Document:

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                                                                    EXHIBIT 10.0

                         [AMPERSAND VENTURES LETTERHEAD]

                                  May 23, 2001

Mr. Donald R. Friedman
President and Chief Executive Officer
Sheldahl, Inc.
1150 Sheldahl Road
Northfield, MN  55057-9444

Dear Don:

This letter agreement (the "Agreement") is written in response to your request
for a proposal from Ampersand IV Limited Partnership, Ampersand IV Companion
Fund Limited Partnership (collectively "Ampersand") and Morgenthaler Venture
Partners V, L.P. ("Morgenthaler" and collectively with Ampersand the
"Investors") to address the immediate and longer term liquidity and capital
resources requirements for Sheldahl, Inc. ("Sheldahl" or the "Company").
Pursuant to this Agreement, the Investors and Molex Incorporated ("Molex") will
immediately extend $5 million in bridge financing to Sheldahl. In addition, the
Investors will immediately undertake an evaluation of the possible acquisition
by the Investors of certain assets of Sheldahl's Materials Business (as
hereinafter defined).

While we understand management is aggressively pursuing all avenues for expense
reduction, we understand that the Company will need an immediate cash infusion
of at least $5 million over the next 10 days to strengthen Sheldahl during this
quarter, and substantial additional funding in the future to give the Company
time to restore itself to a positive cash flow.

We further understand that management has been exploring the complete range of
financing alternatives for meeting this need, including investigating other
means of raising capital, and has initiated a variety of actions to dispose of
specific assets, such as the potential sale of the Materials Business. Although
you have initiated discussions with other parties relating to the sale of the
Materials Business, you have also made clear that neither that sale nor other
alternatives you have explored can be brought to closure in the time frame
necessary to address the short-term cash needs of the Company.

Therefore, as a last resort, the Investors are prepared to make the following
accommodation to the Company:

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o    provide an immediate cash infusion of $5 million in the form of a secured
     subordinated loan; and

o    initiate due diligence analyses and enter into negotiations to acquire the
     Materials Business for cash in a leveraged buyout transaction.

These transactions would be designed to accomplish several simultaneous
objectives, including:

o    to provide Sheldahl with the cash that is necessary to solve its immediate
     needs, without creating any additional dilution for the Company's current
     shareholders; and

o    to provide Sheldahl with an opportunity to pursue other potential buyers of
     the Materials Business while the Investors evaluate the purchase.

Let us hasten to add that the Investors are motivated by the desire to protect
Sheldahl and the Investors' current investment in Sheldahl rather than by a
desire to purchase the Materials Business.

Each of the parties hereto acknowledges agreement in principle to the following
terms and conditions of the transaction and agrees that it will proceed in good
faith in negotiating any refinements and clarifications of such terms and the
proposal of any additional terms. It is expressly agreed that the terms of this
Agreement shall be legally binding. The parties hereto also agree that the
consummation of the purchase of the assets of the Materials Business of Sheldahl
is expressly conditioned on agreement on price, and is subject to the
finalization of a definitive acquisition agreement, the satisfactory completion
of a due diligence investigation of Sheldahl's Materials Business and the
completion of a debt financing in the form of term debt and a working capital
revolver in favor of NEWCO (as hereinafter defined) to fund a portion of the
purchase price of the Materials Business, transaction costs and working capital.

In consideration of the foregoing, the Investors and Sheldahl hereby agree as
follows:

1. Loan Financing. Simultaneously with the execution of this Agreement, the
Investors and Molex have agreed to loan the Company $5 million (the "Loan")
pursuant to the Subordinated Secured Note Purchase Agreement attached hereto as
Exhibit A (the "Note Purchase Agreement").

2. Negotiation for Purchase of Materials Business. The Investors and Sheldahl
shall negotiate in good faith towards the purchase by a new company to be
created by the Investors ("NEWCO") and sale by Sheldahl of all of the assets and
certain liabilities of the Materials Business in the manner set forth below:

                                       2

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     (a)  Assets. NEWCO will purchase all of the assets of the Materials
          Business, including, but not limited to: Accounts Receivable,
          Inventory, Plant, Property and Equipment, Patents, Trademarks,
          Know-How, Formulae, Customer Lists and other intangible property
          necessary for or used in the conduct of the Materials Business. For
          the purposes of this Agreement "Materials Business" shall mean
          Sheldahl's adhesive-based tapes, laminates and composite materials
          business, excluding the Company's Accentia, Comclad and lithium
          batteries products and assets associated exclusively with these
          products. The Materials Business shall also exclude Sheldahl's
          flexible interconnect division including Novaclad, Novaflex and
          Flexbase products and assets associated exclusively with that
          division. The parties will work out acceptable arrangements with
          respect to shared assets.

     (b)  Retained Liabilities. Sheldahl will retain, and be responsible for,
          the eventual repayment of the outstanding loan balance due to Wells
          Fargo, which is estimated to be approximately $25 million at closing,
          as well as all liabilities associated with the $5 million Loan
          financing extended by the Investors. While it is NEWCO's intention to
          assume all of the ordinary course liabilities associated with
          Sheldahl's Materials Business, NEWCO will only assume those
          liabilities that are scheduled at closing and Sheldahl will indemnify
          NEWCO against any claims relating to any unscheduled liabilities or
          encumbrances pertaining to the purchased assets. Sheldahl will retain
          its interest in Sidrabe and in the joint venture with Molex
          Incorporated.

3. Timing. The Investors and Sheldahl will use their best efforts to negotiate
the sale of the Materials Business and close the sale as soon as possible, with
a target of 75 days from the date of execution of this Agreement by all the
parties hereto (the "Signing Date"). The Investors shall immediately begin to
conduct their due diligence investigation regarding the Materials Business. In
any event, this Agreement will expire at the earlier of 90 days from the Signing
Date or the signing of a definitive agreement by the parties. Subject to the
sections entitled Delayed Exclusive Purchaser Clause, Liability of Sheldahl Upon
Certain Events and Transaction Costs below, this Agreement may be terminated (a)
by written notice by Sheldahl or the Investors at any time during the first 60
days after the Signing Date, or (b) by the mutual written consent of Sheldahl
and the Investors at any time after the first 60 days after the Signing Date.

4. Delayed Exclusive Purchaser Clause. During the first 60 days following the
Signing Date, Sheldahl, its agents or representatives will be free to engage in
conversations with, solicit or consider proposals from, or enter into
non-exclusive letters of intent or agreements with, any other party regarding
acquisition or investment with respect to the Materials Business assets, and
provide information to such parties to the extent such information does not
violate the terms of this Agreement.

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Notwithstanding the foregoing, if during this 60-day period Sheldahl receives a
proposal (letter of intent, agreement in principle, purchase agreement, or other
like agreement) and Sheldahl desires to enter into an exclusive relationship
with that party regarding the sale of the Materials Business to such party,
then, subject to the remainder of the terms of this Agreement (including the
section entitled Liability of Sheldahl Upon Certain Events), Sheldahl shall be
free to enter into an agreement with such party. In such an event, Sheldahl
shall be required to repay Investor's and NEWCO's legal, consulting, due
diligence or other expenses related to the pursuit of this transaction, in an
amount not to exceed $300,000, in accordance with the section entitled
Transaction Costs. In addition, if Sheldahl enters into any agreement that
contains exclusivity provisions regarding the sale of the Materials Business or
any financial obligations on the part of Sheldahl to any potential acquirer in
the event the business is not acquired by such potential acquirer, then Sheldahl
must arrange for repayment in full of the Loan by such potential acquirer to the
Investors and Molex in accordance with the terms of the Note Purchase Agreement
and a transfer or assignment of the Loan to such potential acquirer.

If, after the first 60 days following execution of this Agreement, Sheldahl has
not given the Investors written notice that Sheldahl is terminating this
Agreement, then the negotiations with the Investors to purchase the assets of
the Materials Business shall become exclusive. Therefore, from that point
forward, during the term of this Letter Agreement, Sheldahl, its agents,
directors, officers, employees or representatives (each a "Sheldahl
Representative") will not be free to engage in conversations with, or solicit or
directly or indirectly consider proposals from, any other party regarding an
alternative acquisition or investment with respect to the Materials Business
assets. Any overtures that Sheldahl or any Sheldahl Representative receives from
a third party shall be immediately referred to the Investors. During the term of
this Letter Agreement neither Sheldahl nor any Sheldahl Representative will take
or omit to take any action that would result in a violation of the section of
this Agreement entitled Liability of Sheldahl Upon Certain Events.

5. Liability of Sheldahl Upon Certain Events. In the event that any of the
following shall occur prior to the 90th day after the Signing Date:

     (a)  Sheldahl terminates this Agreement unless such termination results
          from a breach by the Investors of any material provision of this
          Agreement or the termination occurs as a result of the provisions of
          (c) below, in which case the provisions of (c) shall apply;

     (b)  Sheldahl closes an agreement for the sale of the Materials Business
          with another buyer; or

     (c)  Sheldahl enters into a letter of intent, agreement in principle or any
          other agreement with any other party regarding the sale of the
          Materials Business, provided that Sheldahl's obligation to pay the
          Investors as provided below shall not be triggered until the closing
          of such sale of the Materials Business,

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then Sheldahl shall, within two business days after demand therefor by the
Investors, (i) pay to the Investors, in connection with this Agreement and the
transaction contemplated hereby, $900,000 plus an amount equal to all
out-of-pocket expenses and legal fees incurred by the Investors and NEWCO, not
to exceed $300,000 in cash, certified check or bank cashier's check to the
extent not previously paid, and (ii) assure that any outstanding principal and
accrued interest on the Loan provided by the Investors is repaid to the
Investors in full, provided however, that the timing of the obligations
hereunder shall be subject to the terms of that certain Subordination Agreement
among the Investors, Molex, the Company and Wells Fargo Bank Minnesota, N.A.
dated this date.

6. Access. During the term of this Agreement, Sheldahl will cooperate fully in
granting the Investors access to Sheldahl's premises, to all of Sheldahl's books
and records, and to Sheldahl's customers, suppliers, employees and independent
accountants to the extent related to the Materials Business.

7. Press Releases. Except as required by law, the timing and content of all
press releases and public statements concerning this transaction shall be made
by the mutual agreement of Sheldahl and the Investors. The Investors acknowledge
that Sheldahl will disclose this Agreement and the transactions contemplated
hereby in its filings under the Securities Exchange Act of 1934, as amended.

8. Transaction Costs. In the event that the Investors or NEWCO enter into a
definitive agreement with Sheldahl to acquire the assets of the Materials
Business, Sheldahl will bear all of its own and all of the Investors' and
NEWCO's out-of-pocket costs incurred in connection with this transaction, not to
exceed $300,000. In any other event (other than a material breach by the
Investors of their obligations hereunder), including, without limitation, (a)
the failure of the parties hereto to enter into a definitive agreement within 90
days of the Signing Date; or (b) the occurrence of any of the events specified
under the section entitled Liability of Sheldahl Upon Certain Events, Sheldahl
shall pay to the Investors an amount equal to all out-of-pocket expenses and
legal fees incurred by the Investors in connection with the transaction
contemplated by this Agreement, provided, however, such amount shall not exceed
$300,000.

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If you are in agreement with the foregoing, please execute and deliver to us the
enclosed copy of this letter.

                                       AMPERSAND IV LIMITED PARTNERSHIP

                                       By: AMP-IV Management Company Limited
                                           Liability Company

                                       By  /s/ Stuart A. Auerbach
                                          --------------------------------------
                                               Stuart A. Auerbach
                                          Its: Managing Member

                                       AMPERSAND IV COMPANION FUND LIMITED
                                       PARTNERSHIP

                                       By: AMP-IV Management Company Limited
                                           Liability Company

                                       By  /s/ Stuart A. Auerbach
                                          --------------------------------------
                                               Stuart A. Auerbach
                                          Its: Managing Member

                                       MORGENTHALER VENTURE PARTNERS V, L.P.

                                       By  /s/ John D. Lutsi
                                          --------------------------------------
                                               John D. Lutsi
                                          Its: General Partner

ACCEPTED AND AGREED TO:

SHELDAHL, INC.

By /s/ Donald R. Friedman
  ------------------------------------------
       Donald R. Friedman
  Its: President and CEO

                                       6<PAGE>   1
EXHIBIT 4.1

                             DATED 4th February 1994

                    (1) ENERGY CAPITAL INVESTMENT COMPANY PLC

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                           (2) ENCAP INVESTMENTS L.C.

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

                          INVESTMENT ADVISORY AGREEMENT

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

                                  Hobson Audley
                                7 Pilgrim Street
                                 London EC4V 6DR

                                  ARG/LJI/2487

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                         INVESTMENT ADVISORY AGREEMENT

AN AGREEMENT made the 4th day of February, One thousand nine hundred and ninety
four.

B E T W E E N

(1)   ENERGY CAPITAL INVESTMENT COMPANY PLC (registered in England No. 2867571)
      whose registered office is at 99 Charterhouse Street, London EC1M 6AB
      ("the Company"),

(2)   ENCAP INVESTMENTS L.C., a Texas limited liability company whose principal
      place of business is at 1100 Louisiana Street, Suite 3150, Houston, Texas
      77002 USA ("EnCap").

WHEREAS:

(A)   The Company is desirous of appointing EnCap (subject as hereinafter
      provided) to advise the Company in relation to the management and
      investment and re-investment of the Company's Investments.

(B)   EnCap is engaged in business offering investment management and advisory
      services in the USA in relation to the oil and gas industry and has
      considerable skill, knowledge and experience in that field.

NOW IT IS HEREBY AGREED as follows:

1.    INTERPRETATION

      1.1   In this Agreement the following words and expressions shall where
            not inconsistent with the context have the following meanings
            respectively:

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            "Affiliate" with regard to another person shall mean any person
            directly or indirectly controlling, controlled by or under common
            control with, such other person; "Control" means the possession,
            directly or indirectly, of the power to direct or cause the
            direction of the management and policies of a person whether through
            the ownership of voting securities, by contract or otherwise;

            "Appointee(s)" means any person or persons to whom EnCap may have
            delegated any of its functions hereunder;

            "Articles" means the Articles of Association of the Company as
            amended from time to time and any reference herein to an Article
            shall be taken to refer to the Articles unless otherwise specified;

            "Directors" means the Board of Directors of the Company from time to
            time including any duly appointed committee thereof;

            "Independent Directors" means the Directors other than those
            connected within the meaning of Section 346 of the Companies Act
            1985 with EnCap;

            "the Investments" means the assets and rights from time to time of
            the Company acquired pursuant to this Agreement and held in
            accordance with the Memorandum of Association and Articles of the
            Company;

            "Investment Policy" means the investment policy of the Company (as
            reviewed and amended by the Directors from time to time) as
            initially stated in the Particulars and repeated in Part A of
            Schedule One;

            "Investment Restrictions" means the investment restrictions (as
            reviewed and amended by the Directors from time to time or as
            amended by statute or rules or regulations thereunder) as initially
            stated in the Particulars and repeated in Part B of Schedule One;

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            "the Particulars" means the Listing Particulars of the Company
            proposed to be dated 4th February 1994;

            "the Partnership" means the US Limited Partnership to be constituted
            between EnCap, Lincoln National Life Insurance Company,
            Internationale Nederlanden (U.S.) Capital Corporation and others to
            co-invest with the Company as is referred to in the Particulars;

            "the Placing" means the placing of Ordinary Shares and Warrants
            described in the Particulars;

            "the Placing Agreement" means the Agreement of even date herewith
            made between the Company (1), Greig Middleton & Co. Limited (2)
            Henderson Crosthwaite Institutional Brokers Limited (3), and
            Rauscher Pierce & Clark Limited (4) described in the Particulars in
            paragraph 7(b) of Part IV thereof under the heading "General
            Information";

            "Schedules" mean the Schedules annexed hereto which form part of
            this Agreement;

            "the Secretary" means Aberdeen Trust PLC or the Secretary of the
            Company for the time being;

            "subsidiary" has the meaning ascribed thereto in Section 144 of the
            Companies Act 1989;

            "The London Stock Exchange" means the International Stock Exchange
            of the United Kingdom and Republic of Ireland Limited;

            Any reference to EnCap includes a reference to its duly authorised
            agents or delegates.

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      1.2   Words and expressions contained in this Agreement (but not defined
            herein) shall bear the same meanings as in the Articles PROVIDED
            THAT any alteration or amendment of the Articles shall not be
            effective for the purpose of this Agreement unless any affected
            party (to the extent that its rights or duties hereunder are
            affected by such alteration or amendment) shall by endorsement
            hereon or otherwise in writing have assented thereto.

      1.3   The headings to the Clauses of this Agreement are for convenience
            only and shall not affect the construction or interpretation
            thereof.

2.    CONDITIONAL AGREEMENT

      This Agreement shall be conditional in all respects upon the Placing
      Agreement becoming unconditional in all respects.

3.    APPOINTMENT AND FUNCTIONS OF ENCAP

      3.1   The Company HEREBY APPOINTS EnCap, subject to and in accordance with
            the directions of the Directors, and in accordance with the
            Investment Policy and Investment Restrictions, as advisors and
            managers in respect of the investment and re-investment of the
            Investments on the terms contained herein and EnCap hereby accepts
            such appointment and agrees to assume the obligations set forth
            herein.

      3.2   Without prejudice to the generality of Clause 3.1 above, the duties
            to be performed by EnCap on behalf of the Company in accordance with
            the Investment Policy and the Investment Restrictions shall include
            the following:

            3.2.1 EnCap shall, as and when requested by the Board, use all
                  reasonable endeavours to identify Investments, conforming with
                  the Investment Policy, for recommendation to the Board. EnCap
                  shall furnish to the

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                  Directors in relation to any proposed Investment all such
                  information as the Directors shall reasonably require or which
                  is in EnCap's possession, to enable the Directors to consider
                  the proposed Investment.

            3.2.2 Following the identification by EnCap of a Proposed
                  Investment, EnCap shall conduct such further investigations as
                  the Directors shall reasonably request and when reasonably
                  requested by the Directors, EnCap shall report and advise in
                  relation thereto.

            3.2.3 As and when so requested by the Directors, EnCap shall
                  commission an independent engineering firm approved by the
                  Directors to furnish to the Directors and EnCap a report in
                  relation to the proposed Investment. The terms of reference
                  for such report shall be as agreed between the Directors and
                  EnCap.

            3.2.4 EnCap shall undertake all negotiations with third parties in
                  relation to a proposed Investment on behalf of the Company and
                  shall be responsible for procuring, in accordance with all
                  applicable legal requirements and best practice, the
                  preparation and execution of all deeds, documents of title and
                  agreements in relation to Investments and the perfecting of
                  the Company's title thereto.

            3.2.5 EnCap shall be responsible for advising and instructing the
                  Company's Corporate Managers for the time being and Secretary
                  on administrative requirements in order to implement the
                  making of Investments.

      3.3   Subject to the terms of this Agreement, to such directions as may
            from time to time be given by the Directors and to the overall
            policy and supervision of the Directors, EnCap is authorised to act
            for the Company or any subsidiary and on behalf of the Company and
            or any subsidiary either itself or wholly or in part through its
            authorised agents or delegates in the same manner and with the same

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            force and effect as the Company or any subsidiary might or could do
            and to exercise the functions, duties, powers and discretions
            exercisable by the Directors under the Articles (including, without
            prejudice to the generality of the foregoing, the functions duties
            powers and discretions specifically mentioned in Clause 3.2 above)
            and to manage the investment and re-investment of the Investments.

      3.4   EnCap shall keep or cause to be kept on behalf of the Company such
            books, records and statements to give a complete record of all
            transactions carried out by EnCap on behalf of the Company (or any
            subsidiary) in relation to the investment and re-investment of the
            Investments and such other books, records and statements as may be
            required to give a complete record of all other transactions carried
            out by EnCap on behalf of the Company (or any subsidiary) and shall
            permit the Company and its employees and agents and the auditors for
            the time being of the Company to inspect such books, records and
            statements at all reasonable times.

      3.5   EnCap hereby warrants that it holds all licences, permissions,
            authorisations and consents necessary to enable it to carry out its
            duties as advisors and managers in the ordinary course of business.
            EnCap undertakes to use its best endeavours to continue to hold all
            such licences, permissions, authorisations and consents necessary
            for its duties hereunder and to notify the Company immediately
            should any such licence, permission, authorisation or consent cease
            to be in full force and effect.

      3.6   EnCap shall observe and comply with the Memorandum of Association
            and Articles of the Company and with any alterations thereto
            notified to EnCap by the Company and with the applicable provisions
            of the Particulars and the Investment Restrictions and all
            obligations deriving from listing particulars of the Company from
            time to time issued and all resolutions of the Directors of which it
            has notice and other lawful orders and directions given to it from
            time to time by the Directors and all activities engaged in by EnCap
            hereunder shall at all times be

                                    - 6 -

<PAGE>   8
            subject to the control of and review by the Directors and EnCap
            shall and shall procure that any person, firm or company to whom it
            delegates any of its functions hereunder shall give effect to all
            such decisions.

      3.7   EnCap shall procure that all Investments shall be registered in the
            name of the Company or any subsidiary or the nominees of the
            Company.

      3.8   EnCap undertakes with the Company that it will procure that, during
            the continuance of this Agreement, the Company shall be afforded the
            opportunity (as is provided in the Particulars) to invest in all
            investments made by, and investment arrangements entered into, by
            the Partnership in all respects upon the same terms and conditions
            as are afforded to the Partnership.

4.    INFORMATION OBLIGATIONS OF ENCAP

      4.1   EnCap shall keep the Company informed of all material matters
            relating to the Investments of the Company, to such extent and in
            such form and at such times as the Company shall reasonably require.

      4.2   Without limiting the generality of Clause 4.1 EnCap shall:

            4.2.1 When reasonably requested by the Board deliver to the Company
                  in respect of each calendar month a summary report, in such
                  form as the Company shall reasonably require, relating to the
                  Company's Investments and any proposed Investment then under
                  consideration;

            4.2.2 Within 30 days of the end of each calendar quarter, deliver to
                  the Company a report, in such form as the Company shall
                  reasonably require, comprising detailed financial information
                  in relation to each Investment of the Company and including
                  detailed cost and revenue allocations;

                                    - 7 -

<PAGE>   9
            4.2.3 Within 90 days of the end of each financial year of the
                  Company, deliver to the Company a report, in such form as the
                  Company shall reasonably require, comprising financial and
                  taxation statements in relation to the Company's Investments
                  as at the end of the financial year then ended prepared by a
                  firm of accountants previously approved by the Company and
                  reserve reports prepared in relation to the Company's
                  Investments as at the end of the financial year then ended,
                  prepared by such independent petroleum engineer previously
                  approved by the Company.

5.    REMUNERATION

      5.1   The Company shall during the continuance of this Agreement pay to
            EnCap by way of remuneration for the provision of services and
            advice pursuant to this Agreement an annual fee, payable by equal
            quarterly instalments in arrears on 31st March, 30th June, 30th
            September and 31st December in each year, calculated at the rate of
            1% of the Company's NAV as at 31st December preceding the year in
            which the payments are due to be made. For the purposes of this
            clause "NAV" means the amount in US dollars of the aggregate of:

            5.1.1 All cash at bank and in hand of the Company; and

            5.1.2 All amounts owing to the Company, whether or not due for
                  payment or repayment at the relevant time, excluding (i) any
                  amount falling within sub-clause 5.1.4 and (ii) any amount
                  loaned by the Company and secured on any asset or interest in
                  respect of oil and gas to the extent that the present worth of
                  future revenue, discounted at a rate of 10 per cent per annum,
                  of the proved reserves (as shown in the relevant independent
                  petroleum engineer's reserve report prepared as at the
                  relevant date or the closest practicable date thereto)
                  securing any such loan does not provide a coverage ratio in
                  respect of the amounts advanced by the Company and all accrued
                  interest of at least 1:1; and

                                    - 8 -

<PAGE>   10
            5.1.3 The present worth of the future net revenue, discounted at 15
                  per cent per annum, of the proved reserves attributable to any
                  direct equity interests owned by the Company in oil and gas
                  properties (as shown in the relevant engineer's reserve report
                  prepared as at the relevant date or the closest practicable
                  date thereto); and

            5.1.4 In the case of any Investment comprising debt or equity
                  securities (including without limitation shares, options,
                  warrants and bonds) that are traded on a recognised investment
                  exchange, the aggregate of the market value to the Company of
                  such securities as at the relevant date (it being agreed that
                  in the event that an Investment falls within this sub-clause
                  5.1.4 and any of sub-clause 5.1.2, 5.1.3 and 5.1.5, the
                  provisions of this sub-clause 5.1.4 shall apply to the
                  exclusion of the other sub-clauses for the purposes of
                  calculating NAV); and

            5.1.5 In the case of any Investment comprising any equity securities
                  in any entity (whether corporate or not) not falling within
                  sub-clause 5.1.4, the value of such equity securities to the
                  Company calculated on the basis of that proportion of such
                  entity's NAV attributable to the Company (the NAV of such
                  entity being calculated on the same basis, mutatis mutandis,
                  as is set out in this Clause);

            less an amount equal to all indebtedness of the Company at the
            relevant time, whether or not then due for payment or repayment;

            PROVIDING that for the purposes of this clause the NAV of the
            Company as at 31st December 1993 shall be deemed to be equal to the
            net proceeds of the Placing having deducted all expenses thereof.

            PROVIDING further that the NAV shall be determined by the
            Independent Directors using the foregoing principles and reserve
            reports prepared by an

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<PAGE>   11
            independent petroleum engineering firm, which shall use the same
            assumptions for future oil and gas prices as those generally
            utilised by major oil and gas lending institutions in the USA at the
            time the valuation is made;

      5.2   The fees payable hereunder are inclusive of all applicable value
            added tax and any other sales or services taxes whatsoever payable
            from time to time and whether principally by the Company or EnCap.

      5.3   The fees payable pursuant to Clause 5.1 shall be deemed to accrue on
            a daily basis.

      5.4   By way of further remuneration for the provision of services and
            advice pursuant to this Agreement, and provided that this Agreement
            shall not previously have been terminated by EnCap pursuant to
            Clause 13.1 or by the Company pursuant to Clause 13.2, the Company
            shall pay to EnCap as soon as such amount shall have been determined
            following 31st December 2001 or the date a special resolution is
            passed pursuant to Section 84 Insolvency Act 1986 for the voluntary
            winding up of the Company, whichever is the earlier, an amount equal
            to 25%. of the Company's Adjusted NAV as at 31st December 2001 or
            the date of the passing of the special resolution for the winding-up
            of the Company, as appropriate.

      5.5   Adjusted NAV means, at the relevant date:

            (a)   NAV;

            (b)   less an amount equal to the aggregate of the Company's share
                  capital and the amount standing to the credit of the Company's
                  share premium account as converted (where appropriate) into US
                  dollars at the actual exchange rates at which such
                  subscriptions were converted into US dollars; and

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            (c)   (i)   less the amount (if any) by which an 8% annual rate
                        of return on the aggregate of the Company's share
                        capital and the amount standing to the credit of the
                        Company's share premium account, calculated from the
                        relevant dates of payment to the Company of such share
                        capital and share premium, exceeds the aggregate of the
                        dividends paid by the Company since its incorporation,
                        inclusive of any tax credit in respect of such
                        dividends; or

                  (ii)  aggregating therewith the amount (if any) by which the
                        aggregate of the dividends paid by the Company since its
                        incorporation, inclusive of any tax credit in respect of
                        such dividends, exceeds an 8% annual rate of return on
                        the aggregate of the amount standing to the credit of
                        the Company's share capital and share premium account
                        calculated from the relevant dates of payment of such
                        share capital and share premium.

      5.6   In the event of any dispute with regard to the determination of any
            fee payable pursuant to this Clause, such dispute shall be referred
            for determination to the Company's auditors, or such other firm of
            Chartered Accountants as the Company and EnCap shall agree. In
            making a determination such accountants shall act as experts and not
            as arbitrators and they shall be entitled to call for and inspect
            such documents as they shall deem appropriate. The determination of
            such accountants shall be final and binding on the Company and
            EnCap.

6.    ADDITIONAL SERVICES

      If EnCap, being willing and having been called upon so to do, shall render
      or perform extra or special services of any kind to the Company, EnCap
      shall be entitled to receive such additional reasonable fees therefor as
      the Directors in consultation with EnCap may from time to time agree. If
      EnCap offers additional services to the Company, EnCap may determine the
      level of fees or charges as it deems fit and proper for the payment of
      such

                                    - 11 -

<PAGE>   13
      services and offer to provide such services to the Company and the Company
      may accept or reject an offer of such services as it so determines.

7.    EXPENSES

      7.1   Unless otherwise agreed between the Company and EnCap, the Company
            shall pay or procure payment of the following expenses:-

            7.1.1 All accountancy fees, petroleum consultants' fees and legal
                  expenses incurred by the Company or EnCap or the secretary in
                  connection with the identifying, negotiating and making of
                  Investments and all other professional and other charges in
                  respect of services rendered to the Company or EnCap in
                  connection with the matters aforesaid;

            7.1.2 Any stamp and other duties, taxes, Governmental charges,
                  brokerage, transfer fees, registration fees and other charges
                  payable in respect of the acquisition or realisation of any
                  Investment, including charges for the transfer of funds or
                  instructions for delivery of securities by telex, cable,
                  telephone or otherwise;

            7.1.3 All taxes and corporate fees payable by the Company to the
                  Government or other authority or to any agency of the
                  Government or authority in the United States of America or
                  elsewhere;

            7.1.4 All charges specifically incurred by EnCap on behalf of the
                  Company.

            EnCap will advise the Company prior to incurring any third party
            fees or any third party expenses for the account of the Company if
            EnCap believes that such fees or expenses will exceed US$7,500.

      7.2   EnCap shall provide at its own expense:-

                                    - 12 -

<PAGE>   14
            7.2.1 Such staff as may be necessary for the due performance of its
                  duties hereunder;

            7.2.2 Such office and other accommodation and office equipment as
                  may be necessary for the due performance of its duties
                  hereunder.

      7.3   It is hereby expressly declared that the persons employed by EnCap
            to perform its obligations under this Agreement shall be the
            employees, agents or sub- contractors of EnCap and not of the
            Company and accordingly shall not be regarded or treated as
            employees of the Company.

      7.4   Any arrangement or other fee (on the appropriate proportion thereof)
            paid to EnCap in respect of any Investment shall be paid or
            reimbursed by EnCap to the Company.

8.    POWER OF DELEGATION

      EnCap may with the consent of the Company delegate the whole or any part
      of its powers, duties, discretions and functions hereunder to any person,
      firm or company.

9.    NON-EXCLUSIVITY

      9.1   The services of EnCap hereunder are not to be deemed exclusive to
            the Company and EnCap or any Affiliate thereof shall be free to
            render similar services to others on such terms as EnCap or such
            Affiliate may arrange so long as its services under this Agreement
            are not thereby impaired, and to retain for its own use and benefit
            fees or other moneys payable thereby, and EnCap shall not be deemed
            to be affected with notice of or to be under any duty to disclose to
            the Company any fact or thing which may come to the notice of it or
            any servant or agent of it in the course of EnCap rendering similar
            services to others or in the

                                    - 13 -

<PAGE>   15
            course of its business in any other capacity or in any manner
            whatsoever otherwise than in the course of carrying out its duties
            under this Agreement.

      9.2   EnCap shall procure that the Company shall have first priority
            (together with the Partnership) to make Investments identified by
            EnCap complying with the Investment Policy and Investment
            Restrictions provided that in the absence of bad faith EnCap shall
            not be liable to the Company in respect of it having arranged any
            Investment made by any person (including EnCap's affiliates) which
            investment the Directors may determine as having complied with the
            Investment Policy and Investment Restrictions.

10.   EXERCISE OF RIGHTS ATTACHED TO INVESTMENTS

      Subject as otherwise provided in this Agreement, any rights conferred by
      Investments of the Company shall be exercised in such manner as the
      Directors may determine and EnCap shall (in so far as it is able) procure
      the exercise of such rights in accordance therewith.

11.   CUSTODY

      EnCap shall be responsible to the Company for procuring the safe custody
      of all documents of title, deeds, certificates and agreements in respect
      of the Investments of the Company unless otherwise notified by the Company
      in writing.

12.   LIABILITY AND INDEMNITY

      12.1  EnCap shall not be liable to the Company or any subsidiary for any
            action taken or not taken by them or for any action taken or not
            taken by any other person with respect to the Company or any
            subsidiary or in respect of the Investments provided that EnCap
            shall remain liable for any loss arising from the fraud,

                                    - 14 -

<PAGE>   16
            negligence, wilful default, bad faith or misconduct of EnCap, its
            employees and/or any of their agents.

      12.2  The Company hereby indemnifies EnCap and each officer, employee or
            agent of EnCap against any losses, claims, damages or liabilities
            (including legal or other expenses reasonably incurred) to which
            such person may become subject by reason of its being an officer,
            employee or agent of EnCap (but only to the extent and with respect
            to services performed by EnCap or officers, employees or agents of
            EnCap for or on behalf of the Company) or representing the Company
            or any subsidiary on the Board of Directors of any company in which
            the Company or any subsidiary has invested or otherwise in providing
            services under this Agreement provided that this indemnity shall not
            apply in cases of fraud, negligence, wilful default, bad faith or
            misconduct.

13.   TERMINATION

      13.1  EnCap shall be entitled to resign its appointment hereunder:

            (i)   by giving at any time not less than one year's notice in
                  writing to the Company expiring not earlier than the date of
                  the second anniversary hereof;

            (ii)  at any time by notice in writing to the Company if the Company
                  shall go into liquidation or if a receiver or administrative
                  receiver or administrator is appointed over any of the assets
                  of the Company;

            (iii) at any time if the Company shall commit any breach of its
                  obligations under this Agreement and (if such breach shall be
                  capable of remedy) shall fail within 30 days of receipt of
                  notice served by EnCap requiring it so to do to make good such
                  breach.

                                    - 15 -

<PAGE>   17
      13.2  The Company may terminate the appointment of EnCap hereunder:

            (i)   if EnCap shall go into liquidation (except a voluntary
                  liquidation for the purposes of reconstruction or amalgamation
                  upon terms previously approved in writing by the Company) or
                  if a receiver or administrative receiver or administrator is
                  appointed of any of the assets of EnCap or if a meeting of
                  EnCap's creditors is convened, or if any analogous insolvency
                  proceeding shall be taken in respect of EnCap in any
                  jurisdiction, or if EnCap ceases or threatens to cease to
                  carry on its business;

            (ii)  if EnCap shall commit any significant breach of its
                  obligations under this Agreement and (if such breach be
                  capable of remedy) shall fail within 30 days of receipt of
                  notice served by the Company requiring them to make good such
                  breach.

      13.3  The appointment of EnCap under this Agreement shall terminate
            automatically upon the passing of a special resolution of the
            Company pursuant to Section 84 of the Insolvency Act 1986 requiring
            the Company to be wound up.

      13.4  On termination of the appointment of EnCap under the provisions of
            this Clause, EnCap shall be entitled to receive all fees and other
            moneys accrued due up to the date of such termination but shall not
            be entitled to compensation in respect of such termination and EnCap
            shall deliver to the Company or as it shall direct, all books of
            account, records, registers, correspondence, documents and assets
            relating to the affairs of or belonging to the Company or any
            subsidiary in the possession of or under the control of EnCap and
            take all necessary steps to vest in the Company any assets
            previously held in the name of or to the order of EnCap on behalf of
            the Company or any subsidiary.

                                    - 16 -

<PAGE>   18
14.   CONFIDENTIALITY

      14.1  Neither of the parties hereto shall during the continuance of this
            Agreement or after its termination disclose to any person, firm or
            fund whatsoever (except with the authority of the relevant party or
            unless ordered to do so by a court of competent jurisdiction) any
            information relating to the business, investments, finances or other
            matters of a confidential nature of the other party of which it may
            in the course of its duties hereunder or otherwise become possessed
            and each party shall use all reasonable endeavours to prevent any
            such disclosure as aforesaid.

      14.2  EnCap and the Company shall be permitted to refer to the appointment
            hereunder in their corporate literature provided that the text of
            any such reference is approved by the other, such approval not to be
            unreasonably withheld or delayed.

15.   RELIANCE ON DOCUMENTS

      Wherever pursuant to any provision of this Agreement any notice,
      instruction or other communication is to be given by, or on behalf of, the
      Company (or its Directors) to EnCap, EnCap may accept as sufficient
      evidence thereof:

      (i)   a document signed or purporting to be signed on behalf of the
            issuing party or by such person or persons whose signature EnCap is
            for the time being authorised by such issuing party to accept; or

      (ii)  a message by tested telex, telecopler, facsimile machine, or cable
            transmitted by, or on behalf of, the Company (or its Directors) by
            such person or person whose messages EnCap is for the time being
            authorised by the Company or its Directors to accept, and EnCap
            shall not be obliged to accept any document or message signed or
            transmitted or purporting to be signed or transmitted by any other
            person.

                                    - 17 -

<PAGE>   19
16.   NOTICES

      Any notice given hereunder shall be in writing and shall be served by hand
      or by being sent by prepaid post or telex or telecopier or facsimile
      machine in the case of the Company to its registered office for the time
      being marked for the attention of the Secretary and in the case of EnCap
      to Messrs Hobson Audley, 7 Pilgrim Street, London EC4V 6DR (marked for the
      attention of Mr M.C. Audley) or such other address in the United Kingdom
      from time to time notified to the Company for the service of notices.

17.   ASSIGNMENT

      Neither party hereto shall be entitled to assign or otherwise part with
      any interest in this Agreement unless the prior written consent of the
      other has been obtained.

18.   INVALIDITY

      The invalidity or unenforceability of any part of this Agreement shall not
      prejudice or affect the validity or enforceability of the remainder.

19.   PROPER LAW

      This Agreement and the rights and obligations of the parties shall be
      governed by and construed in accordance with the laws of England and the
      parties hereby submit to the non-exclusive jurisdiction of the Courts of
      England and Wales.

IN WITNESS whereof the parties hereto have caused this Agreement to be executed
the day and year first before written.

                                    - 18 -

<PAGE>   20
                                 SCHEDULE ONE

                                    PART A

                               INVESTMENT POLICY

Any investment will, at the time it is undertaken, be limited to 15 per cent of
the Company's assets. The Company will not take legal or management control of
underlying investments, nor will it be actively involved in the management of
the projects or entities which it invests.

Investments are expected to take the form of mezzanine-style debt instruments
together with long term equity in the form of royalty interests, net profit
interests, production payments, working interests and other interests in oil and
gas. The right is reserved also to hold other forms of debt or equity securities
including options or warrants and investments may take the form of partnership
arrangements, participations, joint ventures, limited liability company
interests, corporation shares and other forms of equity investment. Care will be
taken both on initial investment and on re-investment to ensure that sufficient
income will accrue to the Company as a return on capital invested to cover
administrative expenses and to permit a progressive dividend policy.

No investments will be made which require mandatory funding beyond a fixed
amount. Funding of any investment may be made in instalments.

Whilst the Company has the power to borrow up to its capital and reserves, there
is currently no intention to utilise this.

The Company will invest in project equity opportunities in the upstream sector
of the oil and gas industry where risks can be quantified by engineering
analysis. EnCap will only recommend Investments to the Directors which meet the
following criteria:

o     All investments will be supported by proved oil and gas reserves.

                                    - 19 -

<PAGE>   21
o     The proved oil and gas reserves must have been confirmed by a qualified,
      independent petroleum engineering firm chosen from a pre-approved list.
      Reserves will be risk valued according to category and specific
      opportunity with no value given to non-proven categories unless geological
      evidence is sufficient to justify inclusion of some probable value.

o     Proposed investments must offer a pre-tax return to the Company of at
      least 20% p.a. net of all fees and performance-related compensation.
      Evaluations will be made on the basis of reports provided by independent
      engineering firms utilising hydrocarbon price projections generally used
      by major commercial banks active in energy financing.

o     Neither EnCap nor the Company will act as operator for any oil and gas
      properties or projects. It will propose investments only where it believes
      that a proposed operator/ project sponsor has experienced management and
      personnel with high integrity and a proven track record and experience in
      the area where the investment is to be made. The operator must demonstrate
      sufficient financial strength both in terms of net worth and cash flow, to
      administer and operate the project throughout the expected term of the
      investment.

o     No investment will be proposed where a likelihood exists of adverse
      selection by the operator/project sponsor (i.e. minimal potential for
      conflicts of interest).

o     Each operator/project sponsor must contribute an acceptable portion of the
      cost of the project on a basis that is subordinate or similar to the
      investment to be made by the Company.

o     No Investment will be made unless the Partnership, EnCap or other funds
      managed by EnCap, or investors procured by EnCap also invest on a
      substantial basis.

                                    - 20 -

<PAGE>   22
                                 SCHEDULE ONE

                                    PART B

                            INVESTMENT RESTRICTIONS

(i)   A reasonable spread of investments will normally be maintained, any new
      investment being limited to not more than 15 per cent of the group's
      assets (before deducting borrowed money) at the time it is made, for which
      purpose any existing interest in the project must be aggregated with the
      proposed new investment;

(ii)  The policy statement set out in Schedule 1 Part A will be adhered to for
      at least 3 years from the date hereof;

(iii) Dividends will only be paid to the extent that they are covered by income
      received from underlying investments, shares of profits of associated
      companies being unavailable for this purpose unless and until distributed
      to the Company; and

(iv)  Realisation of any investment carried at directors' valuation amounting to
      50 per cent or more of the portfolio will be conditional on shareholders'
      approval.

None of the restrictions set out above will require the realisation of any
relevant asset of the Company where any of such restrictions is breached by
reason of any event outside the control of the Company and occurring after the
investment in the relevant asset is made or by reason of the receipt or exercise
of any rights, bonuses or benefits in the nature of capital, or any scheme of
arrangement for amalgamation, reconstruction, conversion or exchange, or of any
repayment or redemption.

                                    - 21 -

<PAGE>   23
SIGNED by                           )
for and on behalf of                )
ENERGY CAPITAL INVESTMENT           )
COMPANY PLC                         )
in the presence of:-                )

SIGNED by.                          )
for and on behalf of                )
EnCAP INVESTMENTS L.C.              )
in the presence of:-                )

                                    - 22 -

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