Document:

<PAGE>
                                                                    EXHIBIT 10.8
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                      INTERCREDITOR AND SECURITY AGREEMENT

                                      among

                   EOTT ENERGY OPERATING LIMITED PARTNERSHIP,

                     EOTT ENERGY CANADA LIMITED PARTNERSHIP,

                           EOTT ENERGY LIQUIDS, L.P.,

                                       and

                    EOTT ENERGY PIPELINE LIMITED PARTNERSHIP

    as debtors and debtors in possession and as joint and several Borrowers,

                                       and

                           EOTT ENERGY PARTNERS, L.P.

                                       and

                       EOTT ENERGY GENERAL PARTNER, L.L.C.

    as debtors and debtors in possession and as joint and several Guarantors,

                                       and

                            STANDARD CHARTERED BANK,

                              LEHMAN BROTHERS INC.

                                       and

                  STANDARD CHARTERED TRADE SERVICES CORPORATION

                       AND VARIOUS OTHER SECURED PARTIES,

                                       and

                             STANDARD CHARTERED BANK
                               as Collateral Agent

                          Dated as of October 18, 2002

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<PAGE>

                                TABLE OF CONTENTS

<Table>
<Caption>
                                                                                       Page
                                                                                       ----
<S>                                                                                    <C>
SECTION 1. DEFINITIONS ..................................................................2

        1.1.    Defined Terms ...........................................................2

        1.2.    Other Definitional Provisions ...........................................9

SECTION 2. COLLATERAL AND ACTIONABLE DEFAULTS ...........................................9

        2.1.    Security Interests and Liens in the Collateral ..........................9

        2.2.    General Authority of the Collateral Agent over the Collateral ..........11

        2.3.    Notices of Actionable Defaults; Directions as to Enforcement
                Actions ................................................................12

        2.4.    Right to Initiate Judicial Proceedings; Appointment of Receiver ........13

        2.5.    Exercise of Powers; Instructions of Required Secured Parties ...........13

        2.6.    Remedies Not Exclusive .................................................15

        2.7.    Waiver and Estoppel ....................................................16

        2.8.    Limitation on Collateral Agent's Duty in Respect of Collateral .........17

        2.9.    Limitation by Law ......................................................17

SECTION 3. COLLECTIONS AND ACCOUNTS ....................................................17

        3.1.    Authorized Accounts ....................................................17

        3.2.    Payments from Debt Service Payment Account .............................19

        3.3.    Special Payments .......................................................21

        3.4.    Other Agreements about Authorized Accounts .............................22

SECTION 4. AGREEMENTS WITH COLLATERAL AGENT ............................................23

        4.1.    Delivery of Credit Documents ...........................................23

        4.2.    Indemnification by Debtors .............................................23

        4.3.    Filing Fees, Excise Taxes, Etc. ........................................24

SECTION 5. THE COLLATERAL AGENT ........................................................24

        5.1.    Appointment ............................................................24

        5.2.    Exculpatory Provisions .................................................24

        5.3.    Delegation of Duties ...................................................25

        5.4.    Reliance by Collateral Agent ...........................................25

        5.5.    Limitations on Duties of Collateral Agent ..............................26

        5.6.    Resignation and Removal of the Collateral Agent ........................26

        5.7.    Status of Successor ....................................................28

        5.8.    Merger of the Collateral Agent .........................................28

        5.9.    Treatment of Payee or Indorsee by Collateral Agent .....................28

        5.10.   Non-Reliance on Collateral Agent .......................................28

        5.11.   Indemnification ........................................................29

SECTION 6. ASSIGNMENTS .................................................................29

        6.1.    Agreement Binding on Assignees .........................................29
</Table>

                                        i
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<Table>
<S>                                                                                    <C>
        6.2.    Limited Restriction on Assignments or Resignation of Term Lender
                Agent ..................................................................29

SECTION 7. MISCELLANEOUS ...............................................................29

        7.1.    Notices ................................................................29

        7.2.    No Waivers .............................................................30

        7.3.    Amendments, Supplements and Waivers ....................................30

        7.4.    Headings ...............................................................31

        7.5.    Severability ...........................................................31

        7.6.    Successors and Assigns .................................................31

        7.7.    GOVERNING LAW ..........................................................31

        7.8.    Counterparts ...........................................................31

        7.9.    SUBMISSION TO JURISDICTION; WAIVERS ....................................31

        7.10.   Termination ............................................................32

        7.11.   Acknowledgements .......................................................33
</Table>

SCHEDULE A  --  ADDRESSES FOR NOTICES

                                       ii
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                       INTERCREDITOR AND SECURITY AGREMENT

                  THIS INTERCREDITOR AND SECURITY AGREEMENT (this "Agreement"),
dated as of October 18, 2002, is made by and among:

     o        EOTT Energy Operating Limited Partnership, a Delaware limited
              partnership ("EOTT OLP"),

     o        EOTT Energy Canada Limited Partnership, a Delaware limited
              partnership ("EOTT Canada"),

     o        EOTT Energy Liquids, L.P., a Delaware limited partnership ("EOTT
              Liquids"),

     o        EOTT Energy Pipeline Limited Partnership, a Delaware limited
              partnership ("EOTT Pipeline") (each of the foregoing entities a
              debtor and a debtor in possession and, on a joint and several
              basis, the "Borrowers"),

     o        EOTT Energy Partners, L.P., a Delaware limited Partnership ("EOTT
              MLP"),

     o        EOTT Energy General Partner, L.L.C., a Delaware limited liability
              company ("EOTT GP" and together with EOTT MLP, each a "Guarantor"
              and collectively, the "Guarantors"),

     o        Standard Chartered Bank, in its capacity as Collateral Agent
              hereunder,

     o        Standard Chartered Bank, in its capacity as LC Agent under the SCB
              DIP LC Agreement referred to below, acting on behalf of the LC
              Issuer and the LC Participants,

     o        Standard Chartered Bank, in its capacity as an LC Participant
              under the SCB DIP LC Agreement,

     o        Lehman Brothers Inc., in its capacity as Term Lender Agent under
              the Term Loan Agreement referred to below, acting on behalf of the
              Term Lenders,

     o        each of the Persons signing below as a Term Lender, and

     o        Standard Chartered Trade Services Corporation ("SCTSC").

                                    RECITALS:

                  WHEREAS, the Borrowers, the Guarantors, Standard Chartered
Bank, as LC Issuer and LC Agent, and the letter of credit participants from time
to time party thereto are parties to that certain Debtor in Possession Letter of
Credit Agreement dated of even date herewith (as from time to time amended in
accordance herewith, the "LC Agreement"), pursuant to which the LC Issuer has
agreed to issue Letters of Credit to the Borrowers on the terms and conditions
set forth therein;

                                       1
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                  WHEREAS, the Borrowers, the Guarantors, Lehman Brothers Inc.,
as Term Lender Agent, and the other lenders from time to time party thereto are
parties to that certain Debtor in Possession Term Loan Agreement dated of even
date herewith (as from time to time amended in accordance herewith, the "Term
Loan Agreement"), pursuant to which the Term Lenders have agreed to make loans
to the Borrowers on the terms and conditions set forth therein;

                  WHEREAS, EOTT OLP and SCTSC are parties to (a) that certain
Amended and Restated Commodities Repurchase Agreement dated of even date
herewith (as from time to time amended in accordance herewith, the "Crude Oil
Purchase Agreement"), pursuant to which SCTSC has agreed to purchase and resell
to EOTT OLP certain commodities on the terms and conditions set forth therein
and (b) that certain Amended and Restated Receivables Purchase Agreement dated
of even date herewith (as from time to time amended in accordance herewith, the
"Receivables Purchase Agreement"), pursuant to which SCTSC has agreed to
purchase certain qualified receivables from EOTT OLP on the terms and conditions
set forth therein; and

                  WHEREAS, the parties hereto desire to provide, among other
things, for their respective rights in respect of the Collateral and the
distribution of the proceeds thereof;

                  NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:

                             SECTION 1. DEFINITIONS

                  1.1. Defined Terms. As used in this Agreement, the following
terms shall have the following meanings:

                  "Acceleration Notice" means either (a) a formal notice given
by the LC Agent on behalf of the LC Participants stating that an "Event of
Default" has occurred under the LC Agreement that has not been remedied and that
the LC Agent has exercised its acceleration remedy under the LC Agreement or (b)
by the Term Lender Agent on behalf of the Term Lenders stating that an "Event of
Default" has occurred under the Term Loan Agreement that has not been remedied
and that the Term Lender Agent has exercised its acceleration remedy under the
Term Loan Agreement.

                  "Actionable Default" means either (a) an "Event of Default",
as defined in the LC Agreement or (b) an "Event of Default", as defined in the
Term Loan Agreement, which, in either case, has neither been cured nor waived at
the time in question.

                  "Administrative Agents" means the LC Agent and the Term Lender
Agent.

                  "Authorized Accounts" means the Collection Accounts, the
Concentration Account, the Debt Service Payment Account, the LC Collateral
Account, the Funding Account, and the Disbursement Accounts.

                  "Bankruptcy Court" means the United States Bankruptcy Court
for the Southern District of Texas, Corpus Christi Division.

                                       2
<PAGE>

                  "Business Day" means any day, other than a Saturday, Sunday or
day which shall be in the State of New York a legal holiday or day on which
banking institutions are required or authorized to close.

                  "Canadian Accounts" means the following accounts maintained by
EOTT Canada with Bank of Montreal: account number 00109-010 (U. S. dollars) and
account number 1185-710 (Canadian dollars).

                  "Cash Equivalents" means "Cash Equivalents" as defined in the
LC Agreement.

                  "Cash Waterfall" means the payment, priority and other
provisions of Sections 3.1, 3.2 and 3.3 hereof.

                  "Collateral" means all of the assets, properties and rights of
each Debtor, whether now or hereafter existing or now owned or hereafter
acquired and wherever located, of every kind and description, tangible or
intangible, real, personal or mixed, including but not limited to: all assets
included in Property, Plant and Equipment as reflected in the Debtors' financial
statements, all real property, all fixtures, all goods (including inventory,
equipment and any accessions thereto), all instruments (including promissory
notes), all documents, all documents of title (as such term is defined in the
Alberta Personal Property Security Act), all accounts (including
health-care-insurance receivables), all chattel paper (whether tangible or
electronic), the Authorized Accounts and all other deposit accounts and all
investments and balances therein, all money (as such term is defined in the
Alberta Personal Property Security Act), all letter-of-credit rights (whether or
not the letter of credit is evidenced by a writing), all commercial tort claims,
all securities and all other investment property (including without limitation,
(i), in the case of EOTT MLP, its entire limited partner interest in EOTT OLP
and its entire membership interest in EOTT GP; (ii) in the case of EOTT OLP, its
entire limited partner interest in each of EOTT Canada, EOTT Liquids and EOTT
Pipeline; and (iii) in the case of EOTT GP, its entire general partner interest
in each of EOTT OLP, EOTT Canada, EOTT Liquids and EOTT Pipeline), all general
intangibles, all payment intangibles, all software, all tax refund claims, all
supporting obligations, all Proceeds of any of the foregoing, and all other
personal property. Notwithstanding the foregoing, however, the term "Collateral"
shall not include (a) any avoidance actions or other assets expressly excluded
from the "Postpetition Liens" granted to the Collateral Agent pursuant to the
DIP Financing Orders, and (b) the receivables and contract rights purchased by
SCTSC under the Receivables Purchase Agreement or any proceeds thereof.

                   "Collateral Agent" means Standard Chartered Bank, acting in
its capacity as collateral agent hereunder and under the DIP Financing Orders,
and any successor collateral agent appointed under Section 5 hereof to act on
behalf of the Secured Parties with respect to the Collateral.

                  "Collection Accounts" means the following bank accounts: the
Canadian Accounts, account number 314994 of EOTT OLP with Southwest Bank,
account number 315001 of EOTT Pipeline with Southwest Bank, and account number
316423 of EOTT Liquids with Southwest Bank.

                                       3
<PAGE>

                  "Concentration Account" means account number 3582-058765-001
of EOTT OLP with SCB into which the funds in the Collection Accounts shall be
transferred.

                  "Control Agreement" means any lock-box agreement, control
agreement, or agency agreement among any of the Debtors, the Collateral Agent,
and the banks with which the Authorized Accounts are maintained (including
without limitation the Bank Agency and Control Agreement dated December 21,
2001, among EOTT OLP, EOTT Liquids, EOTT Pipeline, SCB and Southwest Bank), as
each of the same may be amended, supplemented or otherwise modified from time to
time. Promptly after the execution hereof, SCB and the Debtors shall cause such
Bank Agency and Control Agreement to be amended to reflect SCB's rights and
duties hereunder as Collateral Agent.

                   "Credit Documents" means collectively, the following
agreements as the same may be amended, restated, supplemented or otherwise
modified from time to time: the LC Agreement, the other "Credit Documents" as
defined therein, the Term Loan Agreement, the other "Credit Documents" as
defined therein, the Purchase Agreements and the documents and agreements
entered into pursuant thereto, this Agreement, and all Security Documents and
Orders, in each case whether now existing or hereafter executed and delivered.

                  "Debt Service Payment Account" means a new bank account to be
established promptly after the date hereof with SCB, to be used to pay amounts
owing to the Secured Parties.

                  "Debtors" means the Borrowers and the Guarantors.

                  "Default" means the occurrence of any event or condition,
which with the giving of notice or the lapse of time, or both, would constitute
an Actionable Default.

                  "Designated Assets" means the following assets: (a) the MTBE
Facility in Harris County, Texas, (b) the Mont Belvieu Storage Facility and Grid
in Chambers, Harris and Galveston Counties, Texas, and (c) the gas processing,
storage and transportation facilities at Tupman, Kern County, California.

                  "DIP Financing Orders" means the "Second Interim Order" and
the "Final Order", as such terms are defined in the LC Agreement and the Term
Loan Agreement.

                  "Disbursement Accounts" means the Canadian Accounts and the
following controlled disbursement accounts established by one or more of the
Debtors with Southwest Bank:

                                    888802226
                                    888802239
                                    888802242
                                    888802255
                                    888802320
                                    888802918

                  "Enforcement Action" means (a) any action that the Collateral
Agent may take, whether hereunder or under any of the Security Documents and
Orders, to exercise remedies or

                                       4
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other rights against Collateral following the occurrence of an Actionable
Default or (b) any action that SCTSC may take to enforce its rights and remedies
against the Linefill under the Crude Oil Purchase Agreement following the
occurrence of a default thereunder by EOTT OLP, provided that none of the
following shall constitute Enforcement Actions: (i) actions taken by the
Collateral Agent with respect to the Authorized Accounts pursuant to Section 3
hereof, (ii) acceleration of any of the Secured Obligations, (iii) actions taken
by SCTSC to exercise its rights and remedies under the Receivables Purchase
Agreement, and (iv) actions taken by any of the Secured Parties to seek specific
performance of any covenant in any of the Credit Documents.

                  "Funding Account" means account number 336041 established by
EOTT OLP with Southwest Bank.

                   "GAAP" means generally accepted accounting principles in the
United States of America from time to time in effect.

                   "Koch Payment" means each payment made by Koch Petroleum
Group L.P. or any of its affiliates with respect to any account owed by Koch
Petroleum Group L.P. or its affiliates to EOTT LLP or the other Debtors that is
sold to SCTSC pursuant to the Receivables Purchase Agreement.

                  "LC Agent" means Standard Chartered Bank, in its capacity as
LC Agent under the LC Agreement, and any successor LC Agent appointed
thereunder.

                  "LC Collateral Account" means a new bank account to be
established promptly after the date hereof with SCB, to be used to hold cash
collateral as provided herein.

                  "LC Exposure" means, at any time in question, the sum of all
amounts paid by LC Issuer on drafts or demands for payment drawn or made under
or purported to be under any Letter of Credit plus the maximum amounts LC Issuer
might then or thereafter be called upon to advance under all Letters of Credit
then outstanding.

                  "LC Issuer" means Standard Chartered Bank, in its capacity as
LC Issuer under the LC Agreement, and any successor LC Issuer appointed
thereunder.

                  "LC Obligations" means, at any time in question, any and all
indebtedness, liabilities and obligations of every kind, nature and description
owing by any Debtor to the LC Issuer, the LC Agent, or any LC Participant, or
any of them (however evidenced) under or pursuant to the LC Agreement or the
other "Credit Documents" (as defined in the LC Agreement), whether now existing
or hereafter arising, whether direct or indirect, absolute or contingent, joint
and/or several, due or not due, primary or secondary, liquidated or
unliquidated, secured or unsecured, or on original, renewed or extended terms
and whether arising directly or acquired by the LC Issuer, the LC Agent, or any
LC Participant from any other party to such "Credit Documents" (including,
without limitation, participations or interests in the obligations of any Debtor
to others), whether for principal, interest, fees, expenses, indemnities or
other amounts and whether incurred by any Debtor as principal, surety, endorser,
guarantor, accommodation party, indemnitor or otherwise.

                                       5
<PAGE>

                  "LC Participants" means the Persons that from time make up the
"LC Participants" under the LC Agreement.

                  "Letters of Credit" means the letters of credit issued under
and in compliance with the LC Agreement, in an aggregate face amount not to
exceed $325,000,000 at any time.

                  "Linefill" means the inventory of crude oil, refined petroleum
products or natural gas liquids sold by EOTT OLP to SCTSC under the Crude Oil
Purchase Agreement.

                  "Linefill Sales" means (a) any sales and delivery from time to
time of the Linefill pursuant to the permanent shutdown and purging of pipeline
or storage assets, (b) any sales by the Debtors that reduce the crude oil,
refined petroleum products or natural gas liquids in the Debtors' pipeline and
storage assets to amounts below those required in the Crude Oil Purchase
Agreement, (c) any sales of the Linefill in conjunction with the sale of the
pipelines or storage assets in which the Linefill is stored, and (d) any sales
of the Linefill by SCTSC pursuant to the Crude Oil Repurchase Agreement.

                  "Matured LC Obligations" means all amounts paid by LC Issuer
on drafts or demands for payment drawn or made under or purposed to be under any
Letter of Credit.

                  "Maturity Date" means the earlier to occur of (i) March 31,
2003 and (ii) the effective date of a reorganization plan of the Debtors that
has been confirmed by an order of the Bankruptcy Court.

                  "Monthly Payment Date" means the first Business Day of each
month.

                  "Notice of Actionable Default" means (a) a written notice
stating that an Actionable Default has occurred that has not been remedied, sent
by either the LC Agent or the Term Lender Agent to the other and to the
Collateral Agent, or (b) a written notice stating that a default that has not
been remedied has occurred under the Crude Oil Purchase Agreement and that any
applicable grace period has expired, sent by SCTSC to both LC Agent and the Term
Lender Agent.

                  "Overdraft Obligations" means any obligations or liabilities
of any Debtor to pay to SCB the amount of any amounts advanced to such Debtor by
SCB on account of any overdraft or similar extension of credit honored by SCB in
its capacity as depository bank for such Debtor or in its capacity as Collateral
Agent, along with any interest, fees, expenses, and other amounts due by the
Debtors to SCB in connection therewith.

                  "Percentage of Exposure" means, at the time in question, with
respect to any Term Lender or LC Participant or SCTSC, its percentage share of
the total Tier-A Obligations and Tier-B Obligations at such time.

                  "Person" means an individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority or entity of
whatever nature.

                                       6
<PAGE>

                  "Proceeds" means "proceeds", as defined in the UCC, and, in
any event, shall include, but not be limited to, (a) any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to any of the Debtors from
time to time with respect to any of the Collateral, (b) any and all payments (in
any form whatsoever) made or due and payable to any of the Debtors from time to
time in connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental Authority
and (c) any and all other amounts from time to time paid or payable under or in
connection with any of the Collateral.

                  "Purchase Agreements" means the Crude Oil Purchase Agreement
and the Receivables Purchase Agreement.

                  "Required Secured Parties" means at any date of determination
(a) at any time prior to the Maturity Date when no Actionable Default exists or,
when an Actionable Default exists, at any time prior to the 61st day following
the sending of a Notice of Actionable Default with respect thereto, both of the
Administrative Agents, and (b) at any time after the Maturity Date, or at any
time prior to the Maturity Date whenever an Actionable Default has continued to
exist for at least 60 days following the sending of a Notice of Actionable
Default with respect thereto, either of the Administrative Agents.

                  "SCB" means Standard Chartered Bank.

                  "SCTSC Collection Account" means the account established by
SCTSC with SCB for the purpose of collecting the Koch Payments and any payments
from Linefill Sales.

                  "SCTSC Shortfall Obligations" means (a) any unpaid amounts
owing to SCTSC for recovery of its purchase price paid under either of the
Purchase Agreements that remain after SCTSC has made all efforts customary in
the industry (consistent with applicable restrictions under this Agreement) to
collect the amounts owing to it under such Purchase Agreement, and (b) any other
amounts owing to SCTSC under either or both of the Purchase Agreements that
remain unpaid after SCTSC has made such customary collection efforts.

                  "Secured Obligations" means all LC Obligations, all Term Loan
Obligations, all SCTSC Shortfall Obligations, all Overdraft Obligations, and all
obligations owed by any of the Debtors under this Agreement or any of the
Security Documents and Orders to any of the Secured Parties in their capacity as
such.

                  "Secured Parties" means all of the following: the LC
Participants, the LC Issuer, the LC Agent, the Term Lenders, the Term Lender
Agent, SCTSC, and the Collateral Agent.

                  "Security Documents and Orders" means this Agreement, the DIP
Financing Orders, any additional orders from time to time given by the
Bankruptcy Court to implement and enforce the preceding orders, the Lockbox
Agreements, and any mortgage, security agreement, pledge agreement or other
collateral security agreement from time to time executed and delivered to or for
the benefit of the Collateral Agent to secure or assure payment of the Secured
Obligations.

                                       7
<PAGE>

                  "Southwest Bank" means Southwest Bank of Texas, N.A. or any
successor bank from time to time approved by the Bankruptcy Court.

                  "Term Lender Agent" means Lehman Brothers Inc, in its capacity
as Term Lender Agent under the Term Loan Agreement, and any successor Term
Lender Agent appointed thereunder.

                  "Term Lenders" means the Persons that from time make up the
"Term Lenders" under the Term Loan Agreement.

                  "Term Loan Obligations" means, at any time in question, any
and all indebtedness, liabilities and obligations of every kind, nature and
description owing by any Debtor to the Term Lender Agent or any Term Lender, or
any of them (however evidenced) under or pursuant to the Term Loan Agreement or
the other "Credit Documents" (as defined in the Term Loan Agreement), whether
now existing or hereafter arising, whether direct or indirect, absolute or
contingent, joint and/or several, due or not due, primary or secondary,
liquidated or unliquidated, secured or unsecured, or on original, renewed or
extended terms and whether arising directly or acquired by the Term Lender Agent
or any Term Lender from any other party to such "Credit Documents" (including,
without limitation, participations or interests in the obligations of any Debtor
to others), whether for principal, interest, fees, expenses, indemnities or
other amounts and whether incurred by any Debtor as principal, surety, endorser,
guarantor, accommodation party, indemnitor or otherwise.

                  "Tier-A Obligations" means, at any time, the Tier-A Standard
Chartered Exposure at such time and the Tier-A Term Loan Exposure at such time.

                  "Tier-A Standard Chartered Exposure" means, at any time, the
product of the following formula:

                  [(A + B) - C] + D

where "A" is the amount of the unpaid Overdraft Obligations at such time
(excluding any interest, fees, expenses, and amounts other than advances that
are due by the Debtors to SCB in connection therewith), "B" is the amount of the
LC Exposure at such time, "C" is $300,000,000, and "D" is the product of (i) the
sum of that portion of the Overdraft Obligations consisting of interest, fees,
expenses, and amounts other than advances plus that portion of the LC
Obligations other than the LC Exposure, multiplied by (ii) a fraction whose
numerator is (A + B) - C and whose denominator is A + B.

                  "Tier-A Term Loan Exposure" means, at any time, the unpaid
principal balance of the Tier-A Term Loans at such time, plus any interest,
fees, expenses and other Term Loan Obligations accrued at such time with respect
to the Tier-A Term Loans.

                  "Tier-A Term Loans" means the Term Loans in the original
aggregate principal amount of $50,000,000 that are designated as such pursuant
to the Term Loan Agreement.

                  "Tier-B Obligations" means, at any time, the Tier-B Standard
Chartered Exposure at such time and the Tier-B Term Loan Exposure at such time.

                                       8
<PAGE>

                  "Tier-B LC Exposure" means, at any time, the amount of the LC
Obligations as such time, excluding the amount of LC Obligations included in the
Tier-A Standard Chartered Exposure.

                  "Tier-B Standard Chartered Exposure" means, at any time, the
Tier-B LC Exposure plus the SCTSC Shortfall Obligations.

                  "Tier-B Term Loan Exposure" means, at any time, the amount of
the Term Loan Obligations at such time, excluding the Tier-A Term Loan Exposure.

                  "Tier-B Term Loans" means the Term Loans in the original
aggregate principal amount of $25,000,000 that are designated as such pursuant
to the Term Loan Agreement.

                  "Triggering Event" means any of the following: (a) the giving
of an Acceleration Notice, (b) the giving of a written notice by the LC Agent on
behalf of the LC Participants stating that an "Event of Default" has occurred
under the LC Agreement that has not been remedied and that the LC Agent has
terminated the obligation of the LC Issuer to issue Letters of Credit
thereunder, and (c) the giving of a written notice by the Term Lender Agent
pursuant to Section 3.2(d) below, electing to designate as a Triggering Event
drawings on Letters of Credit in excess of $15,000,000 in a particular calendar
month.

                  "UCC" means the Uniform Commercial Code as in effect in the
State of New York from time to time.

                  1.2. Other Definitional Provisions.

                  (a) As used herein, and any certificate or other document made
or delivered pursuant hereto, accounting terms relating to any of the Debtors
not defined in subsection 1.1, to the extent not defined, shall have the
respective meanings given to them under GAAP.

                  (b) The words "hereof', "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Section,
subsection, Schedule and Exhibit references are to this Agreement unless
otherwise specified.

                  (c) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.

                  SECTION 2. COLLATERAL AND ACTIONABLE DEFAULTS

                  2.1. Security Interests and Liens in the Collateral.

                  (a) The Bankruptcy Court has, pursuant to the DIP Financing
Orders, ordered the grant of the "Postpetition Liens", as defined in each DIP
Financing Order, to the Collateral Agent to secure the Secured Obligations. To
further secure the payment, performance and observance in full of all of the
Secured Obligations, each Debtor hereby ratifies and confirms such action by the
Bankruptcy Court and grants to the Collateral Agent for the benefit of all
Secured Parties a continuing security interest in, a lien upon, and a right of
set-off against, and

                                       9
<PAGE>

each such Debtor hereby assigns, transfers, pledges and sets over to the
Collateral Agent, all of such Debtor's Collateral. All such Collateral shall be
security for the payment, performance and observance of all Secured Obligations,
and the liens and security interests of the Collateral Agent shall have the
priority provided in the DIP Financing Orders. In addition, any liens and
security interests that have been granted in the Security Documents and Orders
to any Secured Party other than the Collateral Agent shall be deemed transferred
to and held by the Collateral Agent, for the benefit of all of the Secured
Parties to secure the Secured Obligations.

                  (b) The DIP Financing Orders provide that the liens and
security interests granted thereunder to the Collateral Agent are fully
perfected, and each Debtor hereby acknowledges and agrees that this is correct.
Nonetheless, the Collateral Agent is hereby specifically authorized by the
Debtors to file financing statements describing the Collateral provided for in
the Security Documents and Orders in each jurisdiction that it deems
appropriate. Each of the Debtors further acknowledges and agrees that (a) any
and all financing statements filed in connection with any other previously or
now existing credit facilities (including, without limitation, the Prepetition
Credit Agreement referred to in the DIP Financing Orders) naming Standard
Chartered Bank, as administrative agent (or otherwise as a representative for
itself and other financial institutions), as secured party, and such Debtor, as
debtor, shall be effective to perfect the Collateral Agent's security interest
granted by such Debtor pursuant to this Agreement to the extent that such
security interest may be perfected by the filing of financing statements and
(ii) such prior filings represent pre-filings of financing statements for
purposes of so perfecting the security interests granted by the Debtors
hereunder. Until all of the Secured Obligations have been finally paid and
satisfied in full, the provisions of this section shall continue to apply, and
such pre-filings shall continue to be effective to the fullest extent permitted
by law and shall not be subject to any right of termination in respect of the
security interests granted herein, whether any such other credit facilities are
to be discharged with the proceeds of any of the Loans, or are to continue
independently.

                  (c) To further secure the Secured Obligations, whenever
requested by the Collateral Agent, the LC Agent, or the Term Lender Agent, each
acting in its sole and absolute discretion, the Debtors will deliver - to or for
the benefit of the Collateral Agent - Control Agreements, mortgages, deeds of
trust, security agreements, financing statements, continuation statements,
extension agreements, acknowledgements, other Security Documents, and amendments
to any of the foregoing, in each case in form and substance satisfactory to the
Person requesting the same and to the Collateral Agent, for the purpose of
granting, evidencing of record, confirming, or perfecting liens and security
interests in favor of the Collateral Agent in any Collateral now owned or
hereafter acquired by any Debtor. Without limiting the foregoing, the Debtors
will, if so requested, deliver amendments to the mortgages previously given to
Standard Chartered Bank and presently of record in order to confirm that such
mortgages, deeds of trust, and other similar instruments evidence the liens and
security interests granted under the DIP Financing Orders and hereunder, and if
any Debtor shall at any time acquire a commercial tort claim that such Debtor
reasonably believes based upon then-current information could result in a
judgment in favor of such Debtor in excess of $25,000, such Debtor shall
promptly notify the Collateral Agent in a writing signed by such Debtor of the
brief details thereof and confirm to the Collateral Agent in such writing that
such commercial tort claim (and the Proceeds thereof) is subject to the security
interests provided herein, with such writing to be in form and substance
reasonably satisfactory to the Collateral Agent.

                                       10
<PAGE>

                  (d) To further secure the repayment of the Secured
Obligations, each Debtor hereby grants to the Collateral Agent a security
interest, a lien and a right of offset, each of which shall be in addition to
all other interests, liens and rights of the Collateral Agent at common law,
under the Credit Documents or otherwise, and each of which shall be upon and
against (i) any and all moneys, securities or other property (and the proceeds
therefrom) of such Debtor now or hereafter held or received by or in transit to
the Collateral Agent from or for the account of such Debtor, whether for
safekeeping, custody, pledge, transmission, collection or otherwise, (ii) any
and all deposits (general or special, time or demand, provisional or final) of
such Debtor with the Collateral Agent, including without limitation all deposits
in the Authorized Accounts, and (iii) any other credits and claims of such
Debtor at any time existing against the Collateral Agent. The remedies of
foreclosure and offset are separate and cumulative, and either may be exercised
independently of the other without regard to procedures or restrictions
applicable to the other.

                  (e) Certain Credit Documents may permit other liens or
security interests to exist on the Collateral, but no such permission shall be
construed as an agreement to subordinate the liens and security interests in
favor of the Collateral Agent to such other liens and security interests.

                  2.2. General Authority of the Collateral Agent over the
Collateral. Each of the Debtors hereby irrevocably constitutes and appoints the
Collateral Agent for the benefit of the Secured Parties and any officer or agent
thereof, with full power of substitution as among such officers and agents, as
its true and lawful attorney-in-fact with full power and authority in the name
of such Debtor or in its own name, from time to time in the Collateral Agent's
discretion to take any and all appropriate action and to execute any and all
documents and instruments which may be necessary or desirable to carry out the
terms of this Agreement and the Security Documents and Orders and to accomplish
the purposes hereof and thereof, including without limitation the right and
power to: (a) receive, take, endorse, assign, deliver, accept, and deposit, in
the name of the Collateral Agent or such Debtor, any and all cash, checks,
commercial paper, drafts, remittances and other instruments and documents
relating to the Collateral, (b) receive, open and dispose of all mail addressed
to such Debtor and notify postal authorities to change the address for delivery
thereof to such address as the Collateral Agent may designate, (c) transmit to
account debtors and any bailees notice of the interest of the Collateral Agent
in the Collateral or request from account debtors or such bailees at any time,
in the name of such Debtor or the Collateral Agent or any designee of the
Collateral Agent, information concerning the Collateral and any amount owing
with respect thereto, (d) notify account debtors to make payment directly to the
Collateral Agent for deposit into the Concentration Account, (e) take or bring,
in the name of the Collateral Agent or such Debtor, all steps, actions, suits or
proceedings deemed by the Collateral Agent necessary or desirable to effect
collection of the Collateral, (f) enter such Debtor's premises for the purpose
of inspecting, verifying, auditing, maintaining, preserving, protecting and
removing the Collateral, (g) obtaining, adjusting, compromising, settling and
canceling insurance policies on the Collateral and any claims thereunder, and
(h) otherwise exercise, without notice to or further assent by the Debtors, all
remedies provided for by the Security Documents and Orders. Each Debtor hereby
releases the Collateral Agent, its officers, employees and designees from any
Liability arising from any act or acts under the authorizations granted under
this Agreement, the other Credit Documents or in furtherance hereof or thereof,
whether by omission or commission, and whether based upon any error of

                                       11
<PAGE>

judgment or mistake of law or fact, and the Debtors hereby ratify all that the
Collateral Agent shall lawfully do or cause to be done by virtue hereof. This
power of attorney is a power coupled with an interest and is irrevocable.

                  2.3. Notices of Actionable Defaults; Directions as to
Enforcement Actions.

                  (a) Prior to the LC Agent and SCTSC declaring pursuant to the
terms of the LC Agreement or the Purchase Agreements, as applicable, that any
and all of the Debtors' obligations thereunder are to become due and payable
prior to the maturity thereof, each of the LC Agent and SCTSC will give five
days' prior notice of its intention to do so to the Term Lender Agent. In
addition, prior to the Term Lender Agent declaring pursuant to the terms of the
Term Loan Agreement that any and all of the Debtors' obligations thereunder are
to become due and payable prior to the maturity thereof, the Term Lender Agent
will give five days' prior notice of its intention to do so to the LC Agent.
Upon receipt of such notice, the LC Agent, the Term Lender Agent or SCTSC, as
applicable, shall have the right to declare, pursuant to the terms of the LC
Agreement, the Term Loan Agreement or the Purchase Agreements, as applicable,
that any and all of the Debtors' obligations thereunder are also to become
immediately due and payable at the same time.

                  (b) Promptly upon receipt by the Collateral Agent of a Notice
of Actionable Default, the Collateral Agent shall simultaneously notify the LC
Agent (if other than the Collateral Agent), SCTSC, and the Term Lender Agent of
the receipt and the contents thereof, and the LC Agent and the Term Lender Agent
shall promptly send copies of such notice to the LC Participants and the Term
Lenders, respectively. So long as such Notice of Actionable Default is in
effect, the Collateral Agent shall exercise the rights and remedies provided in
this Agreement and in the Security Documents and Orders as directed by the
Required Secured Parties, except as otherwise provided herein. Unless otherwise
expressly authorized, herein or in any of the DIP Financing Orders, the
Collateral Agent is not authorized to take any Enforcement Action unless a
Notice of Actionable Default is in effect and the Collateral Agent has obtained
the requisite consent of the Required Secured Parties as provided herein and the
Collateral Agent and the Administrative Agents have complied with any applicable
notice requirements of paragraph 24 of the DIP Financing Orders.

                  (c) A Notice of Actionable Default delivered by an
Administrative Agent shall become effective upon actual receipt thereof by the
Collateral Agent and the other Administrative Agent. A Notice of Actionable
Default, once effective, shall remain in effect unless and until the Collateral
Agent actually receives a written notice of cancellation as provided in Section
2.1(d).

                  (d) The Administrative Agent giving a Notice of Actionable
Default shall be entitled to cancel it by delivering a written notice of
cancellation to the Collateral Agent and the other Administrative Agent. The
Collateral Agent shall immediately notify the Debtors of the cancellation of any
Notice of Actionable Default.

                  (e) Unless the Term Lender Agent consents thereto, SCTSC shall
not take any Enforcement Action with respect to the Linefill prior to the
earliest of (i) the Maturity Date, (ii) the 61st day following the sending of a
Notice of Actionable Default by SCTSC to the Term

                                       12
<PAGE>

Lender Agent, and (iii) the date on which the Collateral Agent is directed by
Required Lenders to take any Enforcement Action against the Collateral.

                  2.4. Right to Initiate Judicial Proceedings; Appointment of
Receiver. If a Notice of Actionable Default is in effect, the Collateral Agent,
subject to the provisions of Section 2.3(b) and of the Security Documents and
Orders, (a) shall have the right and power to institute and maintain such suits
and proceedings as it may deem appropriate to protect and enforce the rights
vested in it by this Agreement and each of the Security Documents and Orders and
(b) may either after entry, or without entry, proceed by suit or suits at law or
in equity to enforce such rights and to foreclose upon the Collateral and to
sell all or, from time to time, any of the Collateral under the judgment or
decree of a court of competent jurisdiction.

                  2.5. Exercise of Powers; Instructions of Required Secured
Parties.

                  (a) All of the powers, remedies and rights of the Collateral
Agent as set forth in this Agreement may be exercised by the Collateral Agent in
respect of any of the Security Documents and Orders as though set forth in full
therein, and, upon the direction of the Required Secured Parties, all of the
powers, remedies and rights of the Collateral Agent and the Secured Parties as
set forth in any of the Security Documents and Orders may be exercised by the
Collateral Agent from time to time as herein and therein provided. In the event
of any inconsistency between this Agreement and any of the Security Documents
and Orders, the provisions of the DIP Financing Orders first, and then this
Agreement second, shall prevail.

                  (b) The Required Secured Parties shall have the right, by one
or more instruments in writing executed and delivered to the Collateral Agent,
to direct the time, method and place of conducting any proceeding for taking or
refraining from taking any Enforcement Action available to the Collateral Agent;
provided that (i) such direction shall not conflict with any provision of law or
of this Agreement or of any of the Security Documents and Orders, and (ii) the
Collateral Agent shall be adequately secured and indemnified as provided in
Section 5.11 and (iii) the written consent of all of the Secured Parties shall
be required before the Collateral Agent may foreclose on any real property owned
by any Debtor that the Collateral Agent knows is contaminated with materials
that could reasonably be expected to give rise to any environmental liability in
excess of $50,000. At any time when either Administrative Agent acting alone
constitutes the Required Secured Parties, the Administrative Agents shall
attempt to coordinate their directions to the Collateral Agent, but each
Administrative Agent shall nonetheless be entitled to direct the Collateral
Agent to take specific affirmative actions to realize upon the Collateral and
neither Administrative Agent shall be entitled to direct the Collateral Agent to
cease taking any such affirmative action to realize upon the Collateral that the
Collateral Agent has been directed to take by the other Administrative Agent.
Nothing in this Section 2.4(b) shall impair the right of the Collateral Agent in
its discretion to take any action which it deems proper and which is not
inconsistent with the written instructions of the Required Secured Parties. In
the absence of such direction, the Collateral Agent shall have no duty to take
or refrain from taking any action unless explicitly required herein.

                  (c) Upon the occurrence and during the continuance of any
Actionable Default with respect to which the Required Secured Parties have
requested the Collateral Agent to take one or more Enforcement Actions, the
Collateral Agent shall provide both the Debtors

                                       13
<PAGE>

and the Official Creditors Committee in the Debtors' bankruptcy proceedings with
five (5) days prior notice of its intention to take such Enforcement Actions,
which such notice shall specify the Actionable Default and the basis therefor
and will be given by the Collateral Agent via facsimile or messenger service to
counsel to both the Debtors and such Creditors' Committee. During such five day
notice period, the Debtors have the right to seek an emergency hearing before
the Bankruptcy Court for the sole purpose of determining whether an Actionable
Default has occurred. Unless during such five day notice period the Bankruptcy
Court determines that an Actionable Default has not occurred, the Collateral
Agent shall upon the expiration of such five day notice period have relief from
the automatic stay and may take such Enforcement Action, including without
limitation any of the following:

                  (i) The Collateral Agent, at its discretion and without
         limitation, may enter upon any premises on or in which the Collateral
         may be located and take possession thereof and remove all or any of the
         Collateral from such premises for the purposes of effecting the sale,
         foreclosure or other disposition thereof or for any other purpose. Each
         Debtor shall, at the request of the Collateral Agent, assemble the
         Collateral at such place or places as the Collateral Agent designates
         in its request. The Collateral Agent shall have the right to take
         possession of the Collateral or any portion thereof pursuant to the UCC
         or other applicable law. In the event the Collateral Agent institutes
         an action to recover any Collateral, or seeks recovery of any
         Collateral by way of prejudgment remedy, each Debtor waives the posting
         of any bond which might otherwise be required.

                  (ii) The Collateral Agent may, at its discretion and without
         limitation, (1) collect, foreclose, receive, appropriate, set off and
         realize upon any and all Collateral, or (2) sell, lease, transfer,
         assign, deliver or otherwise dispose of any and all Collateral
         (including, without limitation, entering into contracts with respect
         thereto and by public or private sales at any exchange, broker's board,
         premises of any Debtor, office of the Collateral Agent or elsewhere) at
         such prices or terms as the Collateral Agent may deem reasonable, for
         cash, upon credit or for future delivery, with any Secured Party having
         the right to purchase the whole or any part of the Collateral at any
         such public sale, all of the foregoing being free from any right or
         equity of redemption of any Debtor, which right or equity of redemption
         is hereby expressly waived and released by each Debtor. If any of the
         Collateral is sold or leased by the Collateral Agent upon credit terms
         or for future delivery, the Secured Obligations shall not be reduced as
         a result thereof until indefeasible payment therefor is finally
         collected by the Collateral Agent. Ten (10) days prior notice by the
         Collateral Agent to the Debtor owning any Collateral, designating the
         time and place of any public auction of such Collateral or the time
         after which any private sale or other disposition of such Collateral
         may take place, shall be deemed to be reasonable notice thereof, and
         each Debtor waives any other notice.

                  (d) The Debtors shall reimburse the Collateral Agent, on
demand, for all of its out-of-pocket costs and expenses in carrying out its
duties hereunder. The costs and expenses incurred or paid by the Collateral
Agent with respect to any Enforcement Action may include, without limitation,
(i) expenses of retaking, holding, assembling, preparing for sale or lease,
advertising, storing, repairing, completing, selling, leasing, foreclosing or
otherwise disposing of the Collateral, (ii) premiums on bonds and undertakings,
(iii) sales, use and other taxes, (iv) fees and expenses of custodians,
warehousemen, brokers, appraisers, auctioneers, sheriffs and others,

                                       14
<PAGE>

(v) legal expenses and attorneys' fees, (vi) travel and hotel expenses, and
(vii) all other expenses that may be incurred or paid by the Collateral Agent in
attempting to collect the Secured Obligations and to foreclose upon the
Collateral.

                  (e) Subject to the directions of the Required Secured Parties,
the Collateral Agent shall have the right at its sole discretion to determine
which Enforcement Actions to exercise and the order of their exercise, and the
Collateral Agent may at any time pursue, relinquish, subordinate, modify or take
any other action with respect thereto, without in any way modifying or affecting
any of the Secured Obligations. The Collateral Agent may, at any time or times,
proceed directly against any or all Debtors or any other guarantor or other
obligor on or in respect of the Secured Obligations to enforce payment of the
Secured Obligations and shall not be required to take any action of any kind to
preserve, collect or protect any Debtor's rights in the Collateral.

                  (f) Section 9-320 of the UCC provides for certain releases of
Collateral constituting personal property upon the sale thereof, and Sections
10(f)(i) and (ii) of the Term Loan Agreement and the LC Agreement authorize the
Debtors to make certain sales of equipment and inventory without the further
consent of the Secured Parties; such assets shall upon such sale be free of any
liens or security interests held by the Collateral Agent. In addition, if the
assets subject to the Purchase Agreements are sold by SCTSC to unaffiliated
third parties pursuant to the exercise of its rights thereunder, such assets
shall upon such sale be free of any liens or security interests held by the
Collateral Agent. If a Debtor requests the Collateral Agent to confirm that any
of the foregoing sales was made free of the Collateral Agent's liens and
security interests, the Collateral Agent may give a release of such Collateral
without the need for any additional authorization from the Secured Parties. All
other releases of Collateral must be given in writing by the Collateral Agent
and may be given only with the consent of the LC Agent and the Term Lender
Agent; provided that the Debtors may, without such consent, sell the Designated
Assets for cash in arm's length transactions with Persons that are not their
affiliates.

                  (f) The Collateral Agent shall deposit into the Concentration
Account all Proceeds and other cash that it obtains in any manner with respect
to the Collateral.

                  2.6. Remedies Not Exclusive.

                  (a) No remedy conferred upon or reserved to the Collateral
Agent herein on its behalf or on behalf of the Secured Parties or in the
Security Documents and Orders is intended to be exclusive of any other remedy or
remedies, but every such remedy shall be cumulative and shall be in addition to
every other remedy conferred herein or in any of the Security Documents and
Orders or now or hereafter existing at law or in equity or by statute.

                  (b) No delay or omission by the Collateral Agent to exercise
any right, remedy or power hereunder or under any of the Security Documents and
Orders shall impair any such right, remedy or power or shall be construed to be
a waiver thereof, and every right, power and remedy given by this Agreement or
any of the Security Documents and Orders to the Collateral Agent may be
exercised from time to time and as often as may be deemed expedient by the
Collateral Agent.

                                       15
<PAGE>

                  (c) If the Collateral Agent shall have proceeded to enforce
any right, remedy or power under this Agreement or any of the Security Documents
and Orders and the proceeding for the enforcement thereof shall have been
discontinued or abandoned for any reason or shall have been determined adversely
to the Collateral Agent, then the Debtors, the Collateral Agent and the Secured
Parties shall, subject to any determination in such proceeding, severally and
respectively be restored to their former positions and rights hereunder or
thereunder and in all other respects, and thereafter all rights, remedies and
powers of the Collateral Agent shall continue as though no such proceeding had
been taken.

                  (d) All rights of action and of asserting claims upon or under
this Agreement and the Security Documents and Orders may be enforced by the
Collateral Agent without the possession of any document or instrument evidencing
or relating to any Secured Obligation or the production thereof at any trial or
other proceeding relative thereto; any suit or proceeding instituted by the
Collateral Agent shall be, subject to Section 5.5(c), brought in its name as
Collateral Agent on behalf of the Secured Parties; and any recovery of judgment
shall be held as part of the Collateral and distributed in accordance with the
terms of this Agreement.

                  2.7. Waiver and Estoppel.

                  (a) Each of the Debtors agrees, to the extent it may lawfully
do so, that it will not at any time in any manner whatsoever claim or take the
benefit or advantage of, any appraisement, valuation, stay, extension,
moratorium, turnover or redemption law, or any law permitting it to direct the
order in which the Collateral shall be sold, now or at any time hereafter in
force, which may delay, prevent or otherwise affect the performance or
enforcement of this Agreement or any of the Security Documents and Orders and
hereby waives all benefit or advantage of all such laws and covenants, to the
extent that it may lawfully do so, that it will not hinder, delay or impede the
execution of any power granted to the Collateral Agent in this Agreement or any
of the Security Documents and Orders but will suffer and permit the execution of
every such power as though no such law were in force.

                  (b) Each of the Debtors, to the extent it may lawfully do so,
on behalf of itself and all who claim through or under it, including, without
limitation, any and all subsequent creditors, vendees, assignees and lienors,
waives and releases all rights to demand or to have any marshalling of the
Collateral upon any sale, whether made under any power of sale granted herein or
in any of the Security Documents and Orders or pursuant to judicial proceedings
or upon any foreclosure or any enforcement of this Agreement or any of the
Security Documents and Orders and consents and agrees that all the Collateral
may at any such sale be offered and sold as an entirety.

                  (c) Each of the Debtors waives, to the extent permitted by
applicable law, presentment, demand, protest and any notice of any kind
(including, without limitation, notice of intent to accelerate maturity or
notice of acceleration of maturity) in connection with this Agreement and the
Credit Documents and any action taken by the Collateral Agent with respect to
the Collateral. Each of the Debtors acknowledges that all of the Secured Parties
are relying on all documents, certificates and opinions that are delivered to
the Collateral Agent under this Agreement.

                                       16
<PAGE>

                  2.8. Limitation on Collateral Agent's Duty in Respect of
Collateral. Beyond its duties as to the custody thereof expressly provided
herein or in any of the Security Documents and Orders and to account to the
Secured Parties for Proceeds and other property received by it hereunder or
under any of the Security Documents and Orders, the Collateral Agent shall not
have any duty to the Debtors or to the Secured Parties as to any Collateral in
its possession or control or in the possession or control of any of its agents
or nominees, or any income thereon or as to the preservation of rights against
prior parties or any other rights pertaining thereto.

                  2.9. Limitation by Law. All rights, remedies and powers
provided herein may be exercised only to the extent that the exercise thereof
does not violate any applicable provision of law, and all the provisions hereof
are intended to be subject to all applicable mandatory provisions of law which
may be controlling and to be limited to the extent necessary so that they will
not render this Agreement invalid, unenforceable in whole or in part or not
entitled to be recorded, registered or filed under the provisions of any
applicable law.

                  SECTION 3. COLLECTIONS AND ACCOUNTS

                  3.1. Authorized Accounts.

                  (a) Establishment of Accounts. The Authorized Accounts have
been established or will be established within two Business Days after the date
hereof. Borrower will have no other bank accounts unless the Collateral Agent
consents and such other accounts are put under the control of the Collateral
Agent.

                  (b) Collateral Agent Control. From and after the Closing Date
and for so long as any LC shall be outstanding and until all amounts due or to
become due in respect of any of the Secured Obligations have been paid in full
in cash, each Authorized Account shall be maintained in the name of and under
the sole dominion and control of the Collateral Agent, except to the extent
otherwise contemplated herein. The Debtors' sole rights in the Authorized
Accounts will be (i) to permit automatic clearinghouse debits to the Collection
Accounts for the benefit of various taxing jurisdictions and payroll, but only
until the Collateral Agent notifies the Debtors to transfer all such deposits to
the Concentration Account, (ii) to make withdrawals from the Funding Account for
deposit into any of the Disbursement Accounts and to make payments out of the
Disbursement Accounts in compliance with the terms of the DIP Financing
Documents and the requirements of all applicable orders of the Bankruptcy Court
and (iii) to direct the Collateral Agent as to the investment of moneys held in
certain Authorized Accounts as permitted by Section 3.4(a). In no event shall
any amounts or Permitted Investments deposited into, or credited to, any
Authorized Account, be registered in the name of any Debtor, payable to the
order of any Debtor, or specially endorsed to any Debtor.

                  (c) Collection Accounts. Concurrently with the execution
hereof (or promptly thereafter), each Debtor shall instruct all account debtors
and other persons or entities that make payments to such Debtor on any accounts
or other rights to payment (including all proceeds of each purchase by SCTSC
pursuant to the Receivables Purchase Agreement and excluding only the Koch
Payments to be made to SCTSC and all purchase price payments for any Designated
Assets) to make such payments directly to one of the Collection Accounts or to
the Concentration Account. In addition to the foregoing, each Debtor agrees that
if any such

                                       17
<PAGE>

payments, or any proceeds of any Collateral, are nonetheless received by it,
such Debtor shall as promptly as possible deposit such proceeds into one of the
Collection Accounts or the Concentration Account. Until so deposited, all such
proceeds shall be held in trust by such Debtor for the Collateral Agent and
shall not be commingled with any other funds or property of such Debtor, and
such Debtor will not adjust, settle or compromise the amount or payment of any
such account or other right to payment or release wholly or partly any account
debtor or obligor thereof or allow any credit or discount thereon.

                  (d) Concentration Account. Except for the automatic
clearinghouse debits to the Collection Accounts as authorized under subsection
(b)(i) above, all collected amounts in the Collections Accounts shall be removed
and transferred to the Concentration Account on a nightly basis (provided that
(i) the Canadian Accounts may be swept on a monthly basis until the Collateral
Agent otherwise requests, (ii) Southwest Bank shall not be required to make any
such transfer of less than $10,000 and (iii) Southwest Bank may, from time to
time, withhold its reasonable and agreed fees for its services in connection
with such accounts). All such transfers to the Collateral Agent shall be made by
wire transfer of immediately available funds.

                  (e) Debt Service Payment Account. Each Administrative Agent
may direct the Collateral Agent to transfer funds from the Concentration Account
to the Debt Service Payment Account in amounts not exceeding (i) all payments
then due and payable on the Secured Obligations or expected to become due and
payable by the next Monthly Payment Date, plus (without duplication) (ii) any
excess of the LC Obligations over the Borrowing Base. To the extent of the
available funds in the Concentration Account, the Collateral Agent shall make
all such requested transfers into the Debt Service Payment Account. The
Collateral Agent shall apply all funds deposited into the Debt Service Payment
Account as provided in Section 3.2. Any funds on deposit in the Debt Service
Payment Account after such applications shall continue to be held in the Debt
Service Payment Account, if less than $1,000,000, and shall be transferred to
the Funding Account if $1,000,000 or more. Each Administrative Agent will
promptly furnish EOTT OLP with a copy of any direction to the Collateral Agent
given as provided above, specifying the amount and date of the transfer of funds
to the Debt Service Account.

                  (f) LC Collateral Account. The LC Collateral Account will be
funded with deposits from the Debt Service Payment Account, as provided in
Section 3.2. Upon the occurrence of any Triggering Event, all amounts then on
deposit in the LC Collateral Account shall be used to make distributions in
accordance with clauses FIRST, SECOND, and THIRD of Section 3.2(b) and all
amounts thereafter deposited in the LC Collateral Account shall be used as
provided in Section 3.2(b)(ii). Prior to the occurrence of any Triggering Event,
all amounts from time to time deposited in the LC Collateral Account shall be
held by the Collateral Agent and used from time to time to make payments on
account of Matured LC Obligations as described in the last sentence of Section
3.2(a). Any funds not so used shall continue to be held in the LC Collateral
Account, provided that on the first Business Day after each Monthly Payment
Date, if there are no Matured LC Obligations then outstanding and if the LC
Obligations do not then exceed the Borrowing Base, the Collateral Agent shall
transfer to the Concentration Account any funds remaining in the LC Collateral
Account.

                  (g) Funding and Disbursement Accounts. After making all
payments into the Debt Service Payment Account that are required above, the
Collateral Agent will transfer the

                                       18
<PAGE>

funds remaining in the Concentration Account into the Funding Account as
requested by the Borrowers. The Borrowers will transfer such funds from the
Funding Account to the various Disbursement Accounts and will use the funds in
the Disbursement Accounts to pay their accounts payable (including any payments
on the Secured Obligations that may be required due to shortfalls in the Debt
Service Payment Account), in accordance with the requirements of the Credit
Documents and all applicable orders of the Bankruptcy Court.

                  3.2. Payments from Debt Service Payment Account.

                  (a) Prior to Triggering Event.

                           (i) So long as no Triggering Event shall have
         occurred, the Collateral Agent shall on each Monthly Payment Date,
         based on the instructions it has received from each Administrative
         Agent, distribute all funds then on deposit in the Debt Service Payment
         Account in the following manner and order of priority:

                  FIRST, to the payment of expense reimbursements and
         indemnities then due and owing to the Secured Parties under this
         Agreement or the Credit Documents, with any partial payments being
         allocated to the Secured Parties in proportion to the amounts so due
         and owing;

                  SECOND, to the payment of all amounts then due and owing with
         respect to the Tier-A Term Loan Exposure and the Tier-A Standard
         Chartered Exposure, allocated in accordance with the amounts so due and
         owing;

                  THIRD, to the payment of all other Term Loan Obligations, LC
         Obligations, Overdraft Obligations, and SCTSC Shortfall Obligations
         then due and owing, allocated in accordance with the amounts so due and
         owing; and

                  FOURTH, for deposit in the LC Collateral Account, an amount
         equal to the excess, if any, of the LC Exposure over the Borrowing Base
         on such Monthly Payment Date (determined after giving effect to the
         payments described in clauses SECOND and THIRD above).

                  (ii) In addition, and notwithstanding the foregoing, to the
         extent that drawings are made on any Letters of Credit, the Collateral
         Agent may from time to time, but subject to Section 3.2(d) below,
         distribute funds from the Debt Service Payment Account (or any other
         Authorized Account) to the LC Agent, for the account of the LC Issuer,
         as needed to allow the Debtors to reimburse the LC Issuer for such
         drawings.

                  (b) After a Triggering Event.

                  (i) After any Triggering Event has occurred, the Collateral
         Agent shall (subject to the special applications provided for in
         Section 3.3), at each time that it distributes funds for application to
         the Secured Obligations, apply such funds in the following manner and
         order of priority:

                                       19
<PAGE>

                  FIRST, to the payment or reimbursement of the Collateral Agent
         for all reasonable costs, expenses, disbursements and losses which
         shall have been incurred by the Collateral Agent (i) in connection with
         the collection of such funds by the Collateral Agent and the
         administration of this Agreement, or (ii) for the exercise, protection
         or enforcement by the Collateral Agent of all or any of the rights,
         remedies, powers and privileges of the Collateral Agent under this
         Agreement and the other Credit Documents or in respect of the
         Collateral;

                  SECOND, to the payment of all Tier-A Term Loan Exposure and
         all Tier-A Standard Chartered Exposure at such time, allocated in
         accordance with the proportionate amounts of Tier-A Term Loan Exposure
         and Tier-A Standard Chartered Exposure that existed as of the effective
         time of such Triggering Event; and

                  THIRD, to the payment of all Tier-B Term Loan Exposure and all
         Tier-B Standard Chartered Exposure, allocated in accordance with the
         proportionate amounts of Tier-B Term Loan Exposure and Tier-B Standard
         Chartered Exposure that existed as of the effective time of such
         Triggering Event (provided that SCTSC may, by notice to the Collateral
         Agent and both Administrative Agents, elect to defer all of such
         payments on the Tier-B Obligations (or any portion of such payments
         acceptable to both Administrative Agents) for a period of up to 120
         days while SCTSC eliminates any contingencies in the calculation of the
         SCTSC Shortfall Obligations.

                  (ii) To the extent that any portion of the Tier-A Standard
         Chartered Exposure referred to in the foregoing clause SECOND consists
         of amounts that the LC Issuer might be called upon to advance under
         undrawn Letters of Credit rather than amounts actually owing, then the
         Collateral Agent shall deposit all amounts otherwise payable on account
         of such contingent advances into the LC Collateral Account and, if
         drawings are thereafter actually made on such undrawn Letters of
         Credit, the Collateral Agent shall distribute such funds to the LC
         Agent to be used to reimburse the LC Issuer for such drawings. To the
         extent that any portion of the Tier-B Standard Chartered Exposure
         referred to in the foregoing clause THIRD consists of amounts that the
         LC Issuer might be called upon to advance under undrawn Letters of
         Credit rather than amounts actually owing, then the Collateral Agent
         shall deposit all amounts otherwise payable on account of such
         contingent advances into the LC Collateral Account and, if drawings are
         thereafter actually made on such undrawn Letters of Credit, the
         Collateral Agent shall distribute such funds to the LC Agent to be used
         to reimburse the LC Issuer for such drawings. To the extent that any
         such Letters of Credit terminate without being drawn, the Collateral
         Agent shall use such funds to make distributions in accordance with the
         foregoing clauses FIRST, SECOND, and THIRD of this subsection (b).

                  (c) Payment Obligations Absolute. Payments on the Secured
Obligations must be made in accordance with the foregoing priorities whether or
not there are sufficient funds on deposit in the Debt Service Payment Account to
make all payments due on the Secured Obligations at the time in question, but
compliance with such priorities do not relieve Borrowers of their duty to
provide funds sufficient to make all payments of the Secured Obligations
whenever they become due.

                                       20
<PAGE>

                  (d) Matured LC Obligations; Optional Triggering Event. The LC
Issuer will notify the Borrowers, in accordance with its customary practices
(and will provide the Term Lender Agent with a copy of each such notice) of any
drawings made on Letters of Credit. If, during any calendar month, drawings are
made on Letters of Credit in an aggregate amount that exceeds $15,000,000, then
the Collateral Agent will suspend making distributions in excess of $15,000,000
to the LC Agent as provided in Section 3.2(a)(ii) and will instead retain in the
Debt Service Account the funds in excess of $15,000,000 that would have
otherwise been distributed to the LC Agent. The Collateral Agent will give
written notice of such suspension to each Administrative Agent, and the Term
Lender Agent (as instructed by the "Majority Term Lenders", as defined in the
Term Loan Agreement) will have up to ten Business Days from the receipt of such
notice to elect to designate such drawings in excess of $15,000,000 as a
Triggering Event or to elect not to designate such drawings in excess of
$15,000,000 as a Triggering Event. Any such election must be made in writing
given to the Collateral Agent, with copies given to the Debtors. (Failure to
give any such notice within such ten Business Day period will be deemed an
election not to designate such drawings as a Triggering Event.) Notwithstanding
anything herein or in the Credit Documents to the contrary, from the time such
suspension occurs until the Term Lender Agent (as directed by the Majority Term
Lenders) elects (or is deemed to have elected) whether or not to designate such
a Triggering Event: (i) the LC Issuer shall not be obligated to issue any
Letters of Credit or allow any Overdraft Obligations to be created, (ii) SCTSC
shall not be obligated to advance any funds under the Receivables Purchase
Agreement or remit to the Debtors any amounts then due by SCTSC to the Debtors,
(iii) the Debtors will not be obligated to reimburse such drawings in excess of
$15,000,000, and (iv) to the extent not in conflict with any applicable
bankruptcy law or orders of the Bankruptcy Court, the Debtors' rights to use
funds in the Disbursement Accounts shall be suspended; provided that if the Term
Lender Agent (as directed by the Majority Term Lenders) elects (or is deemed to
have elected) not to designate such drawings as a Triggering Event, then all
such obligations shall be restored and shall be promptly performed. The Debtors
will pay interest to the LC Issuer at the "Default Rate" provided for in the LC
Agreement on any reimbursement obligations for such drawings in excess of
$15,000,000 for the period of time that such reimbursements are deferred.

                  3.3. Special Payments. Notwithstanding the foregoing
provisions of Sections 3.1 and 3.2:

                  (a) Sales of Designated Assets. Borrower shall cause all
proceeds (net of costs of sale) from the sale of the Designated Assets to be
paid directly to the Collateral Agent for deposit into the Debt Service Payment
Account. Upon receipt, the Collateral Agent shall, on behalf of EOTT OLP,
provide the first $75,000,000 of cumulative proceeds to SCTSC (or as much
thereof as is needed) to (i) first, repay and retire the Crude Oil Purchase
Agreement in full (including associated interest, yield, fees and collection
costs or other costs under the Crude Oil Purchase Agreement), and (ii) second,
repay and retire the Receivables Purchase Agreement in full (including
associated repurchase obligations, interest, yield, fees and collection costs or
other costs under the Receivables Purchase Agreement). To the extent that any
portion of such $75,000,000 remains, and to the extent there are any additional
cumulative proceeds in excess of $75,000,000, the Collateral Agent shall pay
such remaining or additional cumulative proceeds so received to the Term
Lenders, as directed by the Term Lender Agent, as prepayments on the Tier-A Term
Loans.

                                       21
<PAGE>

                   (b) Koch Payments. On or before the date hereof, EOTT LP and
SCTSC shall have instructed Koch Petroleum Group L.P. to make all Koch Payments
directly to the SCTSC Collection Account. The SCTSC Collection Account is not an
account of Borrower but an account of SCTSC. Funds in the SCTSC Collection
Account shall be applied to the payments required by the Receivables Purchase
Agreement. After collecting each Koch Payment and applying such payment to the
payments then required under the Receivables Purchase Agreement (including
associated interest, yield, fees and collection costs or other costs under the
Receivables Purchase Agreement), SCTSC shall, if a Triggering Event has
occurred, apply the remainder of such payment to repay and retire the Crude Oil
Purchase Agreement in full (including associated interest, yield, fees and
collection costs or other costs under the Crude Oil Purchase Agreement). To the
extent that there are any remaining funds from such Koch Payment, SCTSC shall
promptly transfer such remaining funds to the Concentration Account, whereupon
the funds so transferred shall constitute Collateral for all purposes.

                  (c) Linefill Sales. Upon any default by Borrower in making the
repurchase payments required under the Crude Oil Purchase Agreement, Borrower
and SCTSC and the Collateral Agent will cause all proceeds from any Linefill
Sales (and all proceeds from any hedging contract purchased by the Debtors for
the benefit of SCTSC pursuant to the Crude Oil Purchase Agreement) to be
deposited directly into the SCTSC Collection Account. The funds so deposited
shall be applied (i) first, to repay and retire the Crude Oil Purchase Agreement
in full (including associated interest, yield, fees and collection costs or
other costs under the Crude Oil Purchase Agreement), and (ii) second, to repay
and retire the Receivables Purchase Agreement in full (including associated
interest, yield, fees and collection costs or other costs under the Receivables
Purchase Agreement). SCTSC shall then promptly transfer any remaining portion of
such funds to the Concentration Account, whereupon the funds so transferred
shall constitute Collateral for all purposes. (The provisions of this subsection
(c) do not modify the provisions of Section 2.3(b) that require the Collateral
Agent to obtain the consent of the Required Secured Parties before taking any
Enforcement Action to cause Linefill Sales to occur.)

                  3.4. Other Agreements about Authorized Accounts.

                  (a) Investments of Balances in Authorized Accounts. All
amounts on deposit in each Authorized Account (other than the Collections
Account) shall, until applied as provided above, be invested and re-invested
from time to time in such Cash Equivalents as the Borrower Representative (or,
if an Actionable Default has occurred and is continuing, the Collateral Agent)
shall determine, which Cash Equivalents shall be held in the name and be under
the control of the Collateral Agent until liquidated and applied. Any income
received by the Collateral Agent with respect to the balance from time to time
standing to the credit of any Authorized Accounts, including any interest on or
proceeds of such Cash Equivalents, shall also remain, or be deposited, in the
same Authorized Account.

                  (b) Authorized Accounts Part of Collateral. All of the
Debtors' right, title and interest in and to the amounts on deposit from time to
time in the Authorized Accounts, together with any investments thereof in Cash
Equivalents and any interest thereon or other proceeds thereof, shall be
included in the Collateral and shall be subject in all respects to the Liens and
security interests created under this Agreement.

                                       22
<PAGE>

                  (c) Agreement to Honor Waterfall. Should any Debtor or Secured
Party receive any funds to be applied to the Secured Obligations from any source
whatsoever which funds have not been distributed to the Secured Parties in
accordance with the provisions of this Section 3, such Debtor or Secured Party
shall immediately deposit such funds into the appropriate account in accordance
with the provisions of this Section 3 (and shall, prior to such deposit, hold
such funds in trust for the benefit of the Secured Parties). Each Secured Party
agrees not to vote for any plan of reorganization in any of the Cases that would
not give effect to the payment provisions in this Section 3. The parties hereto
irrevocably consent and direct that all Tier-A Obligations shall be paid in full
prior to any payment on any Tier-B Obligations, except such payments as are
expressly permitted by this Section 3, and the Borrowers and the Guarantors
agree not make, and the Secured Parties agree not to accept or receive, any
payment or benefit in cash, by setoff or otherwise, directly or indirectly, on
account of principal, interest or any other amounts owing on any of the Tier-B
Obligations except such payments as are expressly permitted herein.

                  (d) Collateral Agent's Calculations. In making the
determinations and allocations required hereunder, the Collateral Agent may rely
upon information supplied by SCB as to the amounts payable with respect to the
LC Obligations and upon information supplied by the Term Lender Agent as to the
amounts payable with respect to the Term Loans, and upon information supplied by
SCTSC as to the amounts payable with respect to the Purchase Agreements. The
Collateral Agent shall have no duty to inquire as to the application by the LC
Agent, the Term Lender Agent or SCTSC of any amounts distributed to them by the
Collateral Agent.

                  SECTION 4. AGREEMENTS WITH COLLATERAL AGENT

                  4.1. Delivery of Credit Documents. The Debtors have delivered
to the Collateral Agent and the Term Lender Agent true and complete copies of
all Credit Documents as in effect on the date hereof (including all amendments,
supplements and other modifications thereto). The Debtors shall deliver to the
Collateral Agent and the Term Lender Agent, promptly upon the execution thereof,
a true and complete copy of all amendments, modifications or supplements to any
Credit Document entered into after the date hereof. Upon the request of any
Secured Party, the Debtors shall deliver such copies to such Secured Party.

                  4.2. Indemnification by Debtors. Without in any way limiting
any of its indemnification obligations under the LC Agreement, each of the
Debtors agrees to indemnify the Collateral Agent (in its capacity as such, but
not otherwise), jointly and severally, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind whatsoever (in this section, "Losses")
which may at any time (including, without limitation, at any time following the
payment of the Secured Obligations) be imposed on, incurred by or asserted
against the Collateral Agent in any way relating to or arising out of this
Agreement or any of the Security Documents and Orders, or any documents
contemplated by or referred to herein or therein or the transactions
contemplated thereby or any action taken or omitted by the Collateral Agent
hereunder or thereunder or in connection therewith (whether arising in contract
or in tort or otherwise and including any violation or noncompliance with
environmental laws by any Person or any liabilities or duties of any Person with
respect to hazardous materials found in or released into the environment),

                                       23
<PAGE>

provided that no Debtor shall be liable for the payment of any portion of such
Losses to the extent resulting from the gross negligence or willful misconduct
of the Collateral Agent. The agreements in this Section 4.2 shall survive the
payment of the Secured Obligations and all other amounts payable hereunder and
the termination of this Agreement.

                  4.3. Filing Fees, Excise Taxes, Etc. The Debtors jointly and
severally agree to pay or to reimburse the Collateral Agent and each other
Secured Party for any and all payments made by the Collateral Agent in respect
of all search, filing, recording and registration fees, taxes, excise taxes and
other similar imposts which may be payable or determined to be payable in
respect of the execution and delivery of this Agreement and any of the Security
Documents and Orders. The obligations of the Debtors under this section shall
survive the termination of the other provisions of this Agreement and the
repayment of the Secured Obligations.

                  SECTION 5. THE COLLATERAL AGENT

                  5.1. Appointment. Each of the Secured Parties hereby
designates and appoints SCB as the Collateral Agent for such Secured Party under
this Agreement and the Security Documents and Orders and authorizes SCB, as the
Collateral Agent, to take such action on its behalf under the provisions of this
Agreement and the Security Documents and Orders and to exercise such powers and
perform such duties as are expressly delegated to the Collateral Agent by the
terms of this Agreement, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
this Agreement, the Collateral Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary or
trustee relationship with any Secured Party, and no implied covenants,
functions, responsibilities, duties, obligations or liabilities shall be read
into this Agreement or otherwise exist against the Collateral Agent.

                  5.2. Exculpatory Provisions.

                  (a) The Collateral Agent shall not be responsible in any
manner whatsoever for the correctness of any recitals, statements,
representations or warranties herein, all of which are made solely by the
Debtors. The Collateral Agent makes no representations as to the value or
condition of the Collateral or any part thereof, or as to the title of any
Debtor thereto or as to the security afforded by this Agreement or any of the
Security Documents and Orders, or as to the validity, execution, enforceability,
legality or sufficiency of this Agreement, the Security Documents and Orders or
the Secured Obligations, and the Collateral Agent shall incur no liability or
responsibility in respect of any such matters. The Collateral Agent shall not be
responsible for insuring the Collateral or for the payment of taxes, charges or
assessments or discharging of liens upon the Collateral or otherwise as to the
maintenance of the Collateral.

                  (b) The Collateral Agent shall not be required to ascertain or
inquire as to performance by any Debtor of any of the covenants or agreements
contained herein or in any of the Security Documents and Orders or Credit
Document. Whenever it is necessary, or in the opinion of the Collateral Agent
advisable, for the Collateral Agent to ascertain the amount of Secured
Obligations then held by the Secured Parties, the Collateral Agent may rely on a
certificate of the LC Agent, in the case of the LC Obligations, of the Term
Lender Agent, in the

                                       24
<PAGE>

case of the Term Loan Obligations, and of SCTSC, in the case of the SCTSC
Shortfall Obligations.

                  (c) The Collateral Agent shall be under no obligation or duty
to take any action under this Agreement or any of the Security Documents and
Orders if taking such action (i) would subject the Collateral Agent to a tax in
any jurisdiction where it is not then subject to a tax or (ii) would require the
Collateral Agent to qualify to do business in any jurisdiction where it is not
then so qualified, unless the Collateral Agent receives security or indemnity
satisfactory to it against such tax (or equivalent liability), or any liability
resulting from such qualification, in each case as results from the taking of
such action under this Agreement or any of the Security Documents and Orders.

                  (d) Notwithstanding any other provision of this Agreement, the
Collateral Agent shall not be liable for any action taken or omitted to be taken
by it in accordance with this Agreement or the Security Documents and Orders
except for its own gross negligence or willful misconduct.

                  (e) The parties hereto acknowledge that the Collateral Agent
is an LC Participant and the LC Issuer under the LC Agreement and shall have the
same rights with respect to any Secured Obligation owed to it as any other
Secured Party and may exercise such rights as though it were not the Collateral
Agent hereunder, and may accept deposits from, lend money to, and generally
engage in any kind of business or conduct with any Debtor or any of its
subsidiaries or affiliates as if it were not the Collateral Agent.

                  5.3. Delegation of Duties. The Collateral Agent may execute
any of the powers hereof and perform any duty hereunder either directly or by or
through agents or attorneys-in-fact who may include officers or employees of any
Debtor. The Collateral Agent shall be entitled to advice of counsel concerning
all matters pertaining to such powers and duties. The Collateral Agent shall not
be responsible for the negligence or misconduct of any agents or
attorneys-in-fact selected by it provided that such selection occurs without
gross negligence or willful misconduct.

                  5.4. Reliance by Collateral Agent.

                  (a) Whenever in the administration of this Agreement or the
Security Documents and Orders the Collateral Agent shall deem it necessary or
desirable that a factual matter be proved or established in connection with the
Collateral Agent taking, suffering or omitting to take any action hereunder or
thereunder, such matter (unless other evidence in respect thereof is herein
specifically prescribed) may be deemed to be conclusively proved or established
by a certificate of an officer of any Debtor delivered to the Collateral Agent,
and such certificate shall be full warrant to the Collateral Agent for any
action taken, suffered or omitted in reliance thereon, subject, however, to the
provisions of Section 5.5.

                  (b) The Collateral Agent may consult with counsel, and any
advice or statements of legal counsel (including, without limitation, counsel to
any Debtor) shall be full and complete authorization and protection in respect
of any action taken or suffered by it

                                       25
<PAGE>

hereunder or under any of the Security Documents and Orders in good faith in
accordance therewith.

                  (c) The Collateral Agent may rely, and shall be fully
protected in acting, upon any resolution, statement, certificate, instrument,
opinion, report, notice, request, consent, order, bond or other paper or
document believed by it to be genuine and to have been signed or presented by
the proper party or parties or, in the case of cables, telecopies and telexes,
to have been sent by the proper party or parties. In the absence of its gross
negligence or willful misconduct, the Collateral Agent may conclusively rely, as
to the truth of the statements and the correctness of the opinions expressed
therein, upon any certificates or opinions furnished to the Collateral Agent and
conforming to the requirements of this Agreement.

                  (d) The Collateral Agent shall not be under any obligation to
exercise any of the rights or powers vested in the Collateral Agent by this
Agreement and the Security Documents and Orders at the request or direction of
the Required Secured Parties or otherwise unless the Collateral Agent shall have
been provided adequate security and indemnity against the costs, expenses and
liabilities which may be incurred by it in taking such action or in compliance
with such request or direction.

                  5.5. Limitations on Duties of Collateral Agent.

                  (a) The Collateral Agent shall be obligated to perform such
duties and only such duties as are specifically set forth in this Agreement and
the Security Documents and Orders, and no implied covenants or obligations shall
be read into this Agreement or any of the Security Documents and Orders against
the Collateral Agent. If and so long as a Notice of Actionable Default is in
effect, the Collateral Agent shall, subject to the provisions of Section 2.3(b),
exercise the rights and powers vested in it by this Agreement and the Security
Documents and Orders, and shall not be liable with respect to any action taken
by it, or omitted to be taken by it, in accordance with the direction of the
Required Secured Parties.

                  (b) Except as herein otherwise expressly provided, the
Collateral Agent shall not be under any obligation to take any action which is
discretionary with the Collateral Agent under the provisions hereof or of any of
the Security Documents and Orders except upon the written request of the
Required Secured Parties.

                  (c) No provision of this Agreement or of any of the Security
Documents and Orders shall be deemed to impose any duty or obligation on the
Collateral Agent to perform any act or acts or exercise any right, power, duty
or obligation conferred or imposed on it, in any jurisdiction in which it shall
be illegal, or in which the Collateral Agent shall be unqualified or
incompetent, to perform any such act or acts or to exercise any such right,
power, duty or obligation or if such performance or exercise would constitute
doing business by the Collateral Agent in such jurisdiction or impose a tax on
the Collateral Agent by reason thereof.

                  5.6. Resignation and Removal of the Collateral Agent.

                  (a) The Collateral Agent may at any time, by giving written
notice to the Debtors, the LC Agent, and the Term Lender Agent, resign and be
discharged of the responsibilities hereby created, such resignation to become
effective upon (i) the appointment of

                                       26
<PAGE>

a successor Collateral Agent, (ii) the acceptance of such appointment by such
successor Collateral Agent and (iii) the delivery to the successor Collateral
Agent of any documents in the possession of the Collateral Agent that it is
holding in such capacity. As promptly as practicable after the giving of any
such notice, the LC Agent and the Term Lender Agent, acting together, shall
appoint a successor Collateral Agent. If no successor Collateral Agent shall be
appointed and shall have accepted such appointment within 90 days after the
Collateral Agent gives the aforesaid notice of resignation, the Collateral Agent
may apply to the Bankruptcy Court to appoint a successor Collateral Agent to act
until such time, if any, as a successor shall have been appointed as provided in
this subsection. Any successor so appointed by the Bankruptcy Court shall
immediately and without further act be superseded by any successor Collateral
Agent appointed by the LC Agent and the Term Lender Agent, acting together, as
provided in this Section 5.6. The LC Agent and the Term Lender Agent, acting
together, may at any time, after giving 5 Business Days' prior written notice
thereof to the Debtors, remove the Collateral Agent and appoint a successor
Collateral Agent, such removal to be effective upon the acceptance of such
appointment by the successor; provided, however, that the Collateral Agent shall
not be released from any liability hereby created until such time as it shall
deliver to the successor Collateral Agent any documents in its possession that
it is holding in its capacity as Collateral Agent. The Collateral Agent that has
resigned or been removed shall be entitled to fees, costs and expenses to the
extent incurred or arising, or relating to events occurring, before its
resignation or removal.

                  (b) If at any time the Collateral Agent shall resign or be
removed or otherwise become incapable of acting, or if at any time a vacancy
shall occur in the office of the Collateral Agent for any other cause, a
successor Collateral Agent may be appointed by the LC Agent and the Term Lender
Agent, acting together. The powers, duties, authority and title of the
predecessor Collateral Agent shall be terminated and canceled without procuring
the resignation of such predecessor and without any formality, except as may be
required by applicable law and other than appointment and designation of a
successor in writing duly acknowledged and delivered to the predecessor and the
Debtors. Such appointment and designation shall be full evidence of the right
and authority to make the same and of all the facts therein recited, and the
rights and duties of the "Collateral Agent" under this Agreement and the
Security Documents and Orders shall vest in such successor, without any further
act, deed or conveyance, all the estates, properties, rights, powers, trust,
duties, authority and title of its predecessor; but such predecessor shall,
nevertheless, on the written request of either the Term Lender Agent, the LC
Agent, any Debtor or the successor execute and deliver an instrument
transferring to such successor all the estates, properties, rights, powers,
trusts, duties, authority and title of such predecessor hereunder and under the
Security Documents and Orders and shall deliver all Collateral held by it or its
agents to such successor. Should any deed, conveyance or other instrument in
writing from the Debtors be required by any successor Collateral Agent for more
fully and certainly vesting in such successor the estates, properties, rights,
powers, trusts, duties, authority and title vested or intended to be vested in
the predecessor Collateral Agent any and all such deeds, conveyances and other
instruments in writing shall, on request of such successor, be executed,
acknowledged and delivered by the Debtors. If any Debtor shall not have executed
and delivered any such deed, conveyance or other instrument within 10 days after
it receives a written request from the successor Collateral Agent to do so, or
if a Notice of Actionable Default is in effect, the predecessor Collateral Agent
may execute the same on behalf of such Debtor.

                                       27
<PAGE>

Each Debtor hereby appoints any successor Collateral Agent as its agent and
attorney-in-fact to act for it as provided in the immediately preceding
sentence.

                  5.7. Status of Successor. Every successor Collateral Agent
appointed pursuant to Section 5.6 shall be a bank or trust company in good
standing and having power to act as Collateral Agent hereunder, incorporated
under the laws of the United States of America or any State thereof or the
District of Columbia and having its principal office within the 48 contiguous
States and shall also have capital, surplus and undivided profits of not less
than $500,000,000 if there be such an institution with such capital, surplus and
undivided profits willing, qualified and able to accept the agency hereunder
upon the same terms as contained herein.

                  5.8. Merger of the Collateral Agent. Any corporation into
which the Collateral Agent may be merged, or with which it may be consolidated,
or any corporation resulting from any merger or consolidation to which the
Collateral Agent shall be a party, shall be the Collateral Agent under this
Agreement and the Security Documents and Orders without the execution or filing
of any paper or any further act on the part of the parties hereto.

                  5.9. Treatment of Payee or Indorsee by Collateral Agent. The
Collateral Agent may treat the registered holder or, if none, the payee or
indorsee of any promissory note or debenture evidencing a Secured Obligation as
the absolute owner thereof for all purposes and shall not be affected by any
notice to the contrary, whether such promissory note or debenture shall be past
due or not.

                  5.10. Non-Reliance on Collateral Agent. Each Secured Party
expressly acknowledges that neither the Collateral Agent nor any of its
officers, directors, employees, agents, attorneys-in-fact or affiliates has made
any representations or warranties to such Secured Party and that no act by it
hereinafter taken, including any review of the affairs of the Debtors, shall be
deemed to constitute any representation or warranty by the Collateral Agent to
any Secured Party. Each Secured Party represents to the Collateral Agent that it
has or will, independently and without reliance upon the Collateral Agent, and
based on such documents and information as it has deemed or will deem
appropriate, made and will make its own appraisal of and investigation into the
business, operations, property, financial and other condition and
creditworthiness of the Debtors and has made and will make its own decision to
extend credit to the Debtors. Each Secured Party also represents that it will,
independently and without reliance upon the Collateral Agent, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit analysis, appraisals and decisions in taking or not taking
action under the Credit Documents, and to make such investigation as it deems
necessary to inform itself as to the business, operations, property, financial
and other condition and creditworthiness of the Debtors. Except for notices,
reports and other documents expressly required to be furnished to the Secured
Parties by the Collateral Agent hereunder or under any of the Security Documents
and Orders, the Collateral Agent shall not have any duty or responsibility to
provide any Secured Party with any credit or other information concerning the
business, operations, property, financial and other condition or
creditworthiness of any Debtor which may come into its possession or the
possession of any of its officers, directors, employees, agents,
attorneys-in-fact or affiliates.

                                       28
<PAGE>

                  5.11. Indemnification. Each of the Secured Parties agrees to
indemnify the Collateral Agent (in its capacity as such, but not otherwise), to
the extent not paid or reimbursed by the Debtors and without limiting the
obligation of the Debtors to do so, ratably according to its Percentage of
Exposure on the date of occurrence of any action or failure to act which gives
rise to any claim by the Collateral Agent for indemnity under this subsection,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind whatsoever (in this section, "Losses") which may at any time (including,
without limitation, at any time following the payment of the Secured
Obligations) be imposed on, incurred by or asserted against the Collateral Agent
in any way relating to or arising out of this Agreement or any of the Security
Documents and Orders, or any documents contemplated by or referred to herein or
therein or the transactions contemplated thereby or any action taken or omitted
by the Collateral Agent hereunder or thereunder or in connection therewith
(whether arising in contract or in tort or otherwise and including any violation
or noncompliance with environmental laws by any Person or any liabilities or
duties of any Person with respect to hazardous materials found in or released
into the environment), provided that no such Secured Party shall be liable for
the payment of any portion of such Losses to the extent resulting from the gross
negligence or willful misconduct of the Collateral Agent. The agreements in this
Section 5.11 shall survive the payment of the Secured Obligations and all other
amounts payable hereunder and the termination of this Agreement.

                             SECTION 6. ASSIGNMENTS

                  6.1. Agreement Binding on Assignees. Each Secured Party agrees
that it shall be a condition to assignment of any of its Secured Obligations
that any assignee of such Secured Obligations shall agree in writing to be bound
by the terms of this Agreement.

                  6.2. Limited Restriction on Assignments or Resignation of Term
Lender Agent. Until the termination of the LC Agreement and the payment of all
Matured LC Obligations, (a) any assignments of Term Loans made by a Term Lender
must be made pro rata, so that every Term Lender owns both Tier-A Term Loans and
Tier-B Term Loans in the same proportions, and (b) Lehman Brothers Inc. shall
not voluntarily resign as Term Lender Agent. In addition, until the 15th day
after the date hereof, the original Term Lenders may not assign the Term Loans
to any Persons other than those who are "Bondholders" (as defined in the LC
Agreement) or affiliates of such "Bondholders".

                            SECTION 7. MISCELLANEOUS

                  7.1. Notices. Unless otherwise specified herein, all notices,
requests, demands or other communications given to any Debtor, the Collateral
Agent, the LC Issuer, the Term Lender Agent, or SCTSC shall be given in writing
(including facsimile transmission) and shall be deemed to have been duly given
either (a) when personally delivered, or (b) three Business Days after being
duly deposited in the mails, registered or certified mail postage prepaid, or
(C) when transmitted by facsimile transmission, in each case addressed to such
party at its address specified on Schedule A hereto or any other address which
such party shall have specified as its address for the purpose of communications
hereunder, by notice given in accordance with this Section 7.1 to the party
sending such communication.

                                       29
<PAGE>

                  7.2. No Waivers. No failure on the part of the Collateral
Agent or any Secured Party to exercise, no course of dealing with respect to,
and no delay in exercising, any right, power or privilege under this Agreement
or any of the Security Documents and Orders shall operate as a waiver thereof
nor shall any single or partial exercise of any such right, power or privilege
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege.

                  7.3. Amendments, Supplements and Waivers.

                  (a) This Agreement may not be amended or modified except by a
written instrument executed by each party hereto, provided that, with the
written consent of the LC Agent and the Term Lender Agent, the Collateral Agent
may, from time to time, enter into written agreements supplemental hereto or to
any of the Security Documents and Orders for the purpose of adding to, or
waiving any provisions of, this Agreement or any of the Security Documents and
Orders or changing in any manner the rights of the Collateral Agent, the Secured
Parties or the Debtors hereunder or thereunder. Any such supplemental agreement
shall be binding upon the Debtors, the Secured Parties and the Collateral Agent
and their respective successors and assigns.

                  (b) The Debtors, the LC Agent, the LC Issuer and the LC
Participant will not - without the consent of the Term Lender Agent and SCTSC -
enter into any amendment to the LC Agreement or the "Credit Documents", as
defined therein, that (i) reduces the size of the Letter of Credit Facility that
is provided thereunder, (ii) increases the fees, interest, and other per annum
charges payable thereunder by more than two percent per annum, (iii) accelerates
the maturity date under the LC Agreement, (iv) creates any additional mandatory
prepayment obligations or modifies the application of the Cash Waterfall, or (v)
makes any covenants or events of default thereunder materially more restrictive
or burdensome on the Debtors.

                  (c) The Debtors and SCTSC will not - without the consent of
the LC Agent and the Term Lender Agent - enter into any amendment to the
Purchase Agreements that (i) reduces the size of the financing facilities that
are provided thereunder, (ii) increases the fees, interest, and other per annum
charges payable thereunder by more than two percent per annum, (iii) accelerates
the maturity date under either Purchase Agreement, (iv) creates any additional
mandatory prepayment obligations or modifies the application of the Cash
Waterfall, or (v) makes any covenants or events of default thereunder materially
more restrictive or burdensome on the Debtors.

                  (d) The Debtors, the Term Lender Agent, and the Term Lenders
will not - without the consent of the LC Agent and SCTSC - enter into any
amendment to the Term Loan Agreement or the "Credit Documents", as defined
therein, that (i) reduces the size of the credit facility that is provided
thereunder, (ii) increases the fees, interest, and other per annum charges
payable thereunder by more than two percent per annum, (iii) accelerates the
maturity date under the Term Loan Agreement or the Term Notes, (iv) creates any
additional mandatory prepayment obligations or modifies the application of the
Cash Waterfall, or (v) makes any covenants or events of default thereunder
materially more restrictive or burdensome on the Debtors.

                                       30
<PAGE>

                  (e) On any date (in this section, the "Extension Date") that
is no earlier than the effective date of a reorganization plan of the Debtors
that has been confirmed by an order of the Bankruptcy Court and no later than
March 31, 2003, the Borrowers may extend the terms of both the Term Loan
Agreement and the LC Agreement until a date no later than September 30, 2004 and
the terms of both of the Purchase Agreements until a date no later than
September 30, 2003, in each case upon payment of the extension fees described
below and on terms substantially similar to the terms of such Credit Documents
in effect at such times and such other terms as are satisfactory to the parties
thereto, with details to be negotiated. If the Borrowers exercise such extension
right with respect to any such agreement they must exercise such right with
respect to all such agreements. The fees for so extending will be as follows:
(1) for the Term Loan Agreement: $750,000, payable to the Term Loan Agent on the
Extension Date for the account of the Term Lenders; (2) for the LC Facility:
$1,250,000, payable to the LC Agent on the Extension Date for the account of the
LC Participants; and (3) for each Purchase Agreement: 1.0% per annum of the
maximum commitment under such Purchase Agreement as so extended, payable to
SCTSC on the Extension Date.

                  7.4. Headings. The table of contents and the headings of
Sections and subsections have been included herein for convenience only and
should not be considered in interpreting this Agreement.

                  7.5. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall not invalidate the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

                  7.6. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of each of the parties hereto and shall inure to
the benefit of each of the Secured Parties and their respective successors and
assigns, and nothing herein is intended or shall be construed to give any other
Person any right, remedy or claim under, to or in respect of this Agreement or
any Collateral.

                  7.7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

                  7.8. Counterparts. This Agreement may be signed in any number
of counterparts with the same effect as if the signatures thereto and hereto
were upon the same instrument.

                  7.9. SUBMISSION TO JURISDICTION; WAIVERS. (A) EACH OF THE
DEBTORS AND THE SECURED PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY:

                  (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT, ANY SECURITY DOCUMENTS OR ANY OTHER
DOCUMENTS EXECUTED IN RELATION TO THIS AGREEMENT, OR FOR RECOGNITION AND
ENFORCEMENT OF ANY

                                       31
<PAGE>

JUDGMENT IN RESPECT THEREOF, TO THE JURISDICTION OF THE BANKRUPTCY COURT AND TO
THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK,
THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW
YORK, AND APPELLATE COURTS FROM ANY THEREOF;

                  (B) WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM
THE SAME;

                  (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH LEGAL ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING OF A COPY THEREOF (BY REGISTERED OR
CERTIFIED MAIL OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL) POSTAGE PREPAID, TO
SUCH COMPANY, AT ITS ADDRESS REFERRED TO IN SUBSECTION 7.1 OR AT SUCH OTHER
ADDRESS OF WHICH THE COLLATERAL AGENT AND THE SECURED PARTIES SHALL HAVE BEEN
NOTIFIED PURSUANT THERETO;

                  (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE COLLATERAL
AGENT'S OR ANY SECURED PARTY'S RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER
JURISDICTION, IF PERMITTED BY THE BANKRUPTCY COURT; AND

                  (E) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY
RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED
TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.

                  (F) EACH OF THE DEBTORS AND SECURED PARTIES AND THE COLLATERAL
AGENT HEREBY WAIVES TRIAL BY JURY TO THE EXTENT PERMITTED BY LAW IN ANY ACTION
OR PROCEEDING REFERRED TO IN SECTION 7.9(A) HEREOF, AND FOR ANY COUNTERCLAIM
THEREIN.

                  7.10. Termination.

                  (a) Upon (i) receipt by the Collateral Agent from each of the
LC Agent, the Term Lender Agent, and SCTSC of a written direction to cause the
liens created by the Security Documents and Orders to be released and discharged
and (ii) payment in full of all fees and expenses owing to the Collateral Agent
hereunder, the Collateral Agent shall promptly proceed to release the liens and
security interests created by the Security Documents and Orders and to deliver
or cause to be delivered to the Debtors all property of the Debtors then held by
the Collateral Agent or any agent or nominee thereof.

                  (b) This Agreement shall terminate when the liens and security
interests granted under the Security Documents and Orders have terminated and
the Collateral has been released and all Collateral held by the Collateral Agent
has been delivered to the Persons

                                       32
<PAGE>

lawfully entitled thereto in accordance with the provisions of this Agreement;
provided that the provisions of this Agreement which are expressly stated to
survive the termination of other provisions of this Agreement shall not be
affected by any such termination and shall remain in full force and effect.

                  7.11. Acknowledgements.

                  Each Debtor hereby acknowledges that it has been advised by
counsel in the negotiation, execution and delivery of this Agreement and the
other Credit Documents to which such Debtor is a party; that neither the
Collateral Agent nor any other Secured Party has any fiduciary relationship to
such Debtor, and the relationship between the Secured Parties, on one hand, and
the Debtors, on the other hand, is solely that of debtor and creditor; and that
no joint venture exists among the Secured Parties or among any Debtor and the
Secured Parties.

                                       33
<PAGE>
         IN WITNESS WHEREOF, the parties have caused this Intercreditor and
Security Agreement to be duly executed as of the date first written above.

                        STANDARD CHARTERED BANK,
                        as Collateral Agent, as LC Agent and as an LC
                        Participant

                        By:      /s/ Allan J. Lee
                            ----------------------------------------
                        Name:    Allan J. Lee
                        Title:   Senior Vice President

                        By:      /s/ Neil McCauley
                            ----------------------------------------
                        Name:    Neil McCauley
                        Title:   Senior Vice President

<PAGE>

                        STANDARD CHARTERED TRADE SERVICES
                        CORPORATION

                        By:      /s/ Allen J. Lee
                            ----------------------------------------
                                 Name:  Allen J. Lee
                                 Title:   Chief Executive Officer

                        By:      /s/ Daniel Carambot
                            ----------------------------------------
                                 Name:    Daniel Carambot
                                 Title:   President

<PAGE>

                        EOTT ENERGY OPERATING LIMITED PARTNERSHIP

                        By:      EOTT Energy General Partner, L.L.C., its
                                 general partner

                        By:      /s/ Susan Ralph
                            ----------------------------------------
                                 Name:    Susan Ralph
                                 Title:   Treasurer

<PAGE>

                        EOTT ENERGY CANADA LIMITED
                        PARTNERSHIP

                        By:      EOTT Energy General Partner, L.L.C., its
                                 general partner

                        By:      /s/ Susan Ralph
                            ----------------------------------------
                                 Name:  Susan Ralph
                                 Title: Treasurer

<PAGE>

                        EOTT ENERGY LIQUIDS, L.P.

                        By:      EOTT Energy General Partner, L.L.C., its
                                 general partner

                        By:      /s/ Susan Ralph
                            ----------------------------------------
                                 Name:  Susan Ralph
                                 Title:   Treasurer

<PAGE>

                        EOTT ENERGY PIPELINE LIMITED
                        PARTNERSHIP

                        By:      EOTT Energy General Partner, L.L.C., its
                                 general partner

                        By:      /s/  Susan Ralph
                            ----------------------------------------
                                 Name:  Susan Ralph
                                 Title: Treasurer

<PAGE>

                        EOTT ENERGY PARTNERS, L.P.

                        By:      EOTT Energy Corp., its general partner

                        By:      /s/  Susan Ralph
                             ---------------------------------------
                                 Name:    Susan Ralph
                                 Title:   Treasurer

<PAGE>

                        EOTT ENERGY GENERAL PARTNER, L.L.C.

                        By:      /s/  Susan Ralph
                             ---------------------------------------
                                 Name:    Susan Ralph
                                 Title:   Treasurer

<PAGE>

                        LEHMAN BROTHERS INC.,
                        as Term Lender Agent

                        By:      /s/ J. Robert Chambers
                            ----------------------------------------
                             Name:  J. Robert Chambers
                             Title: Managing Director

<PAGE>

                         LEHMAN COMMERCIAL PAPER, INC., as a
                         Term Lender

                        By:      /s/ J. Robert Chambers
                            ----------------------------------------
                            Name:  J. Robert Chambers
                            Title: Authorized Signatory

<PAGE>

                        FARALLON CAPITAL PARTNERS, L.P., a
                        California limited partnership, as a Term Lender

                        By:      Farallon Partners, L.L.C., as General Partner

                                 By:      /s/ Not Legible
                                    --------------------------------
                                     Managing Member
                                     Farallon Partners, L.L.C

<PAGE>

                        FARALLON CAPITAL INSTITUTIONAL
                        PARTNERS, L.P., a California limited partnership,
                        as a Term Lender

                        By:      Farallon Partners, L.L.C., as General Partner

                                 By:    /s/ [ILLEGIBLE]
                                     -------------------------------
                                     Managing Member
                                     Farallon Partners, L.L.C.

<PAGE>

                        FARALLON CAPITAL INSTITUTIONAL
                        PARTNERS II, L.P., a California limited
                        partnership, as a Term Lender

                        By:      Farallon Partners, L.L.C., as General Partner

                                 By:    /s/ [ILLEGIBLE]
                                     -------------------------------
                                     Managing Member,
                                     Farallon Partners, L.L.C.

<PAGE>

                        FARALLON CAPITAL INSTITUTIONAL
                        PARTNERS III, L.P., a Delaware limited
                        partnership, as a Term Lender

                        By:      Farallon Partners, L.L.C., as General Partner

                                 By:    /s/ [ILLEGIBLE]
                                     -------------------------------
                                      Managing Member,
                                      Farallon Partners, L.L.C.

<PAGE>

                        TINICUM PARTNERS, L.P., a New York limited
                        partnership, a Term Lender

                        By:      Farallon Partners, L.L.C., as General Partner

                                 By:    /s/ [ILLEGIBLE]
                                     -------------------------------
                                     Managing Member,
                                     Farallon Partners, L.L.C.,

<PAGE>

                        HIGH YIELD PORTFOLIO, a series of Income
                        Trust

                        By:      /s/ Timothy J. Masek
                             ---------------------------------------
                             Name:        Timothy J. Masek
                             Title:       Assistant Vice President
                                          Income Trust

<PAGE>

                        AXP VARIABLE PORTFOLIO-EXTRA
                        INCOME FUND, a series of AXP Variable
                        Portfolio Income Series, Inc.

                        By:      /s/ Timothy J. Masek
                             ---------------------------------------
                             Name:        Timothy J. Masek
                             Title:       Assistant Vice President
                                          AXP Variable Portfolio Income
                                          Series, Inc.

<PAGE>
                                   SCHEDULE A

                             ADDRESSES FOR NOTICES

EOTT Energy Operating, L.P.
EOTT Energy Canada, L.P.
EOTT Energy Liquids, L.P.
EOTT Energy Pipeline, L.P.
EOTT Energy Partners, L.P.
EOTT Energy General Partner, L.L.C.

Address for each Debtor:
By courier:
2000 W. Sam Houston Parkway, Suite 400
Houston, Texas  770042
By mail:
Post Office Box 4666
Houston, Texas  77210-4666
Telecopy:  (713) 993-5813

Standard Chartered Bank
Special Assets Division
One Madison Avenue
New York, New York 10010-3603
Attn:  Neil McCauley
Telecopy: 212-667-0797

Standard Chartered Trade Services
One Madison Avenue
New York, New York  10010-3603
Attention:  Allan J. Lee
Telecopy: 212-667-0120

Lehman Brothers Inc.
Lehman Commercial Paper Inc.
745 Seventh Avenue
New York, New York  10019
Attention:  Francis Chang/Diane Albanese
Telecopy:  (212) 526-0242/(212) 526-6643

with a copy (excluding financial reports and information) to:

John W. Rain
Thompson & Knight LLP
1700 Pacific Avenue, Suite 3300
Dallas, Texas  75201
Telecopy:  (214) 969-1751

High Yield Portfolio
AXP Variable Portfolio - Extra Income Fund

c/o Kris Robinson
Assistant Manager - Legal Affairs
General Counsel's Office
American Express Financial Advisors
50592 AXP Financial Center
Minneapolis, Minnesota  55474
Telecopy:  612) 671-3767

Farallon Capital Partners, L.P.
Farallon Capital Institutional Partners, L.P.
Farallon Capital Institutional Partners II, L.P.
Farallon Capital Institutional Partners III, L.P.
Tinicum Partners, L.P.

c/o Derek Schrier and Mark C. Wehrly
Farallon Capital Management, L.L.C.
One Maritime Plaza, Suite 1325
San Francisco, California  94111
Telecopy:  (415) 421-2133<PAGE>
                                                                    EXHIBIT 10.1

                                CREDIT AGREEMENT

                            DATED AS OF JULY 10, 2002

                                      AMONG

                            SMITH INTERNATIONAL, INC.

                                       AND

                                   M-I L.L.C.,

                   THE LENDERS FROM TIME TO TIME PARTY HERETO

                                       AND

                                 COMERICA BANK,
                             AS ADMINISTRATIVE AGENT

                               ABN AMRO BANK N.V.,
                              AS SYNDICATION AGENT

                              DEN NORSKE BANK ASA,
                             AS DOCUMENTATION AGENT

                          J.P. MORGAN SECURITIES INC.,

                                       AND

                        CREDIT LYONNAIS NEW YORK BRANCH,
                   AS CO-LEAD ARRANGERS AND JOINT BOOKRUNNERS

<PAGE>

<Table>
<S>                                                                                       <C>
ARTICLE I  Definitions.....................................................................1
         SECTION 1.01  Defined Terms.......................................................1
         SECTION 1.02  Classification of Loans and Borrowings.............................14
         SECTION 1.03  Terms Generally....................................................14
         SECTION 1.04  Accounting Terms; GAAP.............................................14
ARTICLE II  The Credits...................................................................15
         SECTION 2.01  Revolving Commitments..............................................15
         SECTION 2.02  Loans and Borrowings...............................................15
         SECTION 2.03  Requests for Borrowings............................................16
         SECTION 2.04  Letters of Credit..................................................17
         SECTION 2.05  Funding of Borrowings..............................................21
         SECTION 2.06  Interest Elections.................................................22
         SECTION 2.07  Termination, Reduction and Increase of Revolving Commitments.......23
         SECTION 2.08  Repayment of Loans; Evidence of Debt...............................24
         SECTION 2.09  Prepayment of Loans................................................25
         SECTION 2.10  Fees...............................................................25
         SECTION 2.11  Interest...........................................................26
         SECTION 2.12  Alternate Rate of Interest.........................................27
         SECTION 2.13  Increased Costs....................................................28
         SECTION 2.14  Break Funding Payments.............................................29
         SECTION 2.15  Taxes..............................................................29
         SECTION 2.16  Payments Generally; Pro Rata Treatment; Sharing of Set-offs........31
         SECTION 2.17  Mitigation Obligations; Replacement of Lenders.....................32
         SECTION 2.18  Defaulting Lender..................................................33
         SECTION 2.19  Smith Guaranty of Obligations of M-I LLC...........................34
ARTICLE III  Representations and Warranties...............................................35
         SECTION 3.01  Organization; Powers...............................................35
         SECTION 3.02  Authorization; Enforceability......................................35
         SECTION 3.03  Governmental Approvals; No Conflicts...............................36
         SECTION 3.04  Financial Condition................................................36
         SECTION 3.05  Properties.........................................................36
         SECTION 3.06  Litigation and Environmental Matters...............................36
         SECTION 3.07  Compliance with Laws and Agreements................................37
         SECTION 3.08  Investment and Holding Company Status..............................37
         SECTION 3.09  Taxes..............................................................37
         SECTION 3.10  ERISA..............................................................37
         SECTION 3.11  Disclosure.........................................................37
ARTICLE IV  Conditions....................................................................38
         SECTION 4.01  Effective Date.....................................................38
         SECTION 4.02  Each Credit Event..................................................39
</Table>
<PAGE>
<Table>
<S>                                                                                       <C>
ARTICLE V  Affirmative Covenants...........................................................39
         SECTION 5.01  Financial Statements; Ratings Change and Other Information..........39
         SECTION 5.02  Notices of Material Events..........................................41
         SECTION 5.03  Existence; Conduct of Business......................................41
         SECTION 5.04  Payment of Obligations..............................................41
         SECTION 5.05  Maintenance of Properties; Insurance................................42
         SECTION 5.06  Books and Records; Inspection Rights................................42
         SECTION 5.07  Compliance with Laws................................................42
         SECTION 5.08  Use of Proceeds and Letters of Credit...............................42
         SECTION 5.09  Financial Covenants.................................................42
ARTICLE VI  Negative Covenants.............................................................42
         SECTION 6.01  Subsidiary Indebtedness.............................................43
         SECTION 6.02  Liens...............................................................43
         SECTION 6.03  Fundamental Changes.................................................44
         SECTION 6.04  Transactions with Affiliates........................................44
         SECTION 6.05  Restrictive Agreements..............................................44
         SECTION 6.06  Restrictions on M-I LLC Dividends...................................45
ARTICLE VII  Events of Default.............................................................45
ARTICLE VIII  The Administrative Agent.....................................................47
ARTICLE IX  Miscellaneous..................................................................49
         SECTION 9.01  Notices.............................................................49
         SECTION 9.02  Waivers; Amendments.................................................50
         SECTION 9.03  Expenses; Indemnity; Damage Waiver..................................51
         SECTION 9.04  Successors and Assigns..............................................52
         SECTION 9.05  Survival............................................................55
         SECTION 9.06  Counterparts; Integration; Effectiveness............................56
         SECTION 9.07  Severability........................................................56
         SECTION 9.08  Right of Setoff.....................................................56
         SECTION 9.09  Governing Law; Jurisdiction; Consent to Service of Process..........56
         SECTION 9.10  WAIVER OF JURY TRIAL................................................57
         SECTION 9.11  Headings............................................................57
         SECTION 9.12  Confidentiality.....................................................57
         SECTION 9.13  Interest Rate Limitation............................................58
</Table>

Schedule 1.01 -- Applicable Margin
Schedule 2.01--Revolving Commitments
Schedule 6.01 -- Existing Subsidiary Indebtedness
Schedule 6.02 -- Existing Liens
Schedule 6.05 -- Existing Restrictive Agreements

Exhibit A -- Assignment and Assumption
Exhibit B-1 -- Tranche A Revolving Note
Exhibit B-2 -- Tranche B Revolving Note

<PAGE>
                                CREDIT AGREEMENT

         CREDIT AGREEMENT (as amended, modified, restated, supplemented and in
effect from time to time, herein called this "Agreement") dated as of July ____,
2002, among SMITH INTERNATIONAL, INC., a Delaware corporation, M-I L.L.C., a
Delaware limited liability company, the LENDERS party hereto, ABN AMRO BANK
N.V., as Syndication Agent, DEN NORSKE BANK ASA, as Documentation Agent, J.P.
MORGAN SECURITIES INC. and CREDIT LYONNAIS NEW YORK BRANCH, as Co-Lead Arrangers
and Joint Bookrunners, and COMERICA BANK, as Administrative Agent for the
Lenders.

                                    ARTICLE I
                                   Definitions

         The parties hereto agree as follows:

         SECTION 1.01 Defined Terms. As used in this Agreement, the following
terms have the meanings specified below:

         "ABR", when used in reference to any Loan or Borrowing, refers to
whether such Loan, or the Loans comprising such Borrowing, are bearing interest
at a rate determined by reference to the Alternate Base Rate.

         "Adjusted LIBO Rate" means, with respect to any Eurodollar Borrowing
for any Interest Period, an interest rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest
Period multiplied by (b) the Statutory Reserve Rate.

         "Administrative Agent" means Comerica Bank, in its capacity as
administrative agent for the Lenders hereunder, and its successors in that
capacity.

         "Administrative Questionnaire" means an Administrative Questionnaire in
a form supplied by the Administrative Agent.

         "Affiliate" means, with respect to a specified Person, another Person
that directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.

         "Alternate Base Rate" means, for any day, a rate per annum equal to the
greater of (a) the Federal Funds Effective Rate in effect on such day plus 1/2
of 1% or (b) the Prime Rate in effect on such day. Any change in the Alternate
Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate
shall be effective from and including the effective date of such change in the
Prime Rate or the Federal Funds Effective Rate, respectively.

         "Applicable Percentage" means, with respect to any Lender, the
percentage of the total Revolving Commitments represented by such Lender's
Revolving Commitment. If the

                                       1
<PAGE>
Revolving Commitments have terminated or expired, the Applicable Percentages
shall be determined based upon the Revolving Commitments most recently in
effect, giving effect to any assignments.

         "Applicable Margin" means, for any day with respect to any ABR Loan or
Eurodollar Loan or with respect to the commitment fees payable hereunder, as the
case may be, the applicable margin per annum set forth on Schedule 1.01 hereto
under the caption "ABR Applicable Margin", "Adjusted LIBO Applicable Margin" or
"Commitment Fee", as the case may be, based upon the ratings by Moody's and S&P,
respectively, applicable on such date to the Index Debt. For purposes of the
foregoing, (i) if both Moody's and S&P shall not have in effect a rating for the
Index Debt (other than by reason of the circumstances referred to in the last
sentence of this definition), then such rating agencies shall be deemed to have
established a rating in Category 7, and if either (but not both), Moody's and
S&P shall not have in effect a rating for the Index Debt (other than by reason
of the circumstances referred to in the last sentence of this definition), then
the remaining rating shall control; (ii) if the ratings established or deemed to
have been established by Moody's and S&P for the Index Debt shall fall within
different Categories, the Applicable Margin shall be based on the higher of the
two ratings unless one of the two ratings is two or more Categories lower than
the other, in which case the Applicable Margin shall be determined by reference
to the Category next below that of the higher of the two ratings; and (iii) if
the ratings established or deemed to have been established by Moody's and S&P
for the Index Debt shall be changed (other than as a result of a change in the
rating system of Moody's or S&P), such change shall be effective as of the date
on which it is first announced by the applicable rating agency, irrespective of
when notice of such change shall have been furnished to the Agent and the
Lenders pursuant to Section 5.01 or otherwise. Each change in the Applicable
Margin shall apply during the period commencing on the effective date of such
change and ending on the date immediately preceding the effective date of the
next such change. If the rating system of Moody's or S&P shall change, or if
either such rating agency shall cease to be in the business of rating corporate
debt obligations, the Borrowers and the Lenders shall negotiate in good faith to
amend this definition to reflect such changed rating system or the
unavailability of ratings from such rating agency and, pending the effectiveness
of any such amendment, the Applicable Margin shall be determined by reference to
the rating most recently in effect prior to such change or cessation.

         "Approved Fund" has the meaning assigned to such term in Section 9.04.

         "Assignment and Assumption" means an assignment and assumption entered
into by a Lender and an assignee (with the consent of any party whose consent is
required by Section 9.04), and accepted by the Administrative Agent, in the form
of Exhibit A or any other form approved by the Administrative Agent.

         "Board" means the Board of Governors of the Federal Reserve System of
the United States of America and any successor entity performing similar
functions.

         "Borrower" means (i) as to the Tranche A Revolving Commitments, Smith
and (ii) as to the Tranche B Revolving Commitments, M-I LLC. The term
"Borrowers" means Smith and M-I LLC.

                                       2
<PAGE>
         "Borrowing" means Loans of the same Type made, converted or continued
on the same date and, in the case of Eurodollar Loans, as to which a single
Interest Period is in effect.

         "Borrowing Request" means a request by a Borrower for a Borrowing in
accordance with Section 2.03.

         "Business Day" means any day that is not a Saturday, Sunday or other
day on which national banks in New York City or Detroit, Michigan are authorized
or required by law to remain closed; provided that, when used in connection with
a Eurodollar Loan, the term "Business Day" shall also exclude any day on which
banks are not open for dealings in Dollar deposits in the London interbank
market.

         "Capital Expenditures" means, for any period, expenditures by a Person
which are properly classified as fixed or capital assets in accordance with GAAP
(including the capital portion of lease payments made in respect of Capital
Lease Obligations), reduced for (i) proceeds from disposal of fixed or capital
assets and (ii) proceeds from insurance policies to replace capital equipment
damaged or destroyed.

         "Capital Lease Obligations" means, as to any Person, the obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property which obligations are
required to be classified and accounted for as a capital lease on a balance
sheet of such Person under GAAP (including Statement of Financial Accounting
Standards No. 13 of the Financial Accounting Standards Board, as amended) and,
for purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with GAAP (including such
Statement No. 13). Capital Lease Obligations shall not include the interest
component of any applicable rental payment.

         "Ceiling Rate" means, on any day, the maximum nonusurious rate of
interest permitted for that day by whichever of applicable federal or New York
(or any jurisdiction whose usury laws are deemed to apply to the Notes or any
other Loan Documents despite the intention and desire of the parties to apply
the usury laws of the State of New York) laws permits the higher interest rate,
stated as a rate per annum. On each day, if any, that the Texas Finance Code
establishes the Ceiling Rate, the Ceiling Rate shall be the "weekly ceiling" (as
defined in the Texas Finance Code) for that day. Administrative Agent may from
time to time, as to current and future balances, implement any other ceiling
under the Texas Finance Code by notice to the Borrowers, if and to the extent
permitted by the Texas Finance Code. Without notice to the Borrowers or any
other Person, the Ceiling Rate shall automatically fluctuate upward and downward
as and in the amount by which such maximum nonusurious rate of interest
permitted by applicable law fluctuates.

         "Change in Control" means (a) the acquisition of ownership, directly or
indirectly, beneficially or of record, by any Person or group (within the
meaning of the Securities Exchange Act of 1934 and the rules of the Securities
and Exchange Commission thereunder as in effect on the date hereof), of Equity
Interests representing more than 50% of the aggregate ordinary voting power
represented by the issued and outstanding Equity Interests of Smith; (b)
occupation of a majority of the seats (other than vacant seats) on the board of
directors of Smith by Persons who

                                       3
<PAGE>

were neither (i) nominated by the board of directors of Smith nor (ii) appointed
by directors so nominated; or (c) the acquisition of direct or indirect Control
of Smith by any Person or group.

         "Change in Law" means (a) the adoption of any law, rule or regulation
after the date of this Agreement, (b) any change in any law, rule or regulation
or in the interpretation or application thereof by any Governmental Authority
after the date of this Agreement or (c) compliance by any Lender or the Issuing
Bank (or, for purposes of Section 2.13(b), by any lending office of such Lender
or by such Lender's or the Issuing Bank's holding company, if any) with any
request, guideline or directive (whether or not having the force of law) of any
Governmental Authority made or issued after the date of this Agreement.

         "CLO" has the meaning assigned to such term in Section 9.04.

         "Code" means the Internal Revenue Code of 1986, as amended from time to
time.

         "Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person, whether
through the ability to exercise voting power, by contract or otherwise.
"Controlling" and "Controlled" have meanings correlative thereto.

         "Debt to Capitalization Ratio" shall mean, as of any day, without
duplication, the ratio of (a) interest bearing Indebtedness (including
Indebtedness bearing imputed interest as a result of having been issued at a
discount and including the principal component of Capital Lease Obligations) to
(b) the sum of (i) such interest bearing Indebtedness plus (ii) stockholders'
equity as determined in accordance with GAAP plus (iii) minority interests in
majority-owned Subsidiaries. For purposes of this definition, the term
"Indebtedness" shall not include intercompany debt which is held by a Borrower
or any of their Subsidiaries.

         "Default" means any event or condition which constitutes an Event of
Default or which upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.

         "Dollars" or "$" refers to lawful money of the United States of
America.

         "EBITDA" shall mean, without duplication, for any period (a) net income
after taxes plus (b) the sum of (i) Interest Expense for such period, (ii)
income taxes deducted in determining such net income, (iii) depreciation,
depletion and obsolescence of property and (iv) other non-cash expenses and
intangibles (including, without limitation, deferred financing costs and debt
discount) deducted in determining such net income minus (c) non-cash income, in
each case, determined in accordance with GAAP.

         "Effective Date" means the first date on which the conditions specified
in Section 4.01 are satisfied (or waived in accordance with Section 9.02).

         "Environmental Laws" means all laws, rules, regulations, codes,
ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by any Governmental Authority,
relating in any way to the environment, preservation or

                                       4
<PAGE>

reclamation of natural resources or the management, release or threatened
release of any Hazardous Material.

         "Environmental Liability" means any liability, contingent or otherwise
(including any liability for damages, costs of environmental remediation, fines,
penalties or indemnities), of a Borrower or any Material Subsidiary directly or
indirectly resulting from or based upon (a) violation of any Environmental Law,
(b) the generation, use, handling, transportation, storage, treatment or
disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials,
(d) the release or threatened release of any Hazardous Materials into the
environment or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.

         "Equity Interests" means shares of capital stock, partnership
interests, membership interests in a limited liability company, beneficial
interests in a trust or other equity ownership interests in a Person, and any
warrants, options or other rights entitling the holder thereof to purchase or
acquire any such equity interest.

         "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.

         "ERISA Affiliate" means any trade or business (whether or not
incorporated) that, together with a Borrower, is treated as a single employer
under Section 414(b) or (c) of the Code or, solely for purposes of Section 302
of ERISA and Section 412 of the Code, is treated as a single employer under
Section 414 of the Code.

         "ERISA Event" means (a) any "reportable event", as defined in Section
4043 of ERISA or the regulations issued thereunder with respect to a Plan (other
than an event for which the 30-day notice period is waived); (b) the existence
with respect to any Plan of an "accumulated funding deficiency" (as defined in
Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the
filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an
application for a waiver of the minimum funding standard with respect to any
Plan; (d) the incurrence by a Borrower or any of its ERISA Affiliates of any
liability under Title IV of ERISA with respect to the termination of any Plan;
(e) the receipt by a Borrower or any ERISA Affiliate from the PBGC or a plan
administrator of any notice relating to an intention to terminate any Plan or
Plans or to appoint a trustee to administer any Plan; (f) the incurrence by a
Borrower or any of its ERISA Affiliates of any liability with respect to the
withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the
receipt by a Borrower or any ERISA Affiliate of any notice, or the receipt by
any Multiemployer Plan from a Borrower or any ERISA Affiliate of any notice,
concerning the imposition of Withdrawal Liability or a determination that a
Multiemployer Plan is, or is expected to be, insolvent or in reorganization,
within the meaning of Title IV of ERISA.

         "Eurodollar", when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Adjusted LIBO Rate.

                                       5
<PAGE>
         "Eurodollar Office" means with respect to any Lender the office or
offices of such Lender which shall be making or maintaining the Eurodollar
Borrowing of such Lender hereunder. A Eurodollar Office of any Lender may be, at
the option of such Lender, either a domestic or foreign office.

         "Event of Default" has the meaning assigned to such term in Article
VII.

         "Excluded Taxes" means, with respect to the Administrative Agent, any
Lender, the Issuing Bank or any other recipient of any payment to be made by or
on account of any obligation of a Borrower hereunder, (a) income or franchise
taxes imposed on (or measured by) its net income by the United States of
America, or by the jurisdiction under the laws of which such recipient is
organized or in which its principal office is located or, in the case of any
Lender, in which its applicable lending office is located, (b) any branch
profits taxes imposed by the United States of America or any similar tax imposed
by any other jurisdiction in which the applicable Borrower is located and (c) in
the case of a Foreign Lender (other than an assignee pursuant to a request by a
Borrower under Section 2.17(b)), any withholding tax that is imposed on amounts
payable to such Foreign Lender at the time such Foreign Lender becomes a party
to this Agreement (or designates a new lending office) or is attributable to
such Foreign Lender's failure to comply with Section 2.15(e), except to the
extent that such Foreign Lender (or its assignor, if any) was entitled, at the
time of designation of a new lending office (or assignment), to receive
additional amounts from the applicable Borrower with respect to such withholding
tax pursuant to Section 2.15(a).

         "Federal Funds Effective Rate" means, for any day, the weighted average
(rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day that is a Business Day, the average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the quotations for such day for such
transactions received by the Administrative Agent from three Federal funds
brokers of recognized standing selected by the Administrative Agent.

         "Financial Officer" means the chief financial officer, principal
accounting officer, treasurer or controller of the applicable Borrower.

         "Foreign Lender" means any Lender that is organized under the laws of a
jurisdiction other than that in which the Borrowers are located. For purposes of
this definition, the United States of America, each State thereof and the
District of Columbia shall be deemed to constitute a single jurisdiction.

         "GAAP" means generally accepted accounting principles in the United
States of America.

         "Governmental Authority" means the government of the United States of
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising

                                       6
<PAGE>

executive, legislative, judicial, taxing, regulatory or administrative powers or
functions of or pertaining to government.

         "Guarantee" of or by any Person (the "guarantor") means any obligation,
contingent or otherwise, of the guarantor guaranteeing or having the economic
effect of guaranteeing any Indebtedness or other obligation of any other Person
(the "primary obligor") in any manner, whether directly or indirectly, and
including any obligation of the guarantor, direct or indirect, (a) to purchase
or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation or to purchase (or to advance or supply funds
for the purchase of) any security for the payment thereof, (b) to purchase or
lease property, securities or services for the purpose of assuring the owner of
such Indebtedness or other obligation of the payment thereof, (c) to maintain
working capital, equity capital or any other financial statement condition or
liquidity of the primary obligor so as to enable the primary obligor to pay such
Indebtedness or other obligation or (d) as an account party in respect of any
letter of credit or letter of guaranty issued to support such Indebtedness or
obligation; provided, that the term Guarantee shall not include endorsements for
collection or deposit in the ordinary course of business.

         "Hazardous Materials" means all explosive or radioactive substances or
wastes and all hazardous or toxic substances, wastes or other pollutants,
including petroleum or petroleum distillates, asbestos or asbestos containing
materials, polychlorinated biphenyls, radon gas, infectious or medical wastes
and all other substances or wastes of any nature regulated pursuant to any
Environmental Law.

         "Indebtedness" shall mean and include with respect to any Person (a)
all items which in accordance with GAAP would be included on the liability side
of a balance sheet of such Person on the date as of which Indebtedness is to be
determined (excluding capital stock, surplus, surplus reserves and deferred
credits); (b) all guaranties, letter of credit contingent reimbursement
obligations, endorsements and other contingent obligations in respect of, or any
obligations to purchase or otherwise acquire, Indebtedness of others, and (c)
all Indebtedness secured by any Lien existing on any interest of such Person in
property owned subject to such Lien whether or not the Indebtedness secured
thereby shall have been assumed; provided, that the term "Indebtedness" shall
not mean or include any Indebtedness in respect of which monies sufficient to
pay and discharge the same in full (either on the expressed date of maturity
thereof or on such earlier date as such Indebtedness may be duly called for
redemption and payment) shall be deposited, in a manner and with a depository,
agency or trustee reasonably acceptable to the Agent, in trust for the payment
thereof. "Indebtedness" shall not include trade payables and expense accruals
incurred in the ordinary course of the applicable Person's business provided
that such payables have not remained unpaid for a period of ninety (90) days
after the same became due. Expenses which are classified as "operating lease
expenses" under GAAP shall not constitute "Indebtedness" under this Agreement.

         "Indemnified Taxes" means Taxes other than Excluded Taxes.

         "Index Debt" means senior, unsecured, long-term indebtedness for
borrowed money of Smith that is not guaranteed by any other Person or subject to
any other credit enhancement.

                                       7
<PAGE>
         "Interest Coverage Ratio" shall mean, as of any day, the ratio of (a)
EBITDA for the preceding four (4) fiscal quarter period less Capital
Expenditures made during such period, less income or franchise taxes (to the
extent paid in cash) for such period, plus net cash received from, and minus net
cash paid to, M-I LLC during such period to (b) the Interest Expense for such
period. As it relates to cash receipts from, and payments to, M-I LLC, any
proceeds from equity offerings that are distributed or contributed, as the case
may be, in the form of cash, shall be excluded from the Interest Coverage Ratio
calculation.

         "Interest Election Request" means a request by a Borrower to convert or
continue a Revolving Loan in accordance with Section 2.06.

         "Interest Expense" shall mean, for any period, the sum of (a) the cash
interest payments by an obligor made or accrued in accordance with GAAP during
such period in connection with all of its interest-bearing Indebtedness and (b)
the interest component of any Capital Lease Obligations.

         "Interest Payment Date" means (a) with respect to any ABR Loan, the
first day of each January, April, July and October, and (b) with respect to any
Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing
of which such Loan is a part and, in the case of a Eurodollar Borrowing with an
Interest Period of more than three months' duration, each day prior to the last
day of such Interest Period that occurs at intervals of three months' duration
after the first day of such Interest Period.

         "Interest Period" means with respect to any Eurodollar Borrowing, the
period commencing on the date of such Borrowing and ending on the numerically
corresponding day in the calendar month that is one, two, three or six months
thereafter, as a Borrower may elect; provided, that (i) if any Interest Period
would end on a day other than a Business Day, such Interest Period shall be
extended to the next succeeding Business Day unless such next succeeding
Business Day would fall in the next calendar month, in which case such Interest
Period shall end on the next preceding Business Day, and (ii) any Interest
Period that commences on the last Business Day of a calendar month (or on a day
for which there is no numerically corresponding day in the last calendar month
of such Interest Period) shall end on the last Business Day of the last calendar
month of such Interest Period. For purposes hereof, the date of a Borrowing
initially shall be the date on which such Borrowing is made and thereafter shall
be the effective date of the most recent conversion or continuation of such
Borrowing.

         "Issuing Bank" means Comerica Bank (or any other Lender which agrees to
issue any Letter of Credit upon request by a Borrower), in its capacity as the
issuer of Letters of Credit hereunder, and its successors in such capacity as
provided in Section 2.04(i). The Issuing Bank may, in its discretion, arrange
for one or more Letters of Credit to be issued by Affiliates of the Issuing
Bank, in which case the term "Issuing Bank" shall include any such Affiliate
with respect to Letters of Credit issued by such Affiliate.

         "LC Disbursement" means a payment made by the Issuing Bank pursuant to
a Letter of Credit.

                                       8
<PAGE>
         "LC Exposure" means, at any time, the sum of (a) the aggregate undrawn
amount of all outstanding Letters of Credit at such time plus (b) the aggregate
amount of all LC Disbursements that have not yet been reimbursed by or on behalf
of the Borrowers at such time. The LC Exposure of any Lender at any time shall
be its Applicable Percentage of the total LC Exposure at such time.

         "Lenders" means the Persons listed on Schedule 2.01 and any other
Person that shall have become a party hereto pursuant to an Assignment and
Assumption, other than any such Person that ceases to be a party hereto pursuant
to an Assignment and Assumption.

         "Letter of Credit" means any letter of credit issued pursuant to this
Agreement.

         "LIBO Rate", with respect to any Eurodollar Borrowing for any Interest
Period: (a) a rate per annum equal to the offered rate for deposits in Dollars
for a period equal or comparable to such Interest Period which appears on Page
BBAM of the Bloomberg Financial Markets Information Service as of 11:00 A.M.
(Detroit time) two Business Days prior to the first day of such Interest Period,
or (b) in the event the rate referenced in the preceding subsection (a) does not
appear on such page or service or such page or service shall cease to be
available, the rate per annum equal to the rate determined by the Administrative
Agent as the offered rate on such other page or other service that displays an
average British Bankers Association Interest Settlement Rate for deposits in
Dollars (for delivery on the first day of such Interest Period) with a term
equivalent to such Interest Period, determined as of approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period,
or (c) in the event the rates referenced in the preceding subsections (a) and
(b) are not available, the rate per annum determined by the Administrative Agent
(in its reasonable discretion) as the rate of interest at which Dollar deposits
(for delivery on the first day of such Interest Period) in same day funds in the
approximate amount of the applicable Eurodollar Borrowing and with a term
equivalent to such Interest Period would be offered by the Administrative
Agent's Eurodollar Office to major banks in the offshore Dollar market at their
request at approximately 11:00 a.m. (Detroit time) two Business Days prior to
the first day of such Interest Period.

         "Lien" means, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, hypothecation, encumbrance, charge or security interest in,
on or of such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (or any
financing lease having substantially the same economic effect as any of the
foregoing) relating to such asset and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities.

         "Loan Documents" means, collectively, this Agreement, the Notes, the
Notice of Entire Agreement, all instruments, certificates and agreements now or
hereafter executed or delivered to the Administrative Agent or any Lender
pursuant to any of the foregoing or in connection with the obligations of the
Borrowers under this Agreement and the other Loan Documents or any commitment
regarding such obligations, and all amendments, modifications, renewals,
extensions, increases and rearrangements of, and substitutions for, any of the
foregoing.

         "Loans" means the loans made by the Lenders to a Borrower pursuant to
this Agreement.

                                       9
<PAGE>

         "Material Adverse Effect" means a material adverse effect on (a) the
business, assets, property or condition (financial or otherwise) of Smith and
its Subsidiaries, taken as a whole, (b) the validity or enforceability against
the Borrowers of any of the Loan Documents or (c) the rights of or benefits
available to the Administrative Agent or the Lenders under any Loan Document.

         "Material Indebtedness" means Indebtedness (other than the Loans and
Letters of Credit), or obligations in respect of one or more Swap Agreements, of
any Borrower or any of their Material Subsidiaries in an aggregate principal
amount exceeding $7,500,000. For purposes of determining Material Indebtedness,
the "principal amount" of the obligations in respect of any Swap Agreement at
any time shall be the maximum aggregate amount (giving effect to any netting
agreements) that would be required to be paid if such Swap Agreement were
terminated at such time.

         "Material Subsidiary" means M-I LLC and each other Subsidiary of Smith
with assets comprising 5% or more of the aggregate fair market value of all
assets of Smith and its Subsidiaries on a consolidated basis or with a tangible
net worth comprising 5% or more of the tangible net worth of Smith and its
Subsidiaries on a consolidated basis.

         "M-I LLC" means M-I L.L.C., a Delaware limited liability company.

         "Moody's" means Moody's Investors Service, Inc.

         "Multiemployer Plan" means a multiemployer plan as defined in Section
4001(a)(3) of ERISA.

         "Notes" shall have the meaning assigned to such term in Section 2.02(a)
hereof.

         "Notice of Entire Agreement" means a notice of entire agreement
executed by Borrowers and the Administrative Agent, as the same may from time to
time be amended, modified, supplemented or restated.

         "Obligations" means, as at any date of determination thereof, the sum
of the following: (i) the aggregate principal amount of Loans outstanding
hereunder, plus (ii) the aggregate amount of the LC Exposure.

         "Other Taxes" means any and all present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies arising
from any payment made under any Loan Document or from the execution, delivery or
enforcement of, or otherwise with respect to, any Loan Document.

         "Participant" has the meaning set forth in Section 9.04.

         "PBGC" means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA and any successor entity performing similar functions.

                                       10
<PAGE>
         "Permitted Encumbrances" means:

         (a) Liens imposed by law for taxes that are not yet due or are being
contested in compliance with the provisions of this Agreement;

         (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's
and other like Liens imposed by law, arising in the ordinary course of business
and securing obligations that are not overdue by more than 30 days or are being
contested in compliance with Section 5.04;

         (c) Liens, pledges and deposits made in the ordinary course of business
in compliance with workers' compensation, unemployment insurance and other
social security laws or regulations;

         (d) deposits to secure insurance obligations and the performance of
bids, trade contracts, leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature, in each case in the
ordinary course of business;

         (e) judgment and similar liens in respect of judgments that do not
constitute an Event of Default under this Agreement; and

         (f) easements, zoning restrictions, rights-of-way and similar
encumbrances and restrictions on real property imposed by law or arising in the
ordinary course of business that do not secure any monetary obligations and do
not materially detract from the value of the affected property or interfere with
the ordinary conduct of business of a Borrower or any of their Subsidiaries;

         (g) Liens arising from Swap Agreements;

provided that the term "Permitted Encumbrances" shall not include any Lien
securing Indebtedness.

         "Person" means any natural person, corporation, limited liability
company, trust, joint venture, association, company, partnership, Governmental
Authority or other entity.

         "Plan" means any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 302 of ERISA, and in respect of which a Borrower or
any ERISA Affiliate is (or, if such plan were terminated, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.

         "Prime Rate" means, on any day, the prime rate of Comerica Bank in
effect for that day at the principal offices of Comerica Bank in Detroit,
Michigan. The Prime Rate is a reference rate and does not necessarily represent
the lowest or best rate or a favored rate, and Administrative Agent and each
Lender disclaims any statement, representation or warranty to the contrary.
Administrative Agent or any Lender may make commercial loans or other loans at
rates of interest at, above or below the Prime Rate.

                                       11
<PAGE>
         "Register" has the meaning set forth in Section 9.04.

         "Related Parties" means, with respect to any specified Person, such
Person's Affiliates and the respective directors, officers, employees, agents
and advisors of such Person and such Person's Affiliates.

         "Required Lenders" means, at any time, Lenders having Revolving
Exposures and unused Revolving Commitments representing more than 50% of the sum
of the total Revolving Exposures and unused Revolving Commitments at such time.

         "Revolving Availability Period" means the period from and including the
Effective Date to but excluding the earlier of the Revolving Maturity Date and
the date of termination of the applicable Revolving Commitment.

         "Revolving Commitment" means a Tranche A Revolving Commitment or a
Tranche B Revolving Commitment.

         "Revolving Exposure" means Tranche A Revolving Exposure or Tranche B
Revolving Exposure.

         "Revolving Loan" means a Tranche A Revolving Loan or a Tranche B
Revolving Loan made pursuant to Section 2.01.

         "Revolving Maturity Date" means July ____, 2005.

         "S&P" means Standard & Poor's Ratings Group.

         "Smith" means Smith International, Inc., a Delaware corporation.

         "Statutory Reserve Rate" means a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board to which the Administrative Agent is subject, for
eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in
Regulation D of the Board). Such reserve percentages shall include those imposed
pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute
eurocurrency funding and to be subject to such reserve requirements without
benefit of or credit for proration, exemptions or offsets that may be available
from time to time to any Lender under such Regulation D or any comparable
regulation. The Statutory Reserve Rate shall be adjusted automatically on and as
of the effective date of any change in any reserve percentage.

         "Subsidiary" means, with respect to any Person (the "parent") at any
date, any corporation, limited liability company, partnership, association or
other entity the accounts of which would be consolidated with those of the
parent in the parent's consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date, as well as any
other corporation, limited liability company, partnership, association or other

                                       12
<PAGE>

entity (a) of which securities or other ownership interests representing more
than 50% of the equity or more than 50% of the ordinary voting power or, in the
case of a partnership, more than 50% of the general partnership interests are,
as of such date, owned, Controlled or held, or (b) that is, as of such date,
otherwise Controlled, by the parent or one or more Subsidiaries of the parent or
by the parent and one or more Subsidiaries of the parent.

            "Swap Agreement" means any agreement with respect to any swap,
forward, future or derivative transaction or option or similar agreement
involving, or settled by reference to, one or more rates, currencies,
commodities, equity or debt instruments or securities, or economic, financial or
pricing indices or measures of economic, financial or pricing risk or value or
any similar transaction or any combination of these transactions; provided that
no phantom stock or similar plan providing for payments only on account of
services provided by current or former directors, officers, employees or
consultants of a Borrower or any of their Subsidiaries shall be a Swap
Agreement.

         "Taxes" means any and all present or future taxes, levies, imposts,
duties, deductions, charges or withholdings imposed by any Governmental
Authority.

         "Tranche A Revolving Commitment" means, with respect to each Lender,
the commitment, if any, of such Lender to make Tranche A Revolving Loans and to
acquire participations in Letters of Credit issued at the request of Smith,
expressed as an amount representing the maximum aggregate amount of such
Lender's Tranche A Revolving Exposure hereunder, as such commitment may be (a)
reduced from time to time pursuant to Section 2.07 and (b) reduced or increased
from time to time pursuant to assignments by or to such Lender pursuant to
Section 9.04. The initial amount of each Lender's Tranche A Revolving Commitment
is set forth on Schedule 2.01, or in the Assignment and Assumption pursuant to
which such Lender shall have assumed its Tranche A Revolving Commitment, as
applicable. The initial aggregate amount of the Lenders' Tranche A Revolving
Commitments is $400,000,000. The aggregate Tranche A Revolving Commitments shall
be automatically reduced from time to time by the aggregate Tranche B Revolving
Exposure of the Lenders.

         "Tranche B Revolving Commitment" means, with respect to each Lender,
the commitment, if any, of such Lender to make Tranche B Revolving Loans and to
acquire participations in Letters of Credit issued at the request of M-I LLC,
expressed as an amount representing the maximum aggregate amount of such
Lender's Tranche B Revolving Exposure hereunder, as such commitment may be (a)
reduced from time to time pursuant to Section 2.07 and (b) reduced or increased
from time to time pursuant to assignments by or to such Lender pursuant to
Section 9.04. The initial amount of each Lender's Tranche B Revolving Commitment
is set forth on Schedule 2.01, or in the Assignment and Assumption pursuant to
which such Lender shall have assumed its Tranche B Revolving Commitment, as
applicable. The initial aggregate amount of the Lenders' Tranche B Revolving
Commitments is $150,000,000.

         "Tranche A Revolving Exposure" means, with respect to any Lender at any
time, the sum of the outstanding principal amount of such Lender's Tranche A
Revolving Loans and its LC Exposure at such time attributable to Letters of
Credit requested by Smith.

                                       13
<PAGE>
         "Tranche B Revolving Exposure" means, with respect to any Lender at any
time, the sum of the outstanding principal amount of such Lender's Tranche B
Revolving Loans and its LC Exposure at such time attributable to Letters of
Credit requested by M-I LLC.

         "Tranche A Revolving Loan" means a Loan made pursuant to Section
2.01(a).

         "Tranche B Revolving Loan" means a Loan made pursuant to Section
2.01(b).

         "Transactions" means (a) the execution, delivery and performance by
each Borrower of the Loan Documents to which it is to be a party, the borrowing
of Loans, the use of the proceeds thereof and the issuance of Letters of Credit
hereunder and (b) the execution, delivery and performance by the Borrowers of
each other document and instrument required to satisfy the conditions precedent
to the initial Loan hereunder.

         "Type", when used in reference to any Loan or Borrowing, refers to
whether the rate of interest on such Loan, or on the Loans comprising such
Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate
Base Rate.

         "Withdrawal Liability" means liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.

         SECTION 1.02 Classification of Loans and Borrowings. For purposes of
this Agreement, Loans may be classified and referred to by Type (e.g., a
"Eurodollar Loan"). Borrowings also may be classified and referred to by Type
(e.g., a "Eurodollar Borrowing").

         SECTION 1.03 Terms Generally. The definitions of terms herein shall
apply equally to the singular and plural forms of the terms defined. Whenever
the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". The word "will"
shall be construed to have the same meaning and effect as the word "shall".
Unless the context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any Person shall be construed to include such Person's successors and
assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar
import, shall be construed to refer to this Agreement in its entirety and not to
any particular provision hereof, (d) all references herein to Articles,
Sections, Exhibits and Schedules shall be construed to refer to Articles and
Sections of, and Exhibits and Schedules to, this Agreement and (e) the words
"asset" and "property" shall be construed to have the same meaning and effect
and to refer to any and all tangible and intangible assets and properties,
including cash, securities, accounts and contract rights.

         SECTION 1.04 Accounting Terms; GAAP. Except as otherwise expressly
provided herein, all terms of an accounting or financial nature shall be
construed in accordance with

                                       14
<PAGE>

GAAP, as in effect from time to time; provided that, if a Borrower notifies the
Administrative Agent that such Borrower requests an amendment to any provision
hereof to eliminate the effect of any change occurring after the date hereof in
GAAP or in the application thereof on the operation of such provision (or if the
Administrative Agent notifies the Borrowers that the Required Lenders request an
amendment to any provision hereof for such purpose), regardless of whether any
such notice is given before or after such change in GAAP or in the application
thereof, then such provision shall be interpreted on the basis of GAAP as in
effect and applied immediately before such change shall have become effective
until such notice shall have been withdrawn or such provision amended in
accordance herewith.

                                   ARTICLE II
                                   The Credits

         SECTION 2.01  Revolving Commitments.

         (a) Subject to the terms and conditions set forth herein, each Lender
agrees to make Tranche A Revolving Loans to Smith from time to time during the
Revolving Availability Period in an aggregate principal amount that will not
result in such Lender's Tranche A Revolving Exposure exceeding such Lender's
Tranche A Revolving Commitment. Within the foregoing limits and subject to the
terms and conditions set forth herein, Smith may borrow, prepay and reborrow
Tranche A Revolving Loans.

         (b) Subject to the terms and conditions set forth herein, each Lender
agrees to make Tranche B Revolving Loans to M-I LLC from time to time during the
Revolving Availability Period in an aggregate principal amount that will not
result in such Lender's Tranche B Revolving Exposure exceeding such Lender's
Tranche B Revolving Commitment. Within the foregoing limits and subject to the
terms and conditions set forth herein, M-I LLC may borrow, prepay and reborrow
Tranche B Revolving Loans.

         (c) The Borrowers, Administrative Agent and the Lenders agree pursuant
to Chapter 346 ("Chapter 346") of the Texas Finance Code, that Chapter 346
(which relates to open-end line of credit revolving loan accounts) shall not
apply to this Agreement, the Notes or any Revolving Loan and that neither the
Notes nor any Revolving Loan shall be governed by Chapter 346 or subject to its
provisions in any manner whatsoever.

         SECTION 2.02 Loans and Borrowings.

         (a) Each Loan shall be made as part of a Borrowing consisting of Loans
of the same Type made by the Lenders ratably in accordance with their respective
Revolving Commitments. The failure of any Lender to make any Loan required to be
made by it shall not relieve any other Lender of its obligations hereunder;
provided that the Revolving Commitments of the Lenders are several and no Lender
shall be responsible for any other Lender's failure to make Loans as required.
The Tranche A Revolving Loans made by each Lender shall be evidenced by a single
Note of Smith in substantially the form of Exhibit B-1 payable to the order of
such Lender in a principal amount equal to the applicable Tranche A Revolving
Commitment of such Lender, and otherwise duly completed and the Tranche B
Revolving Loans made by each Lender shall be

                                       15
<PAGE>

evidenced by a single Note of M-I LLC in substantially the form of Exhibit B-2
payable to the order of such Lender in a principal amount equal to the
applicable Tranche B Revolving Commitment of such Lender, and otherwise duly
completed (such notes, together with all renewals, extensions, modifications and
replacements thereof and substitutions therefor, being herein called a "Note"
and collectively called the "Notes"). Each Lender is hereby authorized by the
applicable Borrower to endorse on the schedule (or a continuation thereof) that
may be attached to each Note of such Lender, to the extent applicable, the date,
amount, type of and the applicable period of interest for each Loan made by such
Lender to such Borrower hereunder, and the amount of each payment or prepayment
of principal of such Loan received by such Lender, provided, that any failure by
such Lender to make any such endorsement shall not affect the obligations of
such Borrower under such Note or hereunder in respect of such Loan.

         (b) Subject to Section 2.12, each Revolving Loan shall be comprised
entirely of ABR Loans or Eurodollar Loans as the applicable Borrower may request
in accordance herewith. Each Lender at its option may make any Eurodollar Loan
by causing any domestic or foreign branch or Affiliate of such Lender to make
such Loan; provided that any exercise of such option shall not affect the
obligation of the applicable Borrower to repay such Loan in accordance with the
terms of this Agreement or otherwise result in an increased cost to the
Borrowers.

         (c) At the commencement of each Interest Period for any Eurodollar
Borrowing, such Borrowing shall be in an aggregate amount that is equal to
$2,000,000 or an increment of $100,000 in excess thereof. At the time that each
ABR Revolving Loan is made, such Borrowing shall be in an aggregate amount that
is equal to $2,000,000 or an increment of $100,000 in excess thereof; provided
that an ABR Revolving Loan may be in an aggregate amount that is equal to the
entire unused balance of the total Tranche A Revolving Commitments or Tranche B
Revolving Commitments, as the case may be, or that is required to finance the
reimbursement of an LC Disbursement as contemplated by Section 2.04(e).
Borrowings of more than one Type may be outstanding at the same time; provided
that there shall not at any time be more than a total of fourteen (14)
Eurodollar Borrowings outstanding.

         (d) Notwithstanding any other provision of this Agreement, the
Borrowers shall not be entitled to request, or to elect to convert or continue,
any Borrowing if the Interest Period requested with respect thereto would end
after the Revolving Maturity Date.

         SECTION 2.03 Requests for Borrowings. To request a Revolving Loan, the
applicable Borrower shall notify the Administrative Agent of such request by
telephone (a) in the case of a Eurodollar Borrowing, not later than noon,
Detroit, Michigan time, three Business Days before the date of the proposed
Borrowing and (b) in the case of an ABR Borrowing, not later than 11:00 a.m.,
Detroit, Michigan time, on the date of the proposed Borrowing; provided that any
such notice of an ABR Revolving Loan to finance the reimbursement of an LC
Disbursement as contemplated by Section 2.04(e) may be given not later than
11:00 a.m., Detroit, Michigan time, on the date of the proposed Borrowing. Each
such telephonic Borrowing Request shall be irrevocable and shall be confirmed by
hand delivery or telecopy to the Administrative Agent on the same day as the
telephonic request of a written Borrowing Request in a form approved by the

                                       16
<PAGE>

Administrative Agent and signed by the applicable Borrower. Each such telephonic
and written Borrowing Request shall specify the following information in
compliance with Section 2.02:

                  (i) the aggregate amount of such Borrowing;

                  (ii) the date of such Borrowing, which shall be a Business
         Day;

                  (iii) whether such Borrowing is to be an ABR Borrowing or a
         Eurodollar Borrowing;

                  (iv) in the case of a Eurodollar Borrowing, the initial
         Interest Period to be applicable thereto, which shall be a period
         contemplated by the definition of the term "Interest Period"; and

                  (v) the location and number of the applicable Borrower's
         account to which funds are to be disbursed, which shall comply with the
         requirements of Section 2.05.

If no election as to the Type of Borrowing is specified, then the requested
Borrowing shall be an ABR Borrowing. If no Interest Period is specified with
respect to any requested Eurodollar Revolving Loan, then the applicable Borrower
shall be deemed to have selected an Interest Period of one month's duration.
Promptly following receipt of a Borrowing Request in accordance with this
Section, the Administrative Agent shall advise each Lender of the details
thereof and of the amount of such Lender's Loan to be made as part of the
requested Borrowing. Notwithstanding the foregoing, Borrowers acknowledge that
the applicable Borrower shall bear all risk of loss resulting from disbursements
made upon telephonic request.

         SECTION 2.04  Letters of Credit.

         (a) General. Subject to the terms and conditions set forth herein, any
Borrower may request the issuance of Letters of Credit for its own account, in a
form reasonably acceptable to the Administrative Agent and the Issuing Bank, at
any time and from time to time during the Revolving Availability Period. In the
event of any inconsistency between the terms and conditions of this Agreement
and the terms and conditions of any form of letter of credit application or
other agreement submitted by the applicable Borrower to, or entered into by the
applicable Borrower with, the Issuing Bank relating to any Letter of Credit, the
terms and conditions of this Agreement shall control.

         (b) Notice of Issuance, Amendment, Renewal, Extension; Certain
Conditions. To request the issuance of a Letter of Credit (or the amendment,
renewal or extension of an outstanding Letter of Credit), the applicable
Borrower shall hand deliver or telecopy (or transmit by electronic
communication, if arrangements for doing so have been approved by the Issuing
Bank) to the Issuing Bank and the Administrative Agent (reasonably in advance of
the requested date of issuance, amendment, renewal or extension) a notice
requesting the issuance of a Letter of Credit, or identifying the Letter of
Credit to be amended, renewed or extended, and specifying the date of issuance,
amendment, renewal or extension (which shall be a Business Day), the date on
which such Letter of Credit is to expire (which shall comply with paragraph (c)
of this

                                       17
<PAGE>

Section), the amount of such Letter of Credit, the name and address of the
beneficiary thereof and such other information as shall be necessary to prepare,
amend, renew or extend such Letter of Credit. If requested by the Issuing Bank,
the applicable Borrower also shall submit a letter of credit application on the
Issuing Bank's standard form in connection with any request for a Letter of
Credit. A Letter of Credit shall be issued, amended, renewed or extended only if
(and upon issuance, amendment, renewal or extension of each Letter of Credit the
applicable Borrower shall be deemed to represent and warrant that), after giving
effect to such issuance, amendment, renewal or extension (i) the LC Exposure
shall not exceed $25,000,000 and (ii) in the case of a Letter of Credit
requested by Smith, the total Tranche A Revolving Exposures shall not exceed the
total Tranche A Revolving Commitments or, in the case of a Letter of Credit
requested by M-I LLC, the total Tranche B Revolving Exposures shall not exceed
the total Tranche B Revolving Commitments.

         (c) Expiration Date. Each Letter of Credit shall expire at or prior to
the close of business on the earlier of (i) the date one year after the date of
the issuance of such Letter of Credit (or, in the case of any renewal or
extension thereof, one year after such renewal or extension) and (ii) the date
that is five Business Days prior to the Revolving Maturity Date; provided that
any Letter of Credit with a one-year tenor may provide for the renewal thereof
for additional one-year periods (which shall in no event extend beyond the date
referred to in clause (ii) above).

         (d) Participations. By the issuance of a Letter of Credit (or an
amendment to a Letter of Credit increasing the amount thereof) and without any
further action on the part of the Issuing Bank or the Lenders, the Issuing Bank
hereby grants to each Lender, and each Lender hereby acquires from the Issuing
Bank, a participation in such Letter of Credit equal to such Lender's Applicable
Percentage of the aggregate amount available to be drawn under such Letter of
Credit. In consideration and in furtherance of the foregoing, each Lender hereby
absolutely and unconditionally agrees to pay to the Administrative Agent, for
the account of the Issuing Bank, such Lender's Applicable Percentage of each LC
Disbursement made by the Issuing Bank and not reimbursed by the applicable
Borrower on the date due as provided in paragraph (e) of this Section, or of any
reimbursement payment required to be refunded to the applicable Borrower for any
reason. Each Lender acknowledges and agrees that its obligation to acquire
participations pursuant to this paragraph in respect of Letters of Credit is
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including any amendment, renewal or extension of any Letter of
Credit or the occurrence and continuance of a Default or reduction or
termination of the Revolving Commitments, and that each such payment shall be
made without any offset, abatement, withholding or reduction whatsoever.

         (e) Reimbursement. If the Issuing Bank shall make any LC Disbursement
in respect of a Letter of Credit, the applicable Borrower shall reimburse such
LC Disbursement by paying to the Administrative Agent an amount equal to such LC
Disbursement not later than 1:00 p.m., Detroit, Michigan time, on the date that
such LC Disbursement is made, if the applicable Borrower shall have received
notice of such LC Disbursement prior to 11:00 a.m., Detroit, Michigan time, on
such date, or, if such notice has not been received by the applicable Borrower
prior to such time on such date, then not later than 1:00 p.m., Detroit,
Michigan time, on (i) the Business Day that the applicable Borrower receives
such notice, if such notice is received prior

                                       18
<PAGE>

to 11:00 a.m., Detroit, Michigan time, on the day of receipt, or (ii) the
Business Day immediately following the day that the applicable Borrower receives
such notice, if such notice is not received prior to such time on the day of
receipt; provided that the applicable Borrower may, subject to the conditions to
borrowing set forth herein, request in accordance with Section 2.02 or Section
2.18 that such payment be financed with an ABR Revolving Loan in an equivalent
amount and, to the extent so financed, the applicable Borrower's obligation to
make such payment shall be discharged and replaced by the resulting ABR
Revolving Loan. If the applicable Borrower fails to make such payment when due,
the Administrative Agent shall notify each Lender of the applicable LC
Disbursement, the payment then due from the applicable Borrower in respect
thereof and such Lender's Applicable Percentage thereof. Promptly following
receipt of such notice, each Lender shall pay to the Administrative Agent its
Applicable Percentage of the payment then due from the applicable Borrower, in
the same manner as provided in Section 2.05 with respect to Loans made by such
Lender (and Section 2.05 shall apply, mutatis mutandis, to the payment
obligations of the Lenders), and the Administrative Agent shall promptly pay to
the Issuing Bank the amounts so received by it from the Lenders. Promptly
following receipt by the Administrative Agent of any payment from the applicable
Borrower pursuant to this paragraph, the Administrative Agent shall distribute
such payment to the Issuing Bank or, to the extent that Lenders have made
payments pursuant to this paragraph to reimburse the Issuing Bank, then to such
Lenders and the Issuing Bank as their interests may appear. Any payment made by
a Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC
Disbursement (other than the funding of ABR Revolving Loans as contemplated
above) shall not constitute a Loan and shall not relieve the applicable Borrower
of its obligation to reimburse such LC Disbursement.

         (f) Obligations Absolute. The applicable Borrower's obligation to
reimburse LC Disbursements as provided in paragraph (e) of this Section shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement under any and all circumstances
whatsoever and irrespective of (i) any lack of validity or enforceability of any
Letter of Credit or this Agreement, or any term or provision therein, (ii) any
draft or other document presented under a Letter of Credit proving to be forged,
fraudulent or invalid in any respect or any statement therein being untrue or
inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of
Credit against presentation of a draft or other document that does not comply
with the terms of such Letter of Credit, or (iv) any other event or circumstance
whatsoever, whether or not similar to any of the foregoing, that might, but for
the provisions of this Section, constitute a legal or equitable discharge of, or
provide a right of setoff against, the applicable Borrower's obligations
hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank,
nor any of their Related Parties, shall have any liability or responsibility by
reason of or in connection with the issuance or transfer of any Letter of Credit
or any payment or failure to make any payment thereunder (irrespective of any of
the circumstances referred to in the preceding sentence), or any error,
omission, interruption, loss or delay in transmission or delivery of any draft,
notice or other communication under or relating to any Letter of Credit
(including any document required to make a drawing thereunder), any error in
interpretation of technical terms or any consequence arising from causes beyond
the control of the Issuing Bank; provided that the foregoing shall not be
construed to excuse the Issuing Bank from liability to the applicable Borrower
to the extent of any direct damages (as opposed to consequential damages, claims
in respect of which are hereby waived by the Borrowers to the extent permitted
by

                                       19
<PAGE>

applicable law) suffered by the applicable Borrower that are caused by the
Issuing Bank's failure to exercise care when determining whether drafts and
other documents presented under a Letter of Credit comply with the terms
thereof. The parties hereto expressly agree that, in the absence of gross
negligence or willful misconduct on the part of the Issuing Bank (as finally
determined by a court of competent jurisdiction), the Issuing Bank shall be
deemed to have exercised care in each such determination. In furtherance of the
foregoing and without limiting the generality thereof, the parties agree that,
with respect to documents presented which appear on their face to be in
substantial compliance with the terms of a Letter of Credit, the Issuing Bank
may, in its sole discretion, either accept and make payment upon such documents
without responsibility for further investigation, regardless of any notice or
information to the contrary, or refuse to accept and make payment upon such
documents if such documents are not in strict compliance with the terms of such
Letter of Credit.

         (g) Disbursement Procedures. The Issuing Bank shall, promptly following
its receipt thereof, examine all documents purporting to represent a demand for
payment under a Letter of Credit. The Issuing Bank shall promptly notify the
Administrative Agent and the applicable Borrower by telephone (confirmed by
telecopy) of such demand for payment and whether the Issuing Bank has made or
will make an LC Disbursement thereunder; provided that any failure to give or
delay in giving such notice shall not relieve the applicable Borrower of its
obligation to reimburse the Issuing Bank and the Lenders with respect to any
such LC Disbursement.

         (h) Interim Interest. If the Issuing Bank shall make any LC
Disbursement, then, unless the applicable Borrower shall reimburse such LC
Disbursement in full on the date such LC Disbursement is made, the unpaid amount
thereof shall bear interest, for each day from and including the date such LC
Disbursement is made to but excluding the date that the applicable Borrower
reimburses such LC Disbursement, at the rate per annum then applicable to ABR
Revolving Loans; provided that, if the applicable Borrower fails to reimburse
such LC Disbursement when due pursuant to paragraph (e) of this Section, then
Section 2.11(c) shall apply. Interest accrued pursuant to this paragraph shall
be for the account of the Issuing Bank, except that interest accrued on and
after the date of payment by any Lender pursuant to paragraph (e) of this
Section to reimburse the Issuing Bank shall be for the account of such Lender to
the extent of such payment.

         (i) Replacement of the Issuing Bank. The Issuing Bank may be replaced
at any time by written agreement among the Borrowers, the Administrative Agent,
the replaced Issuing Bank and the successor Issuing Bank. The Administrative
Agent shall notify the Lenders of any such replacement of the Issuing Bank. At
the time any such replacement shall become effective, the respective Borrowers
shall pay all applicable unpaid fees accrued for the account of the replaced
Issuing Bank pursuant to Section 2.10(b). From and after the effective date of
any such replacement, (i) the successor Issuing Bank shall have all the rights
and obligations of the Issuing Bank under this Agreement with respect to Letters
of Credit to be issued thereafter and (ii) references herein to the term
"Issuing Bank" shall be deemed to refer to such successor or to any previous
Issuing Bank, or to such successor and all previous Issuing Banks, as the
context shall require. After the replacement of an Issuing Bank hereunder, the
replaced Issuing Bank shall remain a party hereto and shall continue to have all
the rights and obligations of an Issuing Bank

                                       20
<PAGE>

under this Agreement with respect to Letters of Credit issued by it prior to
such replacement, but shall not be required to issue additional Letters of
Credit.

         (j) Cash Collateralization. If any Event of Default shall occur and be
continuing, on the Business Day that a Borrower receives notice from the
Administrative Agent or the Required Lenders (or, if the maturity of the Loans
has been accelerated, Lenders with LC Exposure representing greater than 50% of
the total LC Exposure) demanding the deposit of cash collateral pursuant to this
paragraph, such Borrower shall deposit in an account with the Administrative
Agent, in the name of the Administrative Agent and for the benefit of the
Lenders, an amount in cash equal to the LC Exposure attributable to such
Borrower as of such date plus any accrued and unpaid interest thereon; provided
that the obligation to deposit such cash collateral shall become effective
immediately, and such deposit shall become immediately due and payable, without
demand or other notice of any kind, upon the occurrence of any Event of Default
described in clause (h) or (i) of Article VII. Each such deposit shall be held
by the Administrative Agent as collateral for the payment and performance of the
obligations of the applicable Borrower under this Agreement. The Administrative
Agent shall have exclusive dominion and control, including the exclusive right
of withdrawal, over such account. Other than any interest earned on the
investment of such deposits, which investments shall be made at the option and
sole discretion of the Administrative Agent and at the applicable Borrower's
risk and expense, such deposits shall not bear interest. Interest or profits, if
any, on such investments shall accumulate in such account. Moneys in such
account shall be applied by the Administrative Agent to reimburse the Issuing
Bank for LC Disbursements for which it has not been reimbursed and, to the
extent not so applied, shall be held for the satisfaction of the reimbursement
obligations of the applicable Borrower for the LC Exposure at such time or, if
the maturity of the Loans has been accelerated (but subject to the consent of
Lenders with LC Exposure representing greater than 50% of the total LC
Exposure), be applied to satisfy other obligations of the applicable Borrower
under this Agreement. If a Borrower is required to provide an amount of cash
collateral hereunder as a result of the occurrence of an Event of Default, such
amount (to the extent not applied as aforesaid) shall be returned to such
Borrower within three Business Days after all Events of Default have been cured
or waived.

         SECTION 2.05  Funding of Borrowings.

         (a) Each Lender shall make each Loan to be made by it hereunder on the
proposed date thereof by wire transfer of immediately available funds by 1:00
p.m., Detroit, Michigan time, to the account of the Administrative Agent most
recently designated by it for such purpose by notice to the Lenders. The
Administrative Agent will make such Loans available to the applicable Borrower
by promptly crediting the amounts so received, in like funds, to an account of
the applicable Borrower maintained with the Administrative Agent and designated
by the applicable Borrower in the applicable Borrowing Request; provided that
ABR Revolving Loans made to finance the reimbursement of an LC Disbursement as
provided in Section 2.04(e) shall be remitted by the Administrative Agent to the
Issuing Bank.

         (b) Unless the Administrative Agent shall have received notice from a
Lender prior to the proposed date of any Borrowing that such Lender will not
make available to the Administrative Agent such Lender's share of such
Borrowing, the Administrative Agent may

                                       21
<PAGE>

assume that such Lender has made such share available on such date in accordance
with paragraph (a) of this Section and may, in reliance upon such assumption,
make available to the applicable Borrower a corresponding amount. If a Lender
has not in fact made its share of the applicable Borrowing available to the
Administrative Agent, then the applicable Lender and the applicable Borrower
severally agree to pay to the Administrative Agent forthwith on demand such
corresponding amount with interest thereon, for each day from and including the
date such amount is made available to the applicable Borrower to but excluding
the date of payment to the Administrative Agent, at (i) in the case of such
Lender, the greater of the Federal Funds Effective Rate and a rate determined by
the Administrative Agent in accordance with banking industry rules on interbank
compensation or (ii) in the case of a Borrower, the interest rate applicable to
ABR Loans. If such Lender pays such amount to the Administrative Agent, then
such amount shall constitute such Lender's Loan included in such Borrowing.

         SECTION 2.06  Interest Elections.

         (a) Each Revolving Loan initially shall be of the Type specified in the
applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall
have an initial Interest Period as specified in such Borrowing Request.
Thereafter, the applicable Borrower may elect to convert such Borrowing to a
different Type or to continue such Borrowing and, in the case of a Eurodollar
Borrowing, may elect Interest Periods therefor, all as provided in this Section.
The applicable Borrower may elect different options with respect to different
portions of the affected Borrowing, in which case each such portion shall be
allocated ratably among the Lenders holding the Loans comprising such Borrowing,
and the Loans comprising each such portion shall be considered a separate
Borrowing.

         (b) To make an election pursuant to this Section, the applicable
Borrower shall notify the Administrative Agent of such election by telephone by
the time that a Borrowing Request would be required under Section 2.03 if such
Borrower were requesting a Revolving Loan of the Type resulting from such
election to be made on the effective date of such election. Each such telephonic
Interest Election Request shall be irrevocable and shall be confirmed by hand
delivery or telecopy to the Administrative Agent on the same day as such
telephonic request of a written Interest Election Request in a form approved by
the Administrative Agent and signed by the applicable Borrower.

         (c) Each telephonic and written Interest Election Request shall specify
the following information:

                  (i) the Borrowing to which such Interest Election Request
         applies and, if different options are being elected with respect to
         different portions thereof, the portions thereof to be allocated to
         each resulting Borrowing (in which case the information to be specified
         pursuant to clauses (iii) and (iv) below shall be specified for each
         resulting Borrowing);

                  (ii) the effective date of the election made pursuant to such
         Interest Election Request, which shall be a Business Day;

                                       22
<PAGE>
                  (iii) whether the resulting Borrowing is to be an ABR
         Borrowing or a Eurodollar Borrowing; and

                  (iv) if the resulting Borrowing is a Eurodollar Borrowing, the
         Interest Period to be applicable thereto after giving effect to such
         election, which shall be a period contemplated by the definition of the
         term "Interest Period".

         If any such Interest Election Request requests a Eurodollar Borrowing
but does not specify an Interest Period, then the applicable Borrower shall be
deemed to have selected an Interest Period of one month's duration.

         (d) Promptly following receipt of an Interest Election Request, the
Administrative Agent shall advise each Lender of the details thereof and of such
Lender's portion of each resulting Borrowing.

         (e) If the applicable Borrower fails to deliver a timely Interest
Election Request with respect to a Eurodollar Borrowing prior to the end of the
Interest Period applicable thereto, then, unless such Borrowing is repaid as
provided herein, at the end of such Interest Period such Borrowing shall be
converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if
an Event of Default has occurred and is continuing and the Administrative Agent,
at the request of the Required Lenders, so notifies the Borrowers, then, so long
as an Event of Default is continuing (i) no outstanding Borrowing may be
converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each
Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the
Interest Period applicable thereto.

         SECTION 2.07 Termination, Reduction and Increase of Revolving
Commitments.

         (a) Unless previously terminated, the Revolving Commitments shall
terminate on the Revolving Maturity Date.

         (b) Smith may at any time terminate, or from time to time reduce, the
Tranche A Revolving Commitments; provided that (i) each reduction of the Tranche
A Revolving Commitments shall be in an amount that is an integral multiple of
$5,000,000, (ii) Smith shall not terminate the Tranche A Revolving Commitments
unless the Tranche B Revolving Commitments shall be terminated concurrently and
Smith shall not reduce the Tranche A Revolving Commitments to an amount less
than the then current aggregate amount of the Tranche B Revolving Commitments,
and (iii) Smith shall not terminate or reduce the Tranche A Revolving
Commitments if, after giving effect to any concurrent prepayment of the
applicable Revolving Loans in accordance with Section 2.09, the sum of the
Tranche A Revolving Exposures would exceed the total Tranche A Revolving
Commitments.

         (c) M-I LLC may at any time terminate, or from time to reduce, the
Tranche B Revolving Commitments; provided that (i) each reduction of the Tranche
B Revolving Commitments shall be in an amount that is an integral multiple of
$5,000,000, (ii) M-I LLC may not reduce the Tranche B Revolving Commitments more
than once in any period of three (3) months, and (iii) M-I LLC shall not
terminate or reduce the Tranche B Revolving Commitments

                                       23
<PAGE>

if, after giving effect to any concurrent prepayment of the applicable Revolving
Loans in accordance with Section 2.09, the sum of the Tranche B Revolving
Exposures would exceed the total Tranche B Revolving Commitments.

         (d) Provided further that no Default or Event of Default has occurred
and is continuing, the Borrowers may elect to increase the aggregate of the
Tranche B Revolving Commitments to an amount not exceeding $200,000,000 (or such
greater amount as the Required Lenders may approve in writing); provided that in
no event may the aggregate of the Tranche B Revolving Commitments exceed the
then current aggregate of the Tranche A Revolving Commitments.

         (e) The applicable Borrower shall notify the Administrative Agent of
any election to terminate or reduce the Revolving Commitments under paragraph
(b) or paragraph (c) of this Section, at least three Business Days prior to the
effective date of such termination or reduction, specifying such election and
the effective date thereof. The Borrowers shall notify the Administrative Agent
of any election to increase the Revolving Commitments under paragraph (d) of
this Section, at least thirty days prior to the effective date of such
increases, specifying such election and the effective date thereof. Promptly
following receipt of any notice, the Administrative Agent shall advise the
Lenders of the contents thereof. Each notice delivered by a Borrower pursuant to
this Section shall be irrevocable; provided that a notice of termination of the
Revolving Commitments delivered by a Borrower may state that such notice is
conditioned upon the effectiveness of other credit facilities, in which case
such notice may be revoked by the applicable Borrower (by notice to the
Administrative Agent on or prior to the specified effective date) if such
condition is not satisfied. Any termination or reduction of the Tranche A
Revolving Commitments and any termination of the Tranche B Revolving Commitments
shall be permanent, but reductions or increases of the Tranche B Revolving
Commitments shall not. Each reduction and increase of the Revolving Commitments
shall be made ratably among the Lenders in accordance with their respective
Revolving Commitments.

         SECTION 2.08 Repayment of Loans; Evidence of Debt.

         (a) Smith hereby unconditionally promises to pay to the Administrative
Agent for the account of each Lender the then unpaid principal amount of each
Tranche A Revolving Loan of such Lender on the Revolving Maturity Date and M-I
LLC hereby unconditionally promises to pay to the Administrative Agent for the
account of each Lender the then unpaid principal amount of each Tranche B
Revolving Loan of such Lender on the Revolving Maturity Date.

         (b) Each Lender shall maintain in accordance with its usual practice an
account or accounts evidencing the indebtedness of the Borrowers to such Lender
resulting from each Loan made by such Lender, including the amounts of principal
and interest payable and paid to such Lender from time to time hereunder.

         (c) The Administrative Agent shall maintain accounts in which it shall
record (i) the amount of each Loan made hereunder, the Type thereof and the
Interest Period applicable thereto, (ii) the amount of any principal or interest
due and payable or to become due and payable from the Borrower to each Lender
hereunder and (iii) the amount of any sum received

                                       24
<PAGE>

by the Administrative Agent hereunder for the account of the Lenders and each
Lender's share thereof.

         (d) The entries made in the accounts maintained pursuant to paragraph
(b) or (c) of this Section shall be prima facie evidence of the existence and
amounts of the obligations recorded therein; provided that the failure of any
Lender or the Administrative Agent to maintain such accounts or any error
therein shall not in any manner affect the obligation of the Borrower to repay
the Loans in accordance with the terms of this Agreement.

         SECTION 2.09  Prepayment of Loans.

         (a) Each Borrower shall have the right at any time and from time to
time to prepay any Borrowing in whole or in part, subject to the requirements of
this Section.

         (b) The applicable Borrower shall notify the Administrative Agent by
telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of
prepayment of a Eurodollar Revolving Loan, not later than noon, Detroit,
Michigan time, three Business Days before the date of prepayment or (ii) in the
case of prepayment of an ABR Revolving Loan, not later than noon, Detroit,
Michigan time, one Business Day before the date of prepayment. Each such notice
shall be irrevocable and shall specify the prepayment date, the principal amount
of each Borrowing or portion thereof to be prepaid; provided that, if a notice
of optional prepayment is given in connection with a conditional notice of
termination of the Revolving Commitments as contemplated by Section 2.07, then
such notice of prepayment may be revoked if such notice of termination is
revoked in accordance with Section 2.07. Promptly following receipt of any such
notice, the Administrative Agent shall advise the Lenders of the contents
thereof. Each partial prepayment of any Borrowing shall be in an amount equal to
$2,000,000 or an increment of $100,000 in excess thereof.

         SECTION 2.10  Fees.

         (a) Smith agrees to pay to the Administrative Agent for the account of
each Lender a commitment fee, which shall accrue at the Applicable Margin on the
average daily unused amount of the Tranche A Revolving Commitment of such Lender
during the period from and including the date hereof to but excluding the date
on which such Tranche A Revolving Commitment terminates and M-I LLC agrees to
pay to the Administrative Agent for the account of each Lender a commitment fee,
which shall accrue at the Applicable Margin on the average daily unused amount
of the Tranche B Revolving Commitment of such Lender during the period from and
including the date hereof to but excluding the date on which such Tranche B
Revolving Commitment terminates. For purposes of computing such commitment fees,
a Tranche A Revolving Commitment of a Lender shall be deemed to be used to the
extent of the Tranche A Revolving Exposure plus the Tranche B Revolving Exposure
of such Lender plus the then current unused balance of the Tranche B Revolving
Commitments of such Lender and a Tranche B Revolving Commitment of a Lender
shall be deemed to be used to the extent of the Tranche B Revolving Exposure of
such Lender. Accrued commitment fees shall be payable in arrears on the first
day of January, April, July and October of each year and on the date on which
the applicable Revolving Commitments terminate, commencing on the first such
date to occur after

                                       25
<PAGE>

the date hereof. All commitment fees shall be computed on the basis of a year of
360 days and shall be payable for the actual number of days elapsed (including
the first day but excluding the last day).

         (b) Each Borrower requesting a Letter of Credit hereunder agrees to pay
(i) to the Administrative Agent for the account of each Lender a participation
fee with respect to its participations in Letters of Credit requested by such
Borrower, which shall accrue at the same Applicable Margin as used to determine
the interest rate applicable to Eurodollar Revolving Loans on the average daily
amount of such Lender's applicable LC Exposure (excluding any portion thereof
attributable to applicable unreimbursed LC Disbursements) during the period from
and including the Effective Date to but excluding the later of the date on which
such Lender's applicable Revolving Commitment terminates and the date on which
such Lender ceases to have any applicable LC Exposure, and (ii) to the Issuing
Bank a fronting fee, which shall accrue at the rate of 1/8% per annum on the
average daily amount of the applicable LC Exposure (excluding any portion
thereof attributable to applicable unreimbursed LC Disbursements) during the
period from and including the Effective Date to but excluding the later of the
date of termination of the applicable Revolving Commitments and the date on
which there ceases to be any applicable LC Exposure (with a minimum fronting fee
for each Letter of Credit of $250), as well as the Issuing Bank's standard fees
with respect to the amendment, renewal or extension of any Letter of Credit or
processing of drawings thereunder. Accrued participation fees and fronting fees
shall be due and payable on the first day of January, April, July and October of
each year, commencing on the first such date to occur after the Effective Date;
provided that all such fees shall be payable on the date on which the applicable
Revolving Commitments terminate and any such fees accruing after the date on
which the applicable Revolving Commitments terminate shall be payable on demand.
Any other fees payable to the Issuing Bank pursuant to this paragraph shall be
payable within 10 days after demand. All participation fees and fronting fees
shall be computed on the basis of a year of 360 days and shall be payable for
the actual number of days elapsed (including the first day but excluding the
last day).

         (c) Each Borrower agrees to pay to the Administrative Agent, for its
own account, fees payable in the amounts and at the times separately agreed upon
between such Borrower and the Administrative Agent.

         (d) All fees payable hereunder shall be paid on the dates due, in
immediately available funds, to the Administrative Agent (or to the Issuing
Bank, in the case of fees payable to it) for distribution, in the case of
commitment fees and participation fees, to the Lenders entitled thereto. Fees
paid shall not be refundable under any circumstances, absent manifest error in
the calculation or assessment of such fees.

         SECTION 2.11  Interest.

         (a) The Loans comprising each ABR Borrowing shall bear interest at the
lesser of (i) the Alternate Base Rate plus the Applicable Margin or (ii) the
Ceiling Rate.

                                       26
<PAGE>

         (b) The Loans comprising each Eurodollar Borrowing shall bear interest
at the lesser of (i) the Adjusted LIBO Rate for the Interest Period in effect
for such Borrowing plus the Applicable Margin or (ii) the Ceiling Rate.

         (c) Notwithstanding the foregoing, if any principal of or interest on
any Loan or any fee or other amount payable by any Borrower hereunder is not
paid when due, whether at stated maturity, upon acceleration or otherwise, such
overdue amount shall bear interest, after as well as before judgment, at a rate
per annum equal to the lesser of (i) the Ceiling Rate or (ii) in the case of
overdue principal of any Loan, 2% plus the rate otherwise applicable to such
Loan as provided in the preceding paragraphs of this Section or in the case of
any other amount, 2% plus the rate applicable to ABR Revolving Loans as provided
in paragraph (a) of this Section.

         (d) Accrued interest on each Loan shall be payable in arrears on each
Interest Payment Date for such Loan and, in the case of Revolving Loans, upon
termination of the applicable Revolving Commitments; provided that (i) interest
accrued pursuant to paragraph (c) of this Section shall be payable on demand,
(ii) in the event of any repayment or prepayment of any Loan (other than a
prepayment of an ABR Revolving Loan prior to the end of the Revolving
Availability Period), accrued interest on the principal amount repaid or prepaid
shall be payable on the date of such repayment or prepayment and (iii) in the
event of any conversion of any Eurodollar Loan prior to the end of the current
Interest Period therefor, accrued interest on such Loan shall be payable on the
effective date of such conversion.

         (e) All interest hereunder shall be computed on the basis of a year of
360 days, except that interest computed by reference to the Alternate Base Rate
shall be computed on the basis of a year of 365 days (or 366 days in a leap
year), and in each case shall be payable for the actual number of days elapsed
(including the first day but excluding the last day). The applicable Alternate
Base Rate or Adjusted LIBO Rate shall be determined by the Administrative Agent,
and such determination shall be conclusive absent manifest error.

         SECTION 2.12 Alternate Rate of Interest. If prior to the commencement
of any Interest Period for a Eurodollar Borrowing:

         (a) the Administrative Agent determines (which determination shall be
conclusive absent manifest error) that adequate and reasonable means do not
exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or

         (b) the Administrative Agent is advised by the Required Lenders that
the Adjusted LIBO Rate for such Interest Period will not adequately and fairly
reflect the cost to such Lenders (or Lender) of making or maintaining their
Loans (or its Loan) included in such Borrowing for such Interest Period;

then the Administrative Agent shall give notice thereof to the Borrowers and the
Lenders by telephone or telecopy as promptly as practicable thereafter and,
until the Administrative Agent notifies the Borrowers and the Lenders that the
circumstances giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Borrowing to, or
continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective
and (ii) if any

                                       27
<PAGE>

Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made
as an ABR Borrowing; provided that if the circumstances giving rise to such
notice affect only one Type of Borrowings, then the other Type of Borrowings
shall be permitted.

         SECTION 2.13  Increased Costs.

         (a) If any Change in Law shall:

                  (i) impose, modify or deem applicable any reserve, special
         deposit or similar requirement against assets of, deposits with or for
         the account of, or credit extended by, any Lender (except any such
         reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing
         Bank; or

                  (ii) impose on any Lender or the Issuing Bank or the London
         interbank market any other condition affecting this Agreement or
         Eurodollar Loans made by such Lender or any Letter of Credit or
         participation therein;

and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining any Eurodollar Loan (or of maintaining its
obligation to make any such Loan) or to increase the cost to such Lender or the
Issuing Bank of participating in, issuing or maintaining any Letter of Credit or
to reduce the amount of any sum received or receivable by such Lender or the
Issuing Bank hereunder (whether of principal, interest or otherwise), then the
applicable Borrower will pay to such Lender or the Issuing Bank, as the case may
be, such additional amount or amounts as will compensate such Lender or the
Issuing Bank, as the case may be, for such additional costs incurred or
reduction suffered.

         (b) If any Lender or the Issuing Bank determines that any Change in Law
regarding capital requirements has or would have the effect of reducing the rate
of return on such Lender's or the Issuing Bank's capital or on the capital of
such Lender's or the Issuing Bank's holding company, if any, as a consequence of
this Agreement or the Loans made by, or participations in Letters of Credit held
by, such Lender, or the Letters of Credit issued by the Issuing Bank, to a level
below that which such Lender or the Issuing Bank or such Lender's or the Issuing
Bank's holding company could have achieved but for such Change in Law (taking
into consideration such Lender's or the Issuing Bank's policies and the policies
of such Lender's or the Issuing Bank's holding company with respect to capital
adequacy), then from time to time the applicable Borrower will pay to such
Lender or the Issuing Bank, as the case may be, such additional amount or
amounts as will compensate such Lender or the Issuing Bank or such Lender's or
the Issuing Bank's holding company for any such reduction suffered.

         (c) A certificate of a Lender or the Issuing Bank setting forth the
amount or amounts necessary to compensate such Lender or the Issuing Bank or its
holding company, as the case may be, as specified in paragraph (a) or (b) of
this Section shall be delivered to the applicable Borrower and shall be
conclusive absent manifest error. The applicable Borrower shall pay such Lender
or the Issuing Bank, as the case may be, the amount shown as due on any such
certificate within 10 days after receipt thereof.

                                       28
<PAGE>
         (d) Failure or delay on the part of any Lender or the Issuing Bank to
demand compensation pursuant to this Section shall not constitute a waiver of
such Lender's or the Issuing Bank's right to demand such compensation; provided
that no Borrower shall be required to compensate a Lender or the Issuing Bank
pursuant to this Section for any increased costs or reductions incurred more
than 180 days prior to the date that such Lender or the Issuing Bank, as the
case may be, notifies the applicable Borrower of the Change in Law giving rise
to such increased costs or reductions and of such Lender's or the Issuing Bank's
intention to claim compensation therefor; provided further that, if the Change
in Law giving rise to such increased costs or reductions is retroactive, then
the 180-day period referred to above shall be extended to include the period of
retroactive effect thereof.

         SECTION 2.14 Break Funding Payments. In the event of (a) the payment of
any principal of any Eurodollar Loan other than on the last day of an Interest
Period applicable thereto (including as a result of an Event of Default), (b)
the conversion of any Eurodollar Loan other than on the last day of the Interest
Period applicable thereto, (c) the failure to borrow, convert, continue or
prepay any Eurodollar Loan on the date specified in any notice delivered
pursuant hereto (regardless of whether such notice may be revoked and is revoked
in accordance with the terms of this Agreement), or (d) the assignment of any
Eurodollar Loan other than on the last day of the Interest Period applicable
thereto as a result of a request by a Borrower pursuant to Section 2.17, then,
in any such event, the applicable Borrower shall compensate each Lender for the
loss, cost and expense attributable to such event. Such loss, cost or expense to
any Lender shall be deemed to include an amount determined by such Lender to be
the excess, if any, of (i) the amount of interest which would have accrued on
the principal amount of such Loan had such event not occurred, at the Adjusted
LIBO Rate that would have been applicable to such Loan, for the period from the
date of such event to the last day of the then current Interest Period therefor
(or, in the case of a failure to borrow, convert or continue, for the period
that would have been the Interest Period for such Loan), over (ii) the amount of
interest which would accrue on such principal amount for such period at the
interest rate which such Lender would bid were it to bid, at the commencement of
such period, for Dollar deposits of a comparable amount and period from other
banks in the eurodollar market. A certificate of any Lender setting forth any
amount or amounts that such Lender is entitled to receive pursuant to this
Section shall be delivered to the applicable Borrower and shall be conclusive
absent manifest error. The applicable Borrower shall pay such Lender the amount
shown as due on any such certificate within 10 days after receipt thereof.

         SECTION 2.15  Taxes.

         (a) Any and all payments by or on account of any obligation of any
Borrower hereunder or under any other Loan Document shall be made free and clear
of and without deduction for any Indemnified Taxes or Other Taxes; provided that
if any Borrower shall be required to deduct any Indemnified Taxes or Other Taxes
from such payments, then (i) the sum payable shall be increased as necessary so
that after making all required deductions (including deductions applicable to
additional sums payable under this Section) the Administrative Agent, Lender or
Issuing Bank (as the case may be) receives an amount equal to the sum it would
have received had no such deductions been made, (ii) the applicable Borrower
shall make such

                                       29
<PAGE>

deductions and (iii) the applicable Borrower shall pay the full amount deducted
to the relevant Governmental Authority in accordance with applicable law.

         (b) In addition, each Borrower shall pay any applicable Other Taxes to
the relevant Governmental Authority in accordance with applicable law.

         (c) Each Borrower shall indemnify the Administrative Agent, each Lender
and the Issuing Bank, within 10 days after written demand therefor, for the full
amount of any applicable Indemnified Taxes or applicable Other Taxes paid by the
Administrative Agent, such Lender or the Issuing Bank, as the case may be, on or
with respect to any payment by or on account of any obligation of such Borrower
hereunder or under any other Loan Document (including Indemnified Taxes or Other
Taxes imposed or asserted on or attributable to amounts payable under this
Section) and any penalties, interest and reasonable expenses arising therefrom
or with respect thereto, whether or not such Indemnified Taxes or Other Taxes
were correctly or legally imposed or asserted by the relevant Governmental
Authority. A certificate as to the amount of such payment or liability delivered
to the applicable Borrower by a Lender or the Issuing Bank, or by the
Administrative Agent on its own behalf or on behalf of a Lender or the Issuing
Bank, shall be conclusive absent manifest error.

         (d) As soon as practicable after any payment of Indemnified Taxes or
Other Taxes by any Borrower to a Governmental Authority, such Borrower shall
deliver to the Administrative Agent the original or a certified copy of a
receipt issued by such Governmental Authority evidencing such payment, a copy of
the return reporting such payment or other evidence of such payment reasonably
satisfactory to the Administrative Agent.

         (e) Any Foreign Lender that is entitled to an exemption from or
reduction of withholding tax under the law of the jurisdiction in which the
Borrowers are located, or any treaty to which such jurisdiction is a party, with
respect to payments under this Agreement shall deliver to the Borrowers (with a
copy to the Administrative Agent), at the time or times prescribed by applicable
law, such properly completed and executed documentation prescribed by applicable
law or reasonably requested by the Borrowers as will permit such payments to be
made without withholding or at a reduced rate.

         (f) If the Administrative Agent or a Lender determines, in its sole
discretion, that it has received a refund of any Taxes or Other Taxes or
"gross-up" payment as to which it has been indemnified by a Borrower or with
respect to which a Borrower has paid additional amounts pursuant to this Section
2.15, it shall pay over such refund to the applicable Borrower (but only to the
extent of indemnity payments made, or additional amounts paid, by the applicable
Borrower under this Section 2.15 with respect to the Taxes or Other Taxes giving
rise to such refund), net of all out-of-pocket expenses of the Administrative
Agent or such Lender and without interest (other than any interest paid by the
relevant Governmental Authority with respect to such refund); provided, that the
applicable Borrower, upon the request of the Administrative Agent or such
Lender, agrees to repay the amount paid over to such Borrower (plus any
penalties, interest or other charges imposed by the relevant Governmental
Authority) to the Administrative Agent or such Lender in the event the
Administrative Agent or such Lender is required to repay such refund to such
Governmental Authority. This Section shall not be

                                       30
<PAGE>

construed to require the Administrative Agent or any Lender to make available
its tax returns (or any other information relating to its taxes which it deems
confidential) to any Borrower or any other Person.

         SECTION 2.16 Payments Generally; Pro Rata Treatment; Sharing of
Set-offs.

         (a) Each Borrower shall make each payment required to be made by it
hereunder or under any other Loan Document (whether of principal, interest, fees
or reimbursement of LC Disbursements, or of amounts payable under Section 2.13,
2.14 or 2.15, or otherwise) prior to the time expressly required hereunder or
under such other Loan Document for such payment (or, if no such time is
expressly required, prior to 1:00 p.m., Detroit, Michigan time), on the date
when due, in immediately available funds, without set-off, deduction or
counterclaim. Any amounts payable to the Administrative Agent that are received
after such time on any date may, in the discretion of the Administrative Agent,
be deemed to have been received on the next succeeding Business Day for purposes
of calculating interest thereon. All such payments shall be made to the
Administrative Agent at its offices at 500 Woodward, 9th Floor, Detroit,
Michigan 48226-3289, except payments to be made directly to the Issuing Bank as
expressly provided herein and except that payments pursuant to Sections 2.13,
2.14, 2.15 and 9.03 shall be made directly to the Persons entitled thereto and
payments pursuant to other Loan Documents shall be made to the Persons specified
therein. The Administrative Agent shall distribute any such payments received by
it for the account of any other Person to the appropriate recipient promptly
following receipt thereof. If any payment under any Loan Document shall be due
on a day that is not a Business Day, the date for payment shall be extended to
the next succeeding Business Day, and, in the case of any payment accruing
interest, interest thereon shall be payable for the period of such extension.
All payments under each Loan Document shall be made in Dollars.

         (b) If at any time insufficient funds are received by and available to
the Administrative Agent to pay fully all amounts of principal, unreimbursed LC
Disbursements, interest and fees then due hereunder, such funds shall be applied
(i) first, towards payment of interest and fees then due hereunder, ratably
among the parties entitled thereto in accordance with the amounts of interest
and fees then due to such parties, and (ii) second, towards payment of principal
and unreimbursed LC Disbursements then due hereunder, ratably among the parties
entitled thereto in accordance with the amounts of principal and unreimbursed LC
Disbursements then due to such parties.

         (c) If any Lender shall, by exercising any right of set-off or
counterclaim or otherwise, obtain payment in respect of any principal of or
interest on any of its Revolving Loans or participations in LC Disbursements,
resulting in such Lender receiving payment of a greater proportion of the
aggregate amount of its Revolving Loans and participations in LC Disbursements
and accrued interest thereon than the proportion received by any other Lender,
then the Lender receiving such greater proportion shall purchase (for cash at
face value) participations in the Revolving Loans and participations in LC
Disbursements of other Lenders to the extent necessary so that the benefit of
all such payments shall be shared by the Lenders ratably in accordance with the
aggregate amount of principal of and accrued interest on their respective
Revolving Loans and participations in LC Disbursements; provided that (i) if any
such participations are purchased and all or any portion of the payment giving
rise thereto is

                                       31
<PAGE>

recovered, such participations shall be rescinded and the purchase price
restored to the extent of such recovery, without interest, and (ii) the
provisions of this paragraph shall not be construed to apply to any payment made
by any Borrower pursuant to and in accordance with the express terms of this
Agreement or any payment obtained by a Lender as consideration for the
assignment of or sale of a participation in any of its Loans or participations
in LC Disbursements to any assignee or participant, other than to a Borrower or
any of their Subsidiaries or any of their Affiliates (as to which the provisions
of this paragraph shall apply). Each Lender agrees that it will not exercise any
right of set-off or counterclaim or otherwise obtain payment in respect of any
Obligation owed to it other than principal of and interest accruing on the Loans
and participations in the LC Disbursements, unless all of the outstanding
principal of and accrued interest on the Loans and LC Disbursements have been
paid in full. Each Borrower consents to the foregoing and agrees, to the extent
it may effectively do so under applicable law, that any Lender acquiring a
participation pursuant to the foregoing arrangements may exercise against the
applicable Borrower rights of set-off and counterclaim with respect to such
participation as fully as if such Lender were a direct creditor of the
applicable Borrower in the amount of such participation.

         (d) Unless the Administrative Agent shall have received notice from a
Borrower prior to the date on which any payment is due to the Administrative
Agent for the account of the Lenders or the Issuing Bank hereunder that such
Borrower will not make such payment, the Administrative Agent may assume that
such Borrower has made such payment on such date in accordance herewith and may,
without obligation, in reliance upon such assumption, distribute to the Lenders
or the Issuing Bank, as the case may be, the amount due. If the applicable
Borrower has not in fact made such payment when due, then each of the Lenders or
the Issuing Bank, as the case may be, severally agrees to repay to the
Administrative Agent forthwith on demand the amount so distributed to such
Lender or Issuing Bank with interest thereon, for each day from and including
the date such amount is distributed to it to but excluding the date of payment
to the Administrative Agent, at the greater of the Federal Funds Effective Rate
and a rate determined by the Administrative Agent in accordance with banking
industry rules on interbank compensation.

         (e) If any Lender shall fail to make any payment required to be made by
it pursuant to this Agreement, then the Administrative Agent may, in its
discretion (notwithstanding any contrary provision hereof), apply any amounts
thereafter received by the Administrative Agent for the account of such Lender
to satisfy such Lender's obligations hereunder until all such unsatisfied
obligations are fully paid.

         SECTION 2.17  Mitigation Obligations; Replacement of Lenders.

         (a) If any Lender requests compensation under Section 2.13, or if a
Borrower is required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to Section 2.15,
then such Lender shall use reasonable efforts to designate a different lending
office for funding or booking its Loans hereunder or to assign its rights and
obligations hereunder to another of its offices, branches or Affiliates, if, in
the judgment of such Lender, such designation or assignment (i) would eliminate
or reduce amounts payable pursuant to Section 2.13 or 2.15, as the case may be,
in the future and (ii) would not

                                       32
<PAGE>

subject such Lender to any unreimbursed cost or expense and would not otherwise
be disadvantageous to such Lender. The applicable Borrower hereby agrees to pay
all reasonable costs and expenses incurred by any Lender in connection with any
such designation or assignment.

         (b) If any Lender requests compensation under Section 2.13, or if a
Borrower is required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to Section 2.15,
or if any Lender defaults in its obligation to fund Loans hereunder, then the
applicable Borrower may, at its sole expense and effort, upon notice to such
Lender and the Administrative Agent, require such Lender to assign and delegate,
without recourse (in accordance with and subject to the restrictions contained
in Section 9.04, including without limitation Section 9.04(f)), all its
interests, rights and obligations under this Agreement to an assignee that shall
assume such obligations (which assignee may be another Lender, if a Lender
accepts such assignment); provided that (i) the applicable Borrower shall have
received the prior written consent of the Administrative Agent, which consent
shall not unreasonably be withheld, (ii) such assignor Lender shall have
received payment of an amount equal to the outstanding principal of its Loans
and participations in LC Disbursements, accrued interest thereon, accrued fees
and all other amounts payable to it hereunder, from the assignee (to the extent
of such outstanding principal and accrued interest and fees) or the Borrowers
(in the case of all other amounts) and (iii) in the case of any such assignment
resulting from a claim for compensation under Section 2.13 or payments required
to be made pursuant to Section 2.15, such assignment will result in a reduction
in such compensation or payments. A Lender shall not be required to make any
such assignment and delegation if, prior thereto, as a result of a waiver by
such Lender or otherwise, the circumstances entitling the applicable Borrower to
require such assignment and delegation cease to apply.

         SECTION 2.18 Defaulting Lender.

         (a) Notwithstanding anything to the contrary contained herein, in the
event any Lender (x) has refused (which refusal constitutes a breach by such
Lender of its obligations under this Agreement) to make available its portion of
any Loan or (y) notifies either the Administrative Agent or the applicable
Borrower that such Lender does not intend to make available its portion of any
Loan (if the actual refusal would constitute a breach by such Lender of its
obligations under this Agreement) (each, a "Lender Default"), all rights and
obligations hereunder of such Lender (a "Defaulting Lender") as to which a
Lender Default is in effect and of the other parties hereto shall be modified to
the extent of the express provisions of this Section while such Lender Default
remains in effect.

         (b) Loans shall be made pro rata by Lenders (the "Non-Defaulting
Lenders") which are not Defaulting Lenders based on their respective Revolving
Commitments) and no Revolving Commitment of any Lender or any pro rata share of
any Loans required to be advanced by any Lender shall be increased as a result
of such Lender Default. Amounts received in respect of principal of any type of
Loans shall be applied to reduce the applicable Loans of each Lender pro rata
based on the aggregate of the outstanding Loans of that type of all Lenders at
the time of such application; provided, that, such amount shall not be applied
to any Loans of a Defaulting Lender at any time when, and to the extent that,
the aggregate amount of Loans of any Non-

                                       33
<PAGE>

Defaulting Lender exceeds such Non-Defaulting Lender's Revolving Commitment of
all Loans then outstanding.

         (c) A Defaulting Lender shall not be entitled to give instructions to
the Administrative Agent or to approve, disapprove, consent to or vote on any
matters relating to this Agreement and the other Loan Documents. All amendments,
waivers and other modifications of this Agreement and the other Loan Documents
may be made without regard to a Defaulting Lender and, for purposes of the
definition of "Required Lenders," a Defaulting Lender shall be deemed not to be
a Lender and not to have Loans outstanding.

         (d) Other than as expressly set forth in this Section, the rights and
obligations of a Defaulting Lender (including the obligation to indemnify the
Administrative Agent) and the other parties hereto shall remain unchanged.
Nothing in this Section shall be deemed to release any Defaulting Lender from
its obligations under this Agreement and the other Loan Documents, shall alter
such obligations, shall operate as a waiver of any default by such Defaulting
Lender hereunder, or shall prejudice any rights which any Borrower, the
Administrative Agent or any Lender may have against any Defaulting Lender as a
result of any default by such Defaulting Lender hereunder.

         (e) In the event a Defaulting Lender retroactively cures to the
satisfaction of the Administrative Agent the breach which caused a Lender to
become a Defaulting Lender, such Defaulting Lender shall no longer be a
Defaulting Lender and shall be treated as a Lender under this Agreement and the
other Loan Documents.

         SECTION 2.19 Smith Guaranty of Obligations of M-I LLC. Smith, as a
primary obligor and not as a surety, unconditionally guarantees to
Administrative Agent for the ratable benefit of Lenders the full, prompt and
punctual payment of the Tranche B Revolving Loans, together with accrued and
unpaid interest attributable thereto, and the LC Exposure attributable to
Letters of Credit requested by M-I LLC and all other liabilities and
obligations, now or hereafter created or incurred, of M-I LLC under this
Agreement and the other Loan Documents (herein collectively called the
"Guaranteed Debt") when due (whether at its stated maturity, by acceleration or
otherwise) in accordance with the Loan Documents. The foregoing guaranty is
irrevocable, unconditional and absolute, and if for any reason all or any
portion of the Guaranteed Debt shall not be paid when due, Smith will
immediately pay the Guaranteed Debt to Administrative Agent or other Person
entitled to it, in Dollars, regardless of (a) any defense, right of set-off or
counterclaim which M-I LLC may have or assert and (b) whether Administrative
Agent or any Lender or any other Person shall have taken any steps to enforce
any rights against any obligor or any other Person to collect any of the
Guaranteed Debt. The Guaranteed Debt shall include, to the extent permitted by
applicable law, interest and other liabilities accruing or arising in connection
with the applicable obligations after (a) commencement of any case under any
bankruptcy or similar laws by or against M-I LLC or (b) the obligations of M-I
LLC shall cease to exist by operation of law or for any other reason. The
liability of Smith under this Section shall be unconditional irrespective of (i)
any lack of enforceability of the applicable obligations, (ii) any change of the
time, manner or place of payment, or any other term, of the applicable
obligations, provided, however, that unless Smith expressly consents in writing
to an extension of the Revolving Maturity Date, the guaranty provided under this
Section shall not apply to any principal advances made or Letters of Credit
issued after the Revolving Maturity Date last

                                       34
<PAGE>

consented to in writing by Smith; provided further, however, that the guaranty
provided under this Section shall continue in full force and effect as to all
other amounts comprising the Guaranteed Debt, (iii) any exchange, release, or
non-perfection of any collateral securing payment of the applicable obligations,
(iv) any law, regulation or order of any jurisdiction affecting any term of the
applicable obligations or the rights of Administrative Agent or any Lender with
respect thereto, and (v) any other circumstance which might otherwise constitute
a defense available to, or a discharge of, M-I LLC, save and except any
circumstances involving fraud, bad faith, or gross negligence on the part of
Administrative Agent or any Lender. Smith waives promptness, diligence, and
notices with respect to the applicable obligations and the guaranty provided
under this Section and any requirement that Administrative Agent or any Lender
exhaust any right to take any action against M-I LLC or any collateral security.
Smith agrees that it shall never be entitled to be subrogated to any of
Administrative Agent's or any Lender's rights against any obligor or any other
Person or any other collateral or offset rights held by Administrative Agent or
any Lender for payment of the applicable obligations until final termination of
the guaranty provided under this Section. Smith agrees that, if at any time all
or any part of any payment previously applied by Administrative Agent or any
Lender to the Guaranteed Debt is or must be returned by Administrative Agent or
any Lender--or recovered from Administrative Agent or any Lender--for any reason
(including the order of any bankruptcy court), the guaranty provided under this
Section shall automatically be reinstated to the same effect as if the prior
application had not been made. Subject to the automatic reinstatement provisions
of the preceding sentence, the guaranty provided under this Section shall
terminate and be of no further force or effect upon full payment of the
Guaranteed Debt and final termination of the obligation--if any--to make any
further advances to, or to issue any further Letters of Credit at the request
of, M-I LLC under the Loan Documents.

                                   ARTICLE III
                         Representations and Warranties

         The Borrowers represent and warrant to the Lenders that:

         SECTION 3.01 Organization; Powers. Each of the Borrowers and their
Material Subsidiaries is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, has all requisite power
and authority to carry on its business as now conducted and, except where the
failure to do so would not reasonably be expected to result in a Material
Adverse Effect, is qualified to do business in, and is in good standing in,
every jurisdiction where such qualification is required.

         SECTION 3.02 Authorization; Enforceability. The Transactions to be
entered into by each Borrower are within such Borrower's powers and have been
duly authorized by all necessary action. This Agreement has been duly executed
and delivered by the Borrowers and constitutes, and each other Loan Document to
which any Borrower is to be a party, when executed and delivered by such
Borrower, will constitute, a legal, valid and binding obligation of the
applicable Borrower, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and subject to general principles of
equity, regardless of whether considered in a proceeding in equity or at law.

                                       35
<PAGE>

         SECTION 3.03 Governmental Approvals; No Conflicts. The Transactions (a)
do not require any material consent or approval of, registration or filing with,
or any other action by, any Governmental Authority, except such as have been
obtained or made and are in full force and effect, (b) will not violate any
applicable law or regulation or the charter, by-laws or other organizational
documents of any Borrower or any of their Material Subsidiaries or any order of
any Governmental Authority, (c) will not violate or result in a default under
any material indenture, agreement or other instrument binding upon any Borrower
or any of their Material Subsidiaries or their assets, or give rise to a right
thereunder to require any payment to be made by any Borrower or any of their
Material Subsidiaries, and (d) will not result in the creation or imposition of
any Lien on any asset of any Borrower or any of their Material Subsidiaries.

         SECTION 3.04 Financial Condition. Smith has heretofore furnished to the
Administrative Agent its consolidated balance sheet and statements of
operations, stockholders' equity and cash flows as of and for the fiscal years
ended December 31, 2000 and December 31, 2001, reported on by Arthur Andersen
LLP, independent public accountants. Smith has also furnished to the
Administrative Agent its consolidated balance sheet and statements of operations
and cash flows as of and for the fiscal quarter ended March 31, 2002, certified
by the chief financial officer of Smith. Such financial statements present
fairly, in all material respects, the financial position and results of
operations and cash flows of Smith and its consolidated Subsidiaries as of such
dates and for such periods in accordance with GAAP, subject to year-end audit
adjustments and the absence of footnotes in the case of the March 31, 2002
statements referred to above. Since December 31, 2001 through the date of
Borrowers' execution of this Agreement, there has been no material adverse
change in the business, assets, operations, prospects or condition, financial or
otherwise, of Smith and its Subsidiaries, taken as a whole, other than as a
result of industry conditions generally.

         SECTION 3.05  Properties.

         (a) Each of the Borrowers and their Material Subsidiaries has good
title to, or valid leasehold interests in, all its real and personal property
material to its business, except for minor defects in title that do not
interfere with its ability to conduct its business as currently conducted or to
utilize such properties for their intended purposes.

         (b) Each of the Borrowers and their Material Subsidiaries owns, or is
licensed to use, all trademarks, tradenames, copyrights, patents and other
intellectual property material to its business, and the use thereof by the
Borrowers and their Material Subsidiaries does not infringe upon the rights of
any other Person, except for any such infringements that could not reasonably be
expected to result in a Material Adverse Effect.

         SECTION 3.06  Litigation and Environmental Matters.

         (a) There are no actions, suits or proceedings by or before any
arbitrator or Governmental Authority pending against or, to the knowledge of the
Borrowers, threatened against or affecting any Borrower or any of their Material
Subsidiaries (i) as to which, in the reasonable judgment of the Borrowers, there
is a reasonable possibility of an adverse

                                       36
<PAGE>

determination and that, if adversely determined, could reasonably be expected to
result in a Material Adverse Effect or (ii) that involve any of the Loan
Documents or the Transactions.

         (b) Except with respect to any other matters that, in the reasonable
judgment of the Borrowers, could not reasonably be expected to result in a
Material Adverse Effect, neither any Borrower nor any of their Material
Subsidiaries (i) has failed to comply with any Environmental Law or to obtain,
maintain or comply with any permit, license or other approval required under any
Environmental Law, (ii) has become subject to any Environmental Liability, (iii)
has received notice of any claim with respect to any Environmental Liability or
(iv) knows of any basis for any Environmental Liability.

         SECTION 3.07 Compliance with Laws and Agreements. Each of the Borrowers
and their Material Subsidiaries is in compliance with all laws, regulations and
orders of any Governmental Authority applicable to it or its property and all
indentures, agreements and other instruments binding upon it or its property,
except where the failure to do so could not reasonably be expected to result in
a Material Adverse Effect. No Default has occurred and is continuing.

         SECTION 3.08 Investment and Holding Company Status. Neither any
Borrower nor any of their Material Subsidiaries is (a) an "investment company"
as defined in, or subject to regulation under, the Investment Company Act of
1940 or (b) a "holding company" as defined in, or subject to regulation under,
the Public Utility Holding Company Act of 1935.

         SECTION 3.09 Taxes. Each of the Borrowers and their Material
Subsidiaries has timely filed or caused to be filed all Tax returns and reports
required to have been filed and has paid or caused to be paid all Taxes required
to have been paid by it, except (a) Taxes that are being contested in good faith
by appropriate proceedings and for which the applicable Borrower or Material
Subsidiary, as applicable, has set aside on its books adequate reserves or (b)
to the extent that the failure to do so could not reasonably be expected to
result in a Material Adverse Effect.

         SECTION 3.10 ERISA. No ERISA Event has occurred or is reasonably
expected to occur that, when taken together with all other ERISA Events for
which liability is reasonably expected to occur, could reasonably be expected to
result in a Material Adverse Effect. The present value of all accumulated
benefit obligations under each Plan (based on the assumptions used for purposes
of Statement of Financial Accounting Standards No. 87) did not, as of the date
of the most recent financial statements reflecting such amounts, exceed the fair
market value of the assets of such Plan, and the present value of all
accumulated benefit obligations of all underfunded Plans (based on the
assumptions used for purposes of Statement of Financial Accounting Standards No.
87) did not, as of the date of the most recent financial statements reflecting
such amounts, exceed the fair market value of the assets of all such underfunded
Plans, in each of such cases so as to cause a Material Adverse Effect.

         SECTION 3.11 Disclosure. Each of the Borrowers has disclosed to the
Lenders all agreements, instruments and corporate or other restrictions to which
such Borrower or any of its Material Subsidiaries is subject, and all other
matters known to the Borrowers, that could

                                       37
<PAGE>

reasonably be expected to result in a Material Adverse Effect. None of the
reports, financial statements, certificates or other information furnished by or
on behalf of any Borrower to the Administrative Agent or any Lender in
connection with the negotiation of this Agreement or any other Loan Document or
delivered hereunder or thereunder (as modified or supplemented by other
information so furnished) contains any material misstatement of fact or omits to
state any material fact necessary to make the statements therein, taken as a
whole, in the light of the circumstances under which they were made, not
misleading.

                                   ARTICLE IV
                                   Conditions

         SECTION 4.01 Effective Date. The obligations of the Lenders to make
Loans and of the Issuing Bank to issue Letters of Credit hereunder shall not
become effective until the date on which each of the following conditions is
satisfied (or waived in accordance with Section 9.02):

         (a) The Administrative Agent (or its counsel) shall have received from
each party hereto either (i) counterparts of this Agreement signed on behalf of
such party or (ii) written evidence satisfactory to the Administrative Agent
(which may include telecopy transmission of a signed signature page of this
Agreement) that such party has signed counterparts of this Agreement.

         (b) The Administrative Agent (or its counsel) shall have received from
the Borrowers an original of each applicable Note signed on behalf of the
applicable Borrower.

         (c) The Administrative Agent (or its counsel) shall have received from
Borrowers and from each other party to the Loan Documents (other than the Notes)
either (i) counterparts of each applicable Loan Document signed on behalf of
such party or (ii) written evidence satisfactory to the Administrative Agent
(which may include telecopy transmission of a signed signature page of the
applicable Loan Document) that such party has signed counterparts of such Loan
Document.

         (d) The Administrative Agent shall have received written opinions
(addressed to the Administrative Agent and the Lenders and dated the Effective
Date) of (i) Neal Sutton, General Counsel of Smith, (ii) Richard Chandler,
General Counsel of M-I LLC and (iii) Gardere Wynne Sewell LLP, counsel for the
Borrowers, in form and substance satisfactory to the Administrative Agent and
its counsel, covering such other matters relating to the Borrowers, the Loan
Documents or the Transactions as the Required Lenders shall reasonably request.

         (e) The Administrative Agent shall have received such documents and
certificates as the Administrative Agent or its counsel may reasonably request
relating to the organization, existence and good standing of each Borrower, the
authorization of the Transactions and any other legal matters relating to the
Borrowers, the Loan Documents or the Transactions, all in form and substance
satisfactory to the Administrative Agent and its counsel.

         (f) The Administrative Agent shall have received a certificate, dated
the Effective Date and signed by the President, a Vice President or a Financial
Officer of each of the

                                       38
<PAGE>

Borrowers, confirming compliance with the conditions set forth in paragraphs (a)
and (b) of Section 4.02.

         (g) The Administrative Agent shall have received all fees and other
amounts due and payable on or prior to the Effective Date, including, to the
extent invoiced, reimbursement or payment of all out-of-pocket expenses
(including fees, charges and disbursements of counsel) required to be reimbursed
or paid by any Borrower hereunder or under any other Loan Document.

         (h) The Administrative Agent shall have received evidence satisfactory
to the Administrative Agent that the existing syndicated credit facilities of
Smith and M-I LLC (under credit agreements, each dated as of April 4, 1996, as
amended) shall have been terminated.

The Administrative Agent shall notify the Borrowers and the Lenders of the
Effective Date, and such notice shall be conclusive and binding.

         SECTION 4.02 Each Credit Event. The obligation of each Lender to make a
Loan on the occasion of any Borrowing, and of the Issuing Bank to issue, amend,
renew or extend any Letter of Credit, is subject to receipt of the request
therefor in accordance herewith and to the satisfaction of the following
conditions:

         (a) The representations and warranties of each Borrower set forth in
the Loan Documents shall be true and correct in all material respects on and as
of the date of such Borrowing or the date of issuance, amendment, renewal or
extension of such Letter of Credit, as applicable.

         (b) At the time of and immediately after giving effect to such
Borrowing or the issuance, amendment, renewal or extension of such Letter of
Credit, as applicable, no Default shall have occurred and be continuing and
there shall have occurred no event which would be reasonably likely to have a
Material Adverse Effect.

Each Borrowing and each issuance, amendment, renewal or extension of a Letter of
Credit shall be deemed to constitute a representation and warranty by the
applicable Borrower on the date thereof as to the matters specified in
paragraphs (a) and (b) of this Section.

                                    ARTICLE V
                              Affirmative Covenants

         Until the Revolving Commitments have expired or been terminated and the
principal of and interest on each Loan and all fees payable hereunder shall have
been paid in full and all Letters of Credit shall have expired or terminated and
all LC Disbursements shall have been reimbursed, the Borrowers covenant and
agree with the Lenders that:

         SECTION 5.01 Financial Statements; Ratings Change and Other
Information. The Borrowers will furnish to the Administrative Agent and each
Lender:

                                       39
<PAGE>

         (a) within 105 days after the end of each fiscal year, Smith's audited
consolidated balance sheet and related statements of operations, stockholders'
equity and cash flows as of the end of and for such year, setting forth in each
case in comparative form the figures for the previous fiscal year, all reported
on by Deloitte & Touche LLP or other independent public accountants of
recognized national standing (without a "going concern" or like qualification or
exception and without any qualification or exception as to the scope of such
audit) to the effect that such consolidated financial statements present fairly
in all material respects the financial condition and results of operations of
Smith and its consolidated Subsidiaries on a consolidated basis in accordance
with GAAP consistently applied;

         (b) concurrently with any delivery of financial statements under clause
(a) above, a certificate of the accounting firm that reported on such financial
statements stating whether they obtained knowledge during the course of their
examination of such financial statements of any Default (which certificate may
be limited to the extent required by accounting rules or guidelines);

         (c) within 60 days after the end of each fiscal quarter of each fiscal
year, Smith's unaudited (i) consolidated balance sheets as of the end of such
fiscal quarter and the preceding fiscal year-end period, (ii) related statements
of operations for such fiscal quarter and the then elapsed portion of the fiscal
year, and (iii) related statements of cash flows for the then elapsed portion of
the fiscal year, in the case of (ii) and (iii), setting forth in comparative
form the figures for the corresponding period of the previous fiscal year. The
quarterly financial statements should be certified by a Financial Officer of
Smith as presenting fairly in all material respects the financial condition and
results of operations of the applicable Borrower and its consolidated
Subsidiaries on a consolidated basis in accordance with GAAP consistently
applied, subject to normal year-end audit adjustments and the absence of
footnotes;

         (d) concurrently with any delivery of financial statements under clause
(a) or (c) above, a consolidating balance sheet and statement of operations of
M-I LLC for such period, certified by a Financial Officer of Smith as presenting
fairly in all material respects the financial condition and results of
operations of M-I LLC in accordance with GAAP consistently applied, subject to
normal year-end audit adjustments and the absence of footnotes;

         (e) concurrently with any delivery of financial statements under clause
(a) or (c) above, a certificate of a Financial Officer of Smith (i) certifying
as to whether, to the knowledge of such officer, a Default has occurred and, if
such officer has knowledge of the occurrence of a Default, specifying the
details thereof and any action taken or proposed to be taken with respect
thereto, (ii) setting forth reasonably detailed calculations demonstrating
compliance with Section 5.09 and (iii) to the extent that any change in GAAP or
in the application thereof has occurred since the date of the audited financial
statements referred to in Section 3.04 which affects the financial statements
accompanying such certificate, specifying the effect of such change on such
financial statements;

         (f) promptly after the same become publicly available, copies of each
Form 10-Q and Form 10-K filed by Smith with the Securities and Exchange
Commission or with any Governmental Authority succeeding to any or all of the
functions of said Commission;

                                       40
<PAGE>
         (g) promptly after Moody's or S&P shall have announced a change in the
rating established or deemed to have been established for the Index Debt,
written notice of such rating change; and

         (h) promptly following any request therefore, such other information
regarding the operations, business affairs and financial condition of any
Borrower or any of their Subsidiaries, or compliance with the terms of this
Agreement, as the Administrative Agent or any Lender may reasonably request.

         SECTION 5.02 Notices of Material Events. The Borrowers will, promptly
after becoming aware of the same, furnish to the Administrative Agent and each
Lender written notice of the following:

         (a) the occurrence of any Default;

         (b) the filing or commencement of any action, suit or proceeding by or
before any arbitrator or Governmental Authority against or affecting any
Borrower or any of their Affiliates that, if adversely determined, could
reasonably be expected to result in a Material Adverse Effect;

         (c) the occurrence of any ERISA Event that, alone or together with any
other ERISA Events that have occurred, results in, or could reasonably be
expected to result in, a Material Adverse Effect; and

         (d) any other development that results in, or could reasonably be
expected to result in, a Material Adverse Effect.

Each notice delivered under this Section shall be accompanied by a statement
setting forth the details of the event or development requiring such notice and
any action taken or proposed to be taken with respect thereto.

         SECTION 5.03 Existence; Conduct of Business. The Borrowers will, and
will cause each of their Subsidiaries to, do or cause to be done all things
necessary to preserve, renew and keep in full force and effect its legal
existence and the rights, licenses, permits, privileges and franchises material
to the conduct of its business; provided that the foregoing shall not prohibit
any merger, consolidation, liquidation or dissolution permitted under Section
6.03.

         SECTION 5.04 Payment of Obligations. The Borrowers will, and will cause
each of their Subsidiaries to, pay its obligations, including Tax liabilities,
that, if not paid, could result in a Material Adverse Effect before the same
shall become delinquent or in default, except where (a) the validity or amount
thereof is being contested in good faith by appropriate proceedings, (b) a
Borrower or its applicable Subsidiary has set aside on its books adequate
reserves with respect thereto in accordance with GAAP and (c) the failure to
make payment pending such contest could not reasonably be expected to result in
a Material Adverse Effect.

                                       41
<PAGE>
         SECTION 5.05 Maintenance of Properties; Insurance. The Borrowers will,
and will cause each of their Subsidiaries to, (a) keep and maintain all property
material to the conduct of its business in good working order and condition,
ordinary wear and tear excepted, and (b) maintain, with financially sound and
reputable insurance companies, insurance in such amounts and against such risks
as are customarily maintained by companies engaged in the same or similar
businesses operating in the same or similar locations.

         SECTION 5.06 Books and Records; Inspection Rights. The Borrowers will,
and will cause each of their Subsidiaries to, keep proper books of record and
account in which full, true and correct entries are made of all dealings and
transactions in relation to its business and activities. The Borrowers will, and
will cause each of their Material Subsidiaries to, permit any representatives
designated by the Administrative Agent or any Lender, upon reasonable prior
notice to the Borrowers, to visit and inspect its properties, to examine and
make extracts from its books and records, and to discuss its affairs, finances
and condition with its officers and independent accountants, all at such
reasonable times and as often as reasonably requested.

         SECTION 5.07 Compliance with Laws. The Borrowers will, and will cause
each of their Subsidiaries to, comply with all laws, rules, regulations and
orders of any Governmental Authority applicable to it or its property, except
where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.

         SECTION 5.08 Use of Proceeds and Letters of Credit. The proceeds of the
Loans will be used only to refinance existing Indebtedness and for other working
capital needs and general corporate purposes. No part of the proceeds of any
Loan will be used, whether directly or indirectly, for any purpose that entails
a violation of any of the Regulations of the Board, including Regulations T, U
and X.

         SECTION 5.09 Financial Covenants. Smith will have and maintain, on a
consolidated basis:

         (a) Debt to Capitalization Ratio - a Debt to Capitalization Ratio of
not greater than 40%.

         (b) Interest Coverage Ratio - an Interest Coverage Ratio of not less
than 2.00 to 1.00.

                                   ARTICLE VI
                               Negative Covenants

         Until the Revolving Commitments have expired or terminated and the
principal of and interest on each Loan and all fees payable hereunder have been
paid in full and all Letters of Credit have expired or terminated and all LC
Disbursements shall have been reimbursed, the Borrowers covenant and agree with
the Lenders that:

                                       42
<PAGE>
         SECTION 6.01 Subsidiary Indebtedness. The Borrowers will not permit any
Subsidiary of Smith (including without limitation M-I LLC) to create, incur,
assume or permit to exist any Indebtedness, except:

         (a) Indebtedness created hereunder;

         (b) Indebtedness existing on the date hereof and set forth in Schedule
6.01, all Indebtedness issuable under the instruments and documents set forth in
Schedule 6.01 and extensions, renewals and replacements of any such Indebtedness
that do not increase the outstanding principal amount thereof;

         (c) Indebtedness of any such Subsidiary to any other such Subsidiary;

         (d) Indebtedness of any such Subsidiary as an account party in respect
of trade letters of credit;

         (e) Indebtedness arising under Swap Agreements which have been entered
into for bona fide hedging purposes and not for speculative purposes; and

         (f) other Indebtedness in an aggregate principal amount not exceeding,
at any one time outstanding, $150,000,000 minus secured Indebtedness of Smith.

         SECTION 6.02 Liens. The Borrowers will not, and will not permit any of
their Subsidiaries to, create, incur, assume or permit to exist any Lien on any
property or asset now owned or hereafter acquired by it, or assign or sell any
income or revenues (including accounts receivable) or rights in respect of any
thereof, except:

         (a) Permitted Encumbrances;

         (b) any Lien on any property or asset of a Borrower or any of their
Subsidiaries existing on the date hereof and set forth in Schedule 6.02;
provided that (i) such Lien shall not apply to any other property or asset of a
Borrower or any of their Subsidiaries (other than proceeds of such property or
asset) and (ii) such Lien shall secure only those obligations which it secures
on the date hereof and extensions, renewals and replacements thereof that do not
increase the outstanding principal amount thereof;

         (c) any Lien existing on any property or asset prior to the acquisition
thereof by a Borrower or any of their Subsidiaries or existing on any property
or asset of any Person that becomes a Subsidiary of a Borrower after the date
hereof prior to the time such Person becomes a Subsidiary of a Borrower;
provided that (i) such Lien is not created in contemplation of or in connection
with such acquisition or such Person becoming a Subsidiary of a Borrower, as the
case may be, (ii) such Lien shall not apply to any other property or assets of a
Borrower or any Subsidiary of a Borrower (other than proceeds of such property
or asset) and (iii) such Lien shall secure only those obligations which it
secures on the date of such acquisition or the date such Person becomes a
Subsidiary of a Borrower, as the case may be and extensions, renewals and
replacements thereof that do not increase the outstanding principal amount
thereof;

                                       43
<PAGE>

         (d) Liens on fixed or capital assets acquired, constructed or improved
by a Borrower or any of their Subsidiaries; provided that (i) such security
interests secure Indebtedness permitted by clause (e) of Section 6.01, (ii) such
security interests and the Indebtedness secured thereby are incurred prior to or
within 90 days after such acquisition or the completion of such construction or
improvement, (iii) the Indebtedness secured thereby does not exceed 100% of the
cost of acquiring, constructing or improving such fixed or capital assets and
(iv) such security interests shall not apply to any other property or assets of
a Borrower or any of their Subsidiaries (other than proceeds of such property or
asset); and

         (e) other Liens securing Indebtedness in an aggregate principal amount
not exceeding, at any one time outstanding, $150,000,000 minus Indebtedness of
Subsidiaries of Smith incurred under the exception set forth in Section 6.01(f)
hereof.

         SECTION 6.03 Fundamental Changes.

         (a) The Borrowers will not, and will not permit any of their
Subsidiaries to, merge into or consolidate with any other Person, or permit any
other Person to merge into or consolidate with it, or sell, transfer, lease or
otherwise dispose of (in one transaction or in a series of transactions) all or
substantially all of its assets, or all or substantially all of the stock of any
of their Subsidiaries (in each case, whether now owned or hereafter acquired),
or liquidate or dissolve, except that, so long as at the time thereof and
immediately after giving effect thereto no Default shall have occurred and be
continuing, (i) any Subsidiary of a Borrower may merge into Smith in a
transaction in which Smith is the surviving corporation, (ii) any Subsidiary of
a Borrower (other than M-I LLC) may merge into any other Subsidiary of a
Borrower in a transaction in which the surviving entity is a Subsidiary of a
Borrower, (iii) any Subsidiary of a Borrower may sell, transfer, lease or
otherwise dispose of its assets to a Borrower or to another Subsidiary of a
Borrower and (iv) any Subsidiary of a Borrower (other than M-I LLC) may
liquidate or dissolve if Smith determines in good faith that such liquidation or
dissolution is in the best interests of Smith and is not materially
disadvantageous to the Lenders.

         (b) The Borrowers will not, and will not permit any of their
Subsidiaries to, engage to any material extent in any business other than
businesses of the type conducted by the Borrowers and their Subsidiaries on the
date of execution of this Agreement and businesses reasonably related thereto.

         SECTION 6.04 Transactions with Affiliates. The Borrowers will not, and
will not permit any of their Subsidiaries to, sell, lease or otherwise transfer
any property or assets to, or purchase, lease or otherwise acquire any property
or assets from, or otherwise engage in any other transactions with, any of its
Affiliates, except (a) in the ordinary course of business at prices and on terms
and conditions not less favorable to the applicable Borrower or the applicable
Subsidiary than could be obtained on an arm's-length basis from unrelated third
parties and (b) transactions between or among a Borrower and its wholly owned
Subsidiaries not involving any other Affiliate.

         SECTION 6.05 Restrictive Agreements. The Borrowers will not, and will
not permit any of their Subsidiaries to, directly or indirectly, enter into,
incur or permit to exist any

                                       44
<PAGE>

agreement or other arrangement that prohibits, restricts or imposes any
condition upon (a) the ability of a Borrower or any Subsidiary of a Borrower to
create, incur or permit to exist any Lien upon any of its property or assets, or
(b) the ability of any Subsidiary of a Borrower to pay dividends or other
distributions with respect to any shares of its capital stock or to make or
repay loans or advances to a Borrower or any other Subsidiary of a Borrower or
to Guarantee Indebtedness of a Borrower or any other Subsidiary of a Borrower;
provided that (i) the foregoing shall not apply to restrictions and conditions
imposed by law or by this Agreement, (ii) the foregoing shall not apply to
restrictions and conditions existing on the date hereof identified on Schedule
6.05 (but shall apply to any extension or renewal of, or any amendment or
modification expanding the scope of, any such restriction or condition), (iii)
the foregoing shall not apply to customary restrictions and conditions contained
in agreements relating to the sale of a Subsidiary of a Borrower pending such
sale, provided such restrictions and conditions apply only to the Subsidiary of
a Borrower that is to be sold and such sale is permitted hereunder, (iv) clause
(a) of the foregoing shall not apply to restrictions or conditions imposed by
any agreement relating to secured Indebtedness permitted by this Agreement if
such restrictions or conditions apply only to the property or assets securing
such Indebtedness and (v) clause (a) of the foregoing shall not apply to
customary provisions in leases and other contracts restricting the assignment
thereof.

         SECTION 6.06 Restrictions on M-I LLC Dividends. So long as there shall
be any outstanding Tranche B Revolving Exposure, M-I LLC will not make
distributions to the owners of its Equity Interests as such; provided, however,
that distributions of proceeds from equity offerings by M-I LLC shall not be
restricted by this Section.

                                   ARTICLE VII
                                Events of Default

         If any of the following events ("Events of Default") shall occur:

         (a) any Borrower shall fail to pay any principal of any Loan or any
reimbursement obligation in respect of any LC Disbursement when and as the same
shall become due and payable, whether at the due date thereof or at a date fixed
for prepayment thereof or otherwise;

         (b) any Borrower shall fail to pay any interest on any Loan or any fee
or any other amount (other than an amount referred to in clause (a) of this
Article) payable under this Agreement or any other Loan Document, when and as
the same shall become due and payable, and such failure shall continue
unremedied for a period of five Business Days;

         (c) any representation or warranty made or deemed made by or on behalf
of any Borrower in or in connection with any Loan Document or any amendment or
modification thereof or waiver thereunder, or in any report, certificate,
financial statement or other document furnished pursuant to or in connection
with any Loan Document or any amendment or modification thereof or waiver
thereunder, shall prove to have been materially incorrect when made or deemed
made;

                                       45
<PAGE>

         (d) any Borrower shall fail to observe or perform any covenant,
condition or agreement contained in Sections 5.01 or 5.09 or in Article VI;

         (e) any Borrower shall fail to observe or perform any covenant,
condition or agreement contained in any Loan Document (other than those
specified in clause (a), (b) or (d) of this Article), and such failure shall
continue unremedied for a period of 30 days after the earlier of (i) such
Borrower becoming aware of such failure and (ii) notice thereof from the
Administrative Agent to such Borrower (which notice will be given at the request
of any Lender);

         (f) any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity (other than the
voluntary prepayment, repurchase, redemption or defeasance thereof);

         (g) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed seeking (i) liquidation, reorganization or other relief
in respect of any Borrower or any of their Material Subsidiaries or the debts,
or of a substantial part of the assets, of any of them under any Federal, state
or foreign bankruptcy, insolvency, receivership or similar law now or hereafter
in effect or (ii) the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for any Borrower or any of their
Material Subsidiaries or for a substantial part of the assets of any of them,
and, in any such case, such proceeding or petition shall continue undismissed
for 60 days or an order or decree approving or ordering any of the foregoing
shall be entered;

         (h) any Borrower or any of their Material Subsidiaries shall (i)
voluntarily commence any proceeding or file any petition seeking liquidation,
reorganization or other relief under any Federal, state or foreign bankruptcy,
insolvency, receivership or similar law now or hereafter in effect, (ii) consent
to the institution of, or fail to contest in a timely and appropriate manner,
any proceeding or petition described in clause (h) of this Article, (iii) apply
for or consent to the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for any Borrower or any of their
Material Subsidiaries or for a substantial part of its assets, (iv) file an
answer admitting the material allegations of a petition filed against it in any
such proceeding, (v) make a general assignment for the benefit of creditors or
(vi) take any action for the purpose of effecting any of the foregoing;

         (i) any Borrower or any of their Material Subsidiaries shall become
unable, admit in writing its inability or fail generally to pay its debts as
they become due;

         (j) one or more judgments for the payment of money in an aggregate
amount in excess of $7,500,000 (exclusive of amounts covered by insurance) shall
be rendered against any Borrower or any of their Material Subsidiaries and the
same shall remain undischarged for a period of 45 consecutive days during which
execution shall not be effectively stayed, or any action shall be legally taken
by a judgment creditor to attach or levy upon any assets of any Borrower or any
of their Material Subsidiaries to enforce any such judgment;

                                       46
<PAGE>
         (k) an ERISA Event shall have occurred that, in the opinion of the
Required Lenders, when taken together with all other ERISA Events that have
occurred, could reasonably be expected to result in a Material Adverse Effect;

         (l) a Change in Control shall occur;

         (m) M-I LLC shall cease to be a Subsidiary of Smith (unless all Tranche
B Revolving Exposure shall have been paid in full (or in respect of Letters of
Credit requested by M-I LLC, appropriate cash collateral shall have been
provided) and the right of M-I LLC to request additional Tranche B Revolving
Loans or Letters of Credit shall have been terminated);

then, and in every such event (other than an event described in clause (g) or
(h) of this Article), and at any time thereafter during the continuance of such
event, the Administrative Agent may, and at the request of the Required Lenders
shall, by notice to the Borrowers, take either or both of the following actions,
at the same or different times: (i) terminate the Revolving Commitments, and
thereupon the Revolving Commitments shall terminate immediately, and (ii)
declare the Loans then outstanding to be due and payable in whole (or in part,
in which case any principal not so declared to be due and payable may thereafter
be declared to be due and payable), and thereupon the principal of the Loans so
declared to be due and payable, together with accrued interest thereon and all
fees and other obligations of the Borrowers accrued hereunder, shall become due
and payable immediately, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Borrowers; and in case of any
event described in clause (g) or (h) of this Article, the Revolving Commitments
shall automatically terminate and the principal of the Loans then outstanding,
together with accrued interest thereon and all fees and other obligations of the
Borrowers accrued hereunder, shall automatically become due and payable, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrowers.

                                  ARTICLE VIII
                            The Administrative Agent

         Each of the Lenders and the Issuing Bank hereby irrevocably appoints
the Administrative Agent as its agent and authorizes the Administrative Agent to
take such actions on its behalf and to exercise such powers as are delegated to
the Administrative Agent by the terms of the Loan Documents, together with such
actions and powers as are reasonably incidental thereto.

         The bank serving as the Administrative Agent hereunder shall have the
same rights and powers in its capacity as a Lender as any other Lender and may
exercise the same as though it were not the Administrative Agent, and such bank
and its Affiliates may accept deposits from, lend money to and generally engage
in any kind of business with any Borrower or any of their Subsidiaries or any of
their other Affiliates as if it were not the Administrative Agent hereunder.

         The Administrative Agent shall not have any duties or obligations
except those expressly set forth in the Loan Documents. Without limiting the
generality of the foregoing, (a) the Administrative Agent shall not be subject
to any fiduciary or other implied duties, regardless of whether a Default has
occurred and is continuing, (b) the Administrative Agent shall not have

                                       47
<PAGE>

any duty to take any discretionary action or exercise any discretionary powers,
except discretionary rights and powers expressly contemplated by the Loan
Documents that the Administrative Agent is required to exercise in writing by
the Required Lenders (or such other number or percentage of the Lenders as shall
be necessary under the circumstances as provided in Section 9.02), and (c)
except as expressly set forth in the Loan Documents, the Administrative Agent
shall not have any duty to disclose, and shall not be liable for the failure to
disclose, any information relating to any Borrower or any of their Subsidiaries
that is communicated to or obtained by the bank serving as Administrative Agent
or any of its Affiliates in any capacity. The Administrative Agent shall not be
liable for any action taken or not taken by it with the consent or at the
request of the Required Lenders (or such other number or percentage of the
Lenders as shall be necessary under the circumstances as provided in Section
9.02) or in the absence of its own gross negligence or willful misconduct, BUT
REGARDLESS OF THE PRESENCE OF ORDINARY NEGLIGENCE. The Administrative Agent
shall not be deemed to have knowledge of any Default unless and until written
notice thereof is given to the immediate officers of the Administrative Agent
responsible for this Agreement by a Borrower or a Lender and is called a "notice
of default", and the Administrative Agent shall not be responsible for or have
any duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with any Loan Document, (ii) the
contents of any certificate, report or other document delivered thereunder or in
connection therewith, (iii) the performance or observance of any of the
covenants, agreements or other terms or conditions set forth in any Loan
Document, (iv) the validity, enforceability, effectiveness or genuineness of any
Loan Document or any other agreement, instrument or document, or (v) the
satisfaction of any condition set forth in Article IV or elsewhere in any Loan
Document, other than to confirm receipt of items expressly required to be
delivered to the Administrative Agent.

         The Administrative Agent shall be entitled to rely upon, and shall not
incur any liability for relying upon, any notice, request, certificate, consent,
statement, instrument, document or other writing believed by it to be genuine
and to have been signed or sent by the proper Person. The Administrative Agent
also may rely upon any statement made to it orally or by telephone and believed
by it to be made by the proper Person, and shall not incur any liability for
relying thereon. The Administrative Agent may consult with legal counsel (who
may be counsel for a Borrower), independent accountants and other experts
selected by it, and shall not be liable for any action taken or not taken by it
in accordance with the advice of any such counsel, accountants or experts.

         The Administrative Agent may perform any and all its duties and
exercise its rights and powers by or through any one or more sub-agents
appointed by the Administrative Agent. The Administrative Agent and any such
sub-agent may perform any and all its duties and exercise its rights and powers
through their respective Related Parties. The exculpatory provisions of the
preceding paragraphs shall apply to any such sub-agent and to the Related
Parties of the Administrative Agent and any such sub-agent, and shall apply to
their respective activities in connection with the syndication of the credit
facilities provided for herein as well as activities as Administrative Agent.

         Subject to the appointment and acceptance of a successor Administrative
Agent as provided in this paragraph, the Administrative Agent may (and, in the
event (i) neither the

                                       48
<PAGE>

Administrative Agent nor any Affiliate, as a Lender, has any Revolving Exposure
or unused Revolving Commitment and (ii) the Required Lenders so request, the
Administrative Agent shall) resign at any time by notifying the Lenders, the
Issuing Bank and the Borrowers. Upon any such resignation, the Required Lenders
shall have the right to appoint a successor, with the prior written consent of
the Borrowers (unless an Event of Default shall have occurred which is
continuing, in which event the Borrowers' consent shall not be required). If no
successor shall have been so appointed by the Required Lenders and shall have
accepted such appointment within 30 days after the retiring Administrative Agent
gives notice of its resignation, then the retiring Administrative Agent may, on
behalf of the Lenders and the Issuing Bank, appoint a successor Administrative
Agent which shall be a bank with an office in New York City, or an Affiliate of
any such bank. Upon the acceptance of its appointment as Administrative Agent
hereunder by a successor, such successor shall succeed to and become vested with
all the rights, powers, privileges and duties of the retiring Administrative
Agent, and the retiring Administrative Agent shall be discharged from its duties
and obligations hereunder. The fees payable by the Borrowers to a successor
Administrative Agent shall be the same as those payable to its predecessor
unless otherwise agreed between the Borrowers and such successor. After the
Administrative Agent's resignation hereunder, the provisions of this Article and
Section 9.03 shall continue in effect for the benefit of such retiring
Administrative Agent, its sub-agents and their respective Related Parties in
respect of any actions taken or omitted to be taken by any of them while it was
acting as Administrative Agent.

         Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make its
own decisions in taking or not taking action under or based upon this Agreement,
any other Loan Document or related agreement or any document furnished hereunder
or thereunder.

                                   ARTICLE IX
                                  Miscellaneous

         SECTION 9.01  Notices.

         (a) Except in the case of notices and other communications expressly
permitted to be given by telephone (and subject to paragraph (b) below), all
notices and other communications provided for herein shall be in writing and
shall be delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:

                  (i) if to Smith or to M-I LLC, to 16740 Hardy Street, Houston,
         Texas 77205-0068, Attention: Margaret Dorman (Telecopy No.
         281-233-5505);

                  (ii) if to the Administrative Agent, to Comerica Bank, 500
         Woodward Avenue, 9th Floor, Detroit, Michigan 48226, Attention: William
         B. Murdock (Telecopy No. 313-222-5594); and

                                       49
<PAGE>
                  (iii) if to any other Lender, to it at its address (or
         telecopy number) set forth in its Administrative Questionnaire.

         (b) Notices and other communications to the Lenders hereunder may be
delivered or furnished by electronic communications pursuant to procedures
approved by the Administrative Agent; provided that the foregoing shall not
apply to notices pursuant to Article II unless otherwise agreed by the
Administrative Agent and the applicable Lender. The Administrative Agent or a
Borrower may, in its discretion, agree to accept notices and other
communications to it hereunder by electronic communications pursuant to
procedures approved by it; provided that approval of such procedures may be
limited to particular notices or communications.

         (c) Any party hereto may change its address or telecopy number for
notices and other communications hereunder by notice to the other parties
hereto. All notices and other communications given to any party hereto in
accordance with the provisions of this Agreement shall be deemed to have been
given on the date of receipt.

         SECTION 9.02  Waivers; Amendments.

         (a) No failure or delay by the Administrative Agent, the Issuing Bank
or any Lender in exercising any right or power hereunder or under any other Loan
Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The rights and remedies of
the Administrative Agent, the Issuing Bank and the Lenders hereunder and under
the other Loan Documents are cumulative and are not exclusive of any rights or
remedies that they would otherwise have. No waiver of any provision of any Loan
Document or consent to any departure by any Borrower therefrom shall in any
event be effective unless the same shall be permitted by paragraph (b) of this
Section, and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. Without limiting the generality of
the foregoing, the making of a Loan or issuance of a Letter of Credit shall not
be construed as a waiver of any Default, regardless of whether the
Administrative Agent, any Lender or the Issuing Bank may have had notice or
knowledge of such Default at the time.

         (b) Neither this Agreement nor any other Loan Document nor any
provision hereof or thereof may be waived, amended or modified except, in the
case of this Agreement, pursuant to an agreement or agreements in writing
entered into by the Borrowers and the Required Lenders or, in the case of any
other Loan Document, pursuant to an agreement or agreements in writing entered
into by the Administrative Agent and the Borrowers that are parties thereto, in
each case with the consent of the Required Lenders; provided that no such
agreement shall (i) except as expressly provided in Section 2.07(d), increase
the Tranche A Revolving Commitment or the Tranche B Revolving Commitment of any
Lender without the written consent of such Lender, (ii) reduce the principal
amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or
reduce any fees payable hereunder, without the written consent of each Lender
affected thereby, (iii) postpone the scheduled date of payment of the principal
amount of any Loan or LC Disbursement, or any interest thereon, or any fees
payable hereunder, or reduce the amount of, waive or excuse any such payment, or
postpone the scheduled date of expiration

                                       50
<PAGE>

of any Revolving Commitment, without the written consent of each Lender affected
thereby, (iv) change Section 2.16(b) or (c) in a manner that would alter the pro
rata sharing of payments required thereby or change Section 2.07(e) in a manner
that would alter the pro rata treatment required thereby, without the written
consent of each Lender, (v) change any of the provisions of this Section or the
definition of "Required Lenders" or any other provision of any Loan Document
specifying the number or percentage of Lenders required to waive, amend or
modify any rights thereunder or make any determination or grant any consent
thereunder, without the written consent of each Lender, (vi) release Smith from
any liability under Section 2.19 hereof without the written consent of each
Lender or (vii) terminate or modify any indemnity provided to a Lender hereunder
or under any other Loan Document without the written consent of such Lender;
provided further that no such agreement shall amend, modify or otherwise affect
the rights or duties of the Administrative Agent or the Issuing Bank without the
prior written consent of the Administrative Agent or the Issuing Bank, as the
case may be.

         SECTION 9.03  Expenses; Indemnity; Damage Waiver.

         (a) The Borrowers shall pay (i) all reasonable out-of-pocket expenses
incurred by the Administrative Agent and its Affiliates, including the
reasonable fees, charges and disbursements of counsel for the Administrative
Agent, in connection with the syndication of the credit facilities provided for
herein, the preparation and administration of the Loan Documents or any
amendments, modifications or waivers of the provisions thereof (whether or not
the transactions contemplated hereby or thereby shall be consummated), (ii) all
reasonable out-of-pocket expenses incurred by the Issuing Bank in connection
with the issuance, amendment, renewal or extension of any Letter of Credit or
any demand for payment thereunder and (iii) all out-of-pocket expenses incurred
by the Administrative Agent, the Issuing Bank or any Lender, including the fees,
charges and disbursements of any counsel for the Administrative Agent, the
Issuing Bank or any Lender, in connection with the enforcement or protection of
its rights in connection with the Loan Documents, including its rights under
this Section, or in connection with the Loans made or Letters of Credit issued
hereunder, including all such out-of-pocket expenses incurred during any
workout, restructuring or negotiations in respect of such Loans or Letters of
Credit.

         (b) The Borrowers shall indemnify the Administrative Agent, the Issuing
Bank and each Lender, and each Related Party of any of the foregoing Persons
(each such Person being called an "Indemnitee") against, and hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including the fees, charges and disbursements of any counsel
for any Indemnitee, incurred by or asserted against any Indemnitee arising out
of, in connection with, or as a result of (i) the execution or delivery of any
Loan Document or any other agreement or instrument contemplated hereby, the
performance by the parties to the Loan Documents of their respective obligations
thereunder or the consummation of the Transactions or any other transactions
contemplated hereby or the enforcement of any obligations hereunder or under any
of the other Loan Documents, (ii) any Loan or Letter of Credit or the use of the
proceeds therefrom (including any refusal by the Issuing Bank to honor a demand
for payment under a Letter of Credit if the documents presented in connection
with such demand do not strictly comply with the terms of such Letter of
Credit), (iii) any actual or alleged presence or release of Hazardous Materials
on or from any property currently or formerly owned or operated

                                       51
<PAGE>

by any Borrower or any of their Subsidiaries, or any Environmental Liability
related in any way to any Borrower or any of their Subsidiaries, or (iv) any
actual or prospective claim, litigation, investigation or proceeding relating to
any of the foregoing, whether based on contract, tort or any other theory and
regardless of whether any Indemnitee is a party thereto; provided that such
indemnity shall not, as to any Indemnitee, be available to the extent that such
losses, claims, damages, liabilities or related expenses resulted from the gross
negligence or willful misconduct of such Indemnitee (or any of its Related
Parties), BUT THE PRESENCE OF ORDINARY NEGLIGENCE SHALL NOT AFFECT THE
AVAILABILITY OF SUCH INDEMNITY.

         (c) To the extent that any Borrower fails to pay any amount required to
be paid by it to the Administrative Agent or the Issuing Bank under paragraph
(a) or (b) of this Section, each Lender severally agrees to pay to the
Administrative Agent or the Issuing Bank, as the case may be, such Lender's pro
rata share (determined as of the time that the applicable unreimbursed expense
or indemnity payment is sought) of such unpaid amount; provided that the
unreimbursed expense or indemnified loss, claim, damage, liability or related
expense, as the case may be, was incurred by or asserted against the
Administrative Agent or the Issuing Bank in its capacity as such. For purposes
hereof, a Lender's "pro rata share" shall be determined based upon (without
duplication) its share of the sum of the total Revolving Exposures and unused
Revolving Commitments at the time.

         (d) To the extent permitted by applicable law, neither any Borrower nor
any of their Subsidiaries shall assert, and each hereby waives, any claim
against any Indemnitee, on any theory of liability, for special, indirect,
consequential or punitive damages (as opposed to direct or actual damages)
arising out of, in connection with, or as a result of, this Agreement or any
agreement or instrument contemplated hereby, the Transactions, any Loan or
Letter of Credit or the use of the proceeds thereof.

         (e) All amounts due under this Section shall be payable not later than
three Business Days after written demand therefor.

         SECTION 9.04  Successors and Assigns.

         (a) The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
permitted hereby (including any Affiliate of the Issuing Bank that issues any
Letter of Credit), except that (i) no Borrower may assign or otherwise transfer
any of its rights or obligations hereunder without the prior written consent of
each Lender (and any attempted assignment or transfer by any Borrower without
such consent shall be null and void) and (ii) no Lender may assign or otherwise
transfer its rights or obligations hereunder except in accordance with this
Section. Nothing in this Agreement, expressed or implied, shall be construed to
confer upon any Person (other than the parties hereto, their respective
successors and assigns permitted hereby (including any Affiliate of the Issuing
Bank that issues any Letter of Credit), Participants (to the extent provided in
paragraph (c) of this Section) and, to the extent expressly contemplated hereby,
the Related Parties of each of the Administrative Agent, the Issuing Bank and
the Lenders) any legal or equitable right, remedy or claim under or by reason of
this Agreement.

                                       52
<PAGE>
         (b) (i) Subject to the conditions set forth in paragraph (b)(ii) below,
any Lender may assign to one or more assignees all or a portion of its rights
and obligations under this Agreement (including all or a portion of its
Revolving Commitment and the Loans at the time owing to it) with the prior
written consent (such consent not to be unreasonably withheld) of: (A) the
Borrowers, provided that no consent of any Borrower shall be required for an
assignment to a Lender, an Affiliate of a Lender, an Approved Fund (as defined
below) or, if an Event of Default has occurred and is continuing, any other
assignee; and (B) the Administrative Agent, provided that no consent of the
Administrative Agent shall be required for an assignment to an assignee that is
a Lender immediately prior to giving effect to such assignment or an Affiliate
of such a Lender.

            (ii) Assignments shall be subject to the following additional
conditions: (A) except in the case of an assignment to a Lender or an Affiliate
of a Lender or an assignment of the entire remaining amount of the assigning
Lender's Revolving Commitment, neither the amount of the Revolving Commitment
retained by the assigning Lender nor the amount of the Revolving Commitment
being assigned (in each case, determined as of the date the Assignment and
Assumption with respect to such assignment is delivered to the Administrative
Agent) shall be less than $10,000,000 unless the Borrowers and the
Administrative Agent otherwise consent, provided that no such consent of any
Borrower shall be required if an Event of Default has occurred and is
continuing; (B) each partial assignment shall be made as an assignment of a
proportionate part of all the assigning Lender's rights and obligations under
this Agreement; (C) the parties to each assignment shall execute and deliver to
the Administrative Agent an Assignment and Assumption, together with a
processing and recordation fee of $3,500; (D) the assignee, if it shall not be a
Lender, shall deliver to the Administrative Agent an Administrative
Questionnaire; and (E) in the case of an assignment to a CLO (as defined below),
the assigning Lender shall retain the sole right to approve any amendment,
modification or waiver of any provision of this Agreement, provided that the
Assignment and Assumption between such Lender and such CLO may provide that such
Lender will not, without the consent of such CLO, agree to any amendment,
modification or waiver described in the first proviso to Section 9.02(b) that
affects such CLO.

For the purposes of this Section 9.04(b), the terms "Approved Fund" and "CLO"
have the following meanings:

                     "Approved Fund" means (a) a CLO and (b) with respect to any
         Lender that is a fund which invests in bank loans and similar
         extensions of credit, any other fund that invests in bank loans and
         similar extensions of credit and is managed by the same investment
         advisor as such Lender or by an Affiliate of such investment advisor.

                     "CLO" means any entity (whether a corporation, partnership,
         trust or otherwise) that is engaged in making, purchasing, holding or
         otherwise investing in bank loans and similar extensions of credit in
         the ordinary course of its business and is administered or managed by a
         Lender or an Affiliate of such Lender.

         (iii) Subject to acceptance and recording thereof pursuant to paragraph
(b)(iv) of this Section, from and after the effective date specified in each
Assignment and Assumption the

                                       53
<PAGE>

assignee thereunder shall be a party hereto and, to the extent of the interest
assigned by such Assignment and Assumption, have the rights and obligations of a
Lender under this Agreement, and the assigning Lender thereunder shall, to the
extent of the interest assigned by such Assignment and Assumption, be released
from its obligations under this Agreement (and, in the case of an Assignment and
Assumption covering all of the assigning Lender's rights and obligations under
this Agreement, such Lender shall cease to be a party hereto but shall continue
to be entitled to the benefits of Sections 2.14, 2.15, 2.16 and 9.03). Any
assignment or transfer by a Lender of rights or obligations under this Agreement
that does not comply with this Section 9.04 shall be treated for purposes of
this Agreement as a sale by such Lender of a participation in such rights and
obligations in accordance with paragraph (e) of this Section.

         (iv) The Administrative Agent, acting for this purpose as an agent of
the Borrowers, shall maintain at one of its offices a copy of each Assignment
and Assumption delivered to it and a register for the recordation of the names
and addresses of the Lenders, and the Revolving Commitment of, and principal
amount of the Loans and LC Disbursements owing to, each Lender pursuant to the
terms hereof from time to time (the "Register"). The entries in the Register
shall be conclusive, absent manifest error, and the Borrowers, the
Administrative Agent, the Issuing Bank and the Lenders may treat each Person
whose name is recorded in the Register pursuant to the terms hereof as a Lender
hereunder for all purposes of this Agreement, notwithstanding notice to the
contrary. The Register shall be available for inspection by the Borrowers, the
Issuing Bank and any Lender, at any reasonable time and from time to time upon
reasonable prior notice.

         (v) Upon its receipt of a duly completed Assignment and Assumption
executed by an assigning Lender and an assignee, the assignee's completed
Administrative Questionnaire (unless the assignee shall already be a Lender
hereunder), the processing and recordation fee referred to in paragraph (b) of
this Section and any written consent to such assignment required by paragraph
(b) of this Section, the Administrative Agent shall accept such Assignment and
Assumption and record the information contained therein in the Register. No
assignment shall be effective for purposes of this Agreement unless it has been
recorded in the Register as provided in this paragraph.

         (c) (i) Any Lender may, without the consent of any Borrower, the
Administrative Agent or the Issuing Bank, sell participations to one or more
banks or other entities (a "Participant") in all or a portion of such Lender's
rights and obligations under this Agreement (including all or a portion of its
Revolving Commitment and the Loans owing to it); provided that (A) such Lender's
obligations under this Agreement shall remain unchanged, (B) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations, (C) the Borrowers, the Administrative Agent, the Issuing Bank
and the other Lenders shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under this
Agreement and (D) no such participation may be sold to any entity which is
engaged principally in the oilfield products and services business unless the
Borrowers shall have given their prior written consent. Any agreement or
instrument pursuant to which a Lender sells such a participation shall provide
that such Lender shall retain the sole right to enforce this Agreement and to
approve any amendment, modification or waiver of any provision of this
Agreement; provided that such agreement or instrument may provide that

                                       54
<PAGE>

such Lender will not, without the consent of the Participant, agree to any
amendment, modification or waiver described in the first proviso to Section
9.02(b) that affects such Participant. Subject to paragraph (c)(ii) of this
Section, the Borrowers agree that each Participant shall be entitled to the
benefits of Sections 2.13, 2.14 and 2.15 to the same extent as if it were a
Lender and had acquired its interest by assignment pursuant to paragraph (b) of
this Section. To the extent permitted by law, each Participant also shall be
entitled to the benefits of Section 9.08 as though it were a Lender, provided
such Participant agrees to be subject to Section 2.16(c) as though it were a
Lender.

         (d) A Participant shall not be entitled to receive any greater payment
under Section 2.13 or 2.15 than the applicable Lender would have been entitled
to receive with respect to the participation sold to such Participant, unless
the sale of the participation to such Participant is made with the Borrowers'
prior written consent. A Participant that would be a Foreign Lender if it were a
Lender shall not be entitled to the benefits of Section 2.15 unless the
Borrowers are notified of the participation sold to such Participant and such
Participant agrees, for the benefit of the Borrowers, to comply with Section
2.15(e) as though it were a Lender.

         (e) Any Lender may at any time pledge or assign a security interest in
all or any portion of its rights under this Agreement to secure obligations of
such Lender, including any pledge or assignment to secure obligations to a
Federal Reserve Bank, and this Section shall not apply to any such pledge or
assignment of a security interest; provided that no such pledge or assignment of
a security interest shall release a Lender from any of its obligations hereunder
or substitute any such pledgee or assignee for such Lender as a party hereto.

         (f) No Lender may pledge, assign or convey a participation interest in
its Tranche A Revolving Commitment, Tranche A Revolving Loans or LC Exposure
attributable to Letters of Credit requested by Smith unless such Lender shall,
concurrently therewith pledge, assign or convey a participation in (as the case
may be) an equivalent share of its Tranche B Revolving Commitment, Tranche B
Revolving Loans or LC Exposure attributable to Letters of Credit requested by
M-I LLC (as the case may be).

         SECTION 9.05 Survival. All covenants, agreements, representations and
warranties made by the Borrowers in the Loan Documents and in the certificates
or other instruments delivered in connection with or pursuant to this Agreement
or any other Loan Document shall be considered to have been relied upon by the
other parties hereto and shall survive the execution and delivery of the Loan
Documents and the making of any Loans and issuance of any Letters of Credit,
regardless of any investigation made by any such other party or on its behalf
and notwithstanding that the Administrative Agent, the Issuing Bank or any
Lender may have had notice or knowledge of any Default or incorrect
representation or warranty at the time any credit is extended hereunder, and
shall continue in full force and effect as long as the principal of or any
accrued interest on any Loan or any fee or any other amount payable under this
Agreement is outstanding and unpaid or any Letter of Credit is outstanding and
so long as the Revolving Commitments have not expired or terminated. The
provisions of Sections 2.13, 2.14, 2.15 and 9.03 and Article VIII shall survive
and remain in full force and effect regardless of the consummation of the
transactions contemplated hereby, the repayment of the Loans, the

                                       55
<PAGE>

expiration or termination of the Letters of Credit and the Revolving Commitments
or the termination of this Agreement or any provision hereof.

         SECTION 9.06 Counterparts; Integration; Effectiveness. This Agreement
may be executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which when
taken together shall constitute a single contract. This Agreement, the other
Loan Documents and any separate letter agreements with respect to fees payable
to the Administrative Agent constitute the entire contract among the parties
relating to the subject matter hereof and supersede any and all previous
agreements and understandings, oral or written, relating to the subject matter
hereof. Except as provided in Section 4.01, this Agreement shall become
effective when it shall have been executed by the Administrative Agent and when
the Administrative Agent shall have received counterparts hereof which, when
taken together, bear the signatures of each of the other parties hereto, and
thereafter shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. Delivery of an executed counterpart
of a signature page of this Agreement by telecopy shall be effective as delivery
of a manually executed counterpart of this Agreement.

         SECTION 9.07 Severability. Any provision of this Agreement held to be
invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions hereof; and the invalidity of a particular provision in
a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.

         SECTION 9.08 Right of Setoff. If an Event of Default shall have
occurred and be continuing, each Lender and each of its Affiliates is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other obligations at any time
owing by such Lender or Affiliate to or for the credit or the account of any
Borrower against any of and all the obligations of such Borrower now or
hereafter existing under this Agreement held by such Lender, irrespective of
whether or not such Lender shall have made any demand under this Agreement and
although such obligations may be unmatured. The rights of each Lender under this
Section are in addition to other rights and remedies (including other rights of
setoff) which such Lender may have.

         SECTION 9.09 Governing Law; Jurisdiction; Consent to Service of
Process.

         (a) THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAW OF THE STATE OF NEW YORK.

         (b) Each Borrower hereby irrevocably and unconditionally submits, for
itself and its property, to the nonexclusive jurisdiction of the Supreme Court
of the State of New York sitting in New York County and of the United States
District Court of the Southern District of New York, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to any
Loan Document, or for recognition or enforcement of any judgment, and each of
the parties hereto hereby irrevocably and unconditionally agrees that all claims
in respect of any

                                       56
<PAGE>

such action or proceeding may be heard and determined in such New York State or,
to the extent permitted by law, in such Federal court. Each of the parties
hereto agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement or any other Loan
Document shall affect any right that the Administrative Agent, the Issuing Bank
or any Lender may otherwise have to bring any action or proceeding relating to
this Agreement or any other Loan Document against any Borrower or its properties
in the courts of any jurisdiction.

         (c) Each Borrower hereby irrevocably and unconditionally waives, to the
fullest extent it may legally and effectively do so, any objection which it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement or any other Loan Document in any
court referred to in paragraph (b) of this Section. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court.

         (d) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement or any other Loan Document will affect the right of any party to this
Agreement to serve process in any other manner permitted by law.

         SECTION 9.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH
PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B)
ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION.

         SECTION 9.11 Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and shall not affect the construction of, or be taken into
consideration in interpreting, this Agreement.

         SECTION 9.12 Confidentiality. Each of the Administrative Agent, the
Issuing Bank and the Lenders agrees to maintain the confidentiality of the
Information (as defined below), except that Information may be disclosed (a) to
its and its Affiliates' directors, officers, employees and agents, including
accountants, legal counsel and other advisors (it being understood that the
Persons to whom such disclosure is made will be informed of the confidential
nature of such Information and instructed to keep such Information
confidential), (b) to the extent required by any regulatory authority, (c) to
the extent required in the opinion of legal counsel by applicable

                                       57
<PAGE>

laws or regulations or by any subpoena or similar legal process, (d) to any
other party to this Agreement, (e) in connection with the exercise of any
remedies hereunder or any suit, action or proceeding relating to this Agreement
or the enforcement of rights hereunder, (f) subject to an agreement containing
provisions substantially the same as those of this Section, to (i) any assignee
of or Participant in, or any prospective assignee of or Participant in, any of
its rights or obligations under this Agreement or (ii) any actual or prospective
counterparty (or its advisors) to any swap or derivative transaction relating to
any Borrower and its obligations, (g) with the consent of the Borrowers or (h)
to the extent such Information (i) becomes publicly available other than as a
result of a breach of this Section or (ii) is disclosed to the Administrative
Agent, the Issuing Bank or any Lender on a nonconfidential basis by a source
other than the Borrowers, which disclosure is not the result of a breach of a
duty of confidentiality owed by the discloser to a Borrower if such breach was
reasonably discoverable by the Administrative Agent, the Issuing Bank or the
applicable Lender, as the case may be. For the purposes of this Section,
"Information" means all information received from any Borrower relating to any
Borrower or its business, other than any such information that is known to the
Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis
prior to disclosure by the applicable Borrower. Any Person required to maintain
the confidentiality of Information as provided in this Section shall be
considered to have complied with its obligation to do so if such Person has
exercised the same degree of care to maintain the confidentiality of such
Information as such Person would accord to its own confidential information.

         SECTION 9.13 Interest Rate Limitation. Borrowers and the Lenders intend
to strictly comply with all applicable federal and New York laws, including
applicable usury laws (or the usury laws of any jurisdiction whose usury laws
are deemed to apply to the Notes or any other Loan Documents despite the
intention and desire of the parties to apply the usury laws of the State of New
York). Accordingly, the provisions of this Section shall govern and control over
every other provision of this Agreement or any other Loan Document which
conflicts or is inconsistent with this Section, even if such provision declares
that it controls. As used in this Section, the term "interest" includes the
aggregate of all charges, fees, benefits or other compensation which constitute
interest under applicable law, provided that, to the maximum extent permitted by
applicable law, (a) any non-principal payment shall be characterized as an
expense or as compensation for something other than the use, forbearance or
detention of money and not as interest, and (b) all interest at any time
contracted for, reserved, charged or received shall be amortized, prorated,
allocated and spread, using the actuarial method, during the full term of the
Notes. In no event shall any Borrower or any other Person be obligated to pay,
or any Lender have any right or privilege to reserve, receive or retain, (a) any
interest in excess of the maximum amount of nonusurious interest permitted under
the laws of the State of New York or the applicable laws (if any) of the United
States or of any other jurisdiction, or (b) total interest in excess of the
amount which such Lender could lawfully have contracted for, reserved, received,
retained or charged had the interest been calculated for the full term of the
Notes at the Ceiling Rate. The daily interest rates to be used in calculating
interest at the Ceiling Rate shall be determined by dividing the applicable
Ceiling Rate per annum by the number of days in the calendar year for which such
calculation is being made. None of the terms and provisions contained in this
Agreement or in any other Loan Document (including, without limitation, Article
VII hereof) which directly or indirectly relate to interest shall ever be
construed without reference to this Section, or be construed to create a
contract to pay for the use, forbearance or

                                       58
<PAGE>

detention of money at any interest rate in excess of the Ceiling Rate. If the
term of any Note is shortened by reason of acceleration or maturity as a result
of any Default or by any other cause, or by reason of any required or permitted
prepayment, and if for that (or any other) reason any Lender at any time,
including but not limited to, the stated maturity, is owed or receives (and/or
has received) interest in excess of interest calculated at the Ceiling Rate,
then and in any such event all of any such excess interest shall be canceled
automatically as of the date of such acceleration, prepayment or other event
which produces the excess, and, if such excess interest has been paid to such
Lender, it shall be credited pro tanto against the then-outstanding principal
balance of the applicable Borrower's obligations to such Lender, effective as of
the date or dates when the event occurs which causes it to be excess interest,
until such excess is exhausted or all of such principal has been fully paid and
satisfied, whichever occurs first, and any remaining balance of such excess
shall be promptly refunded to its payor.

                                       59
<PAGE>
         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.

                            SMITH INTERNATIONAL, INC.,
                            a Delaware corporation

                            By:
                               ---------------------------------------------
                            Name:  Margaret K. Dorman
                                 -------------------------------------------
                            Title:     SVP, CFO and Treasurer
                                  ------------------------------------------

                            M-I L.L.C.,
                            a Delaware limited liability company

                            By:
                               ---------------------------------------------
                            Name:  C.I.S. Rivers
                                 -------------------------------------------
                            Title:     VP, CFO and Treasurer
                                  ------------------------------------------

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