Operator with addresses and telephone numbers for notice
purposes,


(4)           Percentages or
fractional interests of parties to this Agreement,


(5)           Oil and Gas Interests
subject to this Agreement,


(6)           Burdens on production
other than landowner royalties,



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(7)           Exhibits “A-1,” “A-2,”“A-3,”
“A-4,” and A-5” shall be the plats delineating the Area of Mutual Interest


B.            Exhibit “B,”
Participation Agreement,


C.            Exhibit “C,”
Accounting Procedure,


D.            Exhibit “D,”
Insurance,


E.             Exhibit
“E,” AE PUD Assignment.


If any provision
contained in the body of this Agreement is inconsistent with the provisions of
Exhibits “B” or “E”, the provisions of Exhibits “B” or “E” shall prevail.


ARTICLE III


INTERESTS OF PARTIES


A.            Interests of Parties in Costs and
Production:


Unless changed by other
provisions, all costs and liabilities incurred in operations under this
Agreement shall be borne and paid, and all equipment and materials acquired in
operations on the Contract Area shall be owned by the parties as their
interests are set forth in Exhibit “A” as it may be amended from time-to-time
and in accordance with the terms of the Participation Agreement.  In the same manner, the parties shall also
own all production of Oil and Gas from the Contract Area subject, however, to
the payment of royalties and other burdens on production as described
hereafter.


Each party shall pay or
deliver, or cause to be paid or delivered, all burdens on its share of the
production from the Contract Area as indicated in Exhibit “A” hereto and shall
indemnify, defend and hold the other parties free from any liability
therefor.  Each party so burdened shall
assume and alone bear all such excess obligations and shall indemnify, defend
and hold the other parties hereto harmless from any and all claims attributable
to such excess burden.  Nothing contained
in this Article III.A. shall be deemed an assignment or cross-assignment of interests
covered hereby.


B.            Subsequently Created Interests:


If any party has
contributed hereto an Oil and Gas Interest that is burdened with an assignment
of production given as security for the payment of money, or if, after the date
of this Agreement, any party creates an overriding royalty, production payment,
net profits interest, assignment of production or other burden payable out of
production attributable to its working interest hereunder, such burden shall be
deemed a “Subsequently Created Interest.” 
Further, if any party has contributed hereto an AMI Interest burdened
with an overriding royalty, production payment, net profits interest, or other
burden payable out of production created prior to the date of this Agreement,
and such burden is not shown on Exhibit “A,” such burden also shall be deemed a
Subsequently Created Interest.


The party whose interest
is burdened with the Subsequently Created Interest (the “Burdened Party”) shall
assume and alone bear, pay and discharge the Subsequently Created Interest and
shall indemnify, defend and hold harmless the other parties from and against
any liability therefore.  Further, if the
Burdened Party fails to pay, when due, its share of expenses chargeable
hereunder, all 



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provisions of Article
VII.B. shall be enforceable against the Subsequently Created Interest in the
same manner as they are enforceable against the working interest of the
Burdened Party.  If the Burdened Party is
required under this Agreement to assign or relinquish to any other party, or
parties, all or a portion of its working interest and/or the production
attributable thereto, said other party, or parties, shall receive said
assignment and/or production free and clear of said Subsequently Created
Interest, and the Burdened Party shall indemnify, defend and hold harmless said
other party, or parties, from any and all claims and demands for payment
asserted by owners of the Subsequently Created Interest.


ARTICLE IV


TITLES


A.            Title Examination:


Title examination shall
be made on the Drillsite of any proposed well prior to commencement of drilling
operations.  The opinion will include the
ownership of the working interest, minerals, royalty, overriding royalty and
any production payments under the applicable leases.  Each party contributing Oil and Gas Interests
to be included in the Drillsite or Drilling Unit, if appropriate, shall furnish
to Operator all abstracts (including federal lease status reports), title
opinions, title papers and curative material in its possession free of
charge.  All such information not in the
possession of or made available to Operator by the parties, but necessary for
the examination of the title, shall be obtained by Operator.  Operator shall cause title to be examined by
attorneys on its staff or by outside attorneys. 
Copies of all title opinions shall be furnished to each party.  Costs incurred by Operator in procuring
abstracts, fees paid outside attorneys for title examination (including
preliminary, supplemental, shut-in royalty opinions and division order title
opinions) and other direct charges as provided in Exhibit “C” shall be borne by
the Parties in the proportion that their working interests appear in Exhibit “A.”  Operator shall make no charge for services
rendered by its staff attorneys or other personnel in the performance of the
above functions.


Operator shall be responsible for securing curative
matter and pooling amendments or agreements required in connection with Oil and
Gas Interests contributed by the parties. 
Operator shall be responsible for the preparation and recording of pooling
designations or declarations and communitization agreements as well as the
conduct of hearings before governmental agencies for the securing of spacing or
pooling orders or any other orders necessary or appropriate to the conduct of
operations hereunder.  This shall not
prevent any party from appearing on its own behalf at such hearings.  Costs incurred by Operator, including fees
paid to outside attorneys, which are associated with hearings before
governmental agencies, and which costs are necessary and proper for the
activities contemplated under this Agreement, shall be direct charges to the
joint account and shall not be covered by the administrative overhead charges
as provided in Exhibit “C.”  Operator
shall make no charge for services rendered by its staff attorneys or other
personnel in the performance of the above functions.


No well shall be drilled on the Contract Area until
after (1) the title to the Drillsite has been examined as above provided, and
(2) the title has been accepted by all of the Parties.



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B.            Losses:


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


ARTICLE
V


OPERATOR


A.            Designation and
Responsibilities of Operator:


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


B.            Resignation or Removal
of Operator and Selection of Successor:


1.             Resignation
or Removal of Operator:  Operator may
resign at any time by giving one hundred eighty (180) days written notice
thereof to Non-Operators.  If Operator
terminates its legal existence or is no longer capable of serving as Operator,
Operator shall be deemed to have resigned without any action by Non-Operators,
except the selection of a successor. 
Operator may be removed only for good cause.  In the case of gross negligence, the Operator
may be removed upon notice from either AE or VEE, regardless of the ownership
interest held by the party giving notice. 
In all other cases, the Operator may be removed by the affirmative vote
of one or more Non-Operators owning a majority interest based on ownership as
shown on Exhibit “A”; such vote shall not be deemed effective until a written
notice has been delivered to the Operator by a Non-Operator detailing the
alleged default and Operator has failed to cure the default within thirty (30)
days from its receipt of the notice or, if the default concerns an operation
then being conducted, within forty-eight (48) hours of its receipt of the
notice.  For purposes hereof, “good cause”
shall mean not only gross negligence or willful misconduct, but also the
material breach of or inability to meet the standards of operation contained in
Article V.A. or material failure or inability to perform its obligations under
this Agreement.


If VEE should sell its interest in the AMI Interests,
upon such sale, AE shall have the right, in its sole discretion, to remove the
Operator and to appoint a successor Operator of its choosing.



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Subject to Article VII.D.1., the resignation or
removal of the Operator shall not become effective until 7:00 o’clock A.M. on
the first day of the calendar month following the expiration of one hundred
eighty (180) days after the giving of notice of resignation by Operator or
action by the Non-Operators to remove Operator, unless a successor Operator has
been selected and assumes the duties of Operator at an earlier date.  A change of a corporate name or structure of
Operator or transfer of Operator’s interest to any single subsidiary, parent or
successor corporation shall not be the basis for removal of Operator.


2.             Selection
of Successor Operator:  Except as
otherwise provided herein, upon the resignation or removal of Operator under
any provision of this Agreement, a successor Operator shall be selected by the
parties.  The successor Operator shall be
selected from the parties owning an interest in the Contract Area at the time
such successor Operator is selected.  The
successor Operator shall be selected by the affirmative vote of one or more
parties owning a majority interest based on ownership as shown on Exhibit “A”.  The former Operator shall promptly deliver to
the successor Operator all records and data relating to the operations
conducted by the former Operator to the extent such records and data are not
already in the possession of the successor Operator.  Any cost of obtaining or copying the former
Operator’s records and data shall be charged to the joint account.


3.             Effect
of Bankruptcy:  If Operator becomes
insolvent, bankrupt or is placed in receivership, it shall be deemed to have
resigned without any action by Non-Operators, except the selection of a
successor.  If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this Agreement pursuant to
the Bankruptcy Code, and an election to reject this Agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor.  During the period
of time the operating committee controls operations, all actions shall require
the approval of two (2) or more parties, one of which must be AE.


C.            Employees and
Contractors:


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


D.            Rights and Duties of
Operator:


1.             Competitive
Rates and Use of Affiliates:  Except
as otherwise provided herein, all work performed or materials supplied by
affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with
customs and standards prevailing in the industry.


2.             Discharge
of Joint Account Obligations:  Except
as herein otherwise specifically provided, Operator shall promptly pay and
discharge expenses incurred in the development and operation of the Contract
Area pursuant to this Agreement and shall charge each of the parties hereto
with their respective proportionate shares upon the expense basis provided in
Exhibit “C”.  



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Operator shall keep an accurate record of the joint
account hereunder, showing expenses incurred and charges and credits made and
received.


3.             Protection
from Liens:  Operator shall pay, or
cause to be paid, as and when they become due and payable all accounts of
contractors and suppliers and wages and salaries for services rendered or
performed, and for materials supplied on, to or in respect of the Contract Area
or any operations for the joint account thereof, and shall keep the Contract
Area free from liens and encumbrances resulting therefrom except for those
resulting from a bona fide dispute as to services rendered or materials
supplied.


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


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


6.             Filing
and Furnishing Governmental Reports: 
Operator will file, and upon written request promptly furnish copies to
each requesting Non-Operator all operational notices, reports or applications
required to be filed by local, state, federal or Indian agencies or authorities
having jurisdiction over operations hereunder. 
Each Non-Operator shall provide to Operator on a timely basis all
information necessary to Operator to make such filings.


7.             Drilling
and Testing Operations:  The
following provisions shall apply to each well drilled hereunder:



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


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


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


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


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


In the event automobile liability insurance is
specified in said Exhibit “D”, or subsequently receives the approval of the
parties, no direct charge shall be made by Operator for premiums paid for such
insurance for Operator’s automotive equipment.


ARTICLE VI


DRILLING AND DEVELOPMENT


A.            Procedures for
Drilling Wells in the AMI:


1.  During the Term of the Participation
Agreement.  So long as the
Participation Agreement is in effect all wells are to be drilled pursuant to
the terms of the Participation Agreement which is attached hereto as Exhibit “B”.


2.  After Termination of the Participation
Agreement.  After the termination of
the Participation Agreement, all wells shall be drilled according to the
following procedures.


(a)           If
any party hereto should desire to drill a well in the Contract Area, the party
desiring to drill such a well shall give written notice of the proposed
operation to the other parties, specifying the work to be performed, the
location, proposed depth, objective Zone and the estimated cost of the
operation.  The parties to whom such a
notice is delivered shall have fifteen (15) days after receipt of the notice
within which to notify the proposing party proposing whether they elect to
participate in the cost of the proposed operation. Failure of a party to whom
such notice is delivered 



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to reply within the period above fixed shall
constitute an election by that party not to participate in the proposed
well.  In such case the non-participating
party:  (i) thereby forfeits any interest
it might otherwise have in and to the proposed well and the Oil and Gas
produced thereby, and (ii) will promptly transfer any interest it may have in
and to the applicable lease to the extent of the well and the producing Zones
of such well and to the extent of the well unit as prescribed by the relevant
regulatory authority. Any proposal by a party to conduct an operation
conflicting with the operation initially proposed shall be delivered to all
parties within the time and in the manner provided in Article VI.B.6.


If all parties to whom such notice is delivered elect
to participate in such a proposed operation, the parties shall be contractually
committed to participate therein provided such operations are commenced within
the time period hereafter set forth, and Operator shall, no later than ninety
(90) days after expiration of the notice period of fifteen (15) days, actually
commence the proposed operation and thereafter complete it with due diligence
at the risk and expense of the parties participating therein; provided,
however, said commencement date may be extended upon written notice of same by
Operator to the other parties, for a period of up to thirty (30) additional
days if, in the sole opinion of the Operator, such additional time is
reasonably necessary to obtain permits from governmental authorities, surface
rights (including rights-of-way) or appropriate drilling equipment, or to
complete title examination or curative matter required for title approval or
acceptance.  If the actual operation has
not been commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior proposal had been made.


B.            Subsequent Operations:


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


If all parties to whom such notice is delivered elect
to participate in such a proposed operation, the parties shall be contractually
committed to participate therein provided such operations are commenced within
the time period hereafter set forth, and Operator shall, no later 



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than ninety (90) days after expiration of the notice
period of thirty (30) days (or as promptly as practicable after the expiration
of the forty-eight (48) hour period when a drilling rig is on location, as the
case may be), actually commence the proposed operation and thereafter complete
it with due diligence at the risk and expense of the parties participating
therein; provided, however, said commencement date may be extended upon written
notice of same by Operator to the other parties, for a period of up to thirty
(30) additional days if, in the sole opinion of the Operator, such additional time
is reasonably necessary to obtain permits from governmental authorities,
surface rights (including rights-of-way) or appropriate drilling equipment, or
to complete title examination or curative matter required for title approval or
acceptance.  If the actual operation has
not been commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior proposal had been made.


2.             Operations by Less
Than All Parties:


(a)           Determination of
Participation.  If any party to whom
such notice is delivered as provided in Article VI.B.1. elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as practicable after the expiration of the forty-eight (48)
hour period when a drilling rig is on location, as the case may be) actually
commence the proposed operation and complete it with due diligence.  Operator shall perform all work for the
account of the Consenting Parties. 
Consenting Parties, when conducting operations on the Contract Area
pursuant to this Article VI.B.2., shall comply with all terms and conditions of
this Agreement.


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



 11
 









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


(b)           Relinquishment of
Interest for Non-Participation.  The
entire cost and risk of conducting such operations shall be borne by the
Consenting Parties in the proportions they have elected to bear same under the
terms of the preceding paragraph. 
Consenting Parties shall keep the Interests involved in such operations
free and clear of all liens and encumbrances of every kind created by or
arising from the operations of the Consenting Parties.  If such an operation results in a dry hole,
then subject to Articles VI.B.6. and VI.E.3., the Consenting Parties shall plug
and abandon the well and restore the surface location at their sole cost, risk
and expense; provided, however, that those Non-Consenting Parties that
participated in the drilling, Deepening or Sidetracking of the well shall
remain liable for, and shall pay, their proportionate shares of the cost of
plugging and abandoning the well and restoring the surface location insofar
only as those costs were not increased by the subsequent operations of the
Consenting Parties.  If any well Reworked,
Sidetracked, Deepened, Recompleted or Plugged Back under the provisions of this
Article results in a well capable of producing Oil and/or Gas in paying
quantities, the Consenting Parties shall Complete and equip the well to produce
at their sole cost and risk, and shall be operated by it at the expense and for
the account of the Consenting Parties. 
Upon commencement of operations for the Reworking, Sidetracking,
Recompleting, Deepening or Plugging Back of any such well by Consenting Parties
in accordance with the provisions of this Article, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties, and the Consenting
Parties shall own and be entitled to receive, in proportion to their respective
interests, all of such Non-Consenting Party’s interest in the well and share of
production therefrom or, in the case of a Reworking, Sidetracking, Deepening,
Recompleting or Plugging Back, all of such Non-Consenting Party’s interest in
the production obtained from the operation in which the Non-Consenting Party’s
interest in the production obtained from the operation in which the
Non-Consenting Party did not elect to participate.  Such relinquishment shall be effective until
the proceeds of the sale of such share, calculated at the well, or market value
thereof if such share is not sold (after deducting applicable ad valorem,
production, severance, and excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.C. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts), shall equal the total of the following:


(i) 200% of each such
Non-Consenting Party’s share of the cost of any newly acquired surface
equipment beyond the wellhead connections (including but not limited to stock
tanks, separators, treaters, pumping equipment and piping), plus 100% of each
such Non-Consenting Party’s share of the cost of operation of the well
commencing with first production and continuing until each such Non-Consenting
Party’s relinquished interest shall revert to it under other provisions of this
Article, it being agreed that each Non-Consenting Party’s share of such costs
and equipment will be that interest which would have been chargeable to such
Non-Consenting Party had it participated in the well from the beginning of the
operations; and



 12
 









(ii) 200% of (a) that
portion of the costs and expenses of Reworking, Sidetracking, Deepening,
Plugging Back, testing, Completing and Recompleting, after deducting any cash
contributions received under Article VIII.C., and of (b) that portion of the
cost of newly acquired equipment in the well (to and including the wellhead
connections), which would have been chargeable to such Non-Consenting Party if
it had participated therein.


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


(c)   Reworking,
Recompleting or Plugging Back.  An
election not to participate in the Sidetracking or Deepening of a well shall be
deemed an election not to participate in any Reworking or Plugging Back
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party’s recoupment
amount.  Similarly, an election not to
participate in the Completing or Recompleting of a well shall be deemed an
election no to participate in any Reworking operation proposed in such a well,
or portion thereof, to which the initial non-consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party’s recoupment amount. 
Any such Reworking, Recompleting or Plugging Back operation conducted
during the recoupment period shall be deemed part of the cost of operation of
said well and there shall be added to the sums to be recouped by the Consenting
Parties 200% of that portion of the costs of the Reworking, Recompleting or
Plugging Back operation which would have been chargeable to such Non-Consenting
Party had it participated therein.  If
such a Reworking, Recompleting or Plugging Back operation is proposed during
such recoupment period, the provisions of this Article VI.B. shall be
applicable as between said Consenting Parties in said well.


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


In the case of any Reworking, Sidetracking, Plugging
Back, Recompleting or Deepening operation, the Consenting Parties shall be
permitted to use, free of cost, all casing, tubing and other equipment in the
well, but the ownership of all such equipment shall remain unchanged; and upon 



 13
 









abandonment of a well after such Reworking,
Sidetracking, Plugging Back, Recompleting or Deepening, the Consenting Parties
shall account for all such equipment to the owners thereof, with each party
receiving its proportionate part in kind or in value, less cost of salvage.


Within ninety (90) days after the completion of any
operation under this Article, the party conducting the operations for the
Consenting Parties shall furnish each Non-Consenting Party with an inventory of
the equipment in and connected to the well, and an itemized statement of the
cost of Sidetracking, Deepening, Plugging Back, testing, Completing,
Recompleting, and equipping the well for production; or, at its option, the
operating party, in lieu of an itemized statement of such costs of operation,
may submit a detailed statement of monthly billings.  Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
the operations for the Consenting Parties shall furnish the Non-Consenting
Parties with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the well’s
working interest production during the preceding month.  In determining the quantity of Oil and Gas
produced during any month, Consenting Parties shall use industry accepted
methods such as but not limited to metering or periodic well tests.  Any amount realized from the sale or other
disposition of equipment newly acquired in connection with any such operation
which would have been owned by a Non-Consenting Party had it participated
therein shall be credited against the total unreturned costs of the work done
and of the equipment purchased in determining when the interest of such
Non-Consenting Party shall revert to it as above provided; and if there is a
credit balance, it shall be paid to such Non-Consenting Party.


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


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



 14
 









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


4.             Deepening:  If less than all the parties elect to
participate in a Sidetracking, or Deepening operation proposed pursuant to
Article VI.B.1., the interest relinquished by the Non-Consenting Parties to the
Consenting Parties under Article VI.B.2. shall relate only and be limited to
the lesser of (i) the total depth actually drilled or (ii) the objective depth
or Zone of which the parties were given notice under Article VI.B.1. (“Initial
Objective”).  Such well shall not be
Deepened beyond the Initial Objective without first complying with this Article
to afford the Non-Consenting Parties the opportunity to participate in the
Deepening operation.


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


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


(b)           If the proposal is for
Sidetracking a well which has previously produced, reimbursement shall be on
the basis of such party’s proportionate share of drilling and equipping costs
incurred in the initial drilling of the well down to the depth at which the
Sidetracking operation is conducted, calculated in the manner described in
Article VI.B.4(b) above.  Such party’s
proportionate share of the cost of the well’s salvable materials and equipment
down to the depth at which the Sidetracking operation is initiated shall be
determined in accordance with the provisions of Exhibit “C.”


6.             Order
of Preference of Operations.  Except
as otherwise specifically provided in this Agreement, if any party desires to
propose the conduct of an operation that conflicts with a proposal that has
been made by a party under this Article VI, such party shall have fifteen (15)
days from delivery of the initial proposal, in the case of a proposal to
perform an operation on a well where no drilling rig is on location, or
twenty-four (24) hours, exclusive of Saturday, Sunday and legal holidays, from
delivery of the initial proposal, if a drilling rig is on location for the well
on which such operation is to be conducted, to deliver to all parties entitled
to participate in the proposed operation such party’s alternative proposal,
such alternate proposal to contain the same information required to be included
in the initial proposal.  Each party
receiving such proposals shall elect by delivery of notice to Operator within
five (5) days after expiration of the proposal period, or within twenty-four
(24) hours (exclusive of Saturday, Sunday and legal holidays) if a drilling rig
is on location for the well that is the subject of the proposals, to
participate in one of the competing proposals. 
Any party not electing within the time required shall be deemed not to
have voted.  The 



 15
 









proposal receiving the vote of parties owning the
largest aggregate percentage interest of the parties voting shall have priority
over all other competing proposals; in the case of a tie vote, the initial
proposal shall prevail.  Operator shall
deliver notice of such result to all parties entitled to participate in the
operation within five (5) days after expiration of the election period (or
within twenty-four (24) hours, exclusive of Saturday, Sunday and legal holidays,
if a drilling rig is on location).  Each
party shall then have two (2) days (or twenty-four (24) hours if a rig is on
location) from receipt of such notice to elect by delivery of notice to
Operator to participate in such operation or to relinquish interest in the
affected well pursuant to the provisions of Article VI.B.2.; failure by a party
to deliver notice within such period shall be deemed an election not to
participate in the prevailing proposal.


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


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


C.            Completion
of Wells; Reworking and Plugging Back:


1.             Completion.           Without the consent of
all parties, no well shall be Reworked, or Sidetracked, except any well
drilled, Deepened or Sidetracked pursuant to the provisions of Article VI.B.2.
of this Agreement.  Consent to the
drilling, Deepening or Sidetracking shall include all necessary expenditures
for the drilling, Deepening or Sidetracking, testing, Completing and equipping
of the well, including necessary tankage and/or surface facilities.


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


D.            Other
Operations:


Operator shall not undertake any single project
reasonably estimated to require an expenditure in excess of Fifteen Thousand
Dollars ($15,000.00) except in connection with the Sidetracking, Reworking,
Deepening, Completing, Recompleting or Plugging Back of a well that has been
previously authorized by or pursuant to this Agreement; provided, however,
that, in case of explosion, fire, flood or other sudden emergency, whether of the
same of different nature, Operator may take such steps and incur such expenses
as in its opinion are required to deal with the emergency to safeguard life and
property but Operator, as promptly as possible, shall report the emergency to
the other parties.  If Operator prepares
an AFE for its own use, Operator shall furnish the Non-Operators an information
copy thereof for any single project costing in excess of Fifteen Thousand
Dollars ($15,000.00).  Any party who has
not relinquished its interest in a well shall have the right to propose that
Operator perform repair work or undertake the installation of artificial lift



 16















equipment or ancillary
production facilities such as salt water disposal wells or to conduct
additional work with respect to a well drilled hereunder or other similar
project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. which shall be governed exclusively by that
Articles).  Operator shall deliver such
proposal to all parties entitled to participate therein.  If within thirty (30) days thereof Operator
secures the written consent of any party or parties owning at least 100% of the
interests of the parties entitled to participate in such operation, each party
having the right to participate in such project shall be bound by the terms of
such proposal and shall be obligated to pay its proportionate share of the
costs of the proposed project as if it had consented to such project pursuant
to the terms of the proposal.


E.                                     Abandonment
of Wells:


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


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



 17
 









the well conducted by
such parties.  Failure of such party or
parties to provided proof reasonably satisfactory to Operator of their
financial capability to conduct such operations or to take over the well within
the required period or thereafter to conduct operations on such well shall
entitle Operator to retain or take possession of such well and plug and abandon
the well.


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


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


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



 18
 









F.                                     Termination
of Operations:


Upon the commencement of
an operation for the drilling, Reworking, Sidetracking, Plugging Back,
Deepening, testing, Completion or plugging of a well such operation shall not
be terminated without consent of parties bearing one-hundred percent (100 %) of
the costs of such operation; provided, however, that in the event granite other
practically impenetrable substance or condition in the hole is encountered
which renders further operations impractical, Operator may discontinue
operations and give notice of such condition in the manner provided in Article
VI.B.1, and the provisions of Article VI.B or VI.E. shall thereafter apply to
such operation, as appropriate.


G.                                   Taking
Production in Kind:


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


To the extent reasonably possible, the parties will
agree on the joint marketing of the oil produced from the Contract Area.


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


If any party fails to
make the arrangements necessary to take in kind or separately dispose of its
proportionate share of the Oil produced from the Contract Area, Operator shall
have the right, subject to the revocation at will by the party owning it, but
not the obligation, to purchase such Oil or sell it to others at any time and
from time to time, for the account of the non-taking party.  Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written notice to the owner
of said production and shall be subject always to the right of the owner of the
production upon at least ten (10) days written notice to Operator to exercise
at any time its right to take in kind, or separately dispose of, its share of
all Oil not previously delivered to a purchaser.  Any purchase or sale by Operator of any party’s
share of Oil shall be only for such reasonable periods of time as are
consistent with the minimum needs of the industry under the particular
circumstances, but in no event for a period in excess of one (1) year without
the consent of all of the parties hereto.


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


All parties shall give
timely written notice to Operator of their Gas marketing arrangements for the
following month, excluding price, and shall notify Operator immediately in the
event of a change in such arrangements. 
Operator shall maintain records of all marketing arrangements, and 



 19
 









of volumes actually sold
or transported, which records shall be made available to Non-Operator upon
reasonable request.  Operator shall give
notice to all parties of the first sale of Gas from any well under this
Agreement.


ARTICLE VII


EXPENDITURES AND LIABILITY OF PARTIES


A.
                                Liability
of Parties:


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


B.                                   Liens
and Security Interests:


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


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



 20
 









other states as Operator
shall deem appropriate to perfect the security interest granted hereunder.  Any party may file this Agreement, the
recording supplement executed herewith, or such other documents as it deems
necessary as a lien or mortgage in the applicable real estate records and/or a
financing statement with the proper officer under the Uniform Commercial Code.


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


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


If any party fails to pay
its share of cost within one hundred twenty (120) days after rendition of a
statement therefore by Operator, the non-defaulting parties may, but shall
have no obligation to do so, upon request by Operator, pay the unpaid
amount in the proportion that the interest of each such party bears to the
interest of all such parties.  Any amount paid by a party so paying its share of the unpaid
amount shall be secured by the liens and security rights described in Article
VII.B., and each paying party may independently pursue any remedy available
hereunder or otherwise.


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



 21
 









exercised in the manner
provided by applicable law or otherwise in a commercially reasonable manner and
upon reasonable notice.


Each party agrees that
the other parties shall be entitled to utilized the provisions of Oil and Gas
lien law or other lien law of any state in which the Contract Area is situated
to enforce the obligations of each party hereunder.  Without limiting the generality of the
foregoing, to the extent permitted by applicable law, Non-Operators agree that
Operator may invoke or utilize the mechanics’ or materialman’s lien law of the
state in which the Contract Area is situated in order to secure the payment to
Operator of any sum due hereunder for services performed or materials supplied
by Operator.


C.                                   Advances:


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


D.                                   Defaults
and Remedies:


If any party fails to
discharge any financial obligation under this Agreement, including without
limitation the failure to make any advance under the preceding VII.C. or any
other provision of this Agreement, within the period required for such payment
hereunder, then in addition to the remedies provided in Article VII.B. or
elsewhere in This Agreement, the remedies specified below shall be
applicable.  For purposes of this Article
VII.D., all notices and elections shall be delivered only by Operator, except
that Operator shall deliver any such notice and election requested by a
non-defaulting Non-Operator, and when Operator is the party in default, the
applicable notices and elections can be delivered by an Non-Operator.  Election of any one or more of the following
remedies shall not preclude the subsequent use of any other remedy specified
below or otherwise available to a non-defaulting party.


1.                                       Suspension
of Rights:  Any party may deliver to
the party in default a Notice of Default, which shall specify the default,
specify the action to be taken to cure the default, and specify that failure to
take such action will result in the exercise of one or more of the remedies
provided in this Article.  If the default
is not cured within thirty (30) days of the delivery of such Notice of Default,
all of the rights of the defaulting party granted by this Agreement may upon
notice be suspended until the default is cured, without prejudice to the right
of the non-defaulting party or parties to continue to enforce the obligations
of the defaulting party previously accrued or thereafter accruing under this
Agreement.  The rights of a defaulting
party that may be suspended hereunder at the election of the non-defaulting
parties shall include, without limitation, the right to



 22
 









 receive information as to any operation
conducted hereunder during the period of such default, the right to elect to
participate in an operation proposed under Article VI.B. of  this Agreement, the right to participate in
an operation being conducted under  this
Agreement even if the party ahs previously elected to participate in such
operation, and the right to receive proceeds of production from any well
subject to  this Agreement.


2.                                       Suit
for Damages:  Non-defaulting parties
or Operator for the benefit of non-defaulting parties may sue (at joint account
expense) to collect the amounts in default, plus interest accruing on the
amounts recovered from the date of default until the date of collection at the
rate specified in Exhibit “C” attached hereto. 
Nothing herein shall prevent any party from suing any defaulting party
to collect consequential damages accruing to such party as a result of the
default.


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


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


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


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



 23
 









E.                                     Rental,
Shut-in Well Payments and Minimum Royalties:


Rentals, shut-in payments
and minimum royalties which may be required under the terms of any lease shall
be paid by Operator, and said expenses shall be born by the parties in
proportion to their respective working interests.  Any party may request, and shall be entitled
to receive, proper evidence of all such payments.  In the event of failure to make proper
payment of any rental, shut-in well payment or minimum royalty through mistake
or oversight where such payment is required to continue the lease in force, any
loss which results from such non-payment shall be borne in accordance with the
provisions of Article IV.B.2.


Operator shall notify
Non-Operators of the anticipated completion of a shut-in well, or the shutting
in or return to production of a producing well, at least five (5) days
(excluding Saturday, Sunday and legal holidays) prior to taking such action, or
at the earliest opportunity permitted by circumstances, but assumes no
liability for failure to do so.  In the
event of failure by Operator to so notify Non-Operators, the loss of any lease
contributed hereto by Non-Operators for failure to make timely payments of any
shut-in well payment shall be borne jointly by the parties hereto under the
provisions of Article IV.B.3.


F.                                     Taxes:


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


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


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



 24
 









ARTICLE VIII.


ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST


A.                                    Surrender of Leases:


The Leases associated
with the Oil and Gas Interests covered by 
this Agreement shall not be surrendered in whole or in part unless all
parties consent thereto.


D.                                    Assignment:


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


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


D.                                    Waiver of Rights to
Partition:


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


ARTICLE IX


[INTENTIONALLY OMITTED]


ARTICLE X


CLAIMS AND LAWSUITS



 25
 









Operator may settle any
single uninsured third party damage claim or suit arising from operations
hereunder if the expenditure does not exceed Fifteen Thousand Dollars
($15,000.00) and if the payment is in complete settlement of such claim or
suit.  If the amount required for
settlement exceeds the above amount, the parties hereto shall assume and take
over the further handling of the claim or suit, unless such authority is
delegated to Operator.  All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation
from which the claim or suit arises.  If
a claim is made against any party or if any party is used on account of any
matter arising from operations hereunder over which such individual has no
control because of the rights given Operator by this Agreement, such party
shall immediately notify all other parties, 
and the claim or suit shall be treated as any other claim or suit
involving operations hereunder.


ARTICLE XI


FORCE MAJEURE


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



 26
 









ARTICLE XII


NOTICES


All notices authorized or
required between the parties by any of the provisions of this Agreement, unless
otherwise specifically provided, shall be in writing and delivered in person or
by United States mail, courier service, telegram, telex, telecopier or any
other form of facsimile, postage or charges prepaid, and addressed to such
parties at the addresses listed on Exhibit “A.” 
All telephone or oral notices permitted by this Agreement shall be
confirmed immediately thereafter by written notice.  The originating notice given under any
provision hereof shall be deemed delivered only when received by the party to
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date the originating notice is
received.  “Receipt” for purposes of this
Agreement with respect to written notice delivered hereunder shall be actual
delivery of the notice to the address of the party to be notified specified in
accordance with this Agreement, or to the telecopy, facsimile or telex machine
of such party.  The second or any
responsive notice shall be deemed delivered when deposited in the United States
mail or at the office of the courier or telegraph service, or upon transmittal
by telex, telecopy or facsimile, or when personally delivered to the party to
be notified, provided, that when response is required within 24 or 48 hours,
such response shall be given orally or by telephone, telex, telecopy or other
facsimile within such period.  Each party
shall have the right to change its address at any time, and from time to time,
by giving written notice thereof to all other parties.  If a party is not available to receive notice
orally or by telephone when a party attempts to deliver a notice required to be
delivered within 24 or 48 hours, the notice may be delivered in writing by any
other method specified herein and shall be deemed delivered in the same manner
provided above for any responsive notice.


ARTICLE XIII


TERM OF AGREEMENT


This Agreement shall remain in full force and effect
as to the Oil and Gas Interests subject hereto so long as any of the Oil and
Gas Interests subject to this Agreement remain or are continued in force as to
any part of the Contract Area, whether by production extension, renewal or
otherwise.


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


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



 27
 









ARTICLE XIV


COMPLIANCE WITH LAWS AND REGULATIONS


A.                                   Laws,
Regulations and Orders:


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


B.                                   Governing
Law:


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


C.                                   Arbitration:


Notwithstanding any other provision of this Agreement to
the contrary, if
any controversy, claim or dispute arising out of or relating to this Agreement
or the breach or performance thereof occurs, the parties shall meet and exert
reasonable efforts to reach an amicable settlement for a period not to exceed
twenty (20) days from the date written notice of the controversy, claim or
dispute is served by the complaining party to the other party under this
Agreement.  If for any reason such
settlement fails to occur within such twenty-day period (or such other period
as the parties may agree in writing), the controversy, claim or dispute shall
be finally and conclusively resolved by binding
arbitration administered
by the American Arbitration Association in accordance with its Commercial
Arbitration Rules (“AAA Rules”) and subject to the Federal Arbitration Act, 9
U.S.C. Sections 1 et  seq., and judgment on any award thereby
rendered may be entered in any court having jurisdiction thereof.


(a)                                  Any such arbitration
shall proceed as promptly and as expeditiously as possible (and the parties
shall cooperate to this end) before three arbitrators, consisting of one
arbitrator appointed by the claimant, one arbitrator appointed by the
respondent, and the third arbitrator appointed by the two party-appointed
arbitrators.  Arbitration shall be
initiated by written notice of intention to arbitrate made pursuant the AAA
Rules.  The claimant shall identify its
appointed arbitrator in the notice of intention to arbitrate, and the
respondent shall identify its appointed arbitrator within ten (10) days of its
receipt of the notice of intention to arbitrate.  The two party-appointed arbitrators shall
agree upon and appoint the third arbitrator within the ten (10) day period
following the appointment of the second party-appointed arbitrator.  If either the claimant or the respondent fail
to appoint an arbitrator pursuant to the foregoing, or if the two
party-appointed arbitrators fail to agree upon and appoint the third arbitrator
within the above-referenced ten (10) day period, then such arbitrator or
arbitrators shall be appointed by the AAA pursuant to the AAA Rules.  The arbitrators chosen or appointed shall
have expertise and/or experience in the oil and gas industry.


(b)                                 Nothing in this
Section shall be deemed to preclude any party from applying to any court of
competent jurisdiction at any time prior to the formation of the arbitration
panel 



 28
 









(including before or during the twenty (20) day
negotiation period referenced in the first sentence of this Section) for
injunctive, provisional or other emergency relief pertaining to the subject
matter of a controversy, claim or dispute that is arbitrable hereunder, or
applying for such relief in aid of arbitration after formation of the
arbitration panel, where (i) the arbitration award to which the party may be
entitled may be rendered ineffectual without such relief, (ii) the party
seeking such relief is not in breach of this Section, and (iii) the relief
sought will not materially delay or frustrate the arbitration.  The grant or denial of any court-ordered
relief pursuant to this paragraph shall not constitute or be deemed to be a
ruling on the merits of the matter to be arbitrated, nor shall any application
for such relief be deemed to be a waiver of any right to arbitration hereunder.


(c)                                  The parties hereby
agree that the costs and expenses, including attorneys’ fees, incurred in
connection with any arbitration or court proceeding hereunder shall be awarded
in favor of the prevailing party and against the losing party as determined by
the arbitration panel or court, as the case may be.


D.                                   Regulatory
Agencies:


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


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


ARTICLE XV


MISCELLANEOUS


A.                                   Execution:


This Agreement shall be
binding upon each Non-Operator when this Agreement or a counterpart thereof has
been executed by all Non-Operators and Operator.


B.                                   Successors
and Assigns; Counterparts:


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



 29
 









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


D.                                   Severability:


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


[End of Text. 
Signatures on Following Page]



 30
 









IN WITNESS WHEREOF, this
Agreement shall be effective as of the date first set forth above.


	
   

  	
  OPERATOR:

  
	
   

  	
   

  
	
   

  	
  VINLAND
  ENERGY OPERATIONS, LLC

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Majeed S.
  Nami

  	
   

  
	
   

  	
   

  
	
   

  	
  Its: Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  NON-OPERATORS:

  
	
   

  	
   

  
	
   

  	
  ARIANA
  ENERGY, LLC

  
	
   

  	
  By: Vanguard
  Natural Gas, LLC

  
	
   

  	
  Its: Sole Member

  
	
   

  	
  By: 

  	
  /s/ Scott W.
  Smith

  	
   

  
	
   

  	
   

  
	
   

  	
  Its: Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  VINLAND
  ENERGY EASTERN LLC

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Mike S. Nami

  	
   

  
	
   

  	
   

  
	
   

  	
  Its: Manager

  
								



 



 31














EXHIBIT A


to the Operating Agreement
(Tennessee)


INFORMATION
FORM











EXHIBIT A-1


to the Operating Agreement
(Tennessee)


AMI Map











EXHIBIT A-2


to the Operating Agreement
(Tennessee)


AMI Map











EXHIBIT A-3


to the Operating Agreement
(Tennessee)


AMI Map











EXHIBIT A-4


to the Operating Agreement
(Tennessee)


AMI Map











EXHIBIT A-5


to the Operating Agreement
(Tennessee)


AMI Map











EXHIBIT B


to the Operating Agreement
(Tennessee)


PARTICIPATION
AGREEMENT











EXHIBIT C


to the Operating Agreement
(Tennessee)


ACCOUNTING
PROCEDURE











EXHIBIT D


to the Operating Agreement
(Tennessee)


INSURANCE











EXHIBIT E


AE PUD
ASSIGNMENT