Document:

CHANGE IN TERMS AGREEMENT

EXHIBIT

10.21

 

CHANGE

IN TERMS AGREEMENT

 

	

  Principal

  $2,000,000.00

  	

  Loan Date

  	

  Maturity

  08-15-2006

  	

  Loan No

  7001014

  	

  Call

  	

  Collateral

  Stock

  	

  Account

  	

  Officer

  	

  Initials

  [Illegible]

  
	

  References in the shaded area are for Lender’s use only and do not

  limit the applicability of this document to any particular loan or item.

  

 

	

  Borrower:

  	

   

  	

  Heritage Oaks Bancorp

  	

   

  	

  Lender:

  	

   

  	

  PACIFIC COAST BANKERS’ BANK

  
	

   

  	

   

  	

  545 12th Street

  	

   

  	

   

  	

   

  	

  340 Pine Street, Suite 401

  
	

   

  	

   

  	

  Paso Robles, CA 93446

  	

   

  	

   

  	

   

  	

  San Francisco, CA 94104

  

 

	

  Principal Amount: $2,000,000.00

  	

   

  	

  Date

  of Agreement: October 23, 2000

  

 

DESCRIPTION OF EXISTING INDEBTEDNESS. Funds are borrowed for expansion of the

bank.

 

DESCRIPTION OF COLLATERAL. 339,332 shares of Heritage Oaks Bank

stock.

 

DESCRIPTION OF CHANGE IN TERMS. Extension of an existing revolving line

of credit for another year; then the facility will be termed out for 5 years

with a new maturity date of 8/15/2006. All other terms and conditions will

remain unchanged.

 

PROMISE TO PAY. Heritage Oaks Bancorp

(“Borrower”) promises to pay to PACIFIC COAST BANKERS’ BANK (“Lender”), or

order, in lawful money of the United States of America, the principal amount of

Two Million & 00/100 Dollars ($2,000,000.00), together with interest on the

unpaid principal balance from October 23, 2000, until paid in full.

 

PAYMENT. Subject to any payment

changes resulting from changes in the Index, Borrower will pay this loan in

accordance with the following payment schedule:

 

  4 consecutive quarterly interest payments,

beginning November 15, 2000, with interest calculated on the unpaid principal

balances at an interest rate of 1.000 percentage points over the Index

described below; and 20 consecutive quarterly principal and interest payments

in the initial amount of $130,289.52 each, beginning November 15, 2001, with

interest calculated on the unpaid principal balances at an interest rate of

1.000 percentage points over the Index described below. Borrower’s final

payment of $130,289.52 will be due on August 15, 2006. This estimated final

payment is based on the assumption that all payments will be made exactly as

scheduled and that the Index does not change; the actual final payment will be

for all principal and accrued interest not yet paid, together with any other

unpaid amounts under this Agreement.

 

The annual interest rate for this Agreement is computed on a 365/360

basis; that is, by applying the ratio of the annual interest rate over a year

of 360 days, multiplied by the outstanding principal balance, multiplied by the

actual number of days the principal balance is outstanding. Borrower will pay

Lender at Lender’s address shown above or at such other place as Lender may

designate in writing. Unless otherwise agreed or required by applicable law,

payments will be applied first to accrued unpaid interest, then to principal,

and any remaining amount to any unpaid collection costs and late charges.

 

VARIABLE INTEREST RATE. The interest rate on this Agreement is

subject to change from time to time based on changes in an independent index

which is the Prime Rate as published in the Western Edition of the Wall Street Journal (the

“Index"). The Index is not necessarily the lowest rate charged by Lender

on its loans. If the Index becomes unavailable during the term of this loan,

Lender may designate a substitute index after notice to Borrower. Lender will

tell Borrower the current Index rate upon Borrower’s request. Borrower

understands that Lender may make loans based on other rates as well. The

interest rate change will not occur more often than each Day. The Index currently is 9.500%. The interest rate or

rates to be applied to the unpaid principal balance of this Agreement will be

the rate or rates set forth above in the “Payment” section. NOTICE:

Under no circumstances will the interest rate on this Agreement be more than

the maximum rate allowed by applicable law. Whenever increases occur in the

interest rate, Lender, at its option, may do one or more of the following: (a)

increase Borrower’s payments to ensure Borrower’s loan will pay off by its

original final maturity date, (b) increase Borrower’s payments to cover

accruing interest, (c) increase the number of Borrower’s payments, and (d)

continue Borrower’s payments at the same amount and increase Borrower’s final

payment.

 

PREPAYMENT. Borrower may pay without penalty all or

a portion of the amount owed earlier than it is due. Early payments will not,

unless agreed to by Lender in writing, relieve Borrower of Borrower’s

obligation to continue to make payments under the payment schedule. Rather,

they will reduce the principal balance due and may result in Borrower making

fewer payments.

 

LATE CHARGE. If a payment is 10 days or more late, Borrower will be

charged 5.000% of the regularly scheduled

payment or $30.00, whichever is greater.

 

DEFAULT. Borrower will be in default if any of

the following happens: (a) Borrower fails to make any payment when due. (b)

Borrower breaks any promise Borrower has made to Lender, or Borrower fails to

comply with or to perform when due any other term, obligation, covenant, or condition

contained in this Agreement or any agreement related to this Agreement, or in

any other agreement or loan Borrower has with Lender. (c) Borrower defaults

under any loan, extension of credit, security agreement, purchase or sales

agreement, or any other agreement, in favor of any other creditor or person

that may materially affect any of Borrower’s property or Borrower’s ability to

repay this Note or perform Borrower’s obligations under this Note or any of the

Related Documents. (d) Any representation or statement made or furnished to

Lender by Borrower or on Borrower’s behalf is false or misleading in any

material respect either now or at the time made or furnished. (e) Borrower

becomes insolvent, a receiver is appointed for any part of Borrower’s property,

Borrower makes an assignment for the benefit of creditors, or any proceeding is

commenced either by Borrower or against Borrower under any bankruptcy or

insolvency laws. (f) Any creditor tries to take any of Borrower’s property on

or in which Lender has a lien or security interest. This includes a garnishment

of any of Borrower’s accounts with Lender. (g) Any guarantor dies or any of the

other events described in this default section occurs with respect to any

guarantor of this Agreement. (h) A material adverse change occurs in Borrower’s

financial condition, or Lender believes the prospect of payment or performance

of the Indebtedness is impaired. (i) Failure to meet the deadlines required in

the Year 2000 Compliance Agreement to be Year 2000 Compliant or a reasonable

likelihood that Borrower cannot be Year 2000 Compliant on or before December

31, 1999. (j) Lender in good faith deems itself insecure.

 

If any default, other than a default in payment, is curable and if

Borrower has not been given a notice of a breach of the same provision of this

Agreement within the preceding twelve (12) months, it may be cured (and no

event of default will have occurred) if Borrower, after receiving written

notice from Lender demanding cure of such default: (a) cures the default within

ten (10) days; or (b) if the cure requires more than ten (10) days, immediately

initiates steps which Lender deems in Lender’s sole discretion to be sufficient

to cure the default and thereafter continues and completes all reasonable and necessary

steps sufficient to produce compliance as soon as reasonably practical.

 

81

 

LENDER’S RIGHTS. Upon default, Lender may declare the

entire unpaid principal balance on this Agreement and all accrued unpaid

interest immediately due, without notice, and then Borrower will pay that

amount. Upon Borrower’s failure to pay all amounts declared due pursuant to

this section, including failure to pay upon final maturity, Lender, at its

option, may also, if permitted under applicable law, increase the variable

interest rate on this Agreement by 5.000 percentage points. Lender may hire or

pay someone else to help collect this Agreement if Borrower does not pay.

Borrower also will pay Lender that amount. This includes, subject to any limits

under applicable law, Lender’s attorneys’ fees and Lender’s legal expenses

whether or not there is a lawsuit, including attorneys’ fees and legal expenses

for bankruptcy proceedings (including efforts to modify or vacate any automatic

stay or injunction), appeals, and any anticipated post–judgment

collection services. Borrower also will pay any court costs, in addition to all

other sums provided by law. This Agreement

has been delivered to Lender and accepted by Lender in the State of California.

If there is a lawsuit, Borrower agrees upon Lender’s request to submit to the

jurisdiction of the courts of San Francisco County, the State of California.

Subject to the provisions on arbitration, this Agreement shall be governed by and

construed in accordance with the laws of the State of California.

 

ARBITRATION. Lender and Borrower

agree that all disputes, claims and controversies between them, whether

individual, joint, or class in nature, arising from this Agreement or

otherwise, including without limitation contract and tort disputes, shall be

arbitrated pursuant to the Rules of the American Arbitration Association, upon

request of either party. No act to take or dispose of any collateral securing this Agreement

shall constitute a waiver of this arbitration agreement or be prohibited by

this arbitration agreement. This includes, without limitation, obtaining

injunctive relief or a temporary restraining order; invoking a power of sale

under any deed of trust or mortgage; obtaining a writ of attachment or

imposition of a receiver; or exercising any rights relating to personal

property, including taking or disposing of such property with or without

judicial process pursuant to Article 9 of the Uniform Commercial Code. Any

disputes, claims, or controversies concerning the lawfulness or reasonableness

of any act, or exercise of any right, concerning any collateral securing this

Agreement, including any claim to rescind, reform, or otherwise modify any

agreement relating to the collateral securing this Agreement, shall also be

arbitrated, provided however that no arbitrator shall have the right or the

power to enjoin or restrain any act of any party. Lender and Borrower agree

that in the event of an action for judicial foreclosure pursuant to California

Code of Civil Procedure Section 726, or any similar provision in any other

state, the commencement of such an action will not constitute a waiver of the

right to arbitrate and the court shall refer to arbitration as much of such

action, including counterclaims, as lawfully may be referred to arbitration.

Judgment upon any award tendered by any arbitrator may be entered in any court

having jurisdiction. Nothing in this Agreement shall preclude any party from

seeking equitable relief from a court of competent jurisdiction. The statute of

limitations, estoppel, waiver, laches, and similar doctrines which would

otherwise be applicable in an action brought by a party shall be applicable in

any arbitration proceeding, and the commencement of an arbitration proceeding

shall be deemed the commencement of an action for these purposes. The Federal

Arbitration Act shall apply to the construction, interpretation, and

enforcement of this arbitration provision.

 

CONTINUING VALIDITY. Except as expressly changed by this

Agreement, the terms of the original obligation or obligations, including all

agreements evidenced or securing the obligation(s), remain unchanged and in

full force and effect. Consent by Lender to this Agreement does not waive

Lender’s right to strict performance of the obligation(s) as changed, nor

obligate Lender to make any future change in terms. Nothing in this Agreement

will constitute a satisfaction of the obligation(s). It is the intention of

Lender to retain as liable parties all makers and endorsers of the original

obligation(s), including accommodation parties, unless a party is expressly

released by Lender in writing. Any maker or endorser, including accommodation

makers, will not be released by virtue of this Agreement. If any person who

signed the original obligation does not sign this Agreement below, then all

persons signing below acknowledge that this Agreement is given conditionally,

based on the representation to Lender that the non–signing party consents

to the changes and provisions of this Agreement or otherwise will not be

released by it. This waiver applies not only to any initial extension,

modification or release, but also to all such subsequent actions.

 

MISCELLANEOUS

PROVISIONS. Lender

may delay or forgo enforcing any of its rights or remedies under this Agreement

without losing them. Borrower and any other person who signs, guarantees or

endorses this Agreement, to the extent allowed by law, waive any applicable

statute of limitations, presentment, demand for payment, protest and notice of

dishonor. Upon any change in the terms of this Agreement, and unless otherwise

expressly stated in writing, no party who signs this Agreement. whether as

maker, guarantor, accommodation maker or endorser, shall be released from

liability. All such parties agree that Lender may renew or extend (repeatedly

and for any length of time) this loan, or release any party or guarantor or

collateral; or impair, fail to realize upon or perfect Lender’s security

interest in the collateral; and take any other action deemed necessary by

Lender without the consent of or notice to anyone. Ail such parties also agree

that Lender may modify this loan without the consent of or notice to anyone

other than the party with whom the modification is made.

 

PRIOR TO SIGNING THIS AGREEMENT,

BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING

THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE

AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT.

 

BORROWER:

 

Heritage

Oaks Bancorp

 

	

  By:

  	

  /s/  Lawrence

  P. Ward

  	

  By:

  	

  /s/ Gwen R. Pelfrey

  
	

   

  	

  Lawrence P. Ward, Chief Executive

  Officer

  	

   

  	

  Gwen R. Pelfrey, EVP/Corporate

  Secretary

  

 

 

82

 

BUSINESS

LOAN AGREEMENT

 

	

  Principal

  $2,000,000.00

  	

  Loan Date

  	

  Maturity

  08-15-2006

  	

  Loan No

  7001014

  	

  Call

  	

  Collateral

  Stock

  	

  Account

  	

  Officer

  	

  Initials

  [Illegible]

  
	

  References in the shaded area are for Lender’s use only and do not

  limit the applicability of this document to any particular loan or item.

  

 

	

  Borrower:

  	

   

  	

  Heritage Oaks Bancorp

  	

   

  	

  Lender:

  	

   

  	

  PACIFIC COAST BANKERS’ BANK

  
	

   

  	

   

  	

  545 12th Street

  	

   

  	

   

  	

   

  	

  340 Pine Street, Suite 401

  
	

   

  	

   

  	

  Paso Robles, CA 93446

  	

   

  	

   

  	

   

  	

  San Francisco, CA 94104

  

 

 

THIS BUSINESS LOAN AGREEMENT between

Heritage Oaks Bancorp (“Borrower”) and PACIFIC COAST BANKERS’ BANK (“Lender”)

is made and executed on the following terms and conditions. Borrower has

received prior commercial loans from Lender or has applied to Lender for a

commercial loan or loans and other financial accommodations, including those

which may be described on any exhibit or schedule attached to this Agreement.

All such loans and financial accommodations, together with all future loans and

financial accommodations from Lender to Borrower, are referred to in this

Agreement individually as the “Loan” and collectively as the “Loans.” Borrower

understands and agrees that: (a) in granting, renewing, or extending any Loan,

Lender is relying upon Borrower’s representations, warranties, and agreements,

as set forth in this Agreement; (b) the granting, renewing, or extending of any

Loan by Lender at all times shall be subject to Lender’s sole judgment and

discretion; and (c) all such Loans shall be and shall remain subject to the

following terms and conditions of this Agreement.

 

TERM. This Agreement shall be effective as of October 23, 2000, and shall continue

thereafter until all Indebtedness of Borrower to Lender has been performed in

full and the parties terminate this Agreement in writing.

 

DEFINITIONS. The following words shall have the

following meanings when used in this Agreement. Terms not otherwise defined in

this Agreement shall have the meanings attributed to such terms in the Uniform

Commercial Code. All references to dollar amounts shall mean amounts in lawful

money of the United States of America.

 

Agreement. The word “Agreement” means this Business

Loan Agreement, as this Business Loan Agreement may be amended or modified from

time to time, together with all exhibits and schedules attached to this

Business Loan Agreement from time to time.

 

Borrower. The word “Borrower” means Heritage Oaks

Bancorp. The word “Borrower” also includes, as applicable, all subsidiaries and

affiliates of Borrower as provided below in the paragraph titled “Subsidiaries

and Affiliates.”

 

CERCLA. The word “CERCLA” means the

Comprehensive Environmental Response, Compensation, and Liability Act of 1980,

as amended.

 

Collateral. The word “Collateral” means and includes

without limitation all property and assets granted as collateral security for a

Loan, whether real or personal property, whether granted directly or

indirectly, whether granted now or in the future, and whether granted in the

form of a security interest, mortgage, deed of trust, assignment, pledge,

chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional

sale, trust receipt, lien, charge, lien or title retention contract, lease or

consignment intended as a security device, or any other security or lien

interest whatsoever, whether created by law, contract, or otherwise.

 

ERISA. The word “ERISA” means the Employee

Retirement Income Security Act of 1974, as amended.

 

Event of

Default. The

words “Event of Default” mean and include without limitation any of the Events

of Default set forth below in the section titled “EVENTS OF DEFAULT.”

 

Grantor. The word “Grantor” means and includes

without limitation each and all of the persons or entities granting a Security

Interest in any Collateral for the Indebtedness, including without limitation

all Borrowers granting such a Security Interest.

 

Guarantor. The word “Guarantor” means and includes

without limitation each and all of the guarantors, sureties, and accommodation

parties in connection with any Indebtedness.

 

Indebtedness. The word “Indebtedness” means and

includes without limitation all Loans, together with all other obligations,

debts and liabilities of Borrower to Lender, or any one or more of them, as

well as all claims by Lender against Borrower, or any one or more of them;

whether now or hereafter existing, voluntary or involuntary, due or not due,

absolute or contingent, liquidated or unliquidated; whether Borrower may be

liable individually or jointly with others; whether Borrower may be obligated

as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may

be or hereafter may become barred by any statute of limitations; and whether

such Indebtedness may be or hereafter may become otherwise unenforceable.

 

Lender. The Word “Lender” means PACIFIC COAST

BANKERS’ BANK, its successors and assigns.

 

Loan. The word “Loan” or “Loans” means and

includes without limitation any and all commercial loans and financial

accommodations from Lender to Borrower, whether now or hereafter existing, and

however evidenced, including without limitation those loans and financial

accommodations described herein or described on any exhibit or schedule

attached to this Agreement from time to time.

 

Note. The word “Note” means and includes

without limitation Borrower’s promissory note or notes, if any, evidencing

Borrower’s Loan obligations in favor of Lender, as well as any substitute,

replacement or refinancing note or notes therefor.

 

Related

Documents. The

words “Related Documents” mean and include without limitation all promissory

notes, credit agreements, loan agreements, environmental agreements,

guaranties, security agreements, mortgages, deeds of trust, and all other

instruments, agreements and documents, whether now or hereafter existing,

executed in connection with the Indebtedness.

 

Security

Agreement. The

words “Security Agreement” mean and include without limitation any agreements,

promises, covenants, arrangements, understandings or other agreements, whether

created by law, contract, or otherwise, evidencing, governing, representing, or

creating a Security Interest.

 

Security

Interest. The

words “Security Interest” mean and include without limitation any type of

collateral security, whether in the form of a lien, charge, mortgage, deed of

trust, assignment, pledge, chattel mortgage, chattel trust, factor’s lien,

equipment trust, conditional sale, trust receipt, lien or title retention

contract, lease or consignment intended as a security device, or any other

security or lien interest whatsoever, whether created by law, contract, or

otherwise.

 

SARA. The word “SARA” means the Superfund

Amendments and Reauthorization Act of 1986 as now or hereafter amended.

 

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to

Lender, as of the date of this Agreement, as of the date of each disbursement

of Loan proceeds, as of the date of any renewal, extension or modification of

any Loan, and at all times any Indebtedness exists:

 

Organization. Borrower is a corporation which is duly

organized, validly existing, and in good standing under the laws of the State

of California and is validly existing and in good standing in all states in

which Borrower is doing business. Borrower has the full power and authority to

own its properties and to transact the businesses in which it is presently

engaged or presently proposes to engage. Borrower also is duly qualified as a

foreign corporation and is in good standing in all states in which the failure

to so qualify would have a material adverse effect on its businesses or

financial condition.

 

 

83

 

Authorization. The execution, delivery, and performance of this

Agreement and all Related Documents by Borrower, to the extent to be executed,

delivered or performed by Borrower, have been duly authorized by all necessary

action by Borrower; do not require the consent or approval of any other person,

regulatory authority or governmental body; and do not conflict with, result in

a violation of, or constitute a default under (a) any provision of its articles

of incorporation or organization, or bylaws, or any agreement or other

instrument binding upon Borrower or (b) any law, governmental regulation, court

decree, or order applicable to Borrower.

 

Financial Information. Each financial statement of Borrower supplied to

Lender truly and completely disclosed Borrower’s financial condition as of the

date of the statement, and there has been no material adverse change in

Borrower’s financial condition subsequent to the date of the most recent

financial statement supplied to Lender. Borrower has no material contingent

obligations except as disclosed in such financial statements.

 

Legal Effect. This Agreement constitutes, and any instrument or

agreement required hereunder to be given by Borrower when delivered will

constitute, legal, valid and binding obligations of Borrower enforceable

against Borrower in accordance with their respective terms.

 

Properties. Except as contemplated by this Agreement or as

previously disclosed in Borrower’s financial statements or in writing to Lender

and as accepted by Lender, and except for property tax liens for taxes not

presently due and payable, Borrower owns and has good title to all of

Borrower’s properties free and clear of all Security Interests, and has not

executed any security documents or financing statements relating to such

properties. All of Borrower’s properties are titled in Borrower’s legal name,

and Borrower has not used, or filed a financing statement under, any other name

for at least the last five (5) years.

 

Hazardous Substances. The terms “hazardous waste,” “hazardous substance,”

“disposal,” “release,” and “threatened release,” as used in this Agreement,

shall have the same meanings as set forth in the “CERCLA,” “SARA,” the

Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the

Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.,

Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety

Code, Section 25100, et seq., or other applicable state or Federal laws, rules,

or regulations adopted pursuant to any of the foregoing. Except as disclosed to

and acknowledged by Lender in writing, Borrower represents and warrants that:

(a) During the period of Borrower’s ownership of the properties, there has been

no use, generation, manufacture, storage, treatment, disposal, release or

threatened release of any hazardous waste or substance by any person on, under,

about or from any of the properties. (b) Borrower has no knowledge of, or

reason to believe that there has been (i) any use, generation, manufacture,

storage, treatment, disposal, release, or threatened release of any hazardous

waste or substance on, under, about or from the properties by any prior owners

or occupants of any of the properties, or (ii) any actual or threatened

litigation or claims of any kind by any person relating to such matters. (c)

Neither Borrower nor any tenant, contractor, agent or other authorized user of

any of the properties shall use, generate, manufacture, store, treat, dispose

of, or release any hazardous waste or substance on, under, about or from any of

the properties; and any such activity shall be conducted in compliance with all

applicable federal, state, and local laws, regulations, and ordinances,

including without limitation those laws, regulations and ordinances described above.

Borrower authorizes Lender and its

agents to enter upon the properties to make such inspections and tests as

Lender may deem appropriate to determine compliance of the properties

with this section of the Agreement. Any inspections or tests made by Lender

shall be at Borrower’s expense and for Lender’s purposes only and shall not be

construed to create any responsibility or liability on the part of Lender to

Borrower or to any other person. The representations and warranties contained

herein are based on Borrower’s due diligence in investigating the properties

for hazardous waste and hazardous substances. Borrower hereby (a) releases and

waives any future claims against Lender for indemnity or contribution in the

event Borrower becomes liable for cleanup or other costs under any such laws,

and (b) agrees to indemnify and hold harmless Lender against any and all

claims, losses, liabilities, damages, penalties, and expenses which Lender may

directly or indirectly sustain or suffer resulting from a breach of this

section of the Agreement or as a consequence of any use, generation,

manufacture, storage, disposal, release or threatened release of a hazardous

waste or substance on the properties. The provisions of this section of the

Agreement, including the obligation to indemnify, shall survive the payment of

the Indebtedness and the termination or expiration of this Agreement and shall

not be affected by Lender's acquisition of any interest in any of the

properties, whether by foreclosure or otherwise.

 

Litigation

and Claims. No

litigation, claim, investigation, administrative proceeding or similar action

(including those for unpaid taxes) against Borrower is pending or threatened,

and no other event has occurred which may materially adversely affect

Borrower’s financial condition or properties, other than litigation, claims, or

other events, if any, that have been disclosed to and acknowledged by Lender in

writing.

 

Taxes. To the best of Borrower’s knowledge, all tax returns and reports of

Borrower that are or were required

to be filed, have been filed, and all taxes, assessments and other governmental

charges have been paid in full, except those presently being or to be contested

by Borrower in good faith in the ordinary course of business and for which

adequate reserves have been provided.

 

Lien Priority. Unless otherwise previously disclosed to Lender in

writing, Borrower has not entered into or granted any Security Agreements, or

permitted the filing or attachment of any Security Interests on or affecting

any of the Collateral directly or indirectly securing repayment of Borrower’s

Loan and Note, that would be prior or that may in any way be superior to

Lender’s Security Interests and rights in and to such Collateral.

 

Binding Effect. This Agreement, the Note, all Security Agreements

directly or indirectly securing repayment of Borrower’s Loan and Note and all

of the Related Documents are binding upon Borrower as well as upon Borrower’s

successors, representatives and assigns, and are legally enforceable in accordance

with their respective terms.

 

Commercial

Purposes.

Borrower intends to use the Loan proceeds solely for business or commercial

related purposes.

 

Employee Benefit Plans. Each employee benefit plan as to which Borrower may

have any liability complies in all material respects with all applicable

requirements of law and regulations, and (i) no Reportable Event nor Prohibited

Transaction (as defined in ERISA) has occurred with respect to any such plan,

(ii) Borrower has not withdrawn from any such plan or initiated steps to do so,

(iii) no steps have been taken to terminate any such plan, and (iv) there are

no unfunded liabilities other than those previously disclosed to Lender in

writing.

 

Location of Borrower’s Offices and Records. Borrower’s place of business, or

Borrower’s Chief executive office, if Borrower has more than one place of

business, is located at 545 12th Street, Paso Robles, CA 93446. Unless Borrower

has designated otherwise in writing this location is also the office or offices

where Borrower keeps its records concerning the Collateral.

 

Information. All information heretofore or contemporaneously

herewith furnished by Borrower to Lender for the purposes of or in connection

with this Agreement or any transaction contemplated hereby is, and all

information hereafter furnished by or on behalf of Borrower to Lender will be,

true and accurate in every material respect on the date as of which such

information is dated or certified; and none of such information is or will be

incomplete by omitting to state any material fact necessary to make such

information not misleading.

 

Survival of Representations and Warranties. Borrower understands and agrees that

Lender, without independent investigation, is relying upon the above

representations and warranties in making the above referenced Loan to Borrower.

Borrower further agrees that the foregoing representations and warranties shall

be continuing in nature and shall remain in full force and effect until such

time as Borrower’s Indebtedness shall be paid in full, or until this Agreement

shall be terminated in the manner provided above, whichever is the last to

occur.

 

 

84

 

AFFIRMATIVE

COVENANTS. Borrower

covenants and agrees with Lender that, while this Agreement is in effect,

Borrower will:

 

Litigation. Promptly inform Lender in writing of (a) all material

adverse changes in Borrower’s financial condition, and (b) all existing and all

threatened litigation, claims, investigations, administrative proceedings or

similar actions affecting Borrower or any Guarantor which could materially

affect the financial condition of Borrower or the financial condition of any

Guarantor.

 

Financial Records. Maintain its books and records in accordance with

generally accepted accounting principles, applied on a consistent basis, and

permit Lender to examine and audit Borrower’s books and records at all

reasonable times.

 

Additional Information. Furnish such additional information and statements,

lists of assets and liabilities, agings of receivables and payables, inventory

schedules, budgets, forecasts, tax returns, and other reports with respect to

Borrower’s financial condition and business operations as Lender may request

from time to time.

 

Insurance. Maintain fire and other risk insurance, public

liability insurance, and such other insurance as Lender may require with

respect to Borrower’s properties and operations, in form, amounts, coverages

and with insurance companies reasonably acceptable to Lender. Borrower, upon request

of Lender, will deliver to Lender from time to time the policies or

certificates of insurance in form satisfactory to Lender, including

stipulations that coverages will not be cancelled or diminished without at

least ten (10) days’ prior written notice to Lender. Each insurance policy also

shall include an endorsement providing that coverage in favor of Lender will

not be impaired in any way by any act, omission or default of Borrower or any

other person. In connection with all policies covering assets in which Lender

holds or is offered a security interest for the Loans, Borrower will provide

Lender with such loss payable or other endorsements as Lender may require.

 

Insurance Reports. Furnish to Lender, upon request of Lender, reports on

each existing insurance policy showing such information as Lender may

reasonably request, including without limitation the following: (a) the name of

the insurer; (b) the risks insured; (c) the amount of the policy; (d) the

properties insured; (e) the then current property values on the basis of which

insurance has been obtained, and the manner of determining those values; and

(f) the expiration date of the policy. In addition, upon request of Lender

(however not more often than annually), Borrower will have an independent

appraiser satisfactory to Lender determine, as applicable, the actual cash

value or replacement cost of any Collateral. The cost of such appraisal shall

be paid by Borrower.

 

Other Agreements. Comply with all terms and conditions of all other

agreements, whether now or hereafter existing, between Borrower and any other

party and notify Lender immediately in writing of any default in connection

with any other such agreements.

 

Loan

Proceeds. Use all

Loan proceeds solely for Borrower’s business operations, unless specifically

consented to the contrary by Lender in writing.

 

Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and

obligations, including without limitation all assessments, taxes, governmental

charges, levies and liens, of every kind and nature, imposed upon Borrower or

its properties, income, or profits, prior to the date on which penalties would

attach, and all lawful claims that, if unpaid, might become a lien or charge

upon any of Borrower’s properties, income, or profits. Provided however,

Borrower will not be required to pay and discharge any such assessment, tax,

charge, levy, lien or claim so long as (a) the legality of the same shall be

contested in good faith by appropriate proceedings, and (b) Borrower shall have

established on its books adequate reserves with respect to such contested

assessment, tax, charge, levy, lien, or claim in accordance with generally

accepted accounting practices. Borrower, upon demand of Lender, will furnish to

Lender evidence of payment of the assessments, taxes, charges, levies, liens

and claims and will authorize the appropriate governmental official to deliver

to Lender at any time a written statement of any assessments, taxes, charges,

levies, liens and claims against Borrower’s properties, income, or profits.

 

Performance. Perform and comply with all terms, conditions, and

provisions set forth in this Agreement and in the Related Documents in a timely

manner, and promptly notify Lender if Borrower learns of the occurrence of any

event which constitutes an Event of Default under this Agreement or under any

of the Related Documents.

 

Operations. Maintain executive and management personnel with

substantially the same qualifications and experience as the present executive

and management personnel; provide written notice to Lender of any change in

executive and management personnel; conduct its business affairs in a

reasonable and prudent manner and in compliance with all applicable federal,

state and municipal laws, ordinances, rules and regulations respecting its

properties, charters, businesses and operations, including without limitation,

compliance with the Americans With Disabilities Act and with all minimum

funding standards and other requirements of ERISA and other laws applicable to

Borrower’s employee benefit plans.

 

Inspection. Permit employees or agents of Lender at any reasonable

time to inspect any and all Collateral for the Loan or Loans and Borrower’s

other properties and to examine or audit Borrower’s books, accounts, and records

and to make copies and memoranda of Borrower’s books, accounts, and records. If

Borrower now or at any time hereafter maintains any records (including without

limitation computer generated records and computer software programs for the

generation of such records) in the possession of a third party, Borrower, upon

request of Lender, shall notify such party to permit Lender free access to such

records at all reasonable times and to provide Lender with copies of any

records it may request, all at Borrower’s expense.

 

Compliance Certificate. Unless waived in writing by Lender, provide Lender at

least annually and at the time of each disbursement of Loan proceeds with a

certificate executed by Borrower’s chief financial officer, or other officer or

person acceptable to Lender, certifying that the representations and warranties

set forth in this Agreement are true and correct as of the date of the

certificate and further certifying that, as of the date of the certificate, no

Event of Default exists under this Agreement.

 

Environmental Compliance and Reports. Borrower shall comply in all respects

with all environmental protection federal, state and local laws, statutes,

regulations and ordinances; not cause or permit to exist, as a result of an

intentional or unintentional action or omission on its part or on the part of

any third party, on property owned and/or occupied by Borrower, any

environmental activity where damage may result to the environment, unless such

environmental activity is pursuant to and in compliance with the conditions of

a permit issued by the appropriate federal, state or local governmental

authorities; shall furnish to Lender promptly and in any event within thirty

(30) days after receipt thereof a copy of any notice, summons, lien, citation,

directive, letter or other communication from any governmental agency or

instrumentality concerning any intentional or unintentional action or omission

on Borrower’s part in connection with any environmental activity whether or not

there is damage to the environment and/or other natural resources.

 

Additional Assurances. Make, execute and deliver to Lender such promissory

notes, mortgages, deeds of trust, security agreements, financing statements,

instruments, documents and other agreements as Lender or its attorneys may

reasonably request to evidence and secure the Loans and to perfect all Security

Interests.

 

RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule,

regulation or guideline, or the interpretation or application of any thereof by

any court or administrative or governmental authority (including any request or

policy not having the force of law) shall impose, modify or make applicable any

taxes (except U.S. federal, state or local income or franchise taxes imposed on

Lender), reserve requirements, capital adequacy requirements or other

obligations which would (a) increase the cost to Lender for extending or

maintaining the credit facilities to which this Agreement relates, (b) reduce

the amounts payable to Lender under this Agreement or the Related Documents, or

(c) reduce the rate of return on Lender’s capital as a consequence of Lender’s

obligations with respect to the credit facilities to which this Agreement

relates, then Borrower agrees to pay Lender such

 

 

85

 

additional amounts as will compensate Lender therefor, within five (5)

days after Lender’s written demand for such payment, which demand shall be

accompanied by an explanation of such imposition or charge and a calculation in

reasonable detail of the additional amounts payable by Borrower, which

explanation and calculations shall be conclusive in the absence of manifest

error.

 

NEGATIVE

COVENANTS. Borrower

covenants and agrees with Lender that while this Agreement is in effect,

Borrower shall not, without the prior written consent of Lender:

 

Indebtedness and Liens. (a) Except for trade debt incurred in the normal

course of business and indebtedness to Lender contemplated by this Agreement,

create, incur or assume indebtedness for borrowed money, including capital

leases, (b) sell, transfer, mortgage, assign, pledge, lease, grant a security

interest in, or encumber any of Borrower’s assets, or (c) sell with recourse

any of Borrower’s accounts, except to Lender.

 

Continuity of Operations. (a) Engage in any business activities substantially

different than those in which Borrower is presently engaged, (b) cease

operations, liquidate, merge, transfer, acquire or consolidate with any other

entity, change ownership, change its name, dissolve or transfer or sell

Collateral out of the ordinary course of business, (c) pay any dividends on

Borrower’s stock (other than dividends payable in its stock), provided, however

that notwithstanding the foregoing, but only so long as no Event of Default has

occurred and is continuing or would result from the payment of dividends, if

Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue

Code of 1986, as amended), Borrower may pay cash dividends on its stock to its

shareholders from time to time in amounts necessary to enable the shareholders

to pay income taxes and make estimated income tax payments to satisfy their

liabilities under federal and state law which arise solely from their status as

Shareholders of a Subchapter S Corporation because of their ownership of shares

of stock of Borrower, or (d) purchase or retire any of Borrower’s outstanding

shares or alter or amend Borrower’s capital structure.

 

Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or

assets, (b) purchase, create or acquire any interest in any other enterprise or

entity, or (c) incur any obligation as surety or guarantor other than in the

ordinary course of business.

 

CESSATION

OF ADVANCES. If

Lender has made any commitment to make any Loan to Borrower, whether under this

Agreement or under any other agreement, Lender shall have no obligation to make

Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is

in default under the terms of this Agreement or any of the Related Documents or

any other agreement that Borrower or any Guarantor has with Lender; (b)

Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or

similar proceedings, or is adjudged a bankrupt; (c) there occurs a material

adverse change in Borrower’s financial condition, in the financial condition of

any Guarantor, or in the value of any Collateral securing any Loan; (d) any

Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such

Guarantor’s guaranty of the Loan or any other loan with Lender; or (e) Lender

in good faith deems itself insecure, even though no Event of Default shall have

occurred.

 

OTHER

CONDITIONS.                     [Illegible]               [Illegible]

 

(1) Corporate resolution with copies of the minutes from the Board of

Directors of Heritage Oaks Bancorp allowing the Bancorp to accept the revised

terms and conditions of the $2,000,000.00 from Pacific Coast Bankers’ Bank.

 

(2) Heritage Oaks Bancorp must receive written permission from Pacific

Coast Bankers’ Bank prior to declaring any cash dividends.

 

(3) All regulatory reports must be shared with Pacific Coast Bankers’

Bank to the extent that they can legally be shared.

 

(4) Annual audited financial statements on Heritage Oaks Bank and

Heritage Oaks Bancorp within 90 days of the fiscal year–end.

 

(5) Quarterly call reports on Heritage Oaks Bank within 30 days of each

quarter–end.

 

(6) Semi–annual company prepared financial statements on Heritage

Oaks Bancorp within 30 days of the

six month period.

 

(7) A minimum debt coverage ratio based on cash flow of 1.5:1.

 

(8) Heritage Oaks Bank

and Heritage Oaks Bancorp must received written approval from Pacific Coast

Bankers’ Bank prior to incurring any additional debt.

 

(9) Minimum capital to

assets ratio of 5% or the minimum capital to assets ratio, which defines a bank

as adequately capitalized by regulatory agencies.

 

(10) All documentation will be CFI Laser Pro.

 

EVENTS OF DEFAULT. Each of the following shall constitute

an Event of Default under this Agreement:

 

Default on Indebtedness. Failure of Borrower to make any payment when due on

the Loans.

 

Other Defaults. Failure of Borrower or any Grantor to comply with or

to perform when due any other term, obligation, covenant or condition contained

in this Agreement or in any of the Related Documents, or failure of Borrower to

comply with or to perform any other term, obligation, covenant or condition

contained in any other agreement between Lender and Borrower.

 

Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan,

extension of credit, security agreement, purchase or sales agreement, or any

other agreement, in favor of any other creditor or person that may materially

affect any of Borrower’s property or Borrower’s or any Grantor’s ability to

repay the Loans or perform their respective obligations under this Agreement or

any of the Related Documents.

 

False Statements. Any warranty, representation or statement made or

furnished to Lender by or on behalf of Borrower or any Grantor under this

Agreement or the Related Documents is false or misleading in any material

respect at the time made or furnished, or becomes false or misleading at any

time thereafter.

 

Defective Collateralization. This Agreement or any of the Related Documents ceases

to be in full force and effect (including failure of any Security Agreement to

create a valid and perfected Security Interest) at any time and for any reason.

 

Insolvency. The dissolution or termination of Borrower’s existence

as a going business, the insolvency of Borrower, the appointment of a receiver

for any part of Borrower’s property, any assignment for the benefit of

creditors, any type of creditor workout, or the commencement of any proceeding

under any bankruptcy or insolvency laws by or against Borrower.

 

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture

proceedings, whether by judicial proceeding, self–help, repossession or

any other method, by any creditor of Borrower, any creditor of any Grantor

against any collateral securing the Indebtedness, or by any governmental

agency. This includes a garnishment, attachment, or levy on or of any of

Borrower's deposit accounts with Lender. However, this Event of Default shall

not apply if there is a good faith dispute by Borrower or Grantor, as the case

may be, as to the validity or reasonableness of the claim which is the basis of

the creditor or forfeiture proceeding, and if Borrower or Grantor gives Lender

written notice of the creditor or forfeiture proceeding and furnishes reserves

or a surety bond for the creditor or forfeiture proceeding satisfactory to

Lender.

 

Events Affecting Guarantor. Any of the preceding events occurs with respect to any

Guarantor of any of the Indebtedness or any Guarantor dies or becomes

incompetent, or revokes or disputes the validity of, or liability under, any

Guaranty of the Indebtedness. Lender, at its option, may, but shall not be

required to, permit the Guarantor’s estate to assume unconditionally the

obligations arising under the guaranty in a manner satisfactory to Lender, and,

in doing so, cure the Event of Default.

 

 

86

 

Change

In Ownership. Any

change in ownership of twenty–five percent (25%) or more of the common

stock of Borrower.

 

Adverse

Change. A

material adverse change occurs in Borrower’s financial condition, or Lender

believes the prospect of payment or performance of the Indebtedness is

impaired.

 

Year

2000 Compliance Failure. Failure to meet the deadlines required in the Year 2000 Compliance

Agreement to be Year 2000 Compliant or a reasonable likelihood that Borrower

cannot be Year 2000 Compliant on or before December 31, 1999.

 

Insecurity. Lender, in good faith, deems itself

insecure.

 

Right to

Cure. If any

default, other than a Default on Indebtedness, is curable and if Borrower or

Grantor, as the case may be, has not been given a notice of a similar default

within the preceding twelve (12) months, it may be cured (and no Event of

Default will have occurred) if Borrower or Grantor, as the case may be, after

receiving written notice from Lender demanding cure of such default: (a) cures

the default within ten (10) days; or (b) if the cure requires more than ten

(10) days, immediately initiates steps which Lender deems in Lender’s sole discretion

to be sufficient to cure the default and thereafter continues and completes all

reasonable and necessary steps sufficient to produce compliance as soon as

reasonably practical.

 

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except

where otherwise provided in this Agreement or the Related Documents, all

commitments and obligations of Lender under this Agreement or the Related

Documents or any other agreement immediately will terminate and, at Lender’s

option, all indebtedness immediately will become due and payable, all without

notice of any kind to Borrower, except that in the case of an Event of Default

of the type described in the “Insolvency” subsection above, such acceleration

shall be automatic and not optional. In addition, Lender shall have all the

rights and remedies provided in the Related Documents or available at law, in

equity, or otherwise. Except as may be prohibited by applicable law, all of

Lender’s rights and remedies shall be cumulative and may be exercised singularly

or concurrently. Election by Lender to pursue any remedy shall not exclude

pursuit of any other remedy, and an election to make expenditures or to take

action to perform an obligation of Borrower or of any Grantor shall not affect

Lender’s right to declare a default and to exercise its rights and remedies.

 

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions

are a part of this Agreement:

 

Amendments. This Agreement, together with any

Related Documents, constitutes the entire understanding and agreement of the

parties as to the matters set forth in this Agreement. No alteration of or

amendment to this Agreement shall be effective unless given in writing and

signed by the party or parties sought to be charged or bound by the alteration

or amendment.

 

Applicable

Law. This Agreement has been delivered to Lender and accepted by Lender in the

State of California. If there is a lawsuit, Borrower agrees upon Lender’s

request to submit to the jurisdiction of the courts of San Francisco County,

the State of California. Subject to the provisions on arbitration, this

Agreement shall be governed by and construed in accordance with the laws of the

State of California.

 

Arbitration.

Lender and Borrower agree that all disputes, claims and controversies between

them, whether individual, joint, or class in nature, arising from this

Agreement or otherwise, including without limitation contract and tort

disputes, shall be arbitrated pursuant to the Rules of the American Arbitration

Association, upon request of either party. No act to take or dispose of any Collateral shall

constitute a waiver of this arbitration agreement or be prohibited by this

arbitration agreement. This includes, without limitation, obtaining injunctive

relief or a temporary restraining order; invoking a power of sale under any

deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights

relating to personal property, including taking or disposing of such property

with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or

controversies concerning the lawfulness or reasonableness of any act, or

exercise of any right, concerning any Collateral, including any claim to

rescind, reform, or otherwise modify any agreement relating to the Collateral,

shall also be arbitrated, provided however that no arbitrator shall have the

right or the power to enjoin or restrain any act of any party. Lender and

Borrower agree that in the event of an action for judicial foreclosure pursuant

to California Code of Civil Procedure Section 726, or any similar provision in

any other state, the commencement of such an action will not constitute a

waiver of the right to arbitrate and the court shall refer to arbitration as

much of such action, including counterclaims, as lawfully may be referred to

arbitration. Judgment upon any award rendered by any arbitrator may be entered

in any court having jurisdiction. Nothing in this Agreement shall preclude any

party from seeking equitable relief from a court of competent jurisdiction. The

statute of limitations, estoppel, waiver, laches, and similar doctrines which

would otherwise be applicable in an action brought by a party shall be

applicable in any arbitration proceeding, and the commencement of an

arbitration proceeding shall be deemed the commencement of an action for these

purposes. The Federal Arbitration Act shall apply to the construction,

interpretation, and enforcement of this arbitration provision.

 

Caption Headings. Caption headings in this Agreement are for convenience

purposes only and are not to be used to interpret or define the provisions of

this Agreement.

 

Multiple

Parties; Corporate Authority. All obligations of Borrower under this Agreement

shall be joint and several, and all references to Borrower shall mean each and

every Borrower. This means that each of the persons signing below is

responsible for all obligations in this Agreement.

 

Consent

to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether now

or later, of one or more participation interests in the Loans to one or more

purchasers, whether related or unrelated to Lender. Lender may provide, without

any limitation whatsoever, to any one or more purchasers, or potential purchasers,

any information or knowledge Lender may have about Borrower or about any other

matter relating to the Loan, and Borrower hereby waives any rights to privacy

it may have with respect to such matters. Borrower additionally waives any and

all notices of sale of participation interests, as well as all notices of any

repurchase of such participation interests. Borrower also agrees that the

purchasers of any such participation interests will be considered as the

absolute owners of such interests in the Loans and will have all the rights

granted under the participation agreement or agreements governing the sale of

such participation interests. Borrower further waives all rights of offset or

counterclaim that it may have now or later against Lender or against any

purchaser of such a participation interest and unconditionally agrees that

either Lender or such purchaser may enforce Borrower’s obligation under the

Loans irrespective of the failure or insolvency of any holder of any interest

in the Loans. Borrower further agrees that the purchaser of any such

participation interests may enforce its interests irrespective of any

personal claims or defenses that Borrower may have against Lender.

 

Costs and Expenses. Borrower agrees to pay upon demand all of Lender’s

expenses, including without limitation attorneys’ fees, incurred in connection

with the preparation, execution, enforcement, modification and collection of

this Agreement or in connection with the Loans made pursuant to this Agreement.

Lender may pay someone else to help collect the Loans and to enforce this

Agreement, and Borrower will pay that amount. This includes, subject to any

limits under applicable law, Lender’s attorneys’ fees and Lender’s legal

expenses, whether or not there is a lawsuit, including attorneys’ fees for

bankruptcy proceedings (including efforts to modify or vacate any automatic

stay or injunction), appeals, and any anticipated post–judgment

collection services. Borrower also will pay any court costs, in addition to all

other sums provided by law.

 

Notices. All notices required to be given under

this Agreement shall be given in writing, may be sent by telefacsimile (unless

otherwise required by law), and shall be effective when actually delivered or

when deposited with a nationally recognized overnight courier or deposited in

the United States mail, first class, postage prepaid, addressed to the party to

whom the notice is to be given at the address shown above. Any party may change

its address for notices under this Agreement by giving formal written notice to

the other parties, specifying that the purpose of the notice is to change the

party’s address. To the extent permitted by applicable law, if there is more

than one Borrower, notice to any Borrower will constitute notice to all

Borrowers. For notice purposes, Borrower will keep Lender informed at all times

of Borrower’s current address(es).

 

 

87

 

Severability. If a court of competent jurisdiction

finds any provision of this Agreement to be invalid or unenforceable as to any

person or circumstance, such finding shall not render that provision invalid or

unenforceable as to any other persons or circumstances. If feasible, any such

offending provision shall be deemed to be modified to be within the limits of

enforceability or validity; however, if the offending provision cannot be so

modified, it shall be stricken and all other provisions of this Agreement in

all other respects shall remain valid and enforceable.

 

Subsidiaries

and Affiliates of Borrower. To the extent the context of any provisions of this

Agreement makes it appropriate, including without limitation any

representation, warranty or covenant, the word “Borrower” as used herein shall

include all subsidiaries and affiliates of Borrower. Notwithstanding the

foregoing however, under no circumstances shall this Agreement be construed to

require Lender to make any Loan or other financial accommodation to any

subsidiary or affiliate of Borrower.

 

Successors and Assigns. All covenants and agreements contained by or on behalf

of Borrower shall bind its successors and assigns and shall Inure to the

benefit of Lender, its successors and assigns. Borrower shall not, however,

have the right to assign its rights under this Agreement or any interest

therein, without the prior written consent of Lender.

 

Survival. All warranties, representations, and

covenants made by Borrower in this Agreement or in any certificate or other

instrument delivered by Borrower to Lender under this Agreement shall be

considered to have been relied upon by Lender and will survive the making of

the Loan and delivery to Lender of the Related Documents, regardless of any

investigation made by Lender or on Lender’s behalf.

 

Time Is of the Essence. Time is of the essence in the performance of this

Agreement.

 

Waiver. Lender shall not be deemed to have

waived any rights under this Agreement unless such waiver is given in writing

and signed by Lender. No delay or omission on the part of Lender in exercising

any right shall operate as a waiver of such right or any other right. A waiver

by Lender of a provision of this Agreement shall not prejudice or constitute a

waiver of Lender’s right otherwise to demand strict compliance with that

provision or any other provision of this Agreement. No prior waiver by Lender,

nor any course of dealing between Lender and Borrower, or between Lender and

any Grantor, shall constitute a waiver of any of Lender’s rights or of any

obligations of Borrower or of any Grantor as to any future transactions.

Whenever the consent of Lender is required under this Agreement, the granting

of such consent by Lender in any instance shall not constitute continuing

consent in subsequent instances where such consent is required, and in all

cases such consent may be granted or withheld in the sole discretion of Lender.

 

BORROWER ACKNOWLEDGES HAVING READ ALL

THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS

TERMS. THIS AGREEMENT IS DATED AS OF OCTOBER 23, 2000.

 

BORROWER:

 

Heritage

Oaks Bancorp

 

	

  By:

  	

  /s/  Lawrence

  P. Ward

  	

  By:

  	

  /s/ Gwen R. Pelfrey

  
	

   

  	

  Lawrence P. Ward, Chief Executive

  Officer

  	

   

  	

  Gwen R. Pelfrey, EVP/Corporate

  Secretary

  

 

LENDER:

 

PACIFIC COAST BANKERS’ BANK

 

	

  By:

  	

  [Illegible]

  
	

   

  	

  Authorized Officer

  

 

 

88<PAGE>
                                                                   Exhibit 10.19

                                    AGREEMENT

     This agreement is entered into effective as of March 5, 200l by Discovery
Operating, Inc. ("Discovery"), a Texas Corporation, whose address is 800 N.
Marienfeld, Suite 100, Midland, Texas 79701, Don L. Sparks, W. Jeffrey Sparks,
Kevin D. Sparks, C. Todd Sparks ("Sparks'"), whose address is the same as
Discovery's, and Ivanhoe Energy (USA) Inc. ("Ivanhoe") a Nevada Corporation
whose address is 1200 Discovery Drive, Suite 301, Bakersfield, California
93309.

     WHEREAS, Discovery has leases covering approximately 1,680 acres in Midland
and Upton County, Texas, said leases, and the property covered thereby being
described in Exhibit "A" attached hereto; and

     WHEREAS, Discovery has committed to assign to third parties 50% of its
interest in said leases; and

     WHEREAS, Discovery, Sparks' and Ivanhoe desire to enter into agreements
covering the remaining 50% of 100% interest ("the 50% interest") in said leases;
and

     WHEREAS, Discovery, Sparks' and Ivanhoe have entered into this Agreement
("Agreement") and a Joint Operating Agreement ("JOA") to govern their
relationship concerning the remaining 50% interest in said leases; and

     WHEREAS, it is the intent of Discovery, Sparks' and Ivanhoe to have all
third parties execute the JOA and become governed by its terms and provisions.

                                       1
<PAGE>

                                   WITNESSETH

1.   The JOA is attached as Exhibit "B" to this Agreement. This Agreement and
     the JOA shall be construed together as one instrument insofar as they
     affect the 50% interest.

2.   Among other things, the JOA shall control the drilling obligations of the
     parties hereto and the penalties for failure to drill. As to the division
     of ownership of those interests fully earned under the JOA in the 50%
     interest by the parties hereto, this Agreement shall control. It is agreed
     that Discovery and/or Sparks' shall be entitled to earn 10% and that
     Ivanhoe shall be entitled to earn 40% (a total of 50%) ownership of, in and
     to the interests covered by the leases. Upon payout, as that term is
     defined below, the ownership interests of the parties to this Agreement
     shall automatically convert to 18% in favor of Discovery and/or Sparks' and
     32% in favor of Ivanhoe. The parties shall bear all costs and receive all
     revenues in the percentages as stated herein. All assignments to the
     parties to this Agreement shall be subject to this Agreement and shall
     reflect the ownership percentages before and after payout.

3.   Payout.

     a    New Wells Drilled by All Parties. Payout shall be calculated by
          comparing the costs and revenues on the first eight wells drilled in
          which both parties hereto have consented to and funded the costs
          pursuant to this Agreement and JOA. Payout shall be deemed to have
          occurred when the producing wells within the first such eight well
          package have generated revenue sufficient to cover the prorated
          leasehold cost, if any, direct drilling and completion costs, lease
          operating expenses, severance taxes, ad valorem taxes, sales taxes,
          royalty and overriding royalty payments attributable to the said eight
          wells. Any other taxes such as income taxes or franchise taxes shall
          not be considered in calculating payout.

                                       2

<PAGE>

          Payout for each successive package of eight wells drilled shall be
          calculated in the same manner. In the event that this Agreement
          terminates prior to the completion of any eight well package, or
          drilling of any package ceases for one year, payout will be calculated
          upon those wells actually drilled within the incomplete package.

     b.   Re-Working Operations By All Parties. The cost of re-working,
          re-drilling, plugging-back, deepening and similar operations on a
          previously drilled well shall be added to the costs of the package of
          wells to which the well belongs for purposes of calculating payout.

     c.   New Well Drilled By Less Than All Parties. In the event a party elects
          not to participate in the drilling of a new well, the JOA shall
          control the ownership of that well, and this Agreement shall not apply
          to that well.

     d.   Re-Working Operations By Less Than All Parties. In the event that any
          party to this Agreement elects not to consent to any proposed
          re-working, re-drilling, plugging-back, deepening or similar operation
          on a well within a package which has not reached payout, the costs of
          such operation and the production from such well thereafter shall not
          be considered in calculating payout of the package of wells to which
          the well belongs, but shall be subject to the non-consent penalties
          provided by the JOA. After the JOA penalties have been satisfied, the
          net revenues thereafter from the well, if any, shall be added to the
          net revenues generated by the last package of wells drilled on any
          lands of attached Exhibit "A" for the purpose of calculating payout on
          said package of wells. Upon payout of said package the ownership % of
          the parties hereto shall be governed by the provisions of Paragraph 2
          of this Agreement.

4.   Transfers and Assignments. Ivanhoe acknowledges that interests in each
     wells surrounding 80 acre proration unit shall be assigned by Discovery
     and/or Sparks' to the parties hereto in the proportionate interests which
     they have earned

                                        3

<PAGE>

     according to the terms of this Agreement and the JOA. Such assignments by
     Discovery and/or Sparks' and the ownership of Discovery and/or Sparks' and
     Ivanhoe shall be subject in all things to the terms of the underlying
     leases, any royalty or overriding royalty or production payment of any
     kind, any prior encumbrances not created or caused by Discovery and/or
     Sparks', the assignment terms from Apache Corporation, all other lessors,
     the JOA, and all documents described in, delivered in connection with or
     contemplated by the JOA, and the 18% back-in interests in favor of
     Discovery and/or Sparks' created by this Agreement. All of such assignments
     shall be made with special warranty only and not otherwise.

5.   Acquisition of Other Interests. In the event that any portion of the 50%
     interest owned by third parties becomes available, and/or if additional
     interests become available through the Area of Mutual Interest Agreement
     contained in the JOA, it is agreed that said interests may be earned by the
     parties hereto in the percentages which their interests before payout bear
     to each other, i.e., 10% to 40% and after payout 18% to 32%.

6.   Term. This Agreement shall terminate pursuant to the provisions of Article
     XIII Option 1 of the JOA.

7.   Binding Upon Heirs, Personal Representatives, Successors and Assigns. This
     Agreement shall be binding upon the heirs, personal representatives,
     successors and assigns of each of the parties to this Agreement.

8.   Entire Agreement. This Agreement, and the JOA set forth the entire
     agreement of Ivanhoe and Discovery and/or Sparks' with respect to their
     interests. Discovery and/or Sparks' and Ivanhoe acknowledge that they have
     read and understand this Agreement and the JOA; and in the event of a
     conflict between the JOA and this Agreement, this Agreement shall control
     as between Ivanhoe and Discovery and/or Sparks'.

                                       4

<PAGE>

9.   GOVERNING LAW. THE LAWS OF THE STATE OF TEXAS SHALL GOVERN THIS AGREEMENT.

10.  Relationship. It is not intended, and this agreement shall not be
     construed to create or perpetuate a partnership, joint venture, mining
     partnership or association of any kind between the parties.

IN WITNESS WHEREOF, this agreement is executed effective as of the date set
forth above.

                                                  Discovery Operating, Inc.

                                                  By: /s/ Don L. Sparks
                                                      --------------------------
                                                      Don L.Sparks, President

                                                  Don L.Sparks

                                                  /s/ Don L. Sparks
                                                  ------------------------------

                                                  W. Jeffrey Sparks

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

                                                  Kevin D. Sparks

                                                  /s/ Kevin D. Sparks
                                                  ------------------------------

                                                  C. Todd Sparks

                                                  /s/ Todd Sparks
                                                  ------------------------------

                                       5
<PAGE>

                                                  Ivanhoe Energy (USA) Inc.

                                                  By: /s/ Robert Coffey
                                                      --------------------------
                                                      Robert Coffey
                                                      Vice President Operations

                                       6
<PAGE>

                                    EXHIBIT A

Attached to and made a part of that certain letter agreement dated March 5, 200l
between Discovery Operating, Inc. and Ivanhoe Energy (USA), Inc.

I.   LEGAL DESCRIPTION

     Block 41, Township 4 South, T&P Railway Company Survey, Midland and Upton
     Counties, Texas

          Section 15: E/2 and SW/4.

          Section 27: W/2, NE/4 and W/2SE/4.

          *Section 22: All.

     * Approximately 60% of the acreage in this section has been leased as of
     this date (March 5, 200l). We are still in the process of acquiring the
     remaining leases.

<PAGE>

                                   EXHIBIT "B"

ATTACHED TO AND MADE A PART OF THAT CERTAIN LETTER AGREEMENT DATED MARCH 5,2001
        BETWEEN DISCOVERY OPERATING, INC. AND IVANHOE ENERGY (USA), INC.

                            A.A.P.L. FORM 610 - 1989

                         MODEL FORM OPERATING AGREEMENT

                               OPERATING AGREEMENT

                                      DATED

                                  MARCH 5,   ,   2001  ,
                                 ------------  --------
                                                 YEAR

OPERATOR     DISCOVERY OPERATING, INC.
             -------------------------------------------------------------------

CONTRACT AREA     AS DESCRIBED ON EXHIBIT "A" ATTACHED HERETO.
                  --------------------------------------------------------------

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

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

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

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

COUNTY OR PARISH OF    MIDLAND AND UPTON   , STATE OF        TEXAS
                   ------------------------           ---------------------

                                   COPYRIGHT 1989 - ALL RIGHTS RESERVED AMERICAN
                                   ASSOCIATION OF PETROLEUM LANDMEN, 4100 FOSSIL
                            CREEK BLVD. FORT WORTH, TEXAS, 76137, APPROVED FORM.

                                               A.A.P.L. NO. 610 - 1989

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Article

I.   DEFINITIONS                                                             1
II.  EXHIBITS                                                                1
III. INTERESTS OF PARTIES                                                    2
     A.  OIL AND GAS INTERESTS:                                              2
     B.  INTERESTS OF PARTIES IN COSTS AND PRODUCTION:                       2
     C.  SUBSEQUENTLY CREATED INTERESTS:                                     2
IV.  TITLES                                                                  2
     A.  TITLE EXAMINATION:                                                  2
     B.

     A.  DESIGNATION AND RESPONSIBILITIES OF OPERATOR:                       4
     B.  RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:      4
         1. Resignation or Removal of Operator                               4
         2. Selection of Successor Operator                                  4
         3. Effect of Bankruptcy                                             4
     C.  EMPLOYEES AND CONTRACTORS:                                          4
     D.  RIGHTS AND DUTIES OF OPERATOR:                                      4
         1. Competitive Rates and Use of Affiliates                          4
         2. Discharge of Joint Account Obligations                           4
         3. Protection from Liens                                            4
         4. Custody of Funds                                                 5
         5. Access to Contract Area and Records                              5
         6. Filing and Furnishing Governmental Reports                       5
         7. Drilling and Testing Operations                                  5
         8. Cost Estimates                                                   5
         9. Insurance                                                        5
VI.  DRILLING AND DEVELOPMENT                                                5
     A.  INITIAL WELL:                                                       5
     B.  SUBSEQUENT OPERATIONS:                                              5
         1. Proposed Operations                                              5
         2. Operations by Less Than All Parties                              6
         3. Stand-By Costs                                                   7
         4. Deepening                                                        8
         5. Sidetracking                                                     8
         6. Order of Preference of Operations                                8
         7. Conformity to Spacing Pattern                                    9
         8. Paying Wells                                                     9
     C.  COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:
         1. Completion                                                       9
         2. Rework, Recomplete or Plug Back                                  9
     D.  OTHER OPERATIONS:                                                   9
     E.  ABANDONMENT OF WELLS:                                               9
         1. Abandonment of Dry Holes                                         9
         2. Abandonment of Wells That Have Produced                         10
         3. Abandonment of Non-Consent Operations                           10
     F.  TERMINATION OF OPERATIONS:                                         1O
     G.  TAKING PRODUCTION IN KIND:                                         10
         (Option 1) Gas Balancing Agreement                                10
         (Option 2) No Gas Balancing Agreement                              11
VII. EXPENDITURES AND LIABILITY OF PARTIES                                  11
     A.  LIABILITY OF PARTIES:                                              11
     B.  LIENS AND SECURITY INTERESTS:                                      12
     C.  ADVANCES:                                                          12
     D.  DEFAULTS AND REMEDIES:                                             12
         1. Suspension of Rights                                            13
         2. Suit for Damages                                                13
         3. Deemed Non-Consent                                              13
         4. Advance Payment                                                 13
         5. Costs and Attorneys' Fees                                       13
     E.  RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:              13
     F.  TAXES:                                                             13
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST                      14
     A.  SURRENDER OF LEASES:                                               14
     B.  RENEWAL OR EXTENSION OF LEASES:                                    14
     C.  ACREAGE OR CASH CONTRIBUTIONS:                                     14

</TABLE>

                                       i
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S>                                                                         <C>

     D.  ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:                         15
     E.  WAIVER OF RIGHTS TO PARTITION:                                       15
     F.
IX.
X.   CLAIMS AND LAWSUITS                                                      15
XI.  FORCE MAJEURE                                                            16
XII. NOTICES                                                                  16
XIII.TERM OF AGREEMENT                                                        16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS                                     16
     A.  LAWS, REGULATIONS AND ORDERS                                         16
     B.  GOVERNING LAW:                                                       16
     C.  REGULATORY AGENCIES:                                                 16
XV.  MISCELLANEOUS                                                            17
     A.  EXECUTION.                                                           17
     B.  SUCCESSORS AND ASSIGNS                                               17
     C.  COUNTERPARTS.                                                        17
     D.  SEVERABILITY                                                         17
XVI. OTHER PROVISIONS                                                         17

</TABLE>

                                       ii
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                               OPERATING AGREEMENT

     THIS AGREEMENT, entered into by and between DISCOVERY OPERATING, INC.
hereinafter designated and referred to as "Operator," and the signatory party or
parties other than Operator, sometimes hereinafter referred to individually as
"Non-Operator," and collectively as "Non-Operators."

                                   WITNESSETH:

     WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A," and the
parties hereto have reached an agreement to explore and develop these Leases
and/or Oil and Gas Interests for the production of Oil and Gas to the extent and
as hereinafter provided,

     NOW THEREFORE, 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 "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.

     B. 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.

     C. The term "Contract Area" shall mean all of the lands, Oil and Gas Leases
and/or Oil and Gas Interests intended to be developed and operated for Oil and
Gas purposes under this agreement. Such lands, Oil and Gas Leases and Oil and
Gas Interests are described in Exhibit "A."

     D. The term "Deepen" 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.

     E. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.

     F. 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.

     G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.

     H. The term "Initial Well" shall mean the well required to be drilled by
the parties hereto as provided in Article VI.A.

     I. 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.

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

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

     L. The term "Oil and Gas Interests" or "Interests" shall mean unleased fee
and mineral interests in Oil and Gas in tracts of land lying within the Contract
Area which are owned by parties to this agreement.

     M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the
oil and gas leases or interests therein covering tracts of land lying within the
Contract Area which are owned by the parties to this agreement.

     N. 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.

     0. 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.

     P. 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.

     Q. 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 drill around junk in the hole to overcome
other mechanical difficulties.

     R. The term "Zone" shall mean a stratum 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.

                                   ARTICLE II.
                                    EXHIBITS

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

[X]  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 agreement with addresses and telephone numbers for notice
          purposes,

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

     (5)  Oil and Gas Leases and/or Oil and Gas Interests subject to this
          agreement,

     (6)  Burdens on production.

---- B. Exhibit "B," Form of Lease.

---- C. Exhibit "C," Accounting Procedure.

---- D. Exhibit "D," Insurance.

---- E. Exhibit "E," Gas Balancing Agreement.

---- F. Exhibit "F," Non-Discrimination and Certification of Non-Segregated
        Facilities.

---- G. Exhibit "G," Tax Partnership.

---- H. Other:

                                       -l-

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.

                                  ARTICLE III.
                              INTERESTS OF PARTIES

A.   OIL AND GAS INTERESTS:

     If any party owns an Oil and Gas Interest in the Contract Area, that
Interest shall be treated for all purposes of this agreement and during the term
hereof as if it were covered by the form of Oil and Gas Lease attached hereto as
Exhibit "B," and the owner thereof shall be deemed to own both royalty interest
in such lease and the interest of the lessee thereunder.

B.   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." 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.

     Regardless of which party has contributed any Oil and Gas Lease or Oil and
Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, 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 up to, but not in excess of, ONE FOURTH (1/4) and shall
indemnify, defend and hold the other parties free from any liability therefor.
Except as otherwise expressly provided in this agreement, if any party has
contributed hereto any Lease or Interest which is burdened with any royalty,
overriding royalty, production payment or other burden on production in excess
of the amounts stipulated above, such 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. However, so long as the Drilling Unit for the productive Zone(s)
is identical with the Contract Area, each party shall pay or deliver, or cause
to be paid or delivered, all burdens on production from the Contract Area due
under the terms of the Oil and Gas Lease(s) which such party has contributed to
this agreement, and shall indemnify, defend and hold the other parties free from
any liability therefor.

     No party shall ever be responsible, on a price basis higher than the price
received by such party, to any other party's lessor or royalty owner, and if
such other party's lessor or royalty owner should demand and receive settlement
on a higher price basis, the party contributing the affected Lease shall bear
the additional royalty burden attributable to such higher price.

     Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.

C.   SUBSEQUENTLY CREATED INTERESTS:

     If any party has contributed hereto a Lease or 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 a Lease or Interest burdened with an overriding
royalty, production payment, net profits interests, 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 to the extent such burden causes the burdens on such party's
Lease or Interest to exceed the amount stipulated in Article III.B. above.

     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 therefor. Further, if the Burdened
Party fails to pay, when due, its share of expenses chargeable hereunder, all
provisions of Article VI1.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 and, if a majority in interest of the
Drilling Parties so request or Operator so elects, title examination shall be
made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of the
well. The opinion will include the ownership of the working interest, minerals,
royalty, overriding royalty and production payments under the applicable
Leases. Each party contributing Leases and/or 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
Drilling 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 Drilling Parties in the
proportion that the interest of each Drilling Party bears to the total interest
of all Drilling Parties as such 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.

     Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with Leases or Oil and Gas
Interests contributed by such party. 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."

                                       -2-

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

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 (I) the title to
the Drillsite or Drilling Unit, if appropriate, has been examined as above
provided, and (2) the title has been approved by the examining attorney or title
has been accepted by all of the Drilling Parties in such well.

B.   LOSS OR FAILURE of TITLE:

     3. Other Losses: All losses of Leases or 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 Lease or 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 Lease 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.

                                      -3-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                   ARTICLE V.
                                    OPERATOR

A.   DESIGNATION AND RESPONSIBILITIES OF OPERATOR:

     DISCOVERY OPERATING. INC. 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 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 by the
affirmative vote of two or more Non-Operators owning a majority interest based
on ownership as shown on Exhibit "A" remaining after excluding the voting
interest of Operator; 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.

     Subject to Article VII.D.1, such resignation or removal shall not become
effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) 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. Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator. 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: 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 two (2) or more parties owning a majority interest based on
ownership as shown on Exhibit "A": provided, however, if an Operator which has
been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative vote
of the party or parties owning a majority interest based on ownership as shown
on Exhibit "A" remaining after excluding the voting interest of the Operator
that was removed or resigned. 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, ail actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit "A."
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit "A."

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 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: All wells drilled on the
Contract Area shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall not
exceed the prevailing rates in the area and the rate of such charges shall be
agreed upon by the parties in writing before drilling operations are commenced,
and such work shall be performed by Operator under the same terms and conditions
as are customary and usual in the area in contracts of independent contractors
who are doing work of a similar nature. 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." 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

                                       -4-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

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 VI1.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-Operator funds as
herein specifically provided.

     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 therefrom, 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 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
furnish copies to each requesting Non-Operator not in default of its payment
obligations, 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, including but not limited to the Initial Well:

          (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: Operator shall finish 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. 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. INITIAL WELL:

     On or before the 1st day of July, 2001, Operator shall commence the
drilling of the Initial Well at the following location:

660' FEL & 1980' FSL, SECTION 15, BLOCK 41, T-4-S, T&P RR Co. Survey, Midland
County, Texas.

The drilling of the Initial Well and the participation therein by all parties is
obligatory, subject to Article V1.C.1. as to participation in Completion
operations and Article V1.F. as to termination of operations and Article XI as
to occurrence of force majeure.

B.   SUBSEQUENT OPERATIONS:

     1. Proposed Operations: If any party hereto should desire to drill any
well on the Contract Area other than the Initial Well, or if any party 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 drill, 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

                                      -5-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - I989

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. 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 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 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. Those parties that did not participate in
the drilling of a well for which a proposal to Deepen or Sidetrack is made
hereunder shall, if such parties desire to participate in the proposed Deepening
or Sidetracking operation, reimburse the Drilling Parties in accordance with
Article VI.B.4. in the event of a Deepening operation and in accordance with
Article VI.B.5. in the event of a Sidetracking operation.

     2.   Operations by Less Than All Parties: See also Article XVI, G, Other
          Provisions.

     (a) Determination of Participation. If any party to whom such notice is
delivered as provided in Article VI.B.1 or V1.C.1. (Option No. 2) 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; provided,
however, if no drilling rig or other equipment is on location, the Consenting
Parties shall either: (i) request Operator to perform the work required by such
proposed operation for the account of the Consenting Parties, or (ii) designate
one of the Consenting Parties as Operator to perform such work. The rights and
duties granted to and imposed upon the Operator under this agreement are granted
to and imposed upon the party designated as Operator for an operation in which
the original Operator is a Non-Consenting Party. 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
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. 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 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 V1.B.l., 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 leasehold estates 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 drilled,
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 the well shall then be turned over
to Operator (if the Operator did not conduct the operation) and shall be
operated by it at the expense and for the account of the Consenting Parties.
Upon commencement of operations for the drilling, 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.

                                      -6-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
V1.C.1. Option No. 2, all of such 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) 100% 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

     (ii) 500% of (a) that portion of the costs and expenses of drilling,
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. SEE ARTICLE XVI, SECTIONS A
AND G, OTHER PROVISIONS.

     (c) Reworking, Recompleting or Plugging Back. An election not to
participate in the drilling, 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 not 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 500% 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. SEE ALSO
ARTICLE XVI.H. OTHER PROVISIONS.

     (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 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 drilling,
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. Semi-annually 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 of 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 am. on
the first day of the next month 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 drilling, 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 drilled or 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,

                                       -7-

<PAGE>

A.A.P.L. FORM 61.0 - MODEL FORM OPERATING AGREEMENT - 1989

Sidetracking, Deepening, Recompleting, Plugging Back or Completing 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 drilling or
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 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.

     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 to the notice, standby costs shall be
allocated between the parties taking 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 parties elect to participate in a drilling,
Sidetracking, or Deepening operation proposed pursuant to Article V1.B.1 ., the
interest relinquished by the Non-Consenting Parties to the Consenting Parties
under Article VI.8.2. 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.

     In the event any Consenting Party desires to drill or Deepen a Non-Consent
Well to a depth below the Initial Objective, such party shall give notice
thereof, complying with the requirements of Article VI.B.l., to all parties
(including Non-Consenting Parties). Thereupon, Articles VI.B.l. and 2. shall
apply and all parties receiving such notice shall have the right to participate
or not participate in the Deepening of such well pursuant to said Articles V1.B.
1. and 2. If a Deepening operation is approved pursuant to such provisions, and
if any Non-Consenting Party elects to participate in the Deepening operation,
such Non-Consenting party shall pay or make reimbursement (as the case may be)
of the following costs and expenses.

     (a) If the proposal to Deepen is made prior to the Completion of such well
as a well capable of producing in paying quantities, such Non-Consenting Party
shall pay (or reimburse Consenting Parties for, as the case may be) that share
of costs and expenses incurred in connection with the drilling of said well from
the surface to the Initial Objective which Non-Consenting Party would have paid
had such Non-Consenting Party agreed to participate therein, plus the
Non-Consenting Party's share of the cost of Deepening and of participating in
any further operations on the well in accordance with the other provisions of
this Agreement; provided, however, all costs for testing and Completion or
attempted Completion of the well incurred by Consenting Parties prior to the
point of actual operations to Deepen beyond the Initial Objective shall be for
the sole account of Consenting Parties.

     (b) If the proposal is made for a Non-Consent Well that has been previously
Completed as a well capable of producing in paying quantities, but is no longer
capable of producing in paying quantities, such Non-Consenting Party shall pay
(or reimburse Consenting Parties for, as the case may be) its proportionate
share of all costs of drilling, Completing, and equipping said well from the
surface to the Initial Objective, calculated in the manner provided in paragraph
(a) above, less those costs recouped by the Consenting Parties from the sale of
production from the well. The Non-Consenting Party shall also pay its
proportionate share of all costs of re-entering said well. The Non-Consenting
Parties' proportionate part (based on the percentage of such well Non-Consenting
Party would have owned had it previously participated in such Non-Consent Well)
of the costs of salvable materials and equipment remaining in the hole and
salvable surface equipment used in connection with such well shall be determined
in accordance with Exhibit "C." If the Consenting Parties have recouped the cost
of drilling, Completing, and equipping the well at the time such Deepening
operation is conducted, then a Non-Consenting Party may participate in the
Deepening of the well with no payment for costs incurred prior to re-entering
the well for Deepening.

     The foregoing shall not imply a right of any Consenting Party to propose
any Deepening for a Non-Consent Well prior to the drilling of such well to its
Initial Objective without the consent of the other Consenting Parties as
provided in Article V1.F.

     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 drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
hours, 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 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 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

                                       -8-

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

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, 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. SEE ALSO ARTICLE XVI.
D, OTHER PROVISIONS.

     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. See also Article XVI.J. Provisions.

C.   COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:

     1. Completion: Without the consent of all parties, no well shall be
drilled, Deepened 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:

[X]  Option No. 1: 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 TWENTY FIVE THOUSAND Dollars ($25,000)
except in connection with the drilling, 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 or
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. Operator shall prepares an AFE for its own use, Operator shall furnish
any Non-Operator an information copy thereof for any single project costing
in excess of TWENTY FIVE THOUSAND Dollars ($25,000). 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
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 V1.D. (except in connection with an operation required to be proposed
under Articles V1.B.1. or V1.C.1. Option No. 2, which shall be governed
exclusively by those 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 two or more parties owning at
least 50% 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 drilled or 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

                                      -9-

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

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 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 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 the well conducted by
such parties. Failure of such party or parties to provide 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 and 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 cost for such well as provided in Article VI.B.2.(b). SEE ALSO
ARTICLE XVI.F. OTHER PROVISIONS.

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, including but not limited to the Initial Well, such operation shall not be
terminated without consent of parties bearing 75% of the costs of such
operation; provided, however, that in the event granite or 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.I., and the
provisions of Article V.I.B. or VI.E. shall thereafter apply to such operation,
as appropriate.

G.   TAKING PRODUCTION IN KIND:

[X]  OPTION NO. 1: GAS BALANCING AGREEMENT ATTACHED

          Each party shall take in kind or separately dispose of its
     proportionate share of all Oil and 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.

          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

                                      -10-

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     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 other 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.

          Any such sale by Operator shall be in a manner commercially reasonable
     under the circumstances but Operator shall have no duty to share any
     existing market or to obtain a price equal to that received under any
     existing market. 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 (1O) 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 al1 marketing arrangements, and of
     volumes actually sold or transported, which records shall be made available
     to Non-Operators upon reasonable request.

          In the event one or more parties' separate disposition of its share of
     the Gas causes split-stream deliveries to separate pipelines and/or
     deliveries which on a day-to-day basis for any reason are not exactly equal
     to a party's respective proportionate share of total Gas sales to be
     allocated to it, the balancing or accounting between the parties shall be
     IN accordance with any Gas balancing agreement between the parties hereto,
     whether such an agreement is attached as Exhibit "E" or is a separate
     agreement. Operator shall give notice to all parties of the first sales 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 arms-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.

                                      -11-

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

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 Oil and Gas Leases and 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 any 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 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, 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,
interests 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 to 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 a
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 therefor by Operator, the non-defaulting
parties, including Operator, shall 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. The amount paid by each 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 marshaling 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 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 utilize 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 materialmen'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:

     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 its 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 Article 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

                                      -12-

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

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 any
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. If Operator is the party in default, the
Non-Operators shall have in addition the right, by vote of Non-Operators owning
a majority in interest in the Contract Area after excluding the voting interest
of Operator, to appoint a new Operator effective immediately. 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 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 has 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 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 non-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 if Operator is
the defaulting party, may thereafter require advance payment defaulting party of
such defaulting party's anticipated share of any item of expense for which
Operator, or Non-Operators, as the case may be, 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 the Article VI.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 collection, and a reasonable attorney's fee, which the lien provided
for herein shall also secure.

E.   RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:

     Rentals, shut-in well payments and minimum royalties which may be required
under the terms of any lease shall be paid by the party or parties who subjected
such lease to this agreement at its or their expense. In the event two or more
parties own and have contributed interests in the same lease to this agreement,
such parties may designate one of such parties to make said payments for and on
behalf of all such parties. 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 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 Leases and 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 payments, 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 other parties for their proportionate
shares of all tax payments in the manner provided in Exhibit "C."

                                      -13-

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     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 pendency 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.

                                  ARTICLE VIII.
                ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

A.   SURRENDER OF LEASES:

     The Leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.

     However, should any party desire to surrender its interest in any Lease or
in any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute a consent to the surrender of the Leases described in the
notice. If all parties do not agree or consent thereto, the party desiring to
surrender shall assign, without express or implied warranty of title, all of its
interest in such Lease, or portion thereof, and any well, material and equipment
which may be located thereon and any rights in production thereafter secured, to
the parties not consenting to such surrender. If the interest of the assigning
party is or includes an Oil and Gas Interest, the assigning party shall execute
and deliver to the party or parties not consenting to such surrender an oil and
gas lease covering such Oil and Gas Interest for a term of one (I) year and so
long thereafter as Oil and/or Gas is produced from the land covered thereby,
such lease to be on the form attached hereto as Exhibit "B." Upon such
assignment or lease, the assigning party shall be relieved from all obligations
thereafter accruing, but not theretofore accrued, with respect to the interest
assigned or leased and the operation of any well attributable thereto, and the
assigning party shall have no further interest in the assigned or leased
premises and its equipment and production other than the royalties retained in
any lease made under the terms of this Article. The party assignee or lessee
shall pay to the party assignor or lessor the reasonable salvage value of the
latter's interest in any well's salvable materials and equipment attributable to
the assigned or leased acreage. The value of all salvable materials and
equipment shall be 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. If such value is less than such costs,
then the party assignor or lessor shall pay to the party assignee or lessee the
amount of such deficit. If the assignment or lease is in favor of more than one
party, the interest shall be shared by such parties in the proportions that the
interest of each bears to the total interest of all such parties. If the
interest of the parties to whom the assignment is to be made varies according to
depth, then the interest assigned shall similarly reflect such variances.

     Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as it
was immediately before the assignment, lease or surrender in the balance of the
Contract Area: and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed subject to an Operating Agreement in the
form of this agreement.

B.   RENEWAL OR EXTENSION OF LEASES:

     If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interest
held at that time by the parties in the Contract Area. Each party who
participates in the purchase of a renewal or replacement Lease shall be given an
assignment of its proportionate interest therein by the acquiring party.

     If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties who
elect to participate therein, 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 parties
participating in the purchase of such renewal or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated in
Exhibit "A," but any renewal or replacement Lease in which less than all parties
elect to participate shall not be subject to this agreement but shall be deemed
subject to a separate Operating Agreement in the form of this agreement.

     If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or replacement
Leases and their right to receive an assignment of interest shall also reflect
such depth variances.

     The provisions of this Article shall apply to renewal or replacement Leases
whether they are for the entire interest covered by the expiring Lease or cover
only a portion of its area or an interest therein. Any renewal or replacement
base taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.

     The provisions in this Article shall also be applicable to extensions of
Oil and Gas Leases.

C.   ACREAGE OR CASH CONTRIBUTIONS:

     While this agreement is in force, if any party contracts for a contribution
of cash towards the drilling of a well or any other operation on the Contract
Area, such contribution shall be paid to the party who conducted the drilling or
other operation and shall be applied by it against the cost of such drilling or
other operation. If the contribution be in the form of acreage, the party to
whom the contribution is made shall promptly tender an assignment of the
acreage, without warranty of title, to the Drilling Parties in the proportions
said Drilling Parties shared the cost of drilling the well. Such acreage shall
become a separate Contract Area and, to the extent possible, be governed by
provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions it may obtain in support of
any well or any other operation on the Contract Area. The above provisions shall
also be applicable to optional rights to earn acreage outside the Contract Area
which are in support of well drilled inside Contract Area.

                                      -14-

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.

D.   ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:

     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 Lease or Interest shall be deemed a party to this
agreement as to the interest conveyed from and after the effective date of the
transfer of ownership; provided, however, that the other parties shall not be
required to recognize any such sale, encumbrance, transfer or other disposition
for any purpose hereunder until thirty (30) days after they have received a copy
of 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.

E.   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.

F.   PREFERENTIAL RIGHT TO PURCHASE:

                                   ARTICLE IX.

                                   ARTICLE X.
                               CLAIMS AND LAWSUITS

     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) 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 a
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
sued 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.

                                      -15-

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                   ARTICLE XI.
                                 FORCE MAJEURE

     If any party 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, lightening, 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.

     The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.

                                  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
Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.

[X]  Option No. 1: So long as any of the Oil and Gas Leases 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 therefor 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.

                                  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 MATTERS 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 TEXAS SHALL
GOVERN.

C.   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

                                      - 16-

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

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 or 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 does 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 such Non-Operator and Operator
notwithstanding that this agreement is not then or thereafter executed by all of
the parties to which it is tendered or which are listed on Exhibit "A" as owning
an interest in the Contract Area or which own, in fact, an interest in the
Contract Area. Operator may, however, by written notice to all Non-Operators who
have become bound by this agreement as aforesaid, given at any time prior to the
actual spud date of the Initial Well but in no event later than five days prior
to the date specified in Article VI.A. for commencement of the Initial Well,
terminate this agreement if Operator in its sole discretion determines that
there is insufficient participation to justify commencement of drilling
operations. In the event of such a termination by Operator, all further
obligations of the parties hereunder shall cease as of such termination. In the
event any Non-Operator has advanced or prepaid any share of drilling or other
costs hereunder, all sums so advanced shall be returned to such Non-Operator
without interest. In the event Operator proceeds with drilling operations for
the Initial Well without the execution hereof by all persons listed on Exhibit
"A" as having a current working interest in such well, Operator shall indemnify
Non-Operators with respect to all costs incurred for the Initial Well which
would have been charged to such person under this agreement if such person had
executed the same and Operator shall receive all revenues which would have been
received by such person under this agreement if such person had executed the
same.

B.   SUCCESSORS AND ASSIGNS:

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

C.   COUNTERPARTS:

     This 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.

                                  ARTICLE XVI.
                                OTHER PROVISIONS

     A. MODIFICATION OF ARTICLE VI.B.2 ON PAGE 6 HEREOF. EACH NON-OPERATING
PARTY SHALL PAY TO THE OPERATOR THEIR PROPORTIONATE PART OF THE AFE COST OF
DRILLING OR RE-ENTERING THE INITIAL WELL; THEREAFTER, EACH CONSENTING PARTY
SHALL PAY TO THE OPERATOR SUCH CONSENTING PARTY'S PROPORTIONATE PART OF THE AFE
COST OF DRILLING OR RE-ENTERING EACH WELL IN THE CONTRACT AREA, AND OPERATOR
SHALL NOT BE OBLIGATED TO COMMENCE OPERATIONS ON ANY WELL UNTIL OPERATOR HAS
RECEIVED 100% OF SAID ESTIMATED COSTS. OPERATOR SHALL PROMPTLY AFTER ALL WORK ON
EACH WELL IS COMPLETED AND ALL COSTS PAID, REFUND TO EACH CONSENTING PARTY ITS
PROPORTIONATE SHARE OF THE PREPAID COSTS NOT EXPENDED IN THE DRILLING OR
RE-ENTRY OF A WELL.

     B. IF ANY PARTY HERETO SHOULD SUBSEQUENTLY CREATE AN OVERRIDING ROYALTY,
PRODUCTION PAYMENT OR OTHER BURDEN AGAINST ITS WORKING INTEREST PRODUCTION AND,
IF ANY OTHER PARTY OR PARTIES SHOULD CONDUCT NON-CONSENT OPERATIONS PURSUANT TO
THIS AGREEMENT, AND AS A RESULT, BECOME ENTITLED TO RECEIVE THE WORKING INTEREST
PRODUCTION OTHERWISE BELONGING TO THE NON-PARTICIPATING PARTY, THE PARTY OR
PARTIES ENTITLED TO RECEIVE THE WORKING INTEREST PRODUCTION OF THE
NON-PARTICIPATING PARTY SHALL RECEIVE SUCH PRODUCTION FREE AND CLEAR OF BURDENS
AGAINST SUCH PRODUCTION WHICH MAY HAVE BEEN CREATED SUBSEQUENT TO THIS AGREEMENT
THE NON-PARTICIPATING PARTY CREATING SUCH SUBSEQUENT BURDEN SHALL HOLD THE
PARTICIPATING PARTY OR PARTIES HARMLESS WITH RESPECT TO THE RECEIPT OF SUCH
WORKING INTEREST PRODUCTION.

     C. NO PARTY SHALL DISTRIBUTE ANY INFORMATION OR PHOTOGRAPHS TO THE PRESS OR
OTHER MEDIA WITHOUT THE APPROVAL OF ALL THE CONSENTING PARTIES, EXCEPT AS
REQUIRED BY LAW OR REGULATION. WHEN ALL CONSENTING PARTIES HAVE REVIEWED SUCH
MATERIAL, AND ALL CONSENTING PARTIES HAVE APPROVED THE ISSUANCE OF THE MATERIAL,
THE COMPANY PROPOSING THE RELEASE OF THE INFORMATION SHALL HAVE THE PRINCIPAL
RESPONSIBILITY FOR ITS ISSUANCE. THE ONLY OTHER EXCEPTION TO THE FOREGOING SHALL
BE THAT IN THE EVENT OF AN EMERGENCY INVOLVING EXTENSIVE PROPERTY DAMAGE,
OPERATIONS FAILURE, LOSS OF HUMAN LIFE OR OTHER CLEAR EMERGENCY, THE OPERATOR IS
AUTHORIZED TO FURNISH SUCH MINIMUM STRICTLY FACTUAL INFORMATION AS SHALL BE
NECESSARY TO SATISFY THE LEGITIMATE PUBLIC INTEREST ON THE PART OF THE PRESS AND
DULY CONSTITUTED AUTHORITIES. IF TIME DOES NOT PERMIT THE OBTAINING OF PRIOR
APPROVAL BY THE CONSENTING PARTIES SUCH PARTY SHALL THEREUPON PROMPTLY ADVISE
THE OTHER PARTIES OF THE INFORMATION SO FURNISHED.

                                      -17-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     D. Notwithstanding other provisions of this Agreement, it is agreed that
where a well which has been authorized under the terms of this Agreement by all
parties, shall have been drilled to the objective depth or the objective
formation, whichever is deepest, and Operator has completed such tests,
including, without limitation, any production tests, which Operator reasonably
deems necessary for the proper evaluation of the formation and has furnished
such results to the parties, and the parties cannot agree on the sequence and
timing of further operations regarding said well, the following elections shall
control in the order enumerated hereafter: (1) an election to attempt to
complete at either the objective depth or the objective formation; (2) an
election to plug back, set casing and attempt to complete said well; (3) an
election to deepen said well; and (4) an election to plug and abandon said well.

If there are conflicting recommendations for further operations, the sequence of
precedence for a further operation are listed herein in this Article XVI(D). At
any time a well is deepened as provided herein, upon total depth being reached
in such deepening operation and following testing to such an extent as shall be
deemed prudent by Operator, the provisions above pertaining to further
operations shall be applicable insofar as such further operations pertain to
items (l), (3) and (4).

It is provided, however, that if at the time said participating parties are
considering any of the above elections the hole is in such condition that a
prudent operator would not conduct the operations contemplated, then such
election shall be eliminated from the priorities set forth herein.

     E. Billing Additional Interest. Notwithstanding the provisions of this
Agreement and the Accounting Procedure attached as Exhibit "C", the parties to
this Agreement specifically agree that in no event during the term of this
contract shall Operator be required to make more than one billing for the entire
interest credited to each party on Exhibit "A". It is further understood and
agreed that if a party sells or otherwise disposes all of its interest as set
forth on Exhibit "A", whether to one or several assignees, Operator shall
continue to issue statements and billings to the selling party for the interest
conveyed until such time as the selling party has designated one assignee to
receive billing for the entire interest credited to selling party on Exhibit
"A".

     The selling party shall promptly furnish to Operator the following:

          1. Written notice of the conveyance and copies of the Assignments;

          2. The name of the Assignee to be billed in which it consents to
     receive statements and billings for the entire interest credited to selling
     party on Exhibit "A".

     F. Consent to Abandonment and Surrender. If the Operator desires to abandon
any well or to surrender any lease, Operator shall notify the other parties
hereto of its intention and if any party receiving such notice shall fail to
reply in writing within thirty (30) days of the date of such notice, such party
shall be deemed to have consented to such abandonment or surrender and the
Operator shall have the authority to abandon any such well as provided in
Article VI.E.2, hereof as if each party had consented to such abandonment or
as the case may be, to surrender such lease pursuant to the terms of Article
VIII, A. hereof as if such party had consented to such surrender.

     G. "In or Out" Non-Consent Election as to Certain Proposed Operations.

     An election by any party not to participate in the completion of the first
well drilled in any section of land covered by this Agreement, or an election
not to participate in additional drilling on a Section is an election out of the
well in question and all remaining undeveloped lands in the section. This shall
apply to any and all sections of land shown on Exhibit "A" and to any lands
which may be added to this Agreement by amendment. This penalty shall not apply
to any re-working, re-drilling, plugging back or deepening of a well. Such
operations shall be governed by Article VI.B.2. of this Agreement.

     H. Notwithstanding any contrary provision in Article VI should two or more
working interest owners owning a majority in interest desire to recomplete an
additional interval within a producing formation, or to recomplete an additional
formation not producing at the time of the recompletion attempt but which can be
commingled with an existing producing formation, the parties desiring to attempt
such recompletion shall give the other parties written notice of the proposed
operation, specifying the work to be done, the objective formation or interval
to be recompleted and the estimated cost of the operation. The parties receiving
such notice shall have thirty (30) days after receipt of such notice within
which to notify the party wishing to recomplete whether they elect to
participate in the cost of the proposed operation. Failure to make an election
will constitute an election not to participate in the proposed operation. Should
a party elect not to participate in such operation, such party shall be treated
as a Non-Consenting Party under Article VI of this Agreement and the consenting
parties shall proceed as specified in Article VI. If any party elects not to
participate in such operation and the operation results in the establishment of
production the Operator shall allocate all production from the well between
intervals that were producing prior to the recompletion and the newly completed
interval based on the following formula:

*    If oil and gas interests within the Area of Mutual Interest (AMI) as
     outlined in red on Figure No. 1 attached to this Operating Agreement and
     not presently shown on Exhibit "A", is purchased and an election to not
     participate in the purchase of the land is made by any party, such an
     election to be out of any drilling within the purchased lands.

                                      -18-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     a)   Denominator: sum a) daily production from producing interval
          immediately prior to the commencement of the recompletion attempt and
          b) daily production from new producing interval immediately prior to
          being commingled with the interval that was producing prior to the
          recompletion attempt.

     b)   Numerator for interval producing prior to the recompletion attempt:
          daily production of this interval immediately prior to recompletion
          work. decimal interest is = b divided by a (b/a).

I. You acknowledge that you are aware of the tax consequences and risk factors
associated with this investment. If you invest in this prospect, there is no
assurance that the wells drilled will obtain production and will allow the
recovery of all or any part of the investment incurred in obtaining such
production. Because of the speculative nature of oil and gas exploration and
development in general, it is understood that Discovery Operating, Inc. makes no
guarantee that any well will be profitable, and if profitable, and if
profitable, the amount of such profits.

                                      -19-

<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     IN WITNESS WHEREOF, this agreement shall be effective as of the 5TH day of
MARCH, 2001.

__________________________________, who has prepared and circulated this form
for execution, represents and warrants that the form was printed from and, with
the exception(s) listed below, is identical to the AAPL Form 610-1989 Model
Form Operating Agreement, as published in computerized form by Forms On-A-Disk,
Inc. No changes, alterations, or modifications, other than those made by
strikethrough and/or insertion and that are clearly recognizable as changes in
Articles ______________________________________, have been made to the form.

ATTEST OR WITNESS:                      OPERATOR

                                        DISCOVERY OPERATING, INC.
                                        ----------------------------------------
                                    By  /s/ DON L. SPARKS
---------------------------------       ----------------------------------------
                                            DON L. SPARKS
---------------------------------       ----------------------------------------
                                        Type or print name

                                        Title  President
                                               ---------------------------------
                                        Date   March 21, 2001
                                               ---------------------------------
                                        Tax ID or S.S. No.
                                                           ---------------------

                                 NON-OPERATORS

                                        IVANHOE ENERGY (USA), INC.
                                        ---------------------------------------
                                    By  /s/ CR COFFEY
---------------------------------       ---------------------------------------
                                            CR COFFEY
---------------------------------       ---------------------------------------
                                        Type or print name

                                        Title  VP Operations
                                               --------------------------------
                                        Date   3/22/01
                                               --------------------------------
                                        Tax ID or S.S. No.
                                                           --------------------

                                        WESTWIN ENERGY I. LIMITED PARTNERSHIP
                                        ---------------------------------------
                                    By  /s/ T.L. HOLLAND
---------------------------------       ---------------------------------------
                                            T.L. HOLLAND
---------------------------------       ---------------------------------------
                                        Type or print name

                                        Title  Vice President
                                               --------------------------------
                                        Date   3/21/01
                                               ---------------------------------
                                        Tax ID or S.S. No.
                                                           ---------------------

                                        DON L. SPARKS
                                        ----------------------------------------
                                    By  /s/ DON L. SPARKS
---------------------------------       ----------------------------------------

---------------------------------       ----------------------------------------
                                        Type or print name

                                        Title
                                               ---------------------------------
                                        Date   3/21/01
                                               ---------------------------------
                                        Tax ID or S.S. No.
                                                           ---------------------

                                      -19-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     IN WITNESS WHEREOF, this agreement shall be effective as of the 5TH day of
MARCH, 2001.

______________________________________, who has prepared and circulated this
form for execution, represents and warrants that the form was printed from and,
with the exception(s) listed below, is identical to the AAPL Form 610-1989 Model
Form Operating Agreement, as published in computerized form by Forms On-A-Disk,
Inc. No changes, alterations, or modifications, other than those made by
strikethrough and/or insertion and that are clearly recognizable as changes in
Articles __________________________________, have been made to the form.

ATTEST OR WITNESS:                      OPERATOR

                                        ----------------------------------------
                                    By
---------------------------------       ----------------------------------------

---------------------------------       ----------------------------------------
                                        Type or print name

                                        Title
                                               ---------------------------------
                                        Date
                                               ---------------------------------
                                        Tax ID or S.S. No.
                                                           ---------------------

                                 NON-OPERATORS

                                        W. JEFFREY SPARKS
                                        ----------------------------------------
                                    By  /s/ W. JEFFREY SPARKS
---------------------------------       ----------------------------------------

---------------------------------       ----------------------------------------
                                        Type or print name

                                        Title
                                               --------------------------------
                                        Date
                                               --------------------------------
                                        Tax ID or S.S. No.
                                                           --------------------

                                        KEVIN D. SPARKS
                                        ---------------------------------------
                                    By  /s/ KEVIN D. SPARKS
---------------------------------       ---------------------------------------

---------------------------------       ---------------------------------------
                                        Type or print name

                                        Title
                                               --------------------------------
                                        Date
                                               --------------------------------
                                        Tax ID or S.S. No.
                                                           --------------------

                                        C. TODD SPARKS
                                        ---------------------------------------
                                    By  /s/ C. TODD SPARKS
---------------------------------       ---------------------------------------

---------------------------------       ---------------------------------------
                                        Type or print name

                                        Title
                                               ---------------------------------
                                        Date
                                               ---------------------------------
                                        Tax ID or S.S. No.
                                                           ---------------------

                                     -19(a)-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                ACKNOWLEDGMENTS

     Note: The following forms of acknowledgment are the short forms approved by
the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the
statutes of that state.

Individual acknowledgment:

State of Texas              )
         ------------------
                            ) ss.

County of Midland           )
          -----------------

     This instrument was acknowledged before me on

March 21, 2001                      by  DON L. SPARKS
-------------------------------         ----------------------------------------
                                        ANGELA DEAVER
(Seal, if any)                          ----------------------------------------

[SEAL]                                  Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

Acknowledgment in representative capacity:

State of Texas              )
         ------------------
                            ) ss.

County of Midland
          ----------------- )

     This instrument was acknowledged before me on

March 21, 2001                      by  DON L. SPARKS                     as
-------------------------------         -------------------------------------

President   of   Discovery Operating, Inc.
---------        --------------------------------------------------------------,

                                        ANGELA DEAVER
(Seal, if any)                          ----------------------------------------

[SEAL]                                  Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

                                      -20-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                 ACKNOWLEDGMENTS

     Note: The following forms of acknowledgment are the short forms approved by
the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the
statutes of that state.

Individual acknowledgment:

State of                    )
         ------------------
                            ) ss.

County of                   )
          -----------------

     This instrument was acknowledged before me on

                                    by
-------------------------------         ----------------------------------------

(Seal, if any)                          ----------------------------------------

                                        Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

Acknowledgment in representative capacity:

State of Texas              )
         ------------------
                            ) ss.

County of Howard            )
          -----------------

     This instrument was acknowledged before me on

                                    by  T.L. HOLLAND                         as
-------------------------------         -------------------------------------

            of   Westwin Energy I.L.P.
---------        --------------------------------------------------------------,

                                        TRINA PRICHARD
(Seal, if any)                          ----------------------------------------

[SEAL]                                  Title (and Rank)
                                                         -----------------------

                                        My commission expires:      9-11-04
                                                               -----------------

                                      -20-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                 ACKNOWLEDGMENTS

     Note: The following forms of acknowledgment are the short forms approved by
the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the
statutes of that state.

Individual acknowledgment:

State of Texas              )
         ------------------
                            ) ss.

County of Midland           )
          -----------------

     This instrument was acknowledged before me on March 21, 2001

by: DON L. SPARKS
-------------------------------         ----------------------------------------
                                        ANGELA DEAVER
(Seal, if any)                          ----------------------------------------

[SEAL]                                  Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

Acknowledgment in representative capacity:

State of Texas              )
         ------------------
                            ) ss.

County of Midland           )
          -----------------

     This instrument was acknowledged before me on

March 21, 2001                      by  DON L. SPARKS                        as
-------------------------------         -------------------------------------

President   of   Discovery Operating, Inc.
---------        --------------------------------------------------------------,

                                        ANGELA DEAVER
(Seal, if any)                          ----------------------------------------

[SEAL]                                  Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

                                      -20-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                 ACKNOWLEDGMENTS

     Note: The following forms of acknowledgment are the short forms approved by
the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the
statutes of that state.

Individual acknowledgment:

State of Texas              )
         ------------------
                            ) ss.

County of Midland           )
          -----------------

     This instrument was acknowledged before me on

March 21, 2001                      by: W. JEFFREY SPARKS
-------------------------------         ----------------------------------------
                                        ANGELA DEAVER
(Seal, if any)                          ----------------------------------------

[SEAL]                                  Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

Acknowledgment in representative capacity:

State of                    )
         ------------------
                            ) ss.

County of                   )
          -----------------

     This instrument was acknowledged before me on

                                    by                                        as
-------------------------------         -------------------------------------
            of
---------        --------------------------------------------------------------,

(Seal, if any)                          ----------------------------------------

                                        Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

                                      -20-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                 ACKNOWLEDGMENTS

     Note: The following forms of acknowledgment are the short forms approved by
the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the
statutes of that state.

Individual acknowledgment:

State of Texas              )
         ------------------
                            ) ss.

County of Midland           )
          -----------------

     This instrument was acknowledged before me on

March 21, 2001                      by: KEVIN D. SPARKS
-------------------------------         ----------------------------------------
                                        ANGELA DEAVER
(Seal, if any)                          ----------------------------------------

[SEAL]                                  Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

Acknowledgment in representative capacity:

State of                    )
         ------------------
                            ) ss.

County of                   )
          -----------------

     This instrument was acknowledged before me on

                                    by                                        as
-------------------------------         -------------------------------------
            of
---------        --------------------------------------------------------------,

(Seal, if any)                          ----------------------------------------

                                        Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

                                      -20-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                 ACKNOWLEDGMENTS

     Note: The following forms of acknowledgment are the short forms approved by
the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the
statutes of that state.

Individual acknowledgment:

State of Texas              )
         ------------------
                            ) ss.

County of Midland           )
          -----------------

     This instrument was acknowledged before me on

March 21, 2001                      by: C. TODD SPARKS
-------------------------------         ----------------------------------------

(Seal, if any)                          ----------------------------------------

[SEAL]                                  Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

Acknowledgment in representative capacity:

State of                    )
         ------------------
                            ) ss.

County of                   )
          -----------------

     This instrument was acknowledged before me on

                                    by                                        as
-------------------------------         -------------------------------------
            of
---------        --------------------------------------------------------------,

(Seal, if any)                          ----------------------------------------

                                        Title (and Rank)
                                                         -----------------------

                                        My commission expires:
                                                               -----------------

                                      -20-
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     Note: The following forms of acknowledgment are the short forms approved by
the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the
statutes of that state.

Individual acknowledgment:

State of                    )
         ------------------
                            ) ss.

County of                   )
          -----------------

     This instrument was acknowledged before me on

                                    by
-------------------------------         ----------------------------------------

(Seal, if any)                          ----------------------------------------

                                        Title (and Rank)
                                                         -----------------------

                                        My commission expires:

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

Acknowledgment in representative capacity:

State of                    )
         ------------------
                            ) ss.

County of                   )
          -----------------

     This instrument was acknowledged before me on

                                    by                                        as
-------------------------------         -------------------------------------
            of
---------        --------------------------------------------------------------,

(Seal, if any)                          ----------------------------------------

                                        Title (and Rank)
                                                         -----------------------

                                        My commission expires:

                                      -20-
<PAGE>
                                   EXHIBIT "A"

ATTACHED TO AND MADE A PART OF THAT CERTAIN JOINT OPERATING AGREEMENT DATED
MARCH 5, 2001 BETWEEN DISCOVERY OPERATING, INC. AND IVANHOE ENERGY (USA), INC.

I.      LEGAL DESCRIPTION:

         Block 41, Township 4 South, T&P Railway Company Survey, Midland and
         Upton Counties, Texas

                 Section 15: E/2 and SW/4.
                 Section 27: W/2, NE/4 and W/2SE/4.
                *Section 22: All

        *Approximately 60% of the acreage in this section has been leased as
         of this date (March 5, 2001). We are still in the process of acquiring
         the remaining leases.

II.     LEASEHOLD INTEREST OF PARTIES TO THIS AGREEMENT:

                                                         BPO              APO
                                                      ---------        ---------
         Don L. Sparks                                .04000000        .04000000
         800 N. Marienfeld, Suite 100
         Midland, Texas 79701

         W. Jeffrey Sparks                            .02000000        .04666660
         800 N. Marienfeld, Suite 100
         Midland, Texas 79701

         Kevin D. Sparks                              .02000000        .04666670
         800 N. Marienfeld, Suite 100
         Midland, Texas 79701

         C. Todd Sparks                               .02000000        .04666670
         800 N. Marienfeld, Suite 100
         Midland, Texas 79701

         Ivanhoe Energy (USA), Inc.                   .40000000        .32000000
         1200 Discovery Drive, Suite 301
         Bakersfield, California 93309

         Westwin Energy I. Limited Partnership        .50000000        .50000000

III.     AREA OF MUTUAL INTEREST:

III.     The office address of Discovery Operating, Inc. is:

         800 N. Marienfeld, Suite 100
         Midland, Texas 79701

IV.      Area of Mutual Interest (AMI).

         One mile around the lands described above and as outlined in red on the
         attached map, titled "Exhibit A-l".

<PAGE>

                                  EXHIBIT A-1

  Attached to and made a part of that certain Joint Operating Agreement dated
 March 5, 2001 Between Discovery Operating, Inc. and Ivanhoe Energy (USA), Inc.

<PAGE>

                                  EXHIBIT "C "

Attached to and made a part of THAT CERTAIN JOINT OPERATING AGREEMENT
DATED MARCH 5, 2001, BY AND BETWEEN DISCOVERY OPERATING, INC. AND IVANHOE
ENERGY (USA), INC.

                              ACCOUNTING PROCEDURE

                                JOINT OPERATIONS

                              I. GENERAL PROVISIONS

1.      DEFINITIONS

        "Joint Property" shall mean the real and personal property subject to
        the agreement to which this Accounting Procedure is attached.

        "Joint Operations" shall mean all operations necessary or proper for the
        development, operation, protection and maintenance of the Joint
        Property.

        "Joint Account" shall mean the account showing the charges paid and
        credits received in the conduct of the Joint Operations and which are to
        be shared by the Parties.

        "Operator" shall mean the party designated to conduct the Joint
        Operations.

        "Non-Operators" shall mean the Parties to this agreement other than the
        Operator.

        "Parties" shall mean Operator and Non-Operators.

        "First Level Supervisors" shall mean those employees whose primary
        function in Joint Operations is the direct supervision of other
        employees and/or contract labor directly employed on the Joint Property
        in a field operating capacity.

        "Technical Employees" shall mean those employees having special and
        specific engineering, geological or other professional skills, and whose
        primary function in Joint Operations is the handling of specific
        operating conditions and problems for the benefit of the Joint Property.

        "Personal Expenses" shall mean travel and other reasonable reimbursable
        expenses of Operator's employees.

        "Material" shall mean personal property, equipment or supplies acquired
        or held for use on the Joint Property.

        "Controllable Material" shall mean Material which at the time is so
        classified in the Material Classification Manual as most recently
        recommended by the Council or Petroleum Accountants Societies.

2.      STATEMENT AND BILLINGS

        Operator shall bill Non-Operators on or before the last day of each
        month for their proportionate share of the Joint Account for the
        preceding month. Such bills will be accompanied by statements which
        identify the authority for expenditure, lease or facility, and all
        charges and credits summarized by appropriate classifications of
        investment and expense except that items of Controllable Material and
        unusual charges and credits shall be separately identified and fully
        described in detail.

3.      ADVANCES AND PAYMENTS BY NON-OPERATORS

        A.  Unless otherwise provided for in the agreement, the Operator may
            require the Non-Operators to advance their share of estimated cash
            outlay for the succeeding month's operation within fifteen (15) days
            after receipt of the billing or by the first day of the month for
            which the advance is required, whichever is later. Operator shall
            adjust each monthly billing to reflect advances received from the
            Non-Operators.

        B.  Each Non-Operator shall pay its proportion of all bills within
            fifteen (15) days after receipt. If payment is not made within such
            time, the unpaid balance shall bear interest monthly at the prime
            rate in effect at an ANNUAL RATE OF TWELVE PERCENT on the first day
            of the month in which delinquency occurs plus 1% or the maximum
            contract rate permitted by the applicable usury laws in the state in
            which the Joint Property is located, whichever is the lesser, plus
            attorney's fees, court costs, and other costs in connection with the
            collection of unpaid amounts.

4.      ADJUSTMENTS

        Payment of any such bills shall not prejudice the right of any
        Non-Operator to protest or question the correctness thereof; provided,
        however, all bills and statements rendered to Non-Operators by Operator
        during any calendar year shall conclusively be presumed to be true and
        correct after twenty-four (24) months following the end of any such
        calendar year, unless within the said twenty-four (24) month period a
        Non-Operator takes written exception thereto and makes claim on Operator
        for adjustment. No adjustment favorable to Operator shall be made unless
        it is made within the same prescribed period. The provisions of this
        paragraph shall not prevent adjustments resulting from a physical
        inventory of Controllable Material as provided for in Section V.

      COPYRIGHT (C) 1985 BY THE COUNCIL OF PETROLEUM ACCOUNTANTS SOCIETIES.

                                       -1-
<PAGE>

5.      AUDITS

        A.  A Non-Operator, upon notice in writing to Operator and all other
            Non-Operators, shall have the right to audit Operator's accounts and
            records relating to the Joint Account for any calendar year within
            the twenty-four (24) month period following the end of such calendar
            year; provided, however, the making of an audit shall not extend the
            time for the taking of written exception to and the adjustments of
            accounts as provided for in Paragraph 4 of this Section I. Where
            there are two or more Non-Operators, the Non-Operators shall make
            every reasonable effort to conduct a joint audit in a manner which
            will result in a minimum of inconvenience to the Operator. Operator
            shall bear no portion of the Non-Operators' audit cost incurred
            under this paragraph unless agreed to by the Operator. The audits
            shall not be conducted more than once each year without prior
            approval of Operator, except upon the resignation or removal of the
            Operator, and shall be made at the expense of those Non-Operators
            approving such audit.

        B.  The Operator shall reply in writing to an audit report within 180
            days after receipt of such report.

6.      APPROVAL BY NON-OPERATORS

        Where an approval or other agreement of the Parties or Non-Operators is
        expressly required under other sections of this Accounting Procedure and
        if the agreement to which this Accounting Procedure is attached contains
        no contrary provisions in regard thereto, Operator shall notify all
        Non-Operators of the Operator's proposal, and the agreement or approval
        of a majority in interest of the Non-Operators shall be controlling on
        all Non-Operators.

                               II. DIRECT CHARGES

Operator shall charge the Joint Account with the following items:

1.      ECOLOGICAL AND ENVIRONMENTAL

        Costs incurred for the benefit of the Joint Property as a result of
        governmental or regulatory requirements to satisfy environmental
        considerations applicable to the Joint Operations. Such costs may
        include surveys of an ecological or archaeological nature and pollution
        control procedures as required by applicable laws and regulations.

2.      RENTALS AND ROYAL TIES

        Lease rentals and royalties paid by Operator for the Joint Operations.

3.      LABOR

        A.  (1) Salaries and wages of Operator's field employees directly
                employed on the Joint Property in the conduct of Joint
                Operations.

            (2) Salaries of First level Supervisors in the field.

            (3) Salaries and wages of Technical Employees directly employed on
                the Joint Property if such charges are excluded from the
                overhead rates.

            (4) Salaries and wages of Technical Employees either temporarily or
                permanently assigned to and directly employed in the operation
                or the Joint Property if such charges are excluded from the
                overhead rates.

            (5) COMPENSATION FOR ALL FIELD ENGINEERING AND FIELD SUPERVISION
                SERVICES FURNISHED BY OFFICERS OR EMPLOYEES OF OPERATOR WILL BE
                CHARGED AT THE FOLLOWING RATES: ENGINEERING-$500/DAY + EXPENSES;
                FIELD SUPERVISOR-$400/DAY + EXPENSES WHEN DIRECTLY EMPLOYED FOR
                THE JOINT PROPERTY IN CONDUCT OF JOINT OPERATIONS.

            (6) ALL FEES AND CHARGES FOR OUTSIDE PROFESSIONAL SERVICES
                (INCLUDING BUT NOT LIMITED TO LEGAL, ENGINEERING AND GEOLOGICAL
                SERVICES FURNISHED BY OUTSIDE PROFESSIONALS AND CONSULTANTS FOR
                SERVICES PERFORMED FOR THE BENEFIT OF THE JOINT PROPERTY).

B.

        C.  Expenditures or contributions made pursuant to assessments imposed
            by governmental authority which are applicable to Operator's costs
            chargeable to the Joint Account under Paragraphs 3A and 3B of this
            Section II.

        D.  Personal Expenses of those employees whose salaries and wages are
            chargeable to the Joint Account under Paragraphs 3A and 3B of this
            Section 11.

4.

                                       -2-
<PAGE>

 5.     MATERIAL

        Material purchased or furnished by Operator for use on the Joint
        Property as provided under Section IV. Only such Material shall be
        purchased for or transferred to the Joint Property as may be required
        for immediate use and is reasonably practical and consistent with
        efficient and economical operations. The accumulation of surplus stocks
        shall be avoided.

 6.     TRANSPORTATION

        Transportation of employees and Material necessary for the Joint
        Operations but subject to the following limitations:

        A.  If Material is moved to the Joint Property from the Operator's
            warehouse or other properties, no charge shall be made to the Joint
            Account for a distance greater than the distance from the nearest
            reliable supply store where like material is normally available or
            railway receiving point nearest the Joint Property unless agreed to
            by the Parties.

        B.  If surplus Material is moved to Operator's warehouse or other
            storage point, no charge shall be made to the Joint Account for a
            distance greater than the distance to the nearest reliable supply
            store where like material is normally available, or railway
            receiving point nearest the Joint Property unless agreed to by the
            Parties. No charge shall be made to the Joint Account for moving
            Material to other properties belonging to Operator. unless agreed to
            by the Parties.

        C.  In the application of subparagraphs A and B above, the option to
            equalize or charge actual trucking cost is available when the actual
            charge is $400 or less excluding accessorial charges. The $400 will
            be adjusted to the amount most recently recommended by the Council
            of Petroleum Accountants Societies.

 7.     SERVICES

        The cost of contract services, equipment and utilities provided by
        outside sources, except services excluded by Paragraph 10 of Section II
        and Paragraph i, ii, and iii, of Section 111. The cost of professional
        consultant services and contract services of technical personnel
        directly engaged on the Joint Property if such charges are excluded from
        the overhead rates. The cost of professional consultant services or
        contract services of technical personnel not directly engaged on the
        Joint Property shall not be charged to the Joint Account unless
        previously agreed to by the Parties. NO COST OF OUTSIDE PROFESSIONAL
        CONSULTANT OR CONTRACT SERVICES ARE COVERED IN THE OVERHEAD RATES.

 8.     EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR

        A.  Operator shall charge the Joint Account for use of Operator owned
            equipment and facilities at rates commensurate with costs of
            ownership and operation. Such rates shall include costs of
            maintenance, repairs, other operating expense, insurance, taxes,
            depreciation, and interest on gross investment less accumulated
            depreciation not to exceed TWELVE percent (12%) per annum. Such
            rates shall not exceed average commercial

        B.  In lieu of charges in Paragraph 8A above, Operator may elect to use
            average commercial rates prevailing in the immediate area of the
            Joint Property less 20% published by the Petroleum Motor Transport
            Association. ALL TRANSPORTATION OF EMPLOYEES BY AUTOMOBILE SHALL BE
            REIMBURSED ON A MILEAGE BASIS OF $0.55 PER MILE SUBJECT TO
            ESCALATION UNDER ARTICLE III PARAGRAPH (3) HEREOF.

 9.     DAMAGES AND LOSSES TO JOINT PROPERTY

        All costs or expenses necessary for the repair or replacement of Joint
        Property made necessary because of damages or losses incurred by fire.
        flood, storm, theft, accident, or other cause, except those resulting
        from Operator's gross negligence or willful misconduct. Operator shall
        furnish Non-Operator written notice of damages or losses incurred IIS
        soon as practicable after a report thereof has been received by
        Operator.

10.     LEGAL EXPENSE

        Expense of handling, investigating and settling litigation or claims,
        discharging of liens, payment of judgments and amounts paid for
        settlement of claims incurred in or resulting from operations under the
        agreement or necessary to protect or recover the Joint Property. NO
        LEGAL EXPENSES ARE CONSIDERED TO BE INCLUDED IN THE OVERHEAD.

11.     TAXES

        All taxes of every kind and nature assessed or levied upon or in
        connection with the Joint Property, the operation thereof, or the
        production therefrom, and which taxes have been paid by the Operator for
        the benefit of the Parties, 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.

                                      -3-

<PAGE>

12.     INSURANCE

        Net premiums paid for insurance required to be carried for the Joint
        Operations for the protection of the Parties. In the event Joint
        Operations are conducted in a state in which Operator may act as
        self-insurer for Worker's Compensation and/or Employers Liability under
        the respective state's laws, Operator may, at its election, include the
        risk under its self-insurance program and in that event, Operator shall
        include a charge at Operator's cost not to exceed manual rates.

13.     ABANDONMENT and RECLAMATION

        Costs incurred for abandonment of the Joint Property, including costs
        required by governmental or other regulatory authority.

14.     COMMUNICATIONS

        Cost of acquiring, leasing, installing, operating, repairing and
        maintaining communication systems, including radio and microwave
        facilities directly serving the Joint Property. In the event
        communication facilities/systems serving the Joint Property are Operator
        owned, charges to the Joint Account shall be made as provided in
        Paragraph 8 of this Section II.

15.     OTHER EXPENDITURES

        Any other expenditure not covered or dealt with in the foregoing
        provisions of this Section II, or in Section III and which is of direct
        benefit to the Joint Property and is incurred by the Operator in the
        necessary and proper conduct of the Joint Operations.

                                  III. OVERHEAD

1.      OVERHEAD - DRILLING AND PRODUCING OPERATIONS

        i.  As compensation for administrative, supervision, office services and
            warehousing costs, Operator shall charge drilling and producing
            operations on either:

            ( X ) Fixed Rate Basis, Paragraph 1A, or
            (   ) Percentage Basis, Paragraph 1B

            Unless otherwise agreed to by the Parties, such charge shall be in
            lieu of costs and expenses of all offices and salaries or wages plus
            applicable burdens and expenses of all personnel, except those
            directly chargeable under Paragraph 3A, Section II. The cost and
            expense of services from outside sources in connection with matters
            of taxation, traffic, accounting or matters before or involving
            governmental agencies shall be considered as included in the
            overhead rates provided for in the above selected Paragraph of this
            Section III unless such cost and expense are agreed to by the
            Parties as a direct charge to the Joint Account.

        ii. The salaries, wages and Personal Expenses of Technical Employees AND
            FIRST LEVEL SUPERVISORS and/or the cost of professional consultant
            services and contract services of technical personnel directly
            employed on the Joint Property:

            (   ) shall be covered by the overhead rates, or
            ( X ) shall not be covered by the overhead rates.

       iii. The salaries, wages and Personal Expenses of Technical Employees
            AND FIRST LEVEL SUPERVISORS and/or costs of professional consultant
            services and contract services of technical personnel either
            temporarily or permanently assigned to and directly employed in the
            operation of the Joint Property:

            (   ) shall be covered by the overhead rates, or
            ( X ) shall not be covered by the overhead rates.

        A.      Overhead - Fixed Rate Basis

            (1) Operator shall charge the Joint Account at the following rates
                per well per month:

                Drilling Well Rate                      $5,000
                                                        ------
                (Prorated for less than a full month)

                Producing Well Rate                     $  400
                                                        ------

            (2) Application of Overhead - Fixed Rate Basis shall be as follows:

                (a) Drilling Well Rate

                (1) Charges for drilling wells shall begin on the date the well
                    is spudded and terminate on the date the drilling rig,
                    completion rig, or other units used in completion of the
                    well is released, whichever

                                      -4-

<PAGE>

              is later, except that no charge shall be made during suspension of
              drilling or completion operations for fifteen (15) or more
              consecutive calendar days.

                (2) Charges for wells undergoing any type of workover or
                    recompletion for a period of five (5) consecutive work days
                    or more shall be made at the drilling well rate. Such
                    charges shall be applied for the period from date workover
                    operations, with rig or other units used in workover,
                    commence through date of rig or other unit release, except
                    that no charge shall be made during suspension of operations
                    for fifteen (15) or more consecutive calendar days.

            (b) Producing Well Rates

                (1) An active well either produced or injected into for any
                    portion of the month shall be considered as a one-well
                    charge for the entire month.

                (2) Each active completion in a multi-completed well in which
                    production is not commingled down hole shall be considered
                    as a one-well charge providing each completion is considered
                    a separate well by the governing regulatory authority.

                (3) An inactive gas well shut in because of overproduction or
                    failure of purchaser to take the production shall be
                    considered as a one-well charge providing the gas well is
                    directly connected to a permanent sales outlet.

                (4) A one-well charge shall be made for the month in which
                    plugging and abandonment operations are completed on any
                    well. This one-well charge shall be made whether or not the
                    well has produced except when drilling well rate applies.

                (5) All other inactive wells (including but not limited to
                    inactive wells covered by unit allowable, lease allowable,
                    transferred allowable, etc.) shall not qualify for an
                    overhead charge.

            (3) The well rates shall be adjusted as of the first day of April
                each year following the effective date of the agreement to which
                this Accounting Procedure is attached. The adjustment shall be
                computed by multiplying the rate currently in use by the
                percentage increase or decrease in the average weekly earnings
                of Crude Petroleum and Gas Production Workers for the last
                calendar year compared to the calendar year preceding as shown
                by the index of average weekly earnings of Crude Petroleum and
                Gas Production Workers as published by the United States
                Department of Labor, Bureau of Labor Statistics, or the
                equivalent Canadian index as published by Statistics Canada, as
                applicable. The ad.justed rates shall be the rates currently in
                use. plus or minus the computed adjustment.

B.

2.      OVERHEAD - MAJOR CONSTRUCTION

        To compensate Operator for overhead costs incurred in the construction
        and installation of fixed assets, the expansion of fixed assets, and any
        other project clearly discernible as a fixed asset required for the
        development and operation of the Joint Property, Operator shall either
        negotiate a rate prior to the beginning of construction, or shall charge
        the Joint

                                      -5-

<PAGE>

        Account for overhead based on the following rates for any Major
        Construction project in excess of $50,000:

        A.  5% of first $100,000 or total cost if less, plus

        B.  3% of costs in excess of $100,000 but less than $1,000,000, plus

        C.  1% of costs in excess of $1,000,000.

        Total cost shall mean the gross cost of any one project. For the purpose
        of this paragraph, the component parts of a single project shall not be
        treated separately and the cost of drilling and workover wells and
        artificial lift equipment shall be excluded.

3.      CATASTROPHE OVERHEAD

        To compensate Operator for overhead costs incurred in the event of
        expenditures resulting from a single occurrence due to oil spill,
        blowout, explosion, fire, storm, hurricane, or other catastrophes as
        agreed to by the Parties, which are necessary to restore the Joint
        Property to the equivalent condition that existed prior to the event
        causing the expenditures. Operator shall either negotiate a rate prior
        to charging the Joint Account or shall charge the Joint Account for
        overhead based on the following rates:

        A.  5% of total costs through $100,000; plus

        B.  3% of total costs in excess of $100,000 but less than $1,000,000;
            plus

        C.  1% of total costs in excess of $l,000,000.

        Expenditures subject to the overheads above will not be reduced by
        insurance recoveries, and no other overhead provisions of this Section
        III shall apply.

4.      AMENDMENT of RATES

        The overhead rates provided for in this Section III may be amended from
        time to time only by mutual agreement between the Parties hereto if, in
        practice, the rates are found to be insufficient or excessive.

            IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND
                DISPOSITIONS

Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator's option, such Material may be supplied by the
Non-Operator. Operator shall make timely disposition of idle and/or surplus
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase, interest of Non-Operators in surplus
condition A or B Material. The disposal of surplus Controllable Material not
purchased by the Operator shall be agreed to by the Parties.

1.      PURCHASES

        Material purchased shall be charged at the price paid by Operator after
        deduction of all discounts received. In case of Material found to be
        defective or returned to vendor for any other reasons, credit shall be
        passed to the Joint Account when adjustment has been received by the
        Operator.

2.      TRANSFERS AND DISPOSITIONS

        Material furnished to the Joint Property and Material transferred from
        the Joint Property or disposed of by the Operator, unless otherwise
        agreed to by the Parties, shall be priced on the following basis
        exclusive of cash discounts:

        A.  New Material (Condition A)

            (1) Tubular Goods Other than Line Pipe

                (a) Tubular goods, sized 2 3/8 inches OD and larger, except line
                    pipe, shall be priced at Eastern mill published carload base
                    prices effective as of date of movement plus transportation
                    cost using the 80,000 pound carload weight basis to the
                    railway receiving point nearest the Joint Property for which
                    published rail rates for tubular goods exist. If the 80,000
                    pound rail rate is not offered, the 70,000 pound or 90,000
                    pound rail rate may be used. Freight charges for tubing will
                    be calculated from Lorain, Ohio and casing from Youngstown,
                    Ohio.

                (b) For grades which are special to one mill only, prices shall
                    be computed at the mill base of that mill plus
                    transportation cost from that mill to the railway receiving
                    point nearest the Joint Property as provided above in
                    Paragraph 2.A.(l)(a). For transportation cost from points
                    other than Eastern mills, the 30,000

                                      -6-

<PAGE>

                    pound Oil Field Haulers Association interstate truck rate
                    shall be used.

                (c) Special end finish tubular goods shall be priced at the
                    lowest published out-of-stock price, f.o.b. Houston, Texas,
                    plus transportation cost, using Oil Field Haulers
                    Association interstate 30,000 pound truck rate, to the
                    railway receiving point nearest the Joint Property.

                (d) Macaroni tubing (size less than 2 3/8 inch OD) shall be
                    priced at the lowest published out-of-stock prices f.o.b.
                    the supplier plus transportation costs, using the Oil Field
                    Haulers Association interstate truck rate per weight of
                    tubing transferred, to the railway receiving point nearest
                    the Joint Property.

            (2) Line Pipe

                (a) Line pipe movements (except size 24 inch OD and larger with
                    walls 3/4 inch and over) 30,000 pounds or more shall be
                    priced under provisions of tubular goods pricing in
                    Paragraph A.(l)(a) as provided above. Freight charges shall
                    be calculated from Lorain, Ohio.

                (b) Line Pipe movements (except size 24 inch OD) and larger with
                    walls 3/4 inch and over) less than 30,000 pounds shall be
                    priced at Eastern mill published carload base prices
                    effective as of date of shipment, plus 20 percent, plus
                    transportation costs based on freight rates as set forth
                    under provisions of tubular goods pricing in Paragraph
                    A.(l)(a) as provided above. Freight charges shall be
                    calculated from Lorain, Ohio.

                (c) Line pipe 24 inch OD and over and 3/4 inch wall and larger
                    shall be priced f.o.b. the point of manufacture at current
                    new published prices plus transportation cost to the railway
                    receiving point nearest the Joint Property.

                (d) Line pipe, including fabricated line pipe, drive pipe and
                    conduit not listed on published price lists shall be priced
                    at quoted prices plus freight to the railway receiving point
                    nearest the Joint Property or at prices agreed to by the
                    Parties.

            (3) Other Material shall be priced at the current new price, in
                effect at date of movement, as listed by a reliable supply store
                nearest the Joint Property, or point of manufacture, plus
                transportation costs, if applicable, to the railway receiving
                point nearest the Joint Property.

            (4) Unused new Material, except tubular goods, moved from the Joint
                Property shall be priced at the current new price, in effect on
                date of movement, as listed by a reliable supply store nearest
                the Joint Property, or point of manufacture, plus transportation
                costs, if applicable, to the railway receiving point nearest the
                Joint Property. Unused new tubulars will be priced as provided
                above in Paragraph 2.A.(1) and (2).

        B.  Good Used Material (Condition B)

            Material in sound and serviceable condition and suitable for reuse
            without reconditioning:

            (1) Material moved to the Joint Property

                At seventy-five percent (75%) of current new price, as
                determined by Paragraph A.

            (2) Material used on and moved from the Joint Property

                (a) At seventy-five percent (75%) of current new price, as
                    determined by Paragraph A, if Material was originally
                    charged to the Joint Account as new Material or

                (b) At sixty-five percent (65%) of current new price, as
                    determined by Paragraph A, if Material was originally
                    charged to the Joint Account as used Material

            (3) Material not used on and moved from the Joint Property

                At seventy-five percent (75%) of current new price as determined
                by Paragraph A.

            The cost of reconditioning, if any, shall be absorbed by the
            transferring property.

        C.  Other Used Material

            (1) Condition C

                Material which is not in sound and serviceable condition and not
                suitable for its original function until after reconditioning
                shall be priced at fifty percent (50%) of current new price as
                determined by Paragraph A. The cost of reconditioning shall be
                charged to the receiving property, provided Condition C value
                plus cost of reconditioning does not exceed Condition B value.

                                      -7-

<PAGE>

            (2) Condition D

                Material, excluding junk, no longer suitable for its original
                purpose, but usable for some other purpose shall be priced on a
                basis commensurate with its use. Operator may dispose of
                Condition D Material under procedures normally used by Operator
                without prior approval of Non-Operators.

                (a) Casing, tubing, or drill pipe used as line pipe shall be
                    priced as Grade A and B seamless line pipe of comparable
                    size and weight. Used casing. tubing or drill pipe utilized
                    as line pipe shall bc priced at used line pipe prices.

                (b) Casing, tubing or drill pipe used as higher pressure service
                    lines than standard line pipe, e.g. power oil lines, shall
                    be priced under normal pricing procedures for casing,
                    tubing, or drill pipe. Upset tubular goods shall be priced
                    on a non upset basis.

            (3) Condition E

                Junk shall be priced at prevailing prices. Operator may dispose
                of Condition E Material under procedures normally utilized by
                Operator without prior approval of Non-Operators.

        D.  Obsolete Material

            Material which is serviceable and usable for its original function
            but condition and/or value of such Material is not equivalent to
            that which would justify a price as provided above may be specially
            priced as agreed to by the Parties. Such price should result in the
            Joint Account being charged with the value of the service rendered
            by such Material.

        E.  Pricing Conditions

            (1) Loading or unloading costs may be charged to the Joint Account
                at the rate of twenty-five cents (25c) per hundred weight on all
                tubular goods movements, in lieu of actual loading or unloading
                costs sustained at the stocking point. The above rate shall be
                adjusted as of the first day of April each year following
                January 1, 1985 by the same percentage increase or decrease used
                to adjust overhead rates in Section III, Paragraph l-A.(3). Each
                year, the rate calculated shall be rounded to the nearest cent
                and shall be the rate in effect until the first day of April
                next year. Such rate shall be published each year by the Council
                of Petroleum Accountants Societies.

            (2) Material involving erection costs shall be charged at applicable
                percentage of the current knocked-down price of new Material.

3.      PREMIUM PRICES

        Whenever Material is not readily obtainable at published or listed
        prices because of national emergencies. strikes or other unusual causes
        over which the Operator has no control, the Operator may charge the
        Joint Account for the required Material at the Operator's actual cost
        incurred in providing such Material, in making it suitable for use, and
        in moving it to the Joint Property; provided notice in writing is
        furnished to Non-Operators of the proposed charge prior to billing
        Non-Operators for such Material. Each Non-Operator shall have the right,
        by so electing and notifying Operator within ten days after receiving
        notice from Operator, to furnish in kind all or part of his share of
        such Material suitable for use and acceptable to Operator.

4.      WARRANTY OF MATERIAL FURNISHED BY OPERATOR

        Operator does not warrant the Material furnished. In case of defective
        Material, credit shall not be passed to the Joint Account until
        adjustment has been received by Operator from the manufacturers or their
        agents.

                                 V. INVENTORIES

The Operator shall maintain detailed records of Controllable Material.

1.      PERIODIC INVENTORIES, NOTICE AND REPRESENTATION

        At reasonable intervals, inventories shall be taken by Operator of the
        Joint Account Controllable Material. Written notice of intention to take
        inventory shall be given by Operator at least thirty (30) days before
        any inventory is to begin so that Non-Operators may be represented when
        any inventory is taken. Failure of Non-Operators to be represented at an
        inventory shall bind Non-Operators to accept the inventory taken by
        Operator.

2.      RECONCILIATION AND ADJUSTMENT OF INVENTORIES

                                       -8-

<PAGE>

        RECONCILIATION OF INVENTORY WITH THE JOINT ACCOUNT SHALL BE MADE, AND A
        LIST OF COVERAGES AND SHORTAGES SHALL BE FURNISHED TO THE NON-OPERATORS.
        INVENTORY ADJUSTMENTS SHALL BE MADE BY OPERATOR WITH THE JOINT ACCOUNT
        FOR SUCH OVERAGES AND SHORTAGES, BUT OPERATOR SHALL BE HELD ACCOUNTABLE
        TO NON-OPERATORS ONLY FOR SHORTAGES DUE TO LACK OF REASONABLE DILIGENCE
        IN FOLLOWING USUAL OIL FIELD PRACTICES IN THE AREA.

3.      SPECIAL INVENTORIES

        Special inventories may be taken whenever there is any sale, change of
        interest, or CHANGE of Operator in the Joint Property. It shall be the
        duty of the party selling to notify all other Parties as quickly as
        possible after the transfer of interest takes place. In such cases, both
        the seller and the purchaser shall be governed by such inventory. In
        cases involving a change of Operator, all Parties shall be governed by
        such inventory.

4.      EXPENSE OF CONDUCTING INVENTORIES

        A.  The expense of conducting periodic inventories shall not be charged
            to the Joint Account unless agreed to by the Parties.

        B.  The expense of conducting special inventories shall be charged to
            the Parties requesting such inventories, except inventories required
            due to change of Operator shall be charged to the Joint Account.

                                      -9-

<PAGE>
                                    EXHIBIT D

Attached to and made part of the certain Operating Agreement by and between

                              INSURANCE PROVISIONS

Unit Operator shall carry the following minimum amount of insurance with respect
to Unit Operations:

(1)  Statutory Workmen's Compensation Insurance as may be required in the state
     or states where work under this agreement, or activities relative thereto,
     will be performed, plus Workmen's Compensation Insurance as may be required
     by Federal law, if applicable, plus Employer's Liability Insurance .

(2)  Public liability and property damage insurance with limits of $1,000,000
     for each occurrence.

(3)  Automobile public liability and property damage insurance with limits of
     $1,000,000 combined single limit.

All insurance coverage required hereby shall be carried at the joint expense and
for the benefit of the Working Interest Owners. Premiums for automobile public
liability and property damage insurance on Unit Operator's fully owned equipment
shall not be charged directly to the joint account, but will be covered by the
flat rate charged assessed for the use of such equipment. Unit Operator will not
carry fire, windstorm or explosion insurance covering Unit Operations or Unit
Equipment.

Contractors and subcontractors will be required to carry insurance of the same
types as hereinabove specified and in such amount as deemed necessary by Working
Interest Owners.

If the parties hereto or any of them shall insure their respective risks beyond
the specific limits of insurance required hereunder to be carried by the Unit
Operator, the benefits of such insurance shall inure to the parties procuring
and maintaining the same, respectively, and the cost of such insurance shall be
borne by such parties, respectively, without reimbursement one from the other
and without entering into any accounting hereunder.

<PAGE>

A.A.P.L. FORM 610-E-GAS BALANCING AGREEMENT - 1992

                                       AMERICAN ASSOCIATION OF PETROLEUM LANDMEN
                                       APPROVED FORM              A.A.P.L. NO. 6

NOTE: Instructions For Use of Gas Balancing
Agreement MUST be reviewed before finalizing
this document.

                                   EXHIBIT "E"
                      GAS BALANCING AGREEMENT ("AGREEMENT")
                    ATTACHED TO AND MADE PART OF THAT CERTAIN
     OPERATING AGREEMENT DATED MARCH 5, 2001 BY AND BETWEEN DISCOVERY OPERATING,
INC. AND IVANHOE ENERGY (USA), INC. ("OPERATING AGREEMENT") RELATING TO THE
APACHE FLATS AREA, Midland and Upton COUNTY, STATE OF TEXAS

1.   DEFINITIONS

     The following definitions shall apply to this Agreement:

     1.01   "Arm's Length Agreement" shall mean any gas sales agreement with an
            unaffiliated purchaser or any gas sales agreement with an affiliated
            purchaser where the sales price and delivery conditions under such
            agreement are representative of prices and delivery conditions
            existing under other similar agreements in the area between
            unaffiliated parties at the same time for natural gas of comparable
            quality and quantity.

     1.02   "Balancing Area" shall mean (SELECT ONE):

            [ ]   each well subject to the Operating Agreement that produces Gas
                  or is allocated a share of Gas production. If a single well is
                  completed in two or more producing intervals, each producing
                  interval from which the Gas production is not commingled in
                  the wellbore shall be considered a separate well.

            [ ]   all of the acreage and depths subject to the Operating
                  Agreement.

            [ ]   --------------------------------------------------------------

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

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

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

     1.03   "Full Share of Current Production" shall mean the Percentage
            Interest of each Party in the Gas actually produced from the
            Balancing Area during each month.

     1.04   "Gas" shall mean all hydrocarbons produced or producible from the
            Balancing Area, whether from a well classified as an oil well or gas
            well by the regulatory agency having jurisdiction in such matters,
            which are or may be made available for sale or separate disposition
            by the Parties, excluding oil, condensate and other liquids
            recovered by field equipment operated for the joint account. "Gas"
            does not include gas used in joint operations, such as for fuel,
            recycling or reinjection, or which is vented or lost prior to its
            sale or delivery from the Balancing Area.

     1.05   "Makeup Gas" shall mean any Gas taken by an Underproduced Party from
            the Balancing Area in excess of its Full Share of Current
            Production, whether pursuant to Section 3.3 or Section 4.1 hereof.

     1.06   "Mcf" shall mean one thousand cubic feet. A cubic foot of Gas shall
            mean the volume of gas contained in one cubic foot of space at a
            standard pressure base and at a standard temperature base.

     1.07   "MMBtu" shall mean one million British Thermal Units. A British
            Thermal Unit shall mean the quantity of heat required to raise one
            pound avoirdupois of pure water from 58.5 degrees Fahrenheit to 59.5
            degrees Fahrenheit at a constant pressure of 14.73 pounds per square
            inch absolute.

     1.08   "Operator" shall mean the individual or entity designated under the
            terms of the Operating Agreement or, in the event this Agreement is
            not employed in connection with an operating agreement, the
            individual or entity designated as the operator of the well(s)
            located in the Balancing Area.

     1.09   "Overproduced Party" shall mean any Party having taken a greater
            quantity of Gas from the Balancing Area than the Percentage interest
            of such Party in the cumulative quantity of all Gas produced from
            the Balancing Area.

     1.10   "Overproduction" shall mean the cumulative quantity of Gas taken by
            a Party in excess of its Percentage Interest in the cumulative
            quantity of all Gas produced from the Balancing Area.

     1.11   "Party" shall mean those individuals or entities subject to this
            Agreement, and their respective heirs, successors, transferees and
            assigns.

     1.12   "Percentage Interest" shall mean the percentage or decimal interest
            of each Party in the Gas produced from the Balancing Area pursuant
            to the Operating Agreement covering the Balancing Area.

     1.13   "Royalty" shall mean payments on production of Gas from the
            Balancing Area to all owners of royalties, overriding royalties,
            production payments or similar interests.

     1.14   "Underproduced Party" shall mean any Party having taken a lesser
            quantity of Gas from the Balancing Area than the Percentage Interest
            of such Party in the cumulative quantity of all Gas produced from
            the Balancing Area.

     1.15   "Underproduction" shall mean the deficiency between the cumulative
            quantity of Gas taken by a Party and its Percentage Interest in the
            cumulative quantity of all Gas produced from the Balancing Area.

     1.16   [ ] (OPTIONAL) "Winter Period" shall mean the month(s) of __________
            _____________________ in one calendar year and the month(s) of
            ___________________________________ in the succeeding calendar year.

2. BALANCING AREA

     2.1 If this Agreement covers more than one Balancing Area, it shall be
applied as if each Balancing Area were covered by separate but identical
agreements. All balancing hereunder shall be on the basis of Gas taken from the
Balancing Area measured in (ALTERNATIVE 1) |X| Mcfs or (ALTERNATIVE 2) [ ]
MMBtus.

     2.2 In the event that all or part of the Gas deliverable from a Balancing
Area is or becomes subject to one or more maximum lawful prices, any Gas not
subject to price controls shall be considered as produced from a single
Balancing Area and Gas subject to each maximum lawful price category shall be
considered produced from a separate Balancing Area.

3. RIGHT OF PARTIES TO TAKE GAS

     3.1 Each Party desiring to take Gas will notify the Operator, or cause the
Operator to be notified, of the volumes nominated, the name of the transporting
pipeline and the pipeline contract number (if available) and meter station
relating to such delivery, sufficiently in advance for the Operator, acting with
reasonable diligence, to meet all nomination and other

                                      - 1 -

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

requirements. Operator is authorized to deliver the volumes so nominated and
confirmed (if confirmation required) transporting pipeline in accordance with
the terms of this Agreement.

     3.2 Each Party shall make a reasonable, good faith effort to take its Full
Share of Current Production each month, to the extent that such production is
required to maintain leases in effect, to protect the producing capacity of a
well or reservoir, to preserve correlative rights, or to maintain oil
production.

     3.3 When a Party fails for any reason to take its Full Share of Current
Production (as such Share may be reduced by the right of the other Parties to
make up for Underproduction as provided herein), the other Parties shall be
entitled to take any Gas which such Party fails to take. To the extent
practicable, such Gas shall be made available initially to each Underproduced
Party in the proportion that its Percentage Interest in the Balancing Area bears
to the total Percentage Interests of all Underproduced Parties desiring to take
such Gas. If all such Gas is not taken by the Underproduced Parties, the portion
not taken shall then be made available to the other Parties in the proportion
that their respective Percentage Interests in the Balancing Area bear to the
total Percentage Interests of such Parties.

     3.4 All Gas taken by a Party in accordance with the provisions of this
Agreement, regardless of whether such Party is underproduced or overproduced,
shall be regarded as Gas taken for its own account with title thereto being in
such taking Party.

     3.5 Notwithstanding the provisions of Section 3.3 hereof, no Overproduced
Party shall be entitled in any month to take any Gas in excess of three hundred
percent (300%) of its Percentage interest of the Balancing Area's then-current
Maximum Monthly Availability; provided, however, that this limitation shall not
apply to the extent that it would preclude production that is required to
maintain leases in effect, to protect the producing capacity of a well or
reservoir, to preserve correlative rights, or to maintain oil production.
"Maximum Monthly Availability" shall mean the maximum average monthly rate of
production at which Gas can be delivered from the Balancing Area, as determined
by the Operator, considering the maximum efficient well rate for each well
within the Balancing Area, the maximum allowable(s) set by the appropriate
regulatory agency, mode of operation, production facility capabilities and
pipeline pressures.

     3.6 In the event that a Party fails to make arrangements to take its Full
Share of Current Production required to be produced to maintain leases in
effect, to protect the producing capacity of a well or reservoir, to preserve
correlative rights, or to maintain oil production, the Operator may sell any
part of such Party's Full Share of Current Production that such Party fails to
take for the account of such Party and render to such Party, on a current basis,
the full proceeds of the sale, less any reasonable marketing, compression,
treating, gathering or transportation costs incurred directly in connection with
the sale of such Full Share of Current Production. In making the sale
contemplated herein, the Operator shall be obligated only to obtain such price
and conditions for the sale as are reasonable under the circumstances and shall
not be obligated to share any of its markets. Any such sale by Operator under
the terms hereof 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 year.
Notwithstanding the provisions of Article 3.4 hereof, Gas sold by Operator for a
Party under the provisions hereof shall be deemed to be Gas taken for the
account of such Party.

4.   IN-KIND BALANCING

     4.1 Effective the first day of any calendar month following at least thirty
(30) days' prior written notice to the Operator, any Underproduced Party may
begin taking, in addition to its Full Share of Current Production and any Makeup
Gas taken pursuant to Section 3.3 of this Agreement, a share of current
production determined by multiplying twenty-five percent (25%) of the Full
Shares of Current Production of all Overproduced Parties by a fraction, the
numerator of which is the Percentage Interest of such Underproduced Party and
the denominator of which is the total of the Percentage Interests of all
Underproduced Parties desiring to take Makeup Gas. In no event will an
Overproduced Party be required to provide more than twenty-five percent (25%) of
its Full Share of Current Production for Makeup Gas. The Operator will promptly
notify all Overproduced Parties of the election of an Underproduced Party to
begin taking Makeup Gas. See Section 14 for additional provisions.

     4.2 [ ] (OPTIONAL - SEASONAL LIMITATION ON MAKEUP - OPTION 1)
Notwithstanding the provisions of Section 4.1, the average monthly amount of
Makeup Gas taken by an Underproduced Party during the Winter Period pursuant to
Section 4.1 shall not exceed the average monthly amount of Makeup Gas taken by
such Underproduced Party during the _____________________ (__________) months
immediately preceding the Winter Period.

     4.2 [ ] (OPTIONAL - SEASONAL LIMITATION ON MAKEUP - OPTION 2)
Notwithstanding the provisions of Section 4.1, no Overproduced Party will be
required to provide more than _____________________ percent (__________%) of its
Full Share of Current Production for Makeup Gas during the Winter Period.

     4.3 [X] (OPTIONAL) Notwithstanding any other provision of this Agreement,
at such time and for so long as Operator, or (insofar as concerns production by
the Operator) any Underproduced Party, determines in good faith that an
Overproduced Party has produced all of its share of the ultimately recoverable
reserves in the Balancing Area, such Overproduced Party may be required to make
available for Makeup Gas, upon the demand of the Operator or any Underproduced
Party, up to one-hundred percent (100%) of such Overproduced Party's Full Share
of Current Production.

5.   STATEMENT OF GAS BALANCES

     5.1 The Operator will maintain appropriate accounting on a monthly and
cumulative basis of the volumes of Gas that each Party is entitled to receive
and the volumes of Gas actually taken or sold for each Party's account. Within
ninety (90) days after the month of production, the Operator will furnish a
statement for such month showing (1) each Party's Full Share of Current
Production, (2) the total volume of Gas actually taken or sold for each Party's
account, (3) the difference between the volume taken by each Party and that
Party's Full Share of Current Production, (4) the Overproduction or
Underproduction of each Party, and (5) other data as recommended by the
provisions of the Council of Petroleum Accountants Societies Bulletin No. 24, as
amended or supplemented hereafter. Each Party taking Gas will promptly provide
to the Operator any data required by the Operator for preparation of the
statements required hereunder.

     5.2 If any Party fails to provide the data required herein for four (4)
consecutive production months, the Operator, or where the Operator has failed to
provide data, another Party, may audit the production and Gas sales and
transportation volumes of the non-reporting Party to provide the required data.
Such audit shall be conducted only after reasonable notice and during normal
business hours in the office of the Party whose records are being audited. All
costs associated with such audit will be charged to the account of the Party
failing to provide the required data.

6.   PAYMENTS ON PRODUCTION

     6.1 Each Party taking Gas shall pay or cause to be paid all production and
severance taxes due on all volumes of Gas actually taken by such Party.

     6.2 [ ] (ALTERNATIVE 1 - ENTITLEMENTS) Each Party shall pay or cause to be
paid all Royalty due with respect to Royalty

                                      -2-

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

owners to whom it is accountable as if such Party were taking its Full Share of
Current Production, and only its Full Share of Current Production.

         6.2.1 [ ] (OPTIONAL - FOR USE ONLY WITH SECTION 6.2 - ALTERNATIVE
1 - ENTITLEMENT) Upon written request of a Party taking less than its Full Share
of Current Production in a given month ("Current Underproducer"), any Party
taking more than its Full Share of Current Production in such month ("Current
Overproducer") will pay to such Current Underproducer an amount each month equal
to the Royalty percentage of the proceeds received by the Current Overproducer
for that portion of the Current Underproducer's Full Share of Current Production
taken by the Current Overproducer; provided, however, that such payment will not
exceed the Royalty percentage that is common to all Royalty burdens in the
Balancing Area. Payments made pursuant to this Section 6.2.1 will be deemed
payments to the Underproduced Party's Royalty owners for purposes of Section
7.5.

         6.2 [ ] (ALTERNATIVE 2 - SALES) Each Party shall pay or cause to
be paid Royalty due with respect to Royalty owners to whom it is accountable
based on the volume of Gas actually taken for its account.

         6.3 In the event that any governmental authority requires that Royalty
payments be made on any other basis than that provided for in this Section 6,
each Party agrees to make such Royalty payments accordingly, commencing on the
effective date required by such governmental authority, and the method provided
for herein shall be thereby superseded.

7. CASH SETTLEMENTS

         7.1 Upon the earlier of the plugging and abandonment of the last
producing interval in the Balancing Area, the termination of the Operating
Agreement or any pooling or unit agreement covering the Balancing Area, or at
any time no Gas is taken from the Balancing Area for a period of twelve (12)
consecutive months, any Party may give written notice calling for cash
settlement of the Gas production imbalances among the Parties. Such notice shall
be given to all Parties in the Balancing Area.

         7.2 Within sixty (60) days after the notice calling for cash settlement
under Section 7.1, the Operator will distribute to each Party a Final Gas
Settlement Statement detailing the quantity of Overproduction owed by each
Overproduced Party to each Underproduced Party pursuant to the methodology set
out in Section 7.4.

7.3 [X] (ALTERNATIVE I - DIRECT PARTY-TO-PARTY SETTLEMENT) Within sixty (60)
days after receipt of the Final Gas Settlement Statement, each Overproduced
Party will pay to each Underproduced Party entitled to settlement the
appropriate cash settlement, accompanied by appropriate accounting detail. At
the time of payment, the Overproduced Party will notify the Operator of the Gas
imbalance settled by the Overproduced Party's payment.

         7.3 [ ] (ALTERNATIVE 2 - SETTLEMENT THROUGH OPERATOR) Within sixty
(60) days after receipt of the Final Gas Settlement Statement, each Overproduced
Party will send its cash settlement, accompanied by appropriate accounting
detail, to the Operator. The Operator will distribute the monies so received,
along with any settlement owed by the Operator as an Overproduced Party, to each
Underproduced Party to whom settlement is due within ninety (90) days after
issuance of the Final Gas Settlement Statement. In the event that any
Overproduced Party fails to pay any settlement due hereunder, the Operator may
turn over responsibility for the collection of such settlement to the Party to
whom it is owed, and the Operator will have no further responsibility with
regard to such settlement.

         7.3.1 [ ] (OPTIONAL - FOR USE ONLY WITH SECTION 7.3, ALTERNATIVE 2 -
SETTLEMENT THROUGH OPERATOR) Any Party shall have the right at any time upon
thirty (30) days' prior written notice to all other Parties to demand that any
settlements due such Party for Overproduction be paid directly to such Party by
the Overproduced Party, rather than being paid through the Operator. In the
event that an Overproduced Party pays the Operator any sums due to an
Underproduced Party at any time after thirty (30) days following the receipt of
the notice provided for herein, the Overproduced Party will continue to be
liable to such Underproduced Party for any sums so paid, until payment is
actually received by the Underproduced Party.

         7.4 [ ] (ALTERNATIVE 1 - HISTORICAL SALES BASIS) The amount of the
cash settlement will be based on the proceeds received by the Overproduced Party
under an Arm's Length Agreement for the Gas taken from time to time by the
Overproduced Party in excess of the Overproduced Party's Full Share of Current
Production. Any Makeup Gas taken by the Underproduced Party prior to monetary
settlement hereunder will be applied to offset Overproduction chronologically in
the order of accrual.

         7.4 [X] (ALTERNATIVE 2 - MOST RECENT SALES BASIS) The amount of the
cash settlement will be based on the proceeds received by the Overproduced Party
under an Arm's Length Agreement for the volume of Gas that constituted
Overproduction by the Overproduced Party from the Balancing Area. For the
purpose of implementing the cash settlement provision of the Section 7, an
Overproduced Party will not be considered to have produced any of an
Underproduced Party's share of Gas until the Overproduced Party has produced
cumulatively all of its Percentage Interest share of the Gas ultimately produced
from the Balancing Area.

         7.5 The values used for calculating the cash settlement under Section
7.4 will include all proceeds received for the sale of the Gas by the
Overproduced Party calculated at the Balancing Area, after deducting any
production or severance taxes paid and any Royalty actually paid by the
Overproduced Party to an Underproduced Party's Royalty owner(s), to the extent
said payments amounted to a discharge of said Underproduced Party's Royalty
obligation, as well as any reasonable marketing, compression, treating,
gathering or transportation costs incurred directly in connection with the sale
of the Overproduction.

         7.5.1 |X| (OPTIONAL - FOR VALUATION UNDER PERCENTAGE OF PROCEEDS
CONTRACTS) For Overproduction sold under a gas purchase contract providing for
payment based on a percentage of the proceeds obtained by the purchaser upon
resale of residue gas and liquid hydrocarbons extracted at a gas processing
plant, the values used for calculating cash settlement will include proceeds
received by the Overproduced Party for both the liquid hydrocarbons and the
residue gas attributable to the Overproduction.

         7.5.2 [ ] (OPTIONAL - VALUATION FOR PROCESSED GAS - OPTION 1) For
Overproduction processed for the account of the Overproduced Party at a gas
processing plant for the extraction of liquid hydrocarbons, the full quantity of
the Overproduction will be valued for purposes of cash settlement at the prices
received by the Overproduced Party for the sale of the residue gas attributable
to the Overproduction without regard to proceeds attributable to liquid
hydrocarbons which may have been extracted from the Overproduction.

         7.52 [X] (OPTIONAL - VALUATION FOR PROCESSED GAS - OPTION 2) For
Overproduction processed for the account of the Overproduced Party at a gas
processing plant for the extraction of liquid hydrocarbons, the values used for
calculating cash settlement will include the proceeds received by the
Overproduced Party for the sale of the liquid hydrocarbons extracted from the
Overproduction, less the actual reasonable costs incurred by the Overproduced
Party to process the Overproduction and to transport, fractionate and handle the
liquid hydrocarbons extracted therefrom prior to sale.

         7.6 To the extent the Overproduced Party did not sell all
Overproduction under an Arm's Length Agreement, the cash settlement will be
based on the weighted average price received by the Overproduced Party for any
gas sold from the

                                      - 3 -
<PAGE>

A.A.P.L. FORM. 610-E - GAS BALANCING AGREEMENT - 1992

Balancing Area under Arm's Length Agreements during the months to which such
Overproduction is attributed. In the event that no sales under Arm's Length
Agreements were made during any such month, the cash settlement for such month
will be based on the spot sales prices published for the applicable geographic
area during such month in a mutually acceptable pricing bulletin.

     7.7  Interest compounded at the rate of nine percent (9%) per annum or the
maximum lawful rate of interest applicable to the Balancing Area, whichever is
less, will accrue for all amounts due under Section 7.1 beginning the first day
following the date payment is due pursuant to Section 7.3. Such interest shall
be borne by the Operator or any Overproduced Party in the proportion that their
respective delays beyond the deadlines set out in Sections 7.2 and 7.3
contributed to the accrual of the interest.

     7.8  In lieu of the cash settlement required by Section 7.3, an
Overproduced Party may deliver to the Underproduced Party an offer to settle its
Overproduction in-kind and at such rates, quantities, times and sources as may
be agreed upon by the Underproduced Party. If the Parties are unable to agree
upon manner in which such in-kind settlement gas will be furnished within sixty
(60) days after the Overproduced Party's offer to settle in kind, which period
may be extended by agreement of said Parties, the Overproduced Party shall make
a cash settlement as provided in Section 7.3. The making of an in-kind
settlement offer under this Section 7.8 will not delay the accrual of interest
on the cash settlement should the Parties fail to reach agreement on an in-kind
settlement.

     7.9  |X| (OPTIONAL -- FOR BALANCING AREAS SUBJECT TO FEDERAL PRICE
REGULATION) That portion of any monies collected by an Overproduced Party for
Overproduction which is subject to refund by orders of the Federal Energy
Regulatory Commission or other governmental authority may be withheld by the
Overproduced Party until such prices are fully approved by such governmental
authority, unless the Underproduced Party furnishes a corporate undertaking,
acceptable to the Overproduced Party, agreeing to hold the Overproduced Party
harmless from financial loss due to refund orders by such governmental
authority.

     7.10  [ ] (OPTIONAL -- INTERIM CASH BALANCING) At any time during the term
of this Agreement, any Overproduced Party may, in its sole discretion, make cash
settlement(s) with the Underproduced Parties covering all or part of its
outstanding Gas imbalance, provided that such settlements must be made with all
Underproduced Parties proportionately based on the relative imbalances of the
Underproduced Parties, and provided further that such settlements may not be
made more often than once every twenty-four (24) months. Such settlements will
be calculated in the same manner provided above for final cash settlements. The
Overproduced Party will provide Operator a detailed accounting of any such cash
settlement within thirty (30) days after the settlement is made.

8.   TESTING

     Notwithstanding any provision of this Agreement to the contrary, any Party
shall have the right, from time to time, to produce and take up to one hundred
percent (100%) of a well's entire Gas stream to meet the reasonable
deliverability test(s) required by such Party's Gas purchaser, and the right to
take any Makeup Gas shall be subordinate to the right of any Party to conduct
such tests; provided, however, that such tests shall be conducted in accordance
with prudent operating practices only after thirty (30) days' prior written
notice to the Operator and shall last no longer than seventy-two (72) hours.

9.   OPERATING COSTS

     Nothing in this Agreement shall change or affect any Party's obligation to
pay its proportionate share of all costs and liabilities incurred in operations
on or in connection with the Balancing Area, as its share thereof is set forth
in the Operating Agreement, irrespective of whether any Party is at any time
selling and using Gas or whether such sales or use are in proportion to its
Percentage Interest in the Balancing Area.

10.  LIQUIDS

     The Parties shall share proportionately in and own all liquid hydrocarbons
recovered with Gas by field equipment operated for the joint account in
accordance with their Percentage Interests in the Balancing Area.

11.  AUDIT RIGHTS

     Notwithstanding any provision in this Agreement or any other agreement
between the Parties hereto, and further notwithstanding any termination or
cancellation of this Agreement, for a period of two (2) years from the end of
the calendar year in which any information to be furnished under Section 5 or 7
hereof is supplied, any Party shall have the right to audit the records of any
other Party regarding quantity, including but not limited to information
regarding Btu-content. Any Underproduced Party shall have the right for a period
of two (2) years from the end of the calendar year in which any cash settlement
is received pursuant to Section 7 to audit the records of any Overproduced Party
as to all matters concerning values, including but not limited to information
regarding prices and disposition of Gas from the Balancing Area. Any such audit
shall be conducted at the expense of the Party or Parties desiring such audit,
and shall be conducted, after reasonable notice, during normal business hours in
the office of the Party whose records are being audited. Each Party hereto
agrees to maintain records as to the volumes and prices of Gas sold each month
and the volumes of Gas used in its own operations, along with the Royalty paid
on any such Gas used by a Party in its own operations. The audit rights provided
for in this Section 11 shall be in addition to those provided for in Section 5.2
of this Agreement.

12.  MISCELLANEOUS

     12.1  As between the Parties, in the event of any conflict between the
provisions of this Agreement and the provisions of any gas sales contract, or
in the event of any conflict between the provisions of this Agreement and the
provisions of the Operating Agreement, the provisions of this Agreement shall
govern.

     12.2  Each Party agrees to defend, indemnify and hold harmless all other
Parties from and against any and all liability for any claims, which may be
asserted by any third party which now or hereafter stands in a contractual
relationship with such indemnifying Party and which arise out of the operation
of this Agreement or any activities of such indemnifying Party under the
provisions of this Agreement, and does further agree to save the other Parties
harmless from all judgments or damages sustained and costs incurred in
connection therewith.

     12.3  Except as otherwise provided in this Agreement, Operator is
authorized to administer the provisions of this Agreement, but shall have no
liability to the other Parties for losses sustained or liability incurred which
arise out of or in connection with the performance of Operator's duties
hereunder, except such as may result from Operator's gross negligence or willful
misconduct. Operator shall not be liable to any Underproduced Party for the
failure of any Overproduced Party, (other than Operator) to pay any amounts owed
pursuant to the terms hereof.

     12.4  This Agreement shall remain in full force and effect for as long as
the Operating Agreement shall remain in force and effect as to the Balancing
Area, and thereafter until the Gas accounts between the Parties are settled in
full, and shall inure to the benefit of and be binding upon the Parties hereto,
and their respective heirs, successors, legal representatives

                                      -4-

<PAGE>
A.A.P.L. FORM. 610-E - GAS BALANCING AGREEMENT - 1992

and assigns, if any. The Parties hereto agree to give notice of the existence of
this Agreement to any successor in interest of any such Party and to provide
that any such successor shall be bound by this Agreement, and shall further make
any transfer of any interest subject to the Operating Agreement, or any part
thereof, also subject to the terms of this Agreement.

         12.5 Unless the context clearly indicates otherwise, words used in the
singular include the plural, the plural includes the singular, and the neuter
gender includes the masculine and the feminine.

         12.6 In the event that any "Optional" provision of this Agreement is
not adopted by the Parties to this Agreement by a typed printed or handwritten
indication, such provision shall not form a part of this Agreement, and no
inference shall be made concerning the intent of the Parties in such event. In
the event that any "Alternative" provision of this Agreement is not so adopted
by the Parties, Alternative 1 in each such instance shall be deemed to have been
adopted by the Parties as a result of any such omission. In those cases where it
is indicated that an Optional provision may be used only if a specific
Alternative is selected: (i) an election to include said Optional provision
shall not be effective unless the Alternative in question is selected; and (ii)
the election to include said Optional provision must be expressly indicated
hereon, it being understood that the selection of an Alternative either
expressly or by default as provided herein shall not, in and of itself,
constitute an election to include an associated Optional provision.

         12.7 This Agreement shall bind the Parties in accordance with the
provisions hereof, and nothing herein shall be construed or interpreted as
creating any rights in any person or entity not a signatory hereto, or as being
a stipulation in favor of any such person or entity.

         12.8 If contemporaneously with this Agreement becoming effective, or
thereafter, any Party requests that any other Party execute an appropriate
memorandum or notice of this Agreement in order to give third parties notice of
record of same and submits same for execution in recordable form, such
memorandum or notice shall be duly executed by the Party to which such request
is made and delivered promptly thereafter to the Party making the request. Upon
receipt, the Party making the request shall cause the memorandum or notice to be
duly recorded in the appropriate real property or other records affecting the
Balancing Area.

         12.9 In the event Internal Revenue Service regulations require a
uniform method of computing taxable income by all Parties, each Party agrees to
compute and report income to the Internal Revenue Service (select one) [ ] as
if such Party were taking its Full Share of Current Production during each
relevant tax period in accordance with such regulations, insofar as same relate
to entitlement method tax computations; or |X| based on the quantity of Gas
taken for its account in accordance with such regulations, insofar as some
relate to sales method tax computations.

13. ASSIGNMENT AND RIGHTS UPON ASSIGNMENT

         13.1 Subject to the provisions of Sections 13.2 (if elected) and 13.3
hereof, and notwithstanding anything in this Agreement or in the Operating
Agreement to the contrary, if any Party assigns (including any sale, exchange or
other transfer) any of its working interest in the Balancing Area when such
Party is an Underproduced or Overproduced Party, the assignment or other act of
transfer shall, insofar as the Parties hereto are concerned, include all
interest of the assigning or transferring Party in the Gas, all rights to
receive or obligations to provide or take Makeup Gas and all rights to receive
or obligations to make any monetary payment which may ultimately be due
hereunder, as applicable. Operator and each of the other Parties hereto shall
thereafter treat the assignment accordingly, and the assigning or transferring
Party shall look solely to its assignee or other transferee for any interest in
the Gas or monetary payment that such Party may have or to which it may be
entitled, and shall cause its assignee or other transferee to assume its
obligations hereunder.

         13.2 |X| (OPTIONAL - CASH SETTLEMENT UPON ASSIGNMENT) Notwithstanding
anything in this Agreement (including but not limited to the provisions of
Section 13.1 hereof) or in the Operating Agreement to the contrary, and subject
to the provisions of Section 13.3 hereof, in the event an Overproduced Party
intends to sell, assign, exchange or otherwise transfer any of its interest in a
Balancing Area, such Overproduced Party shall notify in writing the other
working interest owners who are Parties hereto in such Balancing Area of such
fact at least ____thirty___ (__30__) days prior to closing the transaction.
Thereafter, any Underproduced Party may demand from such Overproduced Party in
writing, within ___fifteen___ (__15__) days after receipt of the Overproduced
Party's notice, a cash settlement of its Underproduction from the Balancing
Area. The Operator shall be notified of any such demand and of any cash
settlement pursuant to this Section 13, and the Overproduction and
Underproduction of each Party shall be adjusted accordingly. Any cash settlement
pursuant to this Section 13 shall be paid by the Overproduced Party on or before
the earlier to occur (i) of sixty (60) days after receipt of the Underproduced
Party's demand or (ii) at the closing of the transaction in which the
Overproduced Party sells, assigns, exchanges or otherwise transfers its interest
in a Balancing Area on the same basis as otherwise set forth in Sections 7.3
through 7.6 hereof, and shall bear interest at the rate set forth in Section 7.7
hereof, beginning sixty (60) days after the Overproduced Party's sale,
assignment, exchange or transfer of its interest in the Balancing Area for any
amounts not paid. Provided, however, if any Underproduced Party does not so
demand such cash settlement of its Underproduction from the Balancing Area, such
Underproduced Party shall look exclusively to the assignee or other successor in
interest of the Overproduced Party giving notice hereunder for the satisfaction
of such Underproduced Party's Underproduction in accordance with the provisions
of Section 13.1 hereof.

         13.3 The provisions of this Section 13 shall not be applicable in the
event any Party mortgages its interest or disposes of its interest by merger,
reorganization, consolidation or sale of substantially all of its assets to a
subsidiary or parent company, or to any company in which any parent or
subsidiary of such Party owns a majority of the stock of such company.

14. OTHER PROVISIONS

         14.1 The election of an underproduced party to commence taking makeup
gas under the provisions of Article 4, hereof, shall remain in effect until such
under-produced party gives Operator thirty (30) days notice of its election to
cease taking makeup gas, or until such party's underproduction is eliminated,
whichever first occurs. In the event an under-produced party provides notice to
the Operator of its intent to cease taking makeup gas, such under-produced party
shall not thereafter be allowed to request makeup gas again until one (1) year
from last day of the month in which they last took makeup gas. This section does
not apply to permanent overproduction situations. Please see section 4.3
regarding situations where an Overproduced Party has produced all of its share
of the ultimately recoverable reserves in the Balancing Area.

                                       -5-

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

15. COUNTERPARTS

This Agreement may be executed in counterparts, each of which when taken with
all other counterparts shall constitute a binding agreement between the Parties
hereto; provided, however, that if a Party or Parties owning a Percentage
Interest in the Balancing Area equal to or greater than a _____________________
percent (_____%) therein fail(s) to execute this Agreement on or before
____________________, this Agreement shall not be binding upon any Party and
shall be of no further force and effect.

IN WITNESS WHEREOF, this Agreement shall be effective as of the ___5TH___ day of
_____MARCH_____, __2001__.

ATTEST OR WITNESS:                                   OPERATOR

                                           DISCOVERY OPERATING, INC.
                                           -------------------------------------
                                       BY:   /s/ Don L. Sparks
--------------------------------           -------------------------------------
                                                 DON L. SPARKS
--------------------------------           -------------------------------------

                                           Type or print name

                                           Title    President
                                           -------------------------------------
                                           Date     March 21, 2001
                                           -------------------------------------

                                           Tax ID or S.S. No.___________________

                                  NON-OPERATORS

                                           IVANHOE ENERGY (USA), INC.
                                           -------------------------------------
                                      BY:     /s/ C.R. Coffey
                                           -------------------------------------
                                                  C.R. COFFEY
                                           -------------------------------------

                                           Type or print name

                                           Title     VP Operations
                                           -------------------------------------
                                           Date         3/22/01
                                           -------------------------------------

                                           Tax ID or S.S. No. __________________

                                           WESTWIN ENERGY I. LIMITED PARTNERSHIP
                                           -------------------------------------
                                       BY:    /s/ T.L. Holland
--------------------------------           -------------------------------------
                                                  T.L. HOLLAND
--------------------------------           -------------------------------------

                                           Type or print name

                                           Title    Vice President
                                           -------------------------------------
                                           Date     March 21, 2001
                                           -------------------------------------

                                           Tax ID or S.S. No.___________________

                                       -6-

<PAGE>
A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

15. COUNTERPARTS

         This Agreement may be executed in counterparts, each of which when
taken with all other counterparts shall constitute a binding agreement between
the Parties hereto; provided, however, that if a Party or Parties owning a
Percentage Interest in the Balancing Area equal to or greater than a
___________________________percent (_____%) therein fail(s) to execute this
Agreement on or before ______________________________-, this Agreement shall not
be binding upon any Party and shall be of no further force and effect.

         IN WITNESS WHEREOF, this Agreement shall be effective as of the __5TH__
day of ____MARCH____ __2001__.

ATTEST OR WITNESS:                                   OPERATOR

                                           -------------------------------------
                                       BY:
--------------------------------           -------------------------------------

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

                                           Type or print name

                                           Title
                                           -------------------------------------
                                           Date
                                           -------------------------------------

                                           Tax ID or S.S. No.___________________

                                  NON-OPERATORS

                                           DON L. SPARKS
                                           -------------------------------------
                                       BY: /s/ Don L. Sparks
                                           -------------------------------------

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

                                           Type or print name

                                           Title     VP Operations
                                           -------------------------------------
                                           Date         3/21/01
                                           -------------------------------------

                                           Tax ID or S.S. No. __________________

                                           W. JEFFREY SPARKS
                                           -------------------------------------
                                       BY:        /s/ W. Jeffrey Sparks
--------------------------------           -------------------------------------

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

                                           Type or print name

                                           Title
                                           -------------------------------------
                                           Date
                                           -------------------------------------

                                           Tax ID or S.S. No.___________________

                                       -6-

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

15. COUNTERPARTS

This Agreement may be executed in counterparts, each of which when taken with
all other counterparts shall constitute a binding agreement between the Parties
hereto; provided, however, that if a Party or Parties owning a Percentage
Interest in the Balancing Area equal to or greater than a _____________________
percent (_____%) therein fail(s) to execute this Agreement on or before
____________________, this Agreement shall not be binding upon any Party and
shall be of no further force and effect.

IN WITNESS WHEREOF, this Agreement shall be effective as of the ___5TH___ day of
_____MARCH_____, __2001__.

ATTEST OR WITNESS:                                   OPERATOR

                                           -------------------------------------
                                       BY:
--------------------------------           -------------------------------------

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

                                           Type or print name

                                           Title
                                           -------------------------------------
                                           Date
                                           -------------------------------------

                                           Tax ID or S.S. No.___________________

                                  NON-OPERATORS

                                                  KEVIN D. SPARK
                                           -------------------------------------
                                       BY:    /s/ Kevin D. Spark
                                           -------------------------------------

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

                                           Type or print name

                                           Title
                                           -------------------------------------
                                           Date
                                           -------------------------------------

                                           Tax ID or S.S. No. __________________

                                                  C. TODD SPARKS
                                           -------------------------------------
                                       BY:    /s/ C. Todd Sparks
--------------------------------           -------------------------------------

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

                                           Type or print name

                                           Title
                                           -------------------------------------
                                           Date
                                           -------------------------------------

                                           Tax ID or S.S. No.___________________

                                       -6-

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

                                 ACKNOWLEDGMENTS

         Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state will depend upon the statutes of that state.

Individual acknowledgment:

State of ____Texas______)

                        ) ss.

County of ____Midland___)

         This instrument was acknowledged before me on ____March 21, 2001_______
________________________________ by _________Don L. Sparks _______

                                      ____________/s/ Angela Deaver_____________
(Angela Deaver Seal)
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

Acknowledgment in representative capacity:

State of ____Texas______)

                        ) ss.

County of ____Midland___)

         This instrument was acknowledged before me on ____March 21, 2001_______
________________________________ by _________Don L. Sparks ____________ as
___President________ of _______Discovery Operating, Inc.________.

(Angela Deaver Seal)
                                      Title (and Rank)_____/s/ Angela Deaver____

                                      My commission expires:____________________

                                     - 7 -

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

                                 ACKNOWLEDGMENTS

         Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state will depend upon the statutes of that state.

Individual acknowledgment:

State of ____Texas______)

                        ) ss.

County of ____Midland___)

         This instrument was acknowledged before me on ____March 21, 2001 ______
________________________________ by ________W. Jeffrey Sparks _______

                                      ___________/s/ Angela Deaver _____________
(Angela Deaver Seal)
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

Acknowledgment in representative capacity:

State of ____Texas______)

                        ) ss.

County of ____Howard____)

         This instrument was acknowledged before me on _____March 21, 2001______
_______________ by ______T.L. Holland_______ as __________________ of
_______Westwin Energy I, L.P.________.

 (Angela Deaver Seal)
                                      Title (and Rank)____/s/ Trina Prichard____

                                      My commission expires:______9-11-04_______

                                     - 7 -

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

                                 ACKNOWLEDGMENTS

         Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state will depend upon the statutes of that state.

Individual acknowledgment:

State of ____Texas______)

                        ) ss.

County of ____Midland___)

         This instrument was acknowledged before me on _____March 21, 2001______
________________________________ by _________Kevin D. Sparks _______

                                      ____________/s/ Angela Deaver_____________
(Angela Deaver Seal)
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

Acknowledgment in representative capacity:

State of _______________)

                        ) ss.

County of ______________)

         This instrument was acknowledged before me on _________________________
________________________________ by _________________________ as
___________________________ of _________________________________________.

(Angela Deaver Seal)
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

                                     - 7 -

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

                                 ACKNOWLEDGMENTS

         Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state will depend upon the statutes of that state.

Individual acknowledgment:

State of ____Texas______)

                        ) ss.

County of ____Midland___)

         This instrument was acknowledged before me on ____March 21, 2001_______
________________________________ by _________C. Todd Sparks _______

                                      _____________/s/ Angela Deaver____________
(Angela Deaver Seal)
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

Acknowledgment in representative capacity:

State of _______________)

                        ) ss.

County of ______________)

         This instrument was acknowledged before me on _________________________
________________________________ by _________________________ as
_____________________________ of _____________________________.

(Angela Deaver Seal)
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

                                      - 7 -

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

                                 ACKNOWLEDGMENTS

         Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state will depend upon the statutes of that state.

Individual acknowledgment:

State of _______________)

                                    ) ss.

County of )   ___________)

         This instrument was acknowledged before me on _________________________
________________________________ by _____________________________

                                      __________________________________________
(Seal, if any)
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

Acknowledgment in representative capacity:

State of _______________)

                        ) ss.

County of ______________)

         This instrument was acknowledged before me on _________________________
________________________________ by _________________________ as
_________________________ of ________________________________

(Seal, if any)  _____________-
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

                                     - 7 -

<PAGE>
A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

                                 ACKNOWLEDGMENTS

         Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state will depend upon the statutes of that state.

Individual acknowledgment:

State of _______________)

                                    ) ss.

County of    ___________)

         This instrument was acknowledged before me on _________________________
________________________________ by _____________________________

                                      __________________________________________
(Seal, if any)
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

Acknowledgment in representative capacity:

State of _______________)

                        ) ss.

County of ______________)

         This instrument was acknowledged before me on _________________________
________________________________ by _________________________ as
_________________________ of ________________________________

(Seal, if any)  _____________
                                      Title (and Rank)__________________________

                                      My commission expires:____________________

                                     - 7 -

<PAGE>

                                    EXHIBIT F

          NON-DISCRIMINATION AND CERTIFICATION OF SEGREGATED FACILITIES

In the performance of its duties under this Agreement, the Operator shall be
bound by and comply with all the terms and provisions of Section 202 of
Executive Order 11246 of September 24, 1965, to the extent it is applicable, all
of which are incorporated herein by reference to the same extent as if fully set
forth herein, and shall be bound by and comply with the rules, regulations and
relevant orders adopted pursuant to such Executive Order.

<PAGE>

                       MEMORANDUM OF OPERATING AGREEMENT,
                   SECURITY AGREEMENT AND FINANCING STATEMENT

THE STATE OF TEXAS

COUNTY OF

         Discovery Operating, Inc. ("Operator"), as Operator, and each of the
parties designated as Non-Operators ("Non-Operators") in Exhibit "A" attached
hereto and made a part hereof for all purposes have entered into an Operating
Agreement (the "Operating Agreement") dated March 5, 2001, covering the oil and
gas interest in the land located in Midland and Upton County, Texas, more
particularly described in Exhibit "A" ("Contract Area"). The provisions of the
Operating Agreement are incorporated herein for all purposes. A copy of said
Operating Agreement is on file at the office of Discovery at the address
specified in Exhibit "A" and may be examined during normal business hours at
said address.

         Article Vl1.B. of the Operating Agreement grants to Operator and to
Non-Operators, and each of the undersigned hereby grants to each of the other
parties hereto, a lien upon its oil and gas rights in the Contract Area and
grants a security interest in its share of oil and/or gas when produced,
accounts and proceeds, contract rights, and its interest in all personal
property, equipment and fixtures now or hereafter used or obtained in connection
with the Contract Area as provided in said Operating Agreement.

         Each of the undersigned agrees that to the extent each of the other
parties hereto has a security interest under the Uniform Commercial Code of the
State of Texas, each such party shall be entitled to exercise the rights and
remedies of a secured party under the Uniform Commercial Code, and that a copy
hereof signed by each of the undersigned may also serve as a financing statement
under the Uniform Commercial Code.

         Each of the undersigned Non-Operators agrees that, upon default in the
payment of its share of the expense of developing and/or operating the Contract
Area as provided in the Operating Agreement, that notice by Operator to any
purchaser of the oil and gas or proceeds from said property, without further
joinder by the defaulting Non-Operator, shall be an order on such purchaser and
authority to such purchaser to deliver to Operator any oil and gas attributable
to the interest of such defaulting Non-Operator or any sums of money or credits
due to the interest of such defaulting Non-Operator until the amount owed by
such defaulting Non-Operator, plus interest, has been paid.

         Without in any manner limiting the generality of any of the foregoing
provisions hereof, portions of the personal property (i.e. tanks, lines, casing
and other tangible personal property), described or to which reference is made
herein are, or are to become, fixtures on the land described in Exhibit "A" and
the hydrocarbons, (minerals, including oil and gas), or accounts will be
financed at the wellhead or minehead located on the lands described in Exhibit
"A" and this instrument is to be for record and/or indexed as a financing
statement in the Real Estate Records of the county or each of the counties shown
in Exhibit "A".

         This Memorandum of Operating Agreement, Security Agreement and
Financing Statement may be executed in multiple counterparts by all of the
undersigned, and Operator is hereby authorized to assemble such counterparts
into one document.

<PAGE>

         DATED and EFFECTIVE as of the date of the Operating Agreement.

OPERATOR

Discovery Operating, Inc.

                                          /s/ Don L. Sparks

                                      ------------------------------------------
                                      By:   DON L. SPARKS, President

                                  NON-OPERATORS

Westwin Energy I. Limited Partnership       Ivanhoe Energy (USA), Inc.

      /s/ T.L. Holland                                 /s/ C.R. Coffey
--------------------------------------      ------------------------------------
         T.L. HOLLAND                                    C.R. COFFEY

THE STATE OF TEXAS          )

COUNTY OF                   )

         This instrument was acknowledged before me on the _21st_ day of
__March__, _2001_, by ____Don L. Sparks____, _____President_____, of
______Discovery Operating, Inc._____, a Corporation, on behalf of said
Corporation.

                                                 /s/ Angela Deaver
[Angela Deaver Seal]                  ------------------------------------------
                                      NOTARY PUBLIC, STATE OF TEXAS
                                      Typed or Printed Name ____________________

My Commission Expires:________________

                            CORPORATE ACKNOWLEDGMENT

THE STATE OF TEXAS          )

COUNTY OF                   )

         This instrument was acknowledged before me on the _21st_ day of
__March__, _2001_, by ____T.L. Holland____, ______Vice-President______, of
_______Westwin Energy I, L.P._______, a Corporation, on behalf of said
Corporation.

                                              /s/ Trina Prichard
[Trina Prichard Seal]                 ------------------------------------------
                                      NOTARY PUBLIC, STATE OF TEXAS
                                      Typed or Printed Name ___Trina Prichard___

My Commission Expires:___9-11-04____

                            CORPORATE ACKNOWLEDGMENT

THE STATE OF TEXAS          )

COUNTY OF                   )

         This instrument was acknowledged before me on the _____ day of
_________, 19___, by _____________________, ___________________________, of
_______________________________________, a Corporation, on behalf of said
Corporation.

                                      ------------------------------------------
                                      NOTARY PUBLIC, STATE OF TEXAS
                                      Typed or Printed Name ____________________

My Commission Expires:_______________

<PAGE>

         DATED and EFFECTIVE as of the date of the Operating Agreement.

                                      OPERATOR

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

                             NON-OPERATORS

      /s/ Don L. Sparks                        /s/ W. Jeffrey Sparks
---------------------------------     ------------------------------------------
          Don L. Sparks                            W. Jeffrey Sparks

THE STATE OF TEXAS          )

COUNTY OF                   )

         This instrument was acknowledged before me on the _____ day of

_________, 19___, by _____________________, ___________________________, of

_________________________________________, a Corporation, on behalf of said
Corporation.

                                      ------------------------------------------
                                      NOTARY PUBLIC, STATE OF TEXAS
                                      Typed or Printed Name ____________

My Commission Expires:____________________

                            INDIVIDUAL ACKNOWLEDGMENT

THE STATE OF TEXAS          )

COUNTY OF MIDLAND           )

         This instrument was acknowledged before me on the _21st_ day of

___March,___ _2001_, by ________Don L. Sparks___________.

                                                 /s/ Angela Deaver
[Angela Deaver Seal]                  ------------------------------------------

                                      NOTARY PUBLIC, STATE OF TEXAS
                                      Typed or Printed Name ____________________

                            INDIVIDUAL ACKNOWLEDGMENT

THE STATE OF TEXAS          )

COUNTY OF MIDLAND           )

       This instrument was acknowledged before me on the _21st_ day of

___March,___ _2001_, ___________by W. Jeffrey Sparks_________.

                                                 /s/ Angela Deaver
[Angela Deaver Seal]                  ------------------------------------------
                                      NOTARY PUBLIC, STATE OF TEXAS
                                      Typed or Printed Name ____________________

<PAGE>

     DATED and EFFECTIVE as of the date of the Operating Agreement.

                                      OPERATOR

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

                                  NON-OPERATORS

    /s/ Kevin D. Sparks                        /s/ C. Todd Sparks
-----------------------------------     ----------------------------------------
        Kevin D. Sparks                            C. Todd Sparks

THE STATE OF TEXAS          )

COUNTY OF                   )

         This instrument was acknowledged before me on the _____ day of

_______________, 19_____, by _______, ____________________, of

_________________________, a Corporation, on behalf of said Corporation.

                                      ------------------------------------------
                                      NOTARY PUBLIC, STATE OF TEXAS
                                      Typed or Printed Name ____________________

My Commission Expires:_______________

                            INDIVIDUAL ACKNOWLEDGMENT

THE STATE OF TEXAS          )

COUNTY OF MIDLAND           )

         This instrument was acknowledged before me on the _21st_ day of

__March,__ _2001_, ___________by Kevin D. Sparks___________.

                                                   /s/ Angela Deaver
[Angela Deaver Seal]                  ------------------------------------------
                                      NOTARY PUBLIC, STATE OF TEXAS
                                      Typed or Printed Name ____________________

                            INDIVIDUAL ACKNOWLEDGMENT

THE STATE OF TEXAS          )

COUNTY OF MIDLAND           )

         This instrument was acknowledged before me on the __21st__ day of

____March____, _2001_, by ______________C. Todd Sparks_____________.

                                                  /s/ Angela Deaver
[Angela Deaver Seal]                  ------------------------------------------
                                      NOTARY PUBLIC, STATE OF TEXAS
                                      Typed or Printed Name ____________________

<PAGE>

A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992

                                 ACKNOWLEDGMENTS

         Note: The following forms of acknowledgment arc the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state iii depend upon the statutes of that state.

Individual acknowledgement:

State of _________________________)

                                  )ss.

County of ________________________)

This instrument was acknowledged before me on _________________________________
_______________________________________ by ____________________________________

(Seal, if any)
                                        ----------------------------------------

                                        Title (and Rank)________________________

                                        My commission expires:__________________

Acknowledgment in representative capacity:

State of _________________________)

                                  )ss.

County of ________________________)

This instrument was acknowledged before me on __________________________________
____________________________________ by ________________________________________

(Seal, if any)         __________

                                        Title (and Rank)________________________

                                        My commission expires:__________________

                                     - 7 -

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