Document:

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                                                                   EXHIBIT 10.36

UNITED STATES OF AMERICA
OFFSHORE LOUISIANA
BAY MARCHAND BLOCK 2 FIELD

                                FARMOUT AGREEMENT

THIS AGREEMENT, entered into effective August 15, 1998, is by and between
Chevron U.S.A. Inc., a Pennsylvania corporation ("Farmoutor"), and
Hughes-Rawls, L.L.C., a Delaware limited liability company
("Farmoutee"). The signers of this Agreement are hereinafter sometimes
referred to individually as "Party" and collectively as "Parties".

                                   WITNESSETH:

For and in consideration of the mutual advantages and benefits accruing to the
Parties hereto, the sufficiency of which is hereby acknowledged, the Parties
hereby agree that this document (this "Agreement") shall constitute the
agreement between Farmoutor and Farmoutee concerning the development of the
Farmout Area:

1.        EXHIBITS
          Attached hereto, made a part hereof and incorporated herein by
          reference are certain Exhibits, as follows:

          1.1.     EXHIBIT A
                   Farmout Leases

          1.2.     EXHIBIT A-1
                   Outline of Farmout Area 1 (OCS)

          1.3.     EXHIBIT A-2
                   Outline of Farmout Area 2 (#60 Prospect in State of
                   Louisiana Offshore)

          1.4.     EXHIBIT A-3
                   Outline of Farmout Area 3 (1500' B in State of Louisiana
                   Offshore)

          1.5.     EXHIBIT A-4
                   Outline of Farmout Area 4 [Exploration Prospect (OCS)]

          1.6.     EXHIBIT A-5
                   Outline of Conditional Area (OCS)

          1.7.     EXHIBIT A-6
                   Outline of Excluded 4900' Reservoir "D" Area

          1.8      EXHIBIT A-7
                   Outline of Excluded 7300' Reservoir "00" Area

          1.9.     EXHIBIT A-8
                   Outline of Excluded Area Down to 7600' Lower Sand (OCS)

          1.10.    EXHIBIT A-9
                   Wells Available to Farmoutee

          1.11.    EXHIBIT B
                   Geological and Well Informational Requirements

          1.12.    EXHIBIT C
                   Tax Partnership Provisions

          1.13.    EXHIBIT D
                   Executive Order 11246

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          1.14.    EXHIBIT E
                   Form of Assignment

          1.15.    CONFLICTS
                   In the event of conflict between the text of this Agreement
                   and any of the Exhibits or any of the agreements to be
                   entered into pursuant to this Agreement, this Agreement
                   shall control.

2. DEFINITIONS

          2.1.     ADVERSE EVENTS
                   Deaths, injuries, illnesses, accidents, fires, explosions,
                   ruptures, spills, pollution, instances of non-compliance, and
                   incurred damages.

          2.2.     CONDITIONAL AREA
                   The area of Lease OCS 0166 within the bold, black outline on
                   Exhibit A-5.

          2.3.     CONTRACT FEES
                   Subject to the further terms and limitations of Section 7,
                   the Contract Fees are as follows:

                   2.3.1.  $5,000 per calendar month per well, subject to annual
                           COPAS adjustment pursuant to Section 7, for Contract
                           Operations of each Farmout Well producing from the
                           Earned Areas for all or any portion of such
                           applicable month.

                   2.3.2.  $500 per calendar month per well, subject to annual
                           COPAS adjustment pursuant to Section 7, for Contract
                           Operations of each Farmout Well completed in the
                           Earned Areas by or on behalf of Farmoutee pursuant to
                           this Agreement, but non-producing for all of such
                           applicable month, and not plugged and abandoned
                           (meaning the well itself is not abandoned and
                           permanent cement surface plugs have not been set)
                           prior to the end of such month, except that in the
                           case of either (i) a Farmout Well on or from a
                           surface structure hereafter installed to serve that
                           well or (ii) a Farmout Well on or from a single well
                           caisson, said fee shall apply until that well is
                           permanently plugged and abandoned, the surface
                           location is cleared, and the surface structure or
                           well caisson is removed.

          2.4.    CONTRACT OPERATIONS
                  Subject to the further terms and limitations of Section 7, the
                  Contract Operations are (i) normal and routine operations and
                  minor maintenance, but limited to normal and routine
                  operations and minor maintenance typically and routinely
                  performed by Farmoutor's operating personnel in the field in a
                  mutually agreeable manner as would a prudent operator, of each
                  Farmout Well and associated production equipment after
                  completion and hook up for production by or on behalf of
                  Farmoutee including, but not limited to, routine choke
                  changes, routine safety checks, routine well tests, routine
                  well gauging, related gas and liquid meter calibrations, and
                  related field metering services (LESS AND EXCEPT any downhole
                  well work and LESS AND EXCEPT any wellhead work other than
                  said routine choke changes and gauging), (ii) marine and air
                  transportation for Farmoutor's operations personnel performing
                  the normal and routine operations and minor maintenance
                  itemized in item (i) above, (iii) administrative work
                  typically done in the field, and (iv) field supervision of
                  items (i) through (iii).

          2.5.     EFFECTIVE DATE
                   The date first written hereinabove.

          2.6.     EARNED AREAS
                   Those portions of the Farmout Area in which Farmoutee earns
                   or has earned an interest pursuant to Section 5.1, as
                   follows:

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                  2.6.1.   Depths and areas in Farmout Area 1 and Farmout Area 2
                           (except depths and areas governed by Farmout
                           Workovers):

                           That portion of each reservoir penetrated by, behind
                           pipe in and within 750' of that certain portion of
                           any well bore of any Earning Well drilled, or
                           sidetracked, and completed for production in paying
                           quantities by or on behalf of Farmoutee pursuant to
                           and meeting the earning requirements of Section 5.1
                           IF AND ONLY IF the entirety of said portion of said
                           reservoir does not encroach on the Excluded Portions
                           of Reservoirs.

                   2.6.2.  Depths and areas in Farmout Area 3 (except depths and
                           areas governed by Farmout Workovers):

                           All of Farmout Area 3 IF AND ONLY IF an Earning Well
                           is drilled and completed for production in paying
                           quantities from Farmout Area 3 by or on behalf of
                           Farmoutee pursuant to and meeting the earning
                           requirements of Section 5.1 BUT LESS AND EXCEPT the
                           Excluded Portions of Reservoirs.

                   2.6.3.  Depths and areas in Farmout Area 4, the Exploration
                           Prospect (except depths and areas governed by Farmout
                           Workovers):

                           That portion of each reservoir penetrated by, behind
                           pipe in and within 1,100' of that certain portion of
                           any well bore drilled, or sidetracked, and completed
                           for production in paying quantities by or on behalf
                           of Farmoutee pursuant to and meeting the earning
                           requirements of Section 5.1 IF AND ONLY IF the
                           entirety of said portion of said reservoir does not
                           encroach on any Excluded Portions of Reservoirs.

                   2.6.4.  Depths and areas governed by Farmout Workovers:

                           That portion of each reservoir penetrated by and
                           within 750' of the well bore of any Earning Well
                           completed for production in paying quantities from
                           such reservoir through a Farmout Workover by or on
                           behalf of Farmoutee pursuant to and meeting the
                           earning requirements of Section 5.1 IF AND ONLY IF
                           the entirety of said portion of said reservoir does
                           not encroach on any Excluded Portions of Reservoirs.

          2.7.    EARNING WELLS
                  Those Obligation Wells and those Optional Wells, if any, under
                  which Farmoutee earns an interest in the Earned Areas, if any,
                  pursuant to and meeting the requirements of Section 5.1.

          2.8.    EXCLUDED PORTIONS OF RESERVOIRS

                  2.8.1.   That portion of each reservoir penetrated by, behind
                           pipe at or above the completion(s) and within certain
                           distances of any well bore producing from such
                           reservoir as of the Effective Date as follows: Said
                           certain distances are 750' in depths above the base
                           of the 9800' Sand in the Farmout Area, except that a
                           250' distance around La. State Lease 1367 Well # 18
                           shall be excluded from this Agreement in Farmout Area
                           3 whether or not La. State Lease 1367 Well # 18 is
                           producing as of the Effective Date. (There are no
                           wells producing below the base of the 9800' Sand in
                           the Farmout Area as of the Effective Date.)

                   2.8.2.  That portion of each reservoir penetrated by, behind
                           pipe at, above or below the completion(s) in and
                           within certain distances of any well bore which
                           produces from such reservoir pursuant to an operation
                           in which Farmoutee elects not to participate or is
                           deemed to have elected not to participate under
                           Section 4.1.3.1, as follows: Said certain distances
                           are 750' in depths above the base of the 9800' Sand
                           in the Farmout Area and

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                           1,100' in depths below the 9800' Sand in the Farmout
                           Area, LESS AND EXCEPT any previously Earned Areas
                           above, at or below the base of the 9800' Sand.

          2.9.    EXCLUDED WELLS
                  All wells except (i) any new wells drilled by or on behalf of
                  Farmoutee under the terms of this Agreement, (ii) any wells
                  proposed by Farmoutor or a third party under Section 4.1.3,
                  (iii) any wells listed on Exhibit A-9, and (iv) any well or
                  wells which Farmoutor agrees to make available to Farmoutee by
                  a subsequent written agreement amending this Agreement.

          2.10.   EXPLORATION PROSPECT
                  The area contained within the bold, black outline on Exhibit
                  A-4 INSOFAR AND ONLY INSOFAR AS the stratigraphic equivalent
                  of depths below the base of the 9800' Sand.

          2.11.   EXPLORATION WELL
                  That certain new well to be drilled or sidetracked to
                  evaluate the Exploration Prospect down to lesser of the base
                  of the 11800' Sand, salt or impenetrables under the
                  Geological and Well Informational Requirements attached
                  hereto.

          2.12.   FARMOUT LEASES
                  The oil and gas leases listed and described on Exhibit A.

          2.13.   FARMOUT AREA
                  Farmout Area 1, Farmout Area 2, Farmout Area 3 and Farmout
                  Area 4, collectively, LESS AND EXCEPT the Excluded Portions
                  of Reservoirs and the Excluded Wells.

          2.14.   FARMOUT AREA 1
                  The area contained within the bold, black outline on Exhibit
                  A-1 LESS AND EXCEPT the following:

                  2.14.1.      The Exploration Prospect;

                  2.14.2.      The stratigraphic portion of Leases OCS 369 and
                               370 within the bold, black outline on Exhibit A-6
                               from the top of the 4900' Sand to the base of the
                               4900' Sand;

                  2.14.3.      The stratigraphic portion of Lease OCS 369 within
                               the bold, black outline on Exhibit A-7 from the
                               top of the 7300' Sand to the base of the 7300'
                               Sand; and

                  2.14.4.      The stratigraphic portion of Lease OCS 0386
                               within the bold, black outline on Exhibit A-8
                               from the surface of the earth to the base of the
                               7600' Lower Sand.

          2.15.    FARMOUT AREA 2
                   The stratigraphic portion of State of Louisiana Lease 1366
                   within the bold, black outline on Exhibit A-2 from the top to
                   the bottom of all sands seen in La. State Lease 1366 Well 49
                   between 3516' MD and 4726' MD.

          2.16.    FARMOUT AREA 3
                   The stratigraphic portion of State of Louisiana Lease 1367
                   within the bold, black outline on Exhibit A-3 from the top
                   of the 1500' Sand to the base of the 1500' Sand.

          2.17.    FARMOUT AREA 4
                   The Exploration Prospect.

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          2.18.    FARMOUT WELLS
                   All wells in the Farmout Area which are drilled, sidetracked,
                   deepened, reworked, completed or recompleted by or on behalf
                   of Farmoutee under the terms of this Agreement or in which
                   other downhole operations are performed by or on behalf of
                   Farmoutee to commence or restore production under the terms
                   of this Agreement, LESS AND EXCEPT the Excluded Wells.

          2.19.    FARMOUT WORKOVERS
                   Major Operations or Minor Operations consisting of re-entries
                   for the purposes of conducting workovers, recompletions and
                   other downhole operations performed by or on behalf of
                   Farmoutee to commence or restore production in original or
                   sidetrack portions of well bores INSOFAR AND ONLY INSOFAR AS
                   those portions thereof which are or were drilled by Farmoutor
                   or another operator, but excluding any portions thereof
                   drilled by or on behalf of Farmoutee pursuant to this
                   Agreement.

          2.20.    GAS RESERVOIR BELOW 9800' SAND
                   Any reservoir which produces with a gas-oil ratio of 10,000
                   scf/bbl or greater upon first production.

          2.21.    INDEX PRICE
                   The daily average, per calendar month, of the posted price
                   (unadjusted for gravity, other quality or transportation of
                   any kind) for South Louisiana Sweet (Onshore) oil at 40.0
                   degree API gravity offered by Chevron Products Company as
                   published in Crude Oil Price Bulletins from the Crude
                   Marketing Division of Chevron Logistics and Trading.

          2.22.    MAJOR OPERATION
                   Any Well Operation actually costing $500,000 or more as
                   accounted for under the Accounting Procedure attached to the
                   Operating Agreement and performed by or on behalf of
                   Farmoutee pursuant to this Agreement whether the Well
                   Operation ends successfully with a Farmout Well completed
                   through hook-up for production in paying quantities or by
                   termination of Farmoutee's diligent, but unsuccessful,
                   attempt to complete a Farmout Well through hook-up for
                   production in paying quantities; provided, however,
                   recompletion of OCS 0390 Well # X-l ST downhole of its
                   existing completion on the Effective Date for less than
                   $500,000 by or on behalf of Farmoutee pursuant to this
                   Agreement shall qualify as a Major Operation if said
                   recompletion is successfully placed on production in paying
                   quantities.

          2.23.    MINOR OPERATION

                   2.23.1.      Any Well Operation estimated to cost $200,000 or
                                more (but less than $500,000) as accounted for
                                under the Accounting Procedure attached to the
                                Operating Agreement and conducted by or on
                                behalf of Farmoutee in an Optional Well; and

                   2.23.2.      Any Well Operation actually costing less than
                                $200,000 conducted by or on behalf of Farmoutee
                                in an Optional Well as accounted for under the
                                Accounting Procedure attached to the Operating
                                Agreement; provided, however, that Farmoutor has
                                furnished its prior written approval for said
                                operation to proceed as a Well Operation in an
                                attempt to earn an interest pursuant to Section
                                5.1.

          2.24.    OBLIGATION WELLS
                   Eight (8) Major Operations to evaluate the Farmout Area
                   under the Geological and Well Informational Requirements
                   attached hereto. Subject to Section 4.2, said eight (8)
                   Major Operations shall consist of the following:

                   2.24.1.    That certain OCS 0370 Well # N-5 ST to be
                              sidetracked and drilled to the 7900' Sand at the
                              approximate location of X = 2,373,673, Y =

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                              139,685 and expected depth of 4,944' subsea, and
                              on down to the lesser of 6,200' subsea, cap rock,
                              salt or impenetrables at the approximate location
                              of X = 2,373,480, Y = 139,513.

                   2.24.2.    One (1) new well or sidetrack of Farmoutee's
                              choice in Farmout Area 1 excluding depths below
                              the 9800' Sand, excluding all of Lease OCS 0166,
                              excluding all of any "participating area" (as per
                              the Operating Agreement) which includes any
                              portion of Lease OCS 0166, and excluding all of
                              the Conditional Area,

                   2.24.3.    Three (3) other Major Operations of Farmoutee's
                              choice in Farmout Area 1 excluding depths below
                              the 9800' Sand, excluding all of Lease OCS 0166,
                              excluding all of any "participating area" (as per
                              the Operating Agreement) which includes any
                              portion of Lease OCS 0166, and excluding all of
                              the Conditional Area,

                   2.24.4.    The # 60 Prospect Well in Farmout Area 2 or a new
                              well or sidetrack of Farmoutee's choice in Farmout
                              Area I or Farmout Area 4 excluding all of Lease
                              OCS 0166, excluding all of any "participating
                              area" (as per the Operating Agreement) which
                              includes any portion of Lease OCS 0166, and
                              excluding all of the Conditional Area,

                   2.24.5.    The 1500 B Prospect Well in Farmout Area 3, and

                   2.24.6.    The Exploration Well in Farmout Area 4 excluding
                              all of Lease OCS 0166, excluding all of any
                              "participating area" (as per the Operating
                              Agreement) which includes any portion of Lease OCS
                              0166, and excluding all of the Conditional Area.

         2.25.    OPTIONAL WELLS
                  All Farmout Wells on which Farmoutee elects to and does
                  perform (whether by or on behalf of Farmoutee) Well Operations
                  in the Farmout Area pursuant to Section 4.3, including but not
                  limited to Farmout Workovers.

         2.26.    OPERATING AGREEMENT
                  As provided for in Section 5.10.

         2.27.    PAYOUT
                  That point in time when gross production proceeds received by
                  Farmoutee from or attributable to its operating rights
                  interest or Working interest in a particular Earning Well,
                  less its share of operating expenses, lessor's royalties,
                  additional tax royalties, processing fees, monthly well
                  contract operating fees, transportation fees, severance taxes
                  and production taxes (unless reimbursed to Farmoutee by the
                  purchaser of such production) equals Farmoutee's cost
                  (including but not limited to drilling, testing, completing,
                  sidetracking, reworking, equipping and connecting) of said
                  well, and its cost of producing said Farmout Well, including
                  its cost associated with all facilities, equipment,
                  connections and pipelines.

         2.28.    PROCESSING
                  Subject to the further terms and limitations of Section 7, the
                  Processing is the field handling and field processing of
                  Farmoutee's production from the Farmout Area through
                  Farmoutor's facilities, equipment and pipelines existing as of
                  the Effective Date in or adjacent to the Farmout Area upstream
                  of delivery to Chevron Pipe Line Company or other regulated
                  common carrier pipelines and facilities, and without any
                  additions, modifications or improvements thereto, all in a
                  manner similar to the processing of Farmoutor's production
                  from the Farmout Area through same as of the Effective Date.
                  The Processing does not include any hydrocarbon or produced
                  water transportation for which a tariff does or should apply.

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         2.29.   PROCESSING FEES
                 Subject to the further terms and limitations of Section 7
                 (including but not limited to subject to annual COPAS
                 adjustment pursuant to Section 7), the Processing Fees are as
                 follows:

                  2.29.1.     $.10/MSCFG for Farmoutee's share of high pressure
                              natural gas production volumes processed through
                              Farmoutor's existing or future facilities and
                              $.15/MSCFG for Farmoutee's share of all low
                              pressure natural gas requiring compression and
                              processed through Farmoutor's existing or future
                              facilities. Farmoutor's share of such high and low
                              pressure natural gas volumes shall include, but
                              not be limited to, Farmoutee's allocated share of
                              gas lift gas, fuel and flare processed by the
                              Processing through Farmoutor's existing or future
                              facilities.

                  2.29.2.     $.40/barrel for Farmoutee's share of all liquid
                              hydrocarbons processed by the Processing through
                              Farmoutor's existing or future facilities; and

                  2.29.3.     $.10/barrel of Farmoutee's share of water
                              processed by the Processing through Farmoutor's
                              existing or future facilities.

         2.30.   SUBSEQUENT WELL OPERATIONS
                 Well Operations (except Farmout Workovers) (i) conducted in
                 Earning Wells after completion and hook up for production in
                 paying quantities or (ii) conducted in one (1) or more other
                 Farmout Wells to further explore and/or develop any Earned Area
                 after Farmoutee has earned an interest in said Earned Area.

         2.31.   SUBSEQUENT WORKOVERS
                 Those Subsequent Well Operations consisting of re-entries for
                 the purposes of conducting workovers, recompletions and other
                 downhole operations to commence or restore production in
                 original or sidetrack portions of well bores INSOFAR AND ONLY
                 INSOFAR AS those portions thereof which are or were drilled by
                 or on behalf of Farmoutee under the terms of this Agreement.

         2.32.   TERMS FOR CONTRACT OPERATIONS AND PROCESSING
                 As set forth in Section 7.

         2.33.   WELL OPERATIONS
                 All drilling, sidetracking, deepening, reworking, completing,
                 recompleting and other downhole operations performed by or on
                 behalf of Farmoutee to commence or restore production in well
                 bores of Farmout Wells under the terms of this Agreement.

         2.34.   1500 B PROSPECT WELL
                 That certain new horizontal well which is to be drilled to and
                 into Farmout Area 3 to evaluate same under the Geological and
                 Well Informational Requirements attached hereto.

         2.35.   1500' SAND
                 That certain sand seen in La. State Lease 1367 Well #18 between
                 1674' MD and 1940' MD.

         2.35.   4900' SAND
                 That certain sand seen in OCS 0369 Well # 23 ST1 between 5495'
                 MD and 5580' MD.

         2.36.   7300' SAND
                 That certain sand seen in OCS 0369 Well # CG-73 between 7586'
                 MD and 7703' MD.

         2.37.   7600' LOWER SAND
                 That certain sand seen in OCS 0386 Well #SD-17 ST3 between
                 8065' MD and at 8108' MD.

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         2.38.   7900' SAND
                 That certain 7900' Sand as seen in OCS 0370 Well # K-6 between
                 6910' MD and 6978' MD.

         2.39.   9800' SAND
                 That certain sand seen in OCS 0387 Well # U-1 between 9,860'
                 MD and 9874' MD, in OCS 0392 Well # 21 between 13246' MD and
                 13368' MD, in OCS 0392 Well # CO-7 between 11831' MD and 11926'
                 MD, and in OCS 0392 Well # R-l between 11174' MD and 11214' MD.

         2.40.   11800' SAND
                 That certain sand seen in Well OCS 0392 # Y-28 ST between
                 14658' MD and 14794' MD.

         2.41.    # 60 PROSPECT WELL
                  That certain La. State Lease 1366 Well #60 which is to be
                  sidetracked and drilled to and into Farmout Area 2 to evaluate
                  same, under the Geological and Well Informational Requirements
                  attached hereto, down to the lesser of the base of the deepest
                  sand included in Farmout Area 2, salt or impenetrables.

 3.      TRANSFER OF RIGHTS DURING FARMOUTEE'S WELL OPERATIONS

         3.1.     During any time that Farmoutee is engaged in Well Operations
                  in any Farmout Well on the Farmout Area pursuant to the terms
                  of this Agreement, Farmoutee shall own, and Farmoutor hereby
                  transfers to Farmoutee, all of Farmoutor's right, title and
                  interest in and to the operating rights in each such well and
                  its appurtenances, if any, and except any proportionate share
                  of such Well Operations in which Farmoutor has elected to
                  participate under the terms of this Agreement, and Farmoutee
                  shall have exclusive charge, control, and supervision of such
                  well during such Well Operations subject, however, to any
                  proposals or elections which any participants therein, whether
                  Farmoutor and/or other participants, therein have the right to
                  make.

         3.2.     Upon completion of each such Well Operation for which
                  Farmoutor transferred operating rights to Farmoutee pursuant
                  to Section 3.1, Farmoutee shall thereupon be deemed to have
                  re-transferred to Farmoutor, and Farmoutor will thereupon once
                  again own, all right, title, and interest in and to the
                  operating rights interest in such Farmout Well and its
                  appurtenances, if any, which were transferred by Farmoutor to
                  Farmoutee pursuant to Sections 3.1 or 3.3 except those
                  operating rights and portions thereof earned by Farmoutee
                  pursuant to Section 5.1.

         3.3.     In order to accommodate the efforts of Farmoutee to perform
                  Well Operations in each Farmout Well, Farmoutee shall
                  prepare, obtain all necessary executions and approvals of and
                  file all the necessary forms with the Minerals Management
                  Service ("MMS") [or with the pertinent regulatory agency(ies)
                  of the State of Louisiana in the case of Farmout Area 2 and
                  Farmout Area 3] in advance (i) for Farmoutee to conduct the
                  Well Operations in said well as the operator of record with
                  the MMS [or with the pertinent regulatory agency(ies) of the
                  State of Louisiana in the case of Farmout Area 2 and Farmout
                  Area 3] and (ii) for Farmoutor to be designated or
                  redesignated as operator of record with the MMS [or with the
                  pertinent regulatory agency(ies) of the State of Louisiana in
                  the case of Farmout Area 2 and Farmout Area 3] upon
                  Farmoutee's completion of the Well Operations in said well;
                  provided, however, that Farmoutor shall provide Farmoutee with
                  Farmoutor's execution of such forms upon presentation by
                  Farmoutee for Farmoutor's execution and that Farmoutee shall
                  be responsible for acquiring any and all executions thereof
                  as necessary from Farmoutor's co-owners.

          3.4.    The operator (whether Farmoutor, Farmoutee or a successor to
                  either) of each operation performed pursuant to this Agreement
                  shall be required to hold, shall

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                  assure it holds and shall hold all necessary authority to, and
                  acquires all right and permit(s) necessary to conduct each
                  such operation, including approvals from any and all third
                  party co-owners, prior to and during any time it engages in
                  each such operation and said operator shall comply with all
                  applicable regulatory bonding requirements prior to and during
                  any time it engages in each such operation.

 4.      WELLS

          4.1.     AFEs FOR OBLIGATIONS WELLS AND OPTIONAL WELLS

                   4.1.1.  At least twenty (20) days [or forty-eight (48) hours
                           if a drilling rig is on location accumulating standby
                           charges] prior to commencement of each Well Operation
                           proposed by Farmoutee for an Obligation Well or an
                           Optional Well, Farmoutee shall make a prospect
                           presentation to Farmoutor and present Farmoutor with
                           a written AFE with full details of the scope of work,
                           well path, objectives, proposed drilling schedule and
                           estimated total cost for said Well Operation.
                           Notwithstanding the foregoing, upon or prior to
                           signing this Agreement, Farmoutee shall present or
                           shall have presented to Farmoutor a written AFE with
                           the details of the scope of work, well path,
                           objectives, proposed drilling schedule and estimated
                           total cost for each Well Operation for Obligation
                           Well(s) which Farmoutee proposes to commence within
                           twenty (20) days of the Effective Date.

                           For any Well Operation in any Obligation Well or
                           Optional Well by or on behalf of Farmoutee on Lease
                           OCS 0166 or within any "participating area" (as per
                           the Operating Agreement) which includes any portion
                           of Lease OCS 0166, Farmoutee shall perform all of the
                           operator's duties and responsibilities towards
                           Farmoutor's co-owners in Lease OCS 0166 under the
                           Operating Agreement including, but not limited to,
                           the AFE provisions and other provisions in Articles
                           VI. VII., VIII., IX., and XVI. of the Operating
                           Agreement. Upon proposing the first AFE proposal to
                           each of Farmoutor's co-owners in Lease OCS 0166
                           pursuant to the foregoing, Farmoutee shall give each
                           of Farmoutor's co-owners in Lease OCS 0166 a
                           reasonable opportunity to farmout its interest in
                           Lease OCS 0166 to Farmoutee on the same terms
                           applicable to farmout of Farmoutor's interest therein
                           to Farmoutee under this Agreement except, of course,
                           that there would not necessarily be any Obligation
                           Wells in such a farmout by any of Farmoutor's
                           co-owners in. Lease OCS 0166 and that the Farmout
                           Area of such a farmout by any of Farmoutor's
                           co-owners in Lease OCS 0166 would not necessarily
                           exceed the area of Lease OCS 0166 and any
                           "participating area" (as per the Operating Agreement)
                           which includes any portion of Lease OCS 0166.

                   4.1.2.  For each AFE proposed by Farmoutee under Section
                           4.1.1, (i) Farmoutee shall consider any concerns or
                           objections of Farmoutor as to the scope of work, well
                           path, objectives, proposed drilling schedule or
                           estimated total cost and Farmoutee shall not
                           unreasonably refuse to make changes to resolve or
                           mitigate such concerns or objections as long as
                           Farmoutee anticipates no additional cost, risk,
                           liability, or expense in Farmoutee's sole opinion on
                           a case by case basis, and (ii) Farmoutor shall have
                           the option, AFE by AFE, (a) to elect to participate
                           therein at up to 25% (or up to 45% if any objective
                           of the operation contemplated by the AFE is in depths
                           below the 9800'S and in the Farmout Area) of
                           Farmoutor's interest, in which case, Farmoutee's
                           participation therein under Section 4.2 or 4.3,
                           whichever is applicable, shall be the balance of
                           Farmoutor's interest, or (b) to elect to have
                           Farmoutee participate to the full extent of
                           Farmoutor's interest therein under Section 4.2 or
                           4.3, whichever is applicable. Farmoutor shall have
                           twenty (20) days [or forty-eight (48) hours if a
                           drilling rig is on location accumulating standby
                           charges] after AFE receipt [or until commencement of
                           the Well Operations for Obligations Wells proposed to
                           commence within twenty (20) days of the Effective
                           Date] to

                                     Page 9
<PAGE>   10

                           provide Farmoutee with Farmoutor's written election
                           with respect to each such AFE. In the event that
                           Farmoutor fails to provide Farmoutee with Farmoutor's
                           written election within the required period,
                           Farmoutee shall participate to the full extent of
                           Farmoutor's interest therein under Section 4.2 or
                           4.3, whichever is applicable.

                4.1.3.     Subject to the terms hereof, Farmoutor shall have the
                           independent right, at all times, to propose drilling,
                           sidetracking, deepening, reworking, completing,
                           recompleting and other downhole operations in any
                           well or wells to explore, develop and/or produce the
                           Farmout Area. In the event that Farmoutor (or a third
                           party by, through or under Farmoutor or owning
                           interests in the Farmout Area and having the right to
                           do so) proposes any AFE or AFEs for any such
                           operations which are to and actually commence between
                           the Effective Date and the termination of Farmoutee's
                           rights in all or the directly relevant portion of the
                           Farmout Area pursuant to 4.3.1.6, 4.3.1.7, 4.3.1.8
                           and/or 4.3.1.9, Farmoutor shall provide Farmoutee
                           with written notice of the details thereof, including
                           but not limited to a copy of the AFE and certain
                           terms shall apply as follows:

                           4.1.3.1.

                                       Farmoutee shall have the option, AFE by
                                       AFE, (i) to elect to participate therein
                                       under Section 4.3 at 75% (or 55% if any
                                       objective of the operation contemplated
                                       by the AFE is in depths below the
                                       9800'Sand or more if Farmoutor so elects
                                       under 4.1.3.2) of Farmoutor's interest,
                                       or (ii) to elect not to participate
                                       therein. Farmoutee shall have twenty (20)
                                       days [forty-eight (48) hours if a
                                       drilling rig is on location accumulating
                                       standby charges; or ten (10) days for any
                                       proposed Well Operation on Lease OCS 0166
                                       or within any "participating area" (as
                                       per the Operating Agreement) which
                                       includes any portion of Leases OCS 0164,
                                       0165 or 0166] after AFE receipt to
                                       provide Farmoutor with Farmoutee's
                                       written election with respect to each
                                       such AFE. In the event that Farmoutee
                                       fails to provide Farmoutor with
                                       Farmoutee's written election within the
                                       required period, Farmoutee shall be
                                       deemed to have elected not to participate
                                       therein.

                           4.1.3.2.    For each AFE in which Farmoutee elects to
                                       participate under Section 4.1.3.1 above,
                                       Farmoutor shall have the option (i) to
                                       elect to participate therein at up to
                                       25% (or up to 45% if any objective of the
                                       operation contemplated by the AFE is in
                                       depths below the 9800'Sand) of
                                       Farmoutor's interest, in which case
                                       Farmoutee's participation therein under
                                       Section 4.2 or 4.3, whichever is
                                       applicable, shall be the balance of
                                       Farmoutor's interest, or (ii) to elect to
                                       have Farmoutee participate in all of
                                       Farmoutor's interest therein under
                                       Section 4.2 or 4.3, whichever is
                                       applicable. Farmoutor shall have twenty
                                       (20) days [forty-eight (48) hours if a
                                       drilling rig is on location accumulating
                                       standby charges; or ten (10) days for any
                                       proposed Well Operation on Lease OCS 0166
                                       or within any "participating area" (as
                                       per the Operating Agreement) which
                                       includes any portion of Leases OCS 0164,
                                       0165 or 0166] after receipt of Farmoutee
                                       election under 4.1.3.1 above to provide
                                       Farmoutee with Farmoutor's written
                                       election with respect to said AFE. In the
                                       event that Farmoutee has timely notified
                                       Farmoutor that Farmoutee elects to
                                       participate under Section 4.1.3.1 above
                                       and Farmoutor fails to provide Farmoutee
                                       with Farmoutor's written election within
                                       the required period, Farmoutee shall
                                       participate to the full extent of
                                       Farmoutor's interest therein under
                                       Section 4.2 or 4.3, whichever is
                                       applicable.

                                     Page 10
<PAGE>   11

                             4.1.3.3.     In the event that Farmoutee elects not
                                          to or is deemed to have elected not to
                                          participate in an AFE pursuant to
                                          Section 4.1.3.1 above, the operation
                                          contemplated by said AFE may proceed
                                          (if it proceeds) without participation
                                          by Farmoutee. Farmoutee shall have no
                                          right to earn any interest in the
                                          Farmout Area pursuant to said
                                          operation or in any well drilled or
                                          sidetracked under said AFE, and
                                          Farmoutor shall have the option to
                                          non-consent the AFE if proposed by a
                                          third party or to participate in the
                                          operation whether proposed by
                                          Farmoutor or a third party. Any
                                          election or deemed election by
                                          Farmoutee not to participate in an
                                          operation under an AFE pursuant to
                                          Section 4.1.3.1 above shall be limited
                                          to only that operation and shall not
                                          require Farmoutee to forfeit any
                                          rights Farmoutee may have previously
                                          earned.

           4.2.     OBLIGATION WELLS

                    Farmoutee hereby obligates itself to (i) diligently perform
                    (within a period of one (1) year after the Effective Date,
                    in a workman like manner as a reasonably prudent operator
                    and whether through successful completion of an Obligation
                    Well hooked-up for production in paying quantities or by
                    termination of Farmoutee's diligent, but unsuccessful,
                    attempt to complete an Obligation Well through hook-up for
                    production in paying quantities) all eight (8) of the Major
                    Operations set forth in the definition of the Obligation
                    Wells subject to the further requirements of this Section
                    4.2.

                    4.2.1.   On or before September 1,1998, Farmoutee (or
                             Farmoutor on behalf of Farmoutee pursuant to
                             Section 4.6) shall commence the Major Operation for
                             the Obligation Well specified in Section 2.24.1,
                             and Farmoutee shall thereafter continuously
                             perform the Major Operations for the Obligation
                             Wells continuously one (1) after another in the
                             order of Farmoutee's choosing with no more than
                             thirty (30) days delay for drilling rig and/or
                             equipment moves between each such Major Operation
                             for the Obligation Wells; provided, however,
                             Farmoutee shall commence, on or before September 1,
                             1998, simultaneously performance of two (2) Major
                             Operations at a time for the Obligation Wells, and
                             further provided that Farmoutee shall thereafter
                             simultaneously and continuously perform said
                             Major Operations two (2) at a time until all of the
                             Major Operations have been performed for the
                             Obligation Wells.

                    4.2.2.   Farmoutee shall be allowed no more than thirty (30)
                             days delay for drilling rig and/or equipment moves
                             between each Major Operation for the Obligation
                             Wells under the single continuous Well Operations
                             requirement pursuant to Section 4.2.1 and the
                             simultaneous dual continuous Well Operations
                             requirement pursuant to Section 4.2.1.

                     4.2.3.  The foregoing time requirements of Section 4.2 for
                             commencing, continuously performing and completing,
                             the Major Operations for Obligation Wells are
                             subject to drilling rig and/or equipment
                             availability at market rates and permitting, both
                             of which Farmoutee shall pursue with all reasonable
                             diligence.

                     4.2.4.  The foregoing time requirements of Section 4.2 for
                             commencing, continuously performing and completing,
                             the Major Operations for Obligation Wells shall be
                             temporarily suspended during any periods of force
                             majeure (including but not limited any delays
                             caused by Farmoutor's co-owners in Lease OCS 0166
                             or any actual or attempted removal of Farmoutor as
                             operator under the Operating Agreement) or
                             mechanical problems which prevent compliance
                             therewith provided that Farmoutee pursues
                             elimination of such force majeure and mechanical
                             problems with all reasonable diligence, and further
                             provided that Farmoutee shall not be

                                    Page 11
<PAGE>   12

                         required to settle any labor dispute against its best
                         interests in order to eliminate said force majeure.

                4.2.5.   In the event that the Index Price falls to $11.00 or
                         less per barrel prior to Farmoutee having fulfilled its
                         obligation to perform any or all of the Major
                         Operations for the Obligation Wells, certain terms and
                         conditions shall apply as follows:

                          4.2.5.1.  Farmoutee shall have the right to notify
                                    Farmoutor in writing that Farmoutee elects
                                    to thereby terminate its rights to earn any
                                    further interests pursuant to this Agreement
                                    and its rights to perform any further Major
                                    Operations and Minor Operations in
                                    Obligation Wells and Optional Wells provided
                                    the Index Price for the current or prior
                                    calendar month is $11.00 or less per barrel
                                    at the time the termination notice is
                                    furnished to Farmoutor.

                          4.2.5.2.  Farmoutee shall have the right to suspend
                                    operations on, and the foregoing time
                                    requirements of Sections 4.2 for commencing,
                                    continuously performing and completing, the
                                    Major Operations for Obligation Wells during
                                    all or any part of a calendar month if the
                                    Index Price is $11.00 or less per barrel for
                                    that calendar month or for the prior
                                    calendar month; provided, however, (i) that
                                    Farmoutee furnishes Farmoutor with prior
                                    written notice of each such suspension, (ii)
                                    that no such suspension shall exceed six (6)
                                    continuous calendar months, and (iii) that
                                    the one (1) year period within which to
                                    perform all eight (8) Major Operations for
                                    Obligation Wells shall not be extended
                                    beyond three (3) years after the Effective
                                    Date. On or before the end of each such
                                    suspension period, Farmoutee shall either
                                    (i) elect to and recommence Major Operations
                                    for Obligation Wells subject to the time
                                    requirements of Sections 4.2.1, 4.2.2, 4.2.3
                                    and 4.2.4 (except as to the suspension
                                    period) and so notify Farmoutor in writing
                                    or (ii) notify Farmoutor in writing that
                                    Farmoutee elects to thereby terminate its
                                    rights to thereafter earn any additional
                                    interests pursuant to this Agreement and its
                                    rights to thereafter perform any Major
                                    Operations and Minor Operations in
                                    Obligation Wells and Optional Wells.

                          4.2.5.3.  Farmoutee shall be relieved of and
                                    released from any and all unfulfilled
                                    obligation to perform Major Operations for
                                    the Obligation Wells provided that Farmoutee
                                    provides Farmoutor with timely termination
                                    notice pursuant to and has otherwise
                                    substantially met the material requirements
                                    of Section 4.2.5.1 or 4.2.5.2 and further
                                    provided that Farmoutee has otherwise
                                    substantially complied with the material
                                    terms of Section 4.2, 4.2.1, 4.2.2, 4.2.3,
                                    and 4.2.4 and all other material terms of
                                    this Agreement through the point of
                                    suspension under 4.2.5.2, if applicable, and
                                    through the point of termination under
                                    Section 4.2.5.1 or 4.2.5.2, whichever is
                                    applicable.

                  4.2.6.    Farmoutee's rights and obligations to perform any
                            unfulfilled Major Operations for Obligations Wells
                            shall terminate upon the earlier of (i) Farmoutor's
                            receipt of termination notice from Farmoutee
                            pursuant to Section 4.2.5.1 or 4.2.5.2 or (ii) any
                            substantial failure of Farmoutee, through no fault
                            of Farmoutor, to timely comply with the material
                            requirements of the foregoing provisions of Section
                            4.2 through 4.2.5.2 (inclusive). In the event of
                            such termination, Farmoutee shall be obligated to
                            pay, upon receipt of invoice from Farmoutor, certain
                            liquidated damages to Farmoutor for each unfulfilled
                            (whether all or part thereof) Major Operation for an
                            Obligation Well except any from

                                    Page 12
<PAGE>   13

                            which Farmoutee has been relieved and released
                            pursuant to Section 4.2.5.3. Said certain liquidated
                            damages are as follows:
<TABLE>
<CAPTION>
                              No. of Unfulfilled            Liquidated       Total
                               Major Operations              Damages       Liquidated
                             For Obligation Wells            Per Well        Damages
                             --------------------           ----------     ----------
<S>                                                         <C>               <C>
                                      8                     $ 300,000         $ 2,400,000
                                      7                     $ 300,000         $ 2,100,000
                                      6                     $ 200,000         $ 1,200,000
                                      5                     $ 200,000         $ 1,000,000
                                      4                     $ 150,000         $   600,000
                                      3                     $ 150,000         $   450,000
                                      2                     $ 150,000         $   300,000
                                      1                     $ 150,000         $   150,000
                                      0                     $       0         $         0
</TABLE>

                            The requirement for payment of liquidated damages as
                            provided for hereinabove shall become null and void
                            and of no force an effect if Farmoutor sells all of
                            its right, title and interest in and to the Farmout
                            Area prior to the earlier of (i) Farmoutor's receipt
                            of termination notice from Farmoutee pursuant to
                            Section 4.2.5.1 or 4.2.5.2 or (ii) any substantial
                            failure of Farmoutee, through no fault of Farmoutor,
                            to timely comply with the material requirements of
                            the foregoing provisions of Section 4.2 through
                            4.2.5.2 (inclusive).

         4.3.     OPTIONAL WELLS

                  4.3.1.    Provided that certain requirements are met as
                            hereafter provided in this Section 4.3.1, Farmoutee
                            shall have the rights and options to perform Major
                            Operations, Minor Operations and Farmout Workovers
                            in (i) both Farmout Area 1 and Farmout Area 2 for a
                            period not to exceed three (3) years after the
                            Effective Date, (ii) Farmout Area 3 for a period not
                            to exceed one (1) year after the Effective Date, and
                            (iii) Farmout Area 4 for a period not to exceed
                            three (3) years after the Effective Date. Said
                            certain requirements are as follows:

                            4.3.1.1.    At least one (1) Major Operation in an
                                        Optional Well must be commenced on or
                                        prior to sixty (60) days after
                                        completion of all the Major Operations
                                        for the Obligation Wells; provided,
                                        however, no Optional Well shall be
                                        commenced to depths below the 9800' Sand
                                        in the Farmout Area within ninety (90)
                                        days after first production from the
                                        first Farmout Well (whether the
                                        Exploration Well or an Optional Well, if
                                        any) which is or will be completed for
                                        production in paying quantities from
                                        depths below the 9800' Sand in the
                                        Farmout Area, nor shall Farmoutor be
                                        required to make a decision with respect
                                        to participation in any Optional Well to
                                        depths below the 9800' Sand in the
                                        Farmout Area within said period.

                            4.3.1.2.    Commencing sixty (60) days after
                                        completion of all the Major Operations
                                        for Obligation Wells, Major Operations
                                        in Optional Wells must be performed
                                        continuously with no more than thirty
                                        (30) days delay for drilling rig and/or
                                        equipment moves between each Major
                                        Operation in an Optional Well and the
                                        next Major Operation in an Optional
                                        Well. Notwithstanding the foregoing,
                                        Farmoutee shall be entitled to one (1)
                                        sixty (60) day delay between Major
                                        Operations in Optional Wells each time
                                        that the four (4) most recent
                                        consecutive Major Operations have been
                                        performed without any delay except
                                        drilling rig and/or equipment moves
                                        between the said most recent four (4) or
                                        more consecutive Major Operations in
                                        Optional Wells.

                                    Page 13
<PAGE>   14
                         4.3.1.3.       The time requirements for commencing and
                                        continuously performing Major Operations
                                        for Optional Wells as provided in
                                        Sections 4.3.1.1 and 4.3.1.2 are subject
                                        to drilling rig and/or equipment
                                        availability at market rates and
                                        permitting, both of which Farmoutee
                                        shall pursue with all reasonable
                                        diligence.

                          4.3.1.4.      The time requirements for commencing
                                        and continuously performing Major
                                        Operations for Optional Wells as
                                        provided in Sections 4.3.1.1 and 4.3.1.2
                                        shall be temporarily suspended during
                                        any periods of force majeure (including
                                        but not limited any delays caused by
                                        Farmoutor's co-owners in Lease OCS 0166
                                        or any actual or attempted removal of
                                        Farmoutor as operator under the
                                        Operating Agreement) or mechanical
                                        problems which prevent compliance
                                        therewith provided that Farmoutee
                                        pursues elimination of such force
                                        majeure and mechanical problems with all
                                        reasonable diligence, and further
                                        provided that Farmoutee shall not be
                                        required to settle any labor dispute
                                        against its best interests in order to
                                        eliminate said force majeure.

                          4.3.1.5.      Notwithstanding the terms of Section
                                        4.3.1.3 and 4.3.1.4, no time requirement
                                        for commencing or continuously
                                        performing Major Operations for Optional
                                        Wells on a timely basis as provided in
                                        Sections 4.3.1.1 and 4.3.1.2 shall be
                                        extended more than ninety (90) days for
                                        any reason without Farmoutor's express
                                        written consent which shall not be
                                        unreasonably withheld.

                          4.3.1.6.      Farmoutee's rights and options to
                                        perform Major Operations, Minor
                                        Operations and Farmout Workovers in
                                        Optional Wells shall terminate in depths
                                        above the base of the 9800' Sand in
                                        Farmout Area 1 upon the earlier of (i)
                                        termination of Farmoutor's rights
                                        pursuant to Section 4.2.6, (ii) any
                                        substantial failure, through no fault of
                                        Farmoutor, to timely comply with the
                                        material requirements of Sections 4.3.1
                                        through 4.3.1.5 (inclusive), or (iii)
                                        the end of that certain three (3) year
                                        period which shall commence on the
                                        Effective Date.

                            4.3.1.7.    Farmoutee's rights and options to
                                        perform Major Operations, Minor
                                        Operations and Farmout Workovers in
                                        Optional Wells shall terminate in
                                        Farmout Area 2 upon the earlier of (i)
                                        termination of Farmoutor's rights
                                        pursuant to Section 4.2.6, (ii) any
                                        substantial failure, through no fault of
                                        Farmoutor, to timely comply with the
                                        material requirements of Sections 4.3.1
                                        through 4.3.1.5 (inclusive), (iii) the
                                        end of that certain three (3) year
                                        period which shall commence on the
                                        Effective Date, or (iv) any failure,
                                        through no fault of Farmoutor, of
                                        Farmoutee to earn an operating rights
                                        interest in Earned Areas in at least
                                        some portion of Farmout Area 2 within a
                                        period not to exceed six (6) months
                                        after the Effective Date; provided,
                                        however, Farmoutee's rights and options
                                        to perform Major Operations, Minor
                                        Operations and Farmout Workovers in
                                        Optional Wells shall terminate in
                                        non-producing and undeveloped portions
                                        of Farmout Area 2 upon the earlier of
                                        any occurrence of any of items (i)
                                        through (iv) (inclusive) or sixty (60)
                                        days (or sooner if needed by Farmoutor
                                        to satisfy the State of Louisiana) after
                                        Farmoutee's receipt of notice from
                                        Farmoutor that the State of Louisiana
                                        has requested drilling on or release of
                                        non-producing or undeveloped portions of
                                        Louisiana State Lease 1367, except of
                                        course, if Farmoutee commits to,
                                        commences and drills a well on
                                        non-producing or o undeveloped portions
                                        of Farmout

                                    Page 14
<PAGE>   15

                                        Area 2 within the time necessary to
                                        satisfy that request from the State of
                                        Louisiana.

                            4.3.1.8.    Farmoutee's rights and options to
                                        perform Major Operations, Minor
                                        Operations and Farmout Workovers in
                                        Optional Wells shall terminate in
                                        Farmout Area 3 upon the earlier of (i)
                                        termination of Farmoutor's rights
                                        pursuant to Section 4.2.6, (ii) any
                                        substantial failure, through no fault of
                                        Farmoutor, to timely comply with the
                                        material requirements of Sections 4.3.1
                                        through 4.3.1.5 (inclusive), or (iii)
                                        the end of that certain one (1) year
                                        period which shall commence on the
                                        Effective Date; provided, however,
                                        Farmoutee's rights and options to
                                        perform Major Operations, Minor
                                        Operations and Farmout Workovers in
                                        Optional Wells shall terminate in
                                        non-producing and undeveloped portions
                                        of Farmout Area 2 upon the earlier of
                                        any occurrence of any of items (i)
                                        through (iv) (inclusive) or sixty (60)
                                        days (or sooner if needed by Farmoutor
                                        to satisfy the State of Louisiana) after
                                        Farmoutee's receipt of notice from
                                        Farmoutor that the State of Louisiana
                                        has requested drilling on or release of
                                        non-producing or undeveloped portions of
                                        Louisiana State Lease 1366, except of
                                        course, if Farmoutee commits to,
                                        commences and drills a well on
                                        non-producing or undeveloped portions of
                                        Farmout Area 2 within the time necessary
                                        to satisfy that request from the State
                                        of Louisiana.

                            4.3.1.9.    Farmoutee's rights and options to
                                        perform Major Operations, Minor
                                        Operations and Farmout Workovers in
                                        Optional Wells shall terminate in both
                                        Farmout Area 4 and in depths below the
                                        9800' Sand in Farmout Area 1 upon the
                                        earlier (i) termination of Farmoutor's
                                        rights pursuant to Section 4.2.6, (ii)
                                        any substantial failure, through no
                                        fault of Farmoutor, to timely comply
                                        with the material requirements of
                                        Section 4.3.1 through 4.3.1.5
                                        (inclusive), (iii) the end of that
                                        certain three (3) year period which
                                        shall commence on the Effective Date, or
                                        (iv) any failure, through no fault of
                                        Farmoutor, to drill (or sidetrack) and
                                        log Farmout Wells to and into the
                                        Exploration Prospect or depths below the
                                        9800' Sand in Farmout Area 1 by or on
                                        behalf of Farmoutee pursuant to this
                                        Agreement with no more than a one (1)
                                        year delay between release of the
                                        drilling rig from one (1) such well to
                                        and into the Exploration Prospect or
                                        depths below the 9800' Sand in Farmout
                                        Area 1 and commencement of the drilling
                                        or sidetracking of the next such well to
                                        and into the Exploration Prospect or
                                        depths below the 9800' Sand in Farmout
                                        Area 1.

                                        Notwithstanding the provisions of this
                                        Section 4.3.1.9, if Farmoutee has timely
                                        performed all of the eight (8) Major
                                        Operations for all of the Obligations
                                        Wells, and if Farmoutee is in
                                        substantial compliance with the material
                                        requirements of Section 4.3.1 through
                                        4.3.1.5 and the other terms of this
                                        Agreement, but wishes to discontinue
                                        continuous operations pursuant to
                                        Section 4.3.1 through 4.3.5
                                        (inclusive), and yet maintain its rights
                                        and options to thereafter perform Major
                                        Operations in Optional Wells in Farmout
                                        Area 4 and in depths below the 9800'
                                        Sand in Farmout Area 1 for a period not
                                        to exceed three (3) years after the
                                        Effective Date, and if Farmoutee so
                                        notifies Farmoutor in writing in advance
                                        of any lapse in meeting the continuous
                                        operations requirements of Sections
                                        4.3.1 through 4.3.5 (inclusive),
                                        Farmoutee may maintain its rights and
                                        options to perform Major Operations in
                                        Optional Wells in Farmout Area 4 and in
                                        depths below the

                                    Page 15
<PAGE>   16

                                      9800' Sand in Farmout Area 1 for a period
                                      not to exceed three (3) years after the
                                      Effective Date by drilling (or
                                      sidetracking) and logging Farmout Wells to
                                      and into the Exploration Prospect or
                                      depths below the 9800' Sand in Farmout
                                      Area 1 by or on behalf of Farmoutee
                                      pursuant to this Agreement with no more
                                      than a six (6) month delay between release
                                      of the drilling rig from one (1) such well
                                      to and into the Exploration Prospect or
                                      depths below the 9800' Sand in Farmout
                                      Area 1 and commencement of the drilling or
                                      sidetracking of the next such well to and
                                      into the Exploration Prospect or depths
                                      below the 9800' Sand in Farmout Area 1,
                                      subject to (i) drilling rig and/or
                                      equipment availability at market rates and
                                      permitting, both of which Farmoutee shall
                                      pursue with all reasonable diligence, and
                                      (ii) force majeure (including but not
                                      limited any delays caused by Farmoutor's
                                      co-owners in Lease OCS 0166) or mechanical
                                      problems which prevent timely operations;
                                      provided, however, (i) that Farmoutee
                                      pursues elimination of any such force
                                      majeure and mechanical problems with all
                                      reasonable diligence, (ii) that Farmoutee
                                      shall not be required to settle any labor
                                      dispute against its best interests in
                                      order to eliminate any such force majeure,
                                      (iii) that the six (6) month maximum time
                                      between such operations shall not be
                                      extended more than ninety (90) days for
                                      any reason without Farmoutor's express
                                      written consent which shall not be
                                      unreasonably withheld, and (iv) that
                                      Farmoutee's rights and options to perform
                                      Major Operations in Optional Wells shall
                                      terminate in both Farmout Area 4 and in
                                      depths below the 9800' Sand in Farmout
                                      Area I upon, the earlier of any
                                      substantial failure, through no fault of
                                      Farmoutor, to timely comply with the
                                      material requirements of this second,
                                      unnumbered paragraph of Section 4.3.1.9 or
                                      the end of that certain three (3) year
                                      period which shall commence on the
                                      Effective Date.

                 4.3.2.   FARMOUT WORKOVERS
                          Notwithstanding the terms of Section 4.3.1 above,
                          either Party (or a third party by, through or under
                          Farmoutor or owning interests in the Farmout Area and
                          having the right to do so) may propose a Farmout
                          Workover in any well as a Well Operation in an
                          Optional Well any time (whether before or after
                          Payout) after Farmoutee has previously earned an
                          interest in such well pursuant to a prior Well
                          Operation under and meeting the requirements of
                          Section 5.1, and Farmoutee shall have a continuing
                          right to participate in and perform any Farmout
                          Workover in such a well as a Well Operation in an
                          Optional Well until the sooner of permanent plug and
                          abandonment of such well or Farmoutee's proposal or
                          approval that such well be permanently plugged and
                          abandoned.

         4.4. FARMOUTEE'S WELL OPERATIONS

              4.4.1.          Farmoutee's Well Operations (including but not
                              limited to the related well hook-up for production
                              and flow back of completion fluids and spent
                              acid) conducted pursuant to this Agreement shall
                              be diligently conducted as would a reasonably
                              prudent operator and in accordance with mutually
                              acceptable written procedures which Farmoutee
                              shall prepare and submit to Farmoutor at least ten
                              (10) days prior to commencement of any such
                              operations.

              4.4.2.          Farmoutee shall plan, design, obtain all permits
                              for and perform (i) all Well Operations in Farmout
                              Wells pursuant to this Agreement, (ii) all hook-up
                              (including but not limited to all related
                              facility, structural, equipment, pipeline or
                              flowline work) required to place all such wells on
                              production through to Farmoutor's processing
                              facilities as

                                    Page 16
<PAGE>   17

                              designated by Farmoutor well by well, and (iii)
                              all flow back of completion fluids and spent acids
                              from each such well. In accomplishing said
                              hook-up, Farmoutor's existing pipelines and
                              facilities upstream of said processing facilities
                              shall be used to the extent acceptable to both
                              Parties and modifications and/or improvements to
                              Farmoutor's existing pipelines and facilities
                              upstream of said processing facilities shall be
                              performed to the extent needed to hook-up the
                              wells for production through to said processing
                              facilities in a manner acceptable to both Parties.

                    4.4.3.    Except for Well Operations in wells listed on
                              Exhibit A-9, Well Operations by or on behalf of
                              Farmoutee may not be conducted on any of
                              Farmoutor's structures or in any Excluded Well
                              without the prior written consent of Farmoutor
                              which shall not be unreasonably withheld.

                    4.4.4.    Upon specific written request from Farmoutee,
                              Farmoutor shall provide information to Farmoutee
                              as to those reservoirs for which portions are
                              considered behind pipe as Excluded Portions of
                              Reservoirs under Section 2.8.2. Farmoutee shall
                              limit any such request to the minimum number of
                              specified wells for which such information is
                              reasonably needed by Farmoutee at the time of
                              each request.

                    4.4.5.    To the extent that Farmoutee anticipates no
                              additional cost, risk, liability, expense or
                              inconvenience in Farmoutee's sole opinion on a
                              case by case basis, Farmoutee agrees to use
                              certain drilling rigs specified by Farmoutor
                              during gaps in Farmoutor's drilling schedule if
                              Farmoutor makes same available to Farmoutee in
                              order to fill such gaps.

           4.5.    FARMOUTOR'S WELL OPERATIONS
                   In the event that Farmoutee provides Farmoutor with formal
                   written notice that Farmoutee desires for Farmoutor to
                   perform certain Well Operations (including but not limited to
                   the related well hook-up for production and flow back of
                   completion fluids and spent acid) on behalf of Farmoutee,
                   Farmoutor shall have the option to perform same on behalf of
                   Farmoutee (and on Farmoutor's own behalf to the extent of any
                   participation therein by Farmoutor pursuant to Section 4.1)
                   or to decline to perform same. Farmoutor's Well Operations
                   pursuant to this Agreement shall be diligently conducted as
                   would a reasonably prudent operator.

            4.6.   FARMOUTOR'S CASING POINT ELECTIONS
                   When any Well Operations in any Farmout Well reach the
                   objective thereof and if Farmoutee plans to install
                   production casing in order to produce such well, AND ONLY IF
                   Farmoutor has elected to participate in said Well Operation
                   to reach said objective, Farmoutee shall notify Farmoutor
                   thereof in writing and provide Farmoutor an estimate of the
                   cost (AFE) to install production casing and complete the well
                   for production. Within forty-eight (48) hours after receipt
                   of such notice (inclusive of weekends and federal holidays),
                   Farmoutor shall inform Farmoutee of Farmoutor's election to
                   participate in the casing and planned completion or have its
                   participating interest be subject to the nonconsent recovery
                   provisions of the Operating Agreement except that, as between
                   Farmoutor and Farmoutee, the nonconsent recovery provisions
                   of the first but not the second paragraph of Article IX. E
                   shall apply, and such nonconsent recovery provisions of the
                   first paragraph of Article IX. E shall apply only to costs
                   and expenses after casing point attributable to any Farmoutor
                   participating interest non-consented at casing point.

            4.7.   COMPLETIONS
                   In the event that more than one productive zone is
                   encountered in a Farmout Well, the Parties hereby agree that
                   completion of the target objective of said Farmout Well shall
                   take precedence over all other potential completion zones,
                   absent mutual agreement to the contrary at the time the
                   Farmout Well has been drilled

                                    Page 17

<PAGE>   18

                and logged. If the objective in any Well Operation in a Farmout
                Well is determined not to be producible, said Farmout Well shall
                be successively targeted for completion based upon the deeper
                depths upward for each productive zone in which Farmoutee owns
                an interest or is entitled to earn an interest.

       4.8.     COSTS AND RISKS

                Farmoutee shall be responsible for all costs, risks, liabilities
                and expenses associated with (i) all Well Operations performed
                by or on behalf of Farmoutee in any Farmout Well under the terms
                of this Agreement, (ii) all hook-up (including but not limited
                to all related facility, structural, equipment, pipeline or
                flowline work) required to place all such wells on production
                through to Farmoutor's processing facilities as designated by
                Farmoutor well by well, and (iii) all flow back of completion
                fluids and spent acids from each such well, LESS AND EXCEPT any
                proportionate share of the cost, risk, liability and expense of
                Well Operations in which Farmoutor (and/or any third party
                having the right) has elected to participate under the terms of
                this Agreement.

        4.9.    WELL TAKE OVER OPTION UPON PROPOSED ABANDONMENT

                4.9.1.   No Farmout Well shall be abandoned by Farmoutee
                         without Farmoutee first giving Farmoutor written notice
                         of its decision to abandon, together with a copy of any
                         final electric log(s) and copies of all other wireline
                         logs, sidewall core analyses and other information
                         required to be provided to Farmoutor under this
                         Agreement. Within thirty (30) days (inclusive of
                         weekends and holidays) after Farmoutor's receipt of
                         such notice and logs (twenty-four (24) hours if the rig
                         having conducted drilling or other operations on said
                         Farmout Well is on location and a decision has been
                         made by Farmoutee to immediately plug and abandon the
                         well), Farmoutor may notify Farmoutee that it elects to
                         take over said well for such further operations it may
                         wish to conduct. Farmoutor shall, at its sole risk and
                         expense, thereupon take immediate possession of said
                         well and of the materials and equipment owned or
                         controlled by Farmoutee (except materials and equipment
                         of third party contractors) located at the well site
                         which may be useful in connection with Farmoutor's
                         further operations, testing, deepening, or evaluation
                         of the said well.

                4.9.2.   If, within the time provided, Farmoutor elects to take
                         over said well, Farmoutee shall, except as hereinafter
                         provided, be deemed to have satisfied its
                         responsibilities to plug and abandon said well
                         pursuant to this Agreement. After taking over said
                         well, Farmoutor shall own all interest in the well and
                         shall be responsible for and shall bear the entire
                         expense of all further operations in connection with
                         the well, specifically including the cost of completion
                         and/or abandonment. In addition, (i) Farmoutor shall
                         own exclusively, free and clear of this Agreement and
                         of any assignment or the Operating Agreement, the well
                         and all production therefrom, regardless of the depth
                         from which produced, and (ii) the rights earned or
                         available for earning by Farmoutee with said well shall
                         expire (except as to any accrued obligations of
                         Farmoutee). After taking over the well, Farmoutor shall
                         indemnify and hold harmless Farmoutee from all losses,
                         costs and liabilities arising therefrom.

                4.9.3.   Farmoutee shall, upon request from Farmoutor, furnish
                         Farmoutor with such documents in recordable form as may
                         be required to perfect title to such well taken over by
                         Farmoutor except that Farmoutee shall not be required
                         to cure any title defects attributable to the actions
                         of Farmoutor before or after the Effective Date of this
                         Agreement.

                  4.9.4.  If Farmoutor elects to take over a well pursuant to
                          Section 4.9.1 above, Farmoutor will reimburse
                          Farmoutee as follows:

                          4.9.4.1.   The reasonable net salvage value (fair
                                     market value) of pipe and any other
                                     materials paid for and placed in the well
                                     by

                                    Page 18
<PAGE>   19

                                     Farmoutee that could have been recovered by
                                     Farmoutee if Farmoutor had not take over
                                     the well; and

                          4.9.4.2.   For Farmoutee's unused materials utilized
                                     by Farmoutor, a reasonable compensation for
                                     Farmoutee's materials.

                4.9.5.   In the event Farmoutee abandons one (1) or more Farmout
                         Wells without Farmoutor's prior approval, this
                         Agreement shall immediately terminate as to such wells.
                         As a result, Farmoutee shall forfeit all rights in such
                         well(s), and shall, as a penalty for said default, pay
                         Farmoutor the sum of $50,000.00 per such well within
                         thirty (30) days of receipt of notice of said default.
                         Additionally, Farmoutee shall remain responsible for
                         any and all costs and obligations incurred in
                         connection with or otherwise associated with
                         Farmoutee's operations on said abandoned well(s).
                         Payment of the above penalty for said default shall
                         constitute the exclusive remedy of Farmoutor for
                         Farmoutee's failure to obtain Farmoutor's prior
                         approval.

        4.10.   CONDITIONAL AREA
                Notwithstanding Sections 4.2 and 4.3, certain terms shall
                apply to the Conditional Area as fol1ows:

                4.10.1.       Farmoutor shall have the right to propose and
                              drill for its own account or participate at up to
                              its full interest in the drilling, sidetracking
                              and/or deepening of any one (1) well of its
                              choosing in the Conditional Area after the
                              Effective Date.

                4.10.2.       Farmoutor shall have the right to propose and
                              drill for its own account or participate at up to
                              its full interest in the drilling, sidetracking
                              and/or deepening of any well in the Farmout Area
                              which would compete with, or drain any reservoirs
                              discovered by, the drilling, sidetracking and/or
                              deepening of the one (1) well provided for in
                              Section 4.10.1.

                4.10.3.       Farmoutee may propose Optional Wells to Farmoutor
                              in the Conditional Area. Prior to the drilling,
                              sidetracking and/or deepening of the one (1) well
                              provided for in Section 4.10, Farmoutee shall not
                              propose any well or disclose any undrilled
                              prospect in the Conditional Area to any third
                              party (including but not limited to any third
                              party owning an interest in the Conditional Area
                              or having the right to participate in such a well
                              or undrilled prospect, but excluding Farmoutee's
                              legal or financial representatives and assigns)
                              unless Farmoutor provides its written permission
                              for the well proposal(s) and undrilled prospect
                              disclosures to such third party(ies).

                4.10.4.       The terms of this Section 4.10 shall not exclude
                              proposal of, or performance of, Farmout Workovers,
                              Subsequent Workovers or Subsequent Well Operations
                              by or on behalf of Farmoutee in the Conditional
                              Area prior to the drilling, sidetracking or
                              deepening of the one (1) well provided for in
                              Section 4.10.1.

        4.11.   WELL SPACING

                4.11.1.  No well shall be completed or recompleted above the
                         base of the 9800' Sand in the Farmout Area within that
                         portion of each reservoir within 1,500' of:

                         4.11.1.1. Any well completion producing from such
                                   reservoir as of the Effective Date, without
                                   the express written approval of Farmoutor.

                         4.11.1.2. Any well completion in Farmout Area 1 or
                                   Farmout Area 2 producing from such reservoir
                                   and which production from

                                    Page 19
<PAGE>   20

                                             such well completion is or, after
                                             Payout hereunder or payout of any
                                             non-consent, will be owned all or
                                             in part by Farmoutor, without the
                                             express written approval of
                                             Farmoutor.

                                4.11.1.3.    Any well completion in Farmout
                                             Area 1 or Farmout Area 2 producing
                                             from such reservoir and which
                                             production from such well
                                             completion is or, after Payout
                                             hereunder or payout of any
                                             non-consent, will be owned all
                                             or in part by Farmoutee, without
                                             the express written approval of
                                             Farmoutee.

                4.11.2.  No well shall be completed or recompleted above the
                         base of the 9800' Sand in the Farmout Area within that
                         portion of each reservoir penetrated by and behind pipe
                         at or above the completion(s) in and within 1,500' of
                         any well bore producing in the Farmout Area as of the
                         Effective Date, without the express written approval of
                         Farmoutor.

                4.11.3.  No well shall be completed or recompleted above the
                         base of the 9800' Sand in the Farmout Area within that
                         portion of each reservoir penetrated by and behind pipe
                         in an unabandoned portion of and within 1,500' of:

                         4.11.3.1.   Any non-producing well bore previously (but
                                     after the Effective Date) drilled and
                                     completed or recompleted for production in
                                     paying quantities which were or, after
                                     Payout hereunder or payout of any
                                     non-consent, would be owned all or in part
                                     by Farmoutor, without the express written
                                     approval of Farmoutor.

                         4.11.3.2.   Any non-producing well bore previously (but
                                     after the Effective Date) drilled and
                                     completed or recompleted for production in
                                     paying quantities which were or, after
                                     Payout hereunder or payout of any
                                     non-consent, would be owned all or in part
                                     by Farmoutee, without the express written
                                     approval of Farmoutee.

                4.11.4.  Notwithstanding the other provision of this
                         Section 4.11, no well shall be completed or recompleted
                         within that portion of each reservoir in Farmout Area 3
                         within 500' of La. State Lease 1367 Well # 18, without
                         the express written approval of Farmoutor.

                4.11.5.  No well shall be completed or recompleted below the
                         base of the 9800' Sand in the Farmout Area within that
                         portion of each reservoir penetrated by and behind pipe
                         in an unabandoned portion of and within 2,200' (4,200'
                         if a Gas Reservoir Below 9800' Sand) of:

                         4.11.5.1. Any well bore previously (but after the
                                   Effective Date) drilled and completed or
                                   recompleted for production in paying
                                   quantities owned all or in part by
                                   Farmoutor (whether before or after Payout, if
                                   applicable) without the express written
                                   approval of Farmoutor.

                         4.11.5.2. Any well bore previously (but after the
                                   Effective Date) drilled and completed or
                                   recompleted in any reservoir for production
                                   in paying quantities owned all or in part by
                                   Farmoutee (whether before or after Payout, if
                                   applicable), without the express written
                                   approval of Farmoutee.

                                    Page 20
<PAGE>   21

               4.11.6.   The 4200' distance for a Gas Reservoir Below 9800'
                         Sand under Section 4.11.5 shall not apply to any well
                         drilled or sidetracked below the 9800' Sand in the
                         Farmout Area through a reservoir prior to the time that
                         said reservoir is determined to be a Gas Reservoir
                         Below 9800' Sand.

               4.11.7.   Notwithstanding the other provision of this
                         Section 4.11, no well shall be completed or recompleted
                         in the stratigraphic portion of the Farmout Area from
                         the surface of the earth to the base of the 7600' Lower
                         Sand within 1,000' of the bold, black outline on
                         Exhibit A-8, without the express written approval of
                         Farmoutor.

               4.11.8.   Each Party shall be entitled to its operating rights
                         interest share or participating interest share, if
                         different, of all production from each well in which it
                         participates regardless of the actual drainage area for
                         the well; provided, however, that the well is not in
                         violation of the provisions of Section 4.11.1 through
                         4.11.6 (inclusive) and that neither the involved
                         reservoir, the drainage area, nor the area proven by
                         the well are solely or partially within Lease OCS 0166
                         or beyond the limits of the Farmout Area.

          4.12.    SUBSEQUENT WELL OPERATIONS
                   Either Party may propose Subsequent Well Operations in an
                   Earning Well or in other Farmout Wells to explore and/or
                   develop Earned Areas and, subject to the Operating Agreement
                   (except that, as between Farmoutor and Farmoutee, the
                   nonconsent recovery provisions of the first but not the
                   second paragraph of Article IX. E. shall apply in the case of
                   a non-consent by either Party), each Party shall have the
                   option to participate at its operating rights interests in
                   said Earned Areas at the time said operation is commenced.
                   Farmoutee shall not earn any additional operating rights
                   interests in the Farmout Area through Subsequent Well
                   Operations.

          4.13.    ABANDONMENT

                   4.13.1.     Subject to Farmoutor's well takeover rights
                               under Section 4.9 and unless mutually agreed in
                               writing by Farmoutor and Farmoutee to the
                               contrary, but not later than allowable by
                               applicable governmental, laws, orders, rules or
                               regulations nor later than six (6) months after
                               termination of this Agreement unless Farmoutor
                               agrees to take over the well, Farmoutee [at its
                               sole cost, risk, liability and expense except to
                               the extent of any participating interest therein
                               of any third party participant(s) in each Farmout
                               Well] shall permanently plug and abandon said
                               well (including but not limited to the caisson
                               and related equipment and flowlines if the well
                               is located in a single well caisson) upon or
                               within six (6) months after completion of an
                               unsuccessful Well Operation therein by or on
                               behalf of Farmoutee.

                   4.13.2.     Within the time allowed by applicable
                               governmental, laws, orders, rules or regulations,
                               but not later than six (6) months after
                               termination of this Agreement unless mutually
                               agreed in writing by Farmoutor and Farmoutee to
                               the contrary, Farmoutee [at its sole cost, risk,
                               liability and expense except to the extent of
                               any participating interest therein of any third
                               party participant(s)] shall abandon and remove
                               each platform and caisson (including but not
                               limited to any related flowlines and equipment
                               thereon) installed after the Effective Date for
                               one (1) or more Farmout Wells.

                   4.13.4.     Except as provided in Section 4.13.1 and 4.13.2
                               and unless mutually agreed in writing by
                               Farmoutor and Farmoutee to the contrary,
                               Farmoutee shall not assume any of Farmoutor's
                               liability for

                                    Page 21
<PAGE>   22

                               abandonment or removal of caissons,
                               platforms, facilities, equipment,
                               flowlines or pipelines pursuant to or as
                               a result of this Agreement.

          5.       EARNING AND TRANSFER(S) OF INTEREST
                   The rights available to be earned by Farmoutee from Farmoutor
                   in the Farmout Area pursuant to this Agreement shall be
                   limited as provided hereafter in this Section 5.

                   5.1. EARNING
                        For each Obligation Well and Optional Well which are
                        completed for production as a commercially productive
                        oil and/or gas well pursuant to Well Operations
                        conducted by or on behalf of Farmoutee in a timely
                        manner pursuant to Sections 4.2 or 4.3, whichever is
                        applicable, and provided that said well is not completed
                        in any of the Excluded Portions of Reservoirs, and
                        further provided that Farmoutee executes and provides
                        Farmoutor with a sworn affidavit stating that there are
                        no delinquent debts, charges, or liens affecting or
                        burdening any of the Farmout Leases as a result of said
                        Well Operations in said well, and provided that
                        Farmoutee has substantially complied with all of the
                        foregoing requirements of this Section 5.1 and all other
                        material requirements of this Agreement with respect to
                        such well and provides Farmoutor with written notice of
                        same within thirty (30) days, then, effective upon
                        completion and hook-up of said well for production,
                        Farmoutee shall earn and Farmoutor shall retain certain
                        interests, subject to Section 5.7, as follows:

                        5.1.1.  If the initial earning Well Operation in said
                                well was spud or commenced in a calendar month
                                for which the Index Price was $17.50 or more per
                                barrel of oil in the prior calendar month (but
                                excluding Earned Areas in the Exploration
                                Prospect):

                                5.1.1.1.   Farmoutee shall earn SEVENTY-FIVE
                                           PERCENT OF ONE HUNDRED PERCENT (75%
                                           of 100%) of Farmoutor's operating
                                           rights interests in and to the Earned
                                           Areas before Payout and FIFTY PERCENT
                                           OF ONE HUNDRED PERCENT (50% of 100%)
                                           of Farmoutor's operating rights
                                           interests in and to the Earned Areas
                                           upon and after Payout.

                                5.1.1.2.   Farmoutor shall retain, reserve and
                                           have TWENTY-FIVE PERCENT OF ONE
                                           HUNDRED PERCENT (25% of 100%) of
                                           Farmoutor's operating rights
                                           interests before Payout in and to the
                                           Earned Areas and FIFTY PERCENT OF ONE
                                           HUNDRED PERCENT (50% of 100%) of
                                           Farmoutor's operating rights
                                           interests upon and after Payout in
                                           and to the Earned Areas.

                                5.1.1.3.   Farmoutee, out of the operating
                                           rights interests transferred to
                                           Farmoutee from Farmoutor pursuant to
                                           Section 3, shall be deemed to have
                                           thereupon transferred back to
                                           Farmoutor and Farmoutor shall
                                           thereupon have and own TWENTY-FIVE
                                           PERCENT OF ONE HUNDRED PERCENT (25%
                                           of 100%) of the operating rights
                                           interests before Payout in and to
                                           said well from the surface down to
                                           the deepest depth contained in Earned
                                           Areas and FIFTY PERCENT OF ONE
                                           HUNDRED PERCENT (50% of 100%) of the
                                           operating rights interests upon and
                                           after Payout in and to said well from
                                           the surface down to the deepest depth
                                           contained in the Earned Areas. The
                                           operating rights interests
                                           transferred back to Farmoutor
                                           pursuant to this subsection 5.1.1.3
                                           shall result in Farmoutor having and
                                           owning operating rights interests in
                                           and to the Farmout Well which equal
                                           the operating rights interests which
                                           were retained and reserved by
                                           Farmoutor under the foregoing
                                           subsection 5.1.1.2.

                                    Page 22
<PAGE>   23

                         5.1.2.    If the initial earning Well Operation in said
                                   well was spud or commenced in a calendar
                                   month for which the Index Price was $14.50 or
                                   more but less than $17.50 per barrel of oil
                                   in the prior calendar month (but excluding
                                   Earned Areas in the Exploration Prospect):

                                   5.1.2.1.     Farmoutee shall earn EIGHTY
                                                PERCENT OF ONE HUNDRED PERCENT
                                                (80% of 100%) of Farmoutor's
                                                operating rights interests in
                                                and to the Earned Areas before
                                                Payout and SIXTY PERCENT OF ONE
                                                HUNDRED PERCENT (60% of 100%) of
                                                Farmoutor's operating rights
                                                interests in and to the Earned
                                                Areas upon and after Payout.

                                   5.1.2.2.     Farmoutor shall retain, reserve
                                                and have TWENTY PERCENT OF ONE
                                                HUNDRED PERCENT (20% of 100%) of
                                                Farmoutor's operating rights
                                                interests before Payout in and
                                                to the Earned Areas and FORTY
                                                PERCENT OF ONE HUNDRED PERCENT
                                                (40% of 100%) of Farmoutor's
                                                operating rights interests upon
                                                and after Payout in and to the
                                                Earned Areas.

                                   5.1.2.3.     Farmoutee, out of the operating
                                                rights interests transferred to
                                                Farmoutee from Farmoutor
                                                pursuant to Section 3, shall be
                                                deemed to have thereupon
                                                transferred back to Farmoutor
                                                and Farmoutor shall thereupon
                                                have and own TWENTY PERCENT OF
                                                ONE HUNDRED PERCENT (20% of
                                                100%) of the operating rights
                                                interests before Payout in and
                                                to said well from the surface
                                                down to the deepest depth
                                                contained in Earned Areas and
                                                FORTY PERCENT OF ONE HUNDRED
                                                PERCENT (40% of 100%) of the
                                                operating rights interests upon
                                                and after Payout in and to said
                                                well from the surface down to
                                                the deepest depth contained in
                                                the Earned Areas. The operating
                                                rights interests transferred
                                                back to Farmoutor pursuant to
                                                this subsection 5.1.2.3 shall
                                                result in Farmoutor having and
                                                owning operating rights
                                                interests in and to the Farmout
                                                Well which equal the operating
                                                rights interests which were
                                                retained and reserved by
                                                Farmoutor under the foregoing
                                                subsection 5.1.2.2.

                         5.1.3.    If the initial earning Well Operation in
                                   said well was spud or commenced in a calendar
                                   month for which the Index Price was less than
                                   $14.50 per barrel of oil in the prior
                                   calendar month (but excluding Earned Areas in
                                   the Exploration Prospect):

                                   5.1.3.1.     Farmoutee shall earn EIGHTY-FIVE
                                                PERCENT OF ONE HUNDRED PERCENT
                                                (85% of 100%) of Farmoutor's
                                                operating rights interests in
                                                and to the Earned Areas before
                                                Payout and SIXTY PERCENT OF ONE
                                                HUNDRED PERCENT (60% of 100%) of
                                                Farmoutor's operating rights
                                                interests in and to the Earned
                                                Areas upon and after Payout.

                                   5.1.3.2.     Farmoutor shall retain, reserve
                                                and have FIFTEEN PERCENT OF ONE
                                                HUNDRED PERCENT (15% of 100%) of
                                                Farmoutor's operating rights
                                                interests before Payout in and
                                                to the Earned Areas and FORTY
                                                PERCENT OF ONE HUNDRED PERCENT
                                                (40% of 100%) of Farmoutor's
                                                operating rights interests upon
                                                and after Payout in and to the
                                                Earned Areas.

                                   5.1.3.3.     Farmoutee, out of the operating
                                                rights interests transferred to
                                                Farmoutee from Farmoutor
                                                pursuant to Section 3, shall be
                                                deemed to have thereupon
                                                transferred back to Farmoutor
                                                and

                                    Page 23
<PAGE>   24

                                      Farmoutor shall thereupon have and own
                                      FIFTEEN PERCENT OF ONE HUNDRED PERCENT
                                      (15% of 100%) of the operating rights
                                      interests before Payout in and to said
                                      well from the surface down to the deepest
                                      depth contained in Earned Areas and FORTY
                                      PERCENT OF ONE HUNDRED PERCENT (40% of
                                      100%) of the operating rights interests
                                      upon and after Payout in and to said well
                                      from the surface down to the deepest depth
                                      contained in the Earned Areas. The
                                      operating rights interests transferred
                                      back to Farmoutor pursuant to this
                                      subsection 5.1.3.3 shall result in
                                      Farmoutor having and owning operating
                                      rights interests in and to the Farmout
                                      Well which equal the operating rights
                                      interests which were retained and reserved
                                      by Farmoutor under the foregoing
                                      subsection 5.1.3.2.

                5.1.4.   For any earning Well Operation in said well if in the
                         Exploration Prospect:

                         5.1.4.1.       Farmoutee shall earn FIFTY-FIVE PERCENT
                                        OF ONE HUNDRED PERCENT (55% of 100%) of
                                        Farmoutor's operating rights interests
                                        in and to the Earned Areas in the
                                        Exploration Prospect, except that
                                        Farmoutee shall earn ONE HUNDRED PERCENT
                                        (100%) of Farmoutor's operating rights
                                        interests before Payout in and to said
                                        well and all production from any and
                                        all completion(s) of said well in the
                                        Earned Areas in the Exploration Prospect
                                        and SEVENTY-FIVE PERCENT OF ONE HUNDRED
                                        PERCENT (75% of 100%) of Farmoutor's
                                        operating rights interests upon and
                                        after Payout of said Well in and to said
                                        well and all production from any and all
                                        completion(s) of said well in the Earned
                                        Areas in the Exploration Prospect.

                         5.1.4.2.       Farmoutor shall retain, reserve and have
                                        FORTY-FIVE PERCENT OF ONE HUNDRED
                                        PERCENT (45% of 100%) of Farmoutor's
                                        operating rights interests in the Earned
                                        Areas in the Exploration Prospect,
                                        except that Farmoutor shall have
                                        TWENTY-FIVE PERCENT OF ONE HUNDRED
                                        PERCENT (25% of 100%) of Farmoutor's
                                        operating rights interests upon and
                                        after Payout of said Well in and to
                                        said well and all production from any
                                        and all completion(s) of said well in
                                        the Earned Areas in the Exploration
                                        Prospect.

                          5.1.4.3.      Farmoutee, out of the operating rights
                                        interests transferred to Farmoutee from
                                        Farmoutor pursuant to Section 3, shall
                                        be deemed to have thereupon transferred
                                        back to Farmoutor and Farmoutor shall
                                        thereupon have and own TWENTY-FIVE
                                        PERCENT OF ONE HUNDRED PERCENT (25% of
                                        100%) of the operating rights interests
                                        upon and after Payout in and to said
                                        well from the surface down to the
                                        deepest depth contained in the Earned
                                        Areas in the Exploration Prospect. The
                                        operating rights interests transferred
                                        back to Farmoutor pursuant to this
                                        subsection 5.1.4.3 shall result in
                                        Farmoutor having and owning operating
                                        rights interests in and to said well
                                        which equal the operating rights
                                        interests which were retained and
                                        reserved by Farmoutor in and to said
                                        well under the foregoing subsection
                                        5.1.4.2.

                          5.1.4.4.      In the event that Farmoutee proposes the
                                        drilling or sidetracking of any well as
                                        a Subsequent Well Operation in the
                                        Earned Areas within the Exploration
                                        Prospect, Farmoutor shall have the
                                        option to participate or non-consent
                                        pursuant to

                                    Page 24

<PAGE>   25

                                    Section 4.12 or to elect to assign to
                                    Farmoutee all of Farmoutor's retained
                                    operating rights interest in and to said
                                    well and all production from any completion
                                    of said well in the Earned Areas within the
                                    Exploration Prospect, subject to Farmoutor
                                    reserving the right to an assignment of
                                    TWENTY-FIVE PERCENT OF ONE HUNDRED PERCENT
                                    (25% of 100%) operating rights interest
                                    therein upon and after Payout of said well
                                    just as would have been the case if
                                    Farmoutee had not already earned therein and
                                    said well was an Obligation Well or an
                                    Optional Well to the Exploration Prospect
                                    rather than a Subsequent Well Operation in
                                    the Earned Areas within the Exploration
                                    Prospect. Notwithstanding terms of this
                                    Section 5.1.4.4, until termination of this
                                    Agreement, Farmoutee shall have the option
                                    to participate in any replacement well in
                                    the Earned Areas within the Exploration
                                    Prospect at the same interests, if any, in
                                    which Farmoutee participated in a well which
                                    is to be replaced by said replacement well
                                    and, if Farmoutee so participates in said
                                    replacement well, Farmoutee shall have the
                                    right to participate in the production from
                                    said replacement well at the same interests,
                                    if any, which Farmoutee had in the
                                    production from the well which was replaced
                                    by said replacement well; provided, however,
                                    (i) that said replacement well is drilled or
                                    sidetracked solely for the purpose of
                                    replacing a well lost due to mechanical or
                                    other failure, (ii) that said replacement
                                    well produces only within 200' of the lost
                                    well it replaces, and (ii) that said
                                    replacement well produces only production
                                    from the same reservoir(s) in which
                                    Farmoutee was entitled to participate in
                                    production at said interests in the lost
                                    well.

         5.2.     TERMINATION OF FARMOUTEE'S RIGHT TO EARN

                  Subject to the sole exception of certain Farmout Workovers
                  performed pursuant to Section 4.3.2, Farmoutee's rights to
                  earn any additional interest under Section 5.1 shall terminate
                  (i) in depths above the base of the 9800' Sand in Farmout Area
                  1 upon termination of Farmoutor's rights pursuant to 4.3.1.6,
                  (ii) in Farmout Area 2 upon termination of Farmoutor's rights
                  pursuant to 4.3.1.7, (iii) in all of Farmout Area 3 upon
                  termination of Farmoutor's rights pursuant to 4.3.1.8, and
                  (iii) in Farmout Area 4 and depths below the 9800' Sand in
                  Farmout Area 1 upon termination of Farmoutor's rights pursuant
                  to 4.3.1.9.

         5.3.     INTERESTS TRANSFERRED

                  5.3.1.   In the event that Farmoutee earns operating rights
                           interests pursuant to Section 5.1, Farmoutor shall
                           execute and deliver an assignment conveying to
                           Farmoutee the percentage of operating rights
                           interests specified in Section 5.1 before Payout of
                           the Farmout Well. Said assignment shall be effective
                           upon Farmoutee's completion and hook-up of the
                           Farmout Well for production.

                  5.3.2.   Said assignment shall be in the form of Exhibit E or
                           a mutually agreeable form recordable in the records
                           of Lafourche Parish, Louisiana and acceptable to the
                           MMS or the State Mineral Board of the State of
                           Louisiana as appropriate. Said Assignment shall be
                           filed for approval with the MMS or the State Mineral
                           Board of the State of Louisiana as appropriate.

                  5.3.3.   In order to comply with current MMS rules and
                           regulations for assignments, said assignments for
                           filing with the MMS shall be made by aliquots (1/4 -
                           1/4 - 1/4s) from the stratigraphic equivalent of the
                           most shallow depth in each particular aliquot in
                           which Farmoutee earned operating rights pursuant to
                           Section 5.1 down to the stratigraphic

                                     Page 25

<PAGE>   26

                           equivalent of the deepest depth in which Farmoutee
                           earned operating rights pursuant to Section 5.1 in
                           that particular aliquot; provided, however, that said
                           assignment or assignments shall be subject to this
                           Agreement and to a letter agreement or letter
                           agreements by and between the Parties in which the
                           Parties shall specify the actual Earned Areas
                           assigned notwithstanding the depths and aliquots
                           described as assigned in said assignment.

                  5.3.4.   Upon and effective with Payout throughout the
                           assigned portion of each aliquot in MMS assignments,
                           Farmoutee shall make a re-assignment to Farmoutor in
                           similar form, which instrument shall be filed for
                           approval with the MMS so that Farmoutee and Farmoutor
                           each have proper title to their respective share of
                           operating rights after Payout as provided in Section
                           5.1.

                  5.3.5.   Upon and effective with Payout of the assigned
                           portion of the Farmout Area in the State of
                           Louisiana, Farmoutee shall make a re-assignment to
                           Farmoutor in similar form to that used to assign the
                           before Payout interests therein, which instrument
                           shall be filed for approval with the State Mineral
                           Board of the State of Louisiana so that Farmoutee and
                           Farmoutor each have proper title to their respective
                           share of operating rights after Payout as provided in
                           Section 5.1.

         5.4.     NO WARRANTY

                  Without representation or warranty, but subject to the
                  subrogation hereafter provided for in this Section 5.4,
                  Farmoutor has advised Farmoutee that Farmoutor believes (a)
                  that it owns ONE HUNDRED PERCENT (100%) of the operating
                  rights and record title interest in the Farmout Area except
                  for (i) that portion of the Farmout Area affected by OCS-G
                  0166 covering the S/2 of South Timbalier Block 23 and (ii)
                  within any "participating area" (as per the Operating
                  Agreement) which includes any portion of Leases OCS 0164,0165
                  or 0166, (b) that there are no encumbrances burdening the
                  Farmout Area other than the lessor's royalty and additional
                  tax royalty, and (c) that it has the right to grant to
                  Farmoutee the rights set forth in this Agreement. The transfer
                  of any interest in the Farmout Well pursuant to this Agreement
                  shall be made without express or implied warranty of any kind,
                  but shall grant and convey full subrogation to the rights of
                  the Party or Parties making the transfer.

         5.5.     NEW BURDENS

                  Farmoutor represents and warrants that from and after March 1,
                  1998 it has not created, and it agrees that it shall not under
                  any circumstance(s) hereafter create, any overriding royalty,
                  production payment, net profits interest, mortgage or other
                  similar or dissimilar burden which Farmoutee would have to
                  bear under any circumstance(s) pursuant to or as a result of
                  this Agreement whether as a result of any transfer or
                  assignment to Farmoutee hereunder, any non-consent or default
                  hereunder by Farmoutor, any full or partial termination of
                  this Agreement or otherwise. Farmoutee represents and warrants
                  that it has not heretofore created, and it agrees that it
                  shall not under any circumstance(s) create, any overriding
                  royalty, production payment, net profits interest, mortgage or
                  other similar or dissimilar burden which Farmoutor would have
                  to bear under any circumstance(s) pursuant to or as a result
                  this Agreement whether as a result of any transfer or
                  assignment to Farmoutor hereunder, any non-consent or default
                  hereunder by Farmoutee, any full or partial termination of
                  this Agreement or otherwise.

         5.6.     TRANSFERS SUBJECT TO APPLICABLE APPROVALS

                  In the event that the transfer of any interest in and to the
                  Farmout Area or the Farmout Well requires approval of the
                  lessor or of any state or federal agency having jurisdiction,
                  the obligations so to transfer shall be subject to Farmoutee's
                  obtaining the pertinent approval. Farmoutor agrees to assist
                  Farmoutee in any reasonable way necessary to help Farmoutee
                  secure such approvals.

                                     Page 26

<PAGE>   27

         5.7.     PROPORTIONATE REDUCTION

                  If the operating rights interest earned and transferred to
                  Farmoutee pursuant to this Agreement covers less than the full
                  operating rights interests in the Earned Areas, then the
                  operating rights conveyed to Farmoutee and reserved and/or
                  transferred to Farmoutor in any such transfer shall be reduced
                  proportionately as to any production affected thereby. If
                  Farmoutor participates in an earning Well Operation, then
                  Farmoutor's operating rights interest in which Farmoutor so
                  participates shall be reserved to Farmoutor, and the balance
                  of Farmoutor's operating rights interest shall be
                  proportionately conveyed to Farmoutee and reserved and/or
                  transferred to Farmoutor in any such transfer pursuant to
                  Section 5.1.

         5.8.     RETAINED RIGHTS: NO UNREASONABLE INTERFERENCE

                  5.8.1.   Any transfer of interest from Farmoutor to Farmoutee
                           pursuant to this Agreement shall provide that
                           Farmoutor shall retain all rights necessary to drill
                           to, produce from and operate in all depths on the
                           Farmout Lease; provided, however, until the earlier
                           of Farmoutee earning operating rights interests under
                           this Agreement or termination of this Agreement
                           without Farmoutee's earning operating rights
                           interests under this Agreement, Farmoutor shall not
                           (a) develop or produce from that portion of the
                           Farmout Area in which Farmoutee has the right to
                           earn operating rights interests under this Agreement
                           or (b) produce from or conduct operations in any of
                           the Obligation Wells except any taken over by
                           Farmoutor upon any proposed abandonment thereof by
                           Farmoutee.

                  5.8.2.   In the event that Farmoutee earns operating rights
                           pursuant to Section 5.1, all future development and
                           operation of and production from Earned Areas by
                           Earning Wells or any other wells through Subsequent
                           Well Operations shall be done thereupon and
                           thereafter for the mutual benefit of the Parties
                           under the terms of this Agreement, the Terms for
                           Contract Operations and Processing, and the Operating
                           Agreement until and subject to the reassignment,
                           termination and other provisions of Sections 7.5 and
                           10.

                  5.8.3.   Each Party agrees not to interfere unreasonably with
                           the operations of the other Party. In the event of
                           conflicting operations, the Parties agree to meet
                           promptly and work in good faith to resolve such
                           conflicts, including those situations remedied by the
                           provisions of Section 6 below. In addition, it is
                           understood and agreed that Farmoutee shall provide
                           Farmoutor with all Designation of Operator and other
                           regulatory forms requested by Farmoutor to enable
                           Farmoutor to conduct all the operations, other than
                           Farmoutee's Well Operations, under the terms of this
                           Agreement, the Terms for Contract Operations and
                           Processing, and the Operating Agreement subject to
                           the reassignment, termination and other provisions of
                           Sections 7.5 and 10.

         5.9.     ACCOUNTING MATTERS

                  5.9.1.   ACCOUNTING PROCEDURE

                           As to all Farmout Wells, all costs and expenses
                           (including those associated with Payout) which are
                           accruing or incurred pursuant to this Agreement and
                           under any transfer of interest between the Parties
                           pursuant hereto, if any, shall be determined and
                           accounted for in accordance with the Accounting
                           Procedure attached to the Operating Agreement. To the
                           extent that any provision of said Accounting
                           Procedure conflicts with any other provision of this
                           Agreement, the terms of this Agreement shall prevail.

                  5.9.2.   PAYOUT

                           Payout shall be calculated separately Earning Well by
                           Earning Well. Farmoutee shall monitor Payout,
                           providing monthly payout statements to Farmoutor
                           pursuant to Section 9.2.2.5 below. In the event that
                           Payout has not occurred in an Earning Well, and if a
                           Subsequent Well Operation,

                                    Page 27
<PAGE>   28

                           including but not limited to a Subsequent Workover is
                           performed in such a well and whether or not both
                           Parties participate in said workover, certain terms
                           shall apply with respect to Payout in said well as
                           follows:

                           5.9.2.1. The proceeds of production from Farmoutee's
                                    participating interest, if any, in said
                                    Subsequent Well Operation shall be applied
                                    first to Payout of Farmoutee's share of
                                    costs and expenses of, from and after said
                                    Subsequent Well Operation in said well
                                    (including but not limited to recovery of
                                    penalty for any non-consent by Farmoutor in
                                    said Subsequent Well Operation, but
                                    excluding all costs, expenses and
                                    non-consent penalty of, from or after the
                                    next Subsequent Well Operation in said well
                                    or any other Subsequent Well Operation in
                                    said well) and shall be then applied to any
                                    unpaid out balance of Farmoutee's share of
                                    costs and expenses incurred of and for said
                                    well prior to the first Subsequent Well
                                    Operation in said well.

                           5.9.2.2. Payout shall occur upon Farmoutee's recovery
                                    of its share of (i) costs and expenses of,
                                    from and after said Subsequent Well
                                    Operation (including but not limited to
                                    recovery of penalty for any non-consent by
                                    Farmoutor in said Subsequent Well Operation,
                                    but excluding all costs, expenses and
                                    non-consent penalty of, from or after the
                                    next Subsequent Well Operation in said well
                                    or any other Subsequent Well Operation in
                                    said well, and (b) costs and expenses
                                    incurred of and for said well prior to the
                                    first Subsequent Well Operation in said
                                    well.

                           5.9.2.3. Notwithstanding the provisions of Sections
                                    5.9.2.1 and 5.9.2.2, no unrecovered cost or
                                    expense, including but not limited to any
                                    unrecovered non-consent penalty, from or
                                    applicable to any workover or Subsequent
                                    Well Operation in an Earning Well shall be
                                    carried forward, applied against or
                                    recovered out of production from any other
                                    workover or Subsequent Well Operation in
                                    such Earning Well.

                           5.9.2.4. Non-consent of a Subsequent Workover (or any
                                    workover) shall not serve as a transfer of
                                    operating rights interest in any well and
                                    shall not preclude a Party which
                                    non-consented such workover from proposing
                                    and/or participating in another workover
                                    whether or not the prior workover or any
                                    other workover has paid out.

                  5.9.3.   POOLED PAYOUT EXCEPTION

                           Notwithstanding the terms and conditions of Section
                           5.9.2.1 and 5.9.2.2, in the event that the 1500 B
                           Prospect Well and/or any one (1) certain sidetrack
                           well (as expressly identified and designated in
                           advance by Farmoutee as hereinafter provided) in
                           Farmout Area 1 or Farmout Area 2 is not successfully
                           completed for production, Farmoutee shall be allowed
                           to recoup its costs of said unsuccessful well(s)
                           including said costs thereof in with the costs
                           incurred in and subject to payout of any one (1)
                           other certain Major Operation (as expressly
                           identified and designated in advance by Farmoutee as
                           hereinafter provided), whether in an Obligation Well
                           or an Optional Well; provided, however, that said
                           certain sidetrack well and said certain Major
                           Operation are expressly identified and designated for
                           said recoupment purpose by written notice from
                           Farmoutee to Farmoutor prior to commencement of said
                           sidetrack well and said Major Operation. In the event
                           that such Major Operation is unsuccessful or fails
                           to fully recover all such sums, Farmoutee's right

                                    Page 28
<PAGE>   29

                           of recoupment terminates with the abandonment of that
                           Major Operation.

         5.10.    OPERATING AGREEMENT

                  Except as otherwise provided in this Agreement, all operations
                  pursuant to this Agreement (including, but not limited to,
                  plugging and abandonment of wells, cleaning and restoration of
                  wells, and abandonment and removal of structures) shall be
                  performed pursuant to the terms of that certain Operating
                  Agreement effective as of June 28, 1957, between Continental
                  Oil Company, The Atlantic Refining Company, Tidewater Oil
                  Company, Cities Service Production Company and The California
                  Company, as amended. Notwithstanding the foregoing and as
                  between Farmoutor and Farmoutee, (i) the nonconsent recovery
                  provisions of the first but not the second paragraph of
                  Article IX. E. of said agreement shall apply in the case of a
                  non-consent by either Party.

         5.11.    PRE-EXISTING AGREEMENTS

                  Notwithstanding any other provisions of this Agreement, the
                  Parties hereby expressly acknowledge and agree that this
                  Agreement and all operations performed under the terms of this
                  Agreement and all agreements, transfers and assignments
                  entered into between the Parties pursuant to this Agreement
                  are subject to the terms and provisions of certain agreements
                  being (i) the Leases, (ii) that certain South Bay Marchand
                  Unit Agreement dated June 28, 1957 between The California
                  Company, Continental Oil Company, The Atlantic Refining
                  Company, Tidewater Oil Company, and Cities Service Production
                  Company, and designated and approved by the U.S. Geological
                  Survey as No. 14-08-001-3915, as amended, (iii) the Operating
                  Agreement, (iv) that certain Unit Agreement for the
                  Development and Operation of the 3650' Upper RD Sand effective
                  October 1, 1970 between Chevron Oil Company and the State
                  Mineral Board for the State of Louisiana, and designated and
                  approved by the U.S. Geological Survey as
                  No. 14-08-0001-11737, as amended, (v) that certain Unit
                  Agreement for the Development and Operation of the 3650' Lower
                  RD Sand effective April 1, 1973 between Chevron Oil Company
                  and the State Mineral Board for the State of Louisiana, and
                  designated and approved by the U.S. Geological Survey as No.
                  14-08-0001-12442, as amended, (vi) that certain Purchase and
                  Sale Agreement effective October 1, 1987 between Atlantic
                  Richfield Company and Chevron U.S.A. Inc., (vii) that certain
                  Purchase and Sale/Exchange Agreement executed November 1, 1995
                  between Conoco Inc. and Chevron U.S.A. Inc., (viii) that
                  certain Farmout Agreement effective May 1, l998 by and
                  between Chevron U.S.A. Production Company, a division of
                  Chevron U.S.A. Inc., and W & T Offshore, Inc., as amended by
                  Letter Agreement effective June 16, 1998 and by Letter
                  Agreement dated July 29, 1998, and (ix) any other agreement of
                  public record as of March 1, 1998; provided, however, the
                  Parties shall endeavor in good faith to operate under and
                  comply with the terms of this Agreement and all agreements
                  entered into between the Parties pursuant to this Agreement to
                  the extent reasonably possible to do so given the agreements
                  itemized in (i) through (ix) above.

6.       SHUTTING IN PRODUCTION

         6.1.     OPERATIONS, SAFETY AND COMPLIANCE

                  6.1.1.   Farmoutor shall have the right to shut in Farmoutee's
                           production for reasonable periods in order to conduct
                           drilling or other operations. Likewise, Farmoutee
                           shall have the right to require Farmoutor to shut in
                           Farmoutor's production for reasonable periods in
                           order to conduct drilling or other operations in
                           support of efforts to produce and sell production
                           from the Farmout Well. Each Party shall give the
                           other at least ten (10) days notice of a proposed
                           shut in, except that in the event of an emergency
                           whichever Party is the operator detecting or
                           incurring the emergency, Farmoutee during its Well
                           Operations or Farmoutor during its operations; shall
                           give the other Party notice as soon as is reasonably
                           possible under the circumstances.

                                     Page 29

<PAGE>   30

                  6.1.2.   If, within forty-eight (48) hours of Farmoutee's
                           receipt of written notice of any governmental safety
                           or governmental compliance problem affecting the
                           Farmout Well or associated pipelines, equipment and
                           facilities which arises as a result of Farmoutee's
                           operations, such problem is not corrected or in
                           process of correction to the satisfaction of the
                           governmental agency involved, Farmoutor shall have
                           the right, which shall not be unreasonably exercised,
                           to take over and/or shut down the operations of
                           Farmoutee in order to rectify such governmental
                           safety or governmental compliance problems affecting
                           Farmoutor's platforms, equipment or production. Any
                           expenses or costs incurred by Farmoutee as the result
                           of Farmoutor's takeover and/or shut down of
                           Farmoutee's operations pursuant to this paragraph
                           shall be borne exclusively by Farmoutee.

         6.2.     NO COST TO PARTIES

                  Neither Party shall bear any cost, responsibility or
                  obligation to the other Party for any production deferral,
                  loss or other cost associated with the shutting in of
                  production pursuant to this Section 6.

7.       TERMS FOR CONTRACT OPERATIONS AND PROCESSING

         7.1.     Farmoutor shall contract operate the wells completed for
                  production under this Agreement, and shall contract operate
                  and process all production from said wells pursuant to the
                  terms of this Section 7.

         7.2.     Subject to Section 7.4, the terms for Contract Operations
                  shall include the following provisions:

                  7.2.1.   Notwithstanding the terms and conditions of the
                           Operating Agreement and its Accounting Procedure,
                           Farmoutor shall bear all costs and expenses of the
                           Contract Operations except as expressly provided
                           otherwise in this Section 7, and, as compensation for
                           the Contract Operations, Farmoutor shall charge
                           Farmoutee and Farmoutee shall pay its operating
                           interest share, or participating interest if
                           different, of the Contract Fee.

                  7.2.2.   The Contract Fee shall be subject to an annual
                           adjustment effective April 1st each year beginning
                           April 1, 2000. The adjustment shall be computed by
                           multiplying the Contract Fee then currently in use by
                           the percentage adjustment recommended by COPAS each
                           year. The adjusted Contract Fee shall be the Contract
                           Fee currently in use, plus or minus the computed
                           adjustment. If any dispute arises over acceptance of
                           any adjustment to the Contract Fee requested and if
                           such dispute remains unresolved for one hundred
                           twenty (120) days, Farmoutor shall thereafter have
                           the right to suspend the Contract Operations until
                           Farmoutee pays the Contract Fee in use prior to such
                           dispute plus at least 75% of the disputed adjustment,
                           and the Parties shall diligently strive to resolve
                           such dispute in good faith as soon as possible.

                  7.2.3.   The Contract Fee does include Farmoutor's extra
                           overhead for performing and accounting for the
                           Contract Operations; provided, however, that
                           Farmoutor's basic overhead as operator under the
                           Accounting Procedure attached to the Operating
                           Agreement shall be an additional charge under the
                           Operating Agreement.

                  7.2.4.   The Contract Fee includes recovery of Farmoutor's
                           existing investment in facilities, equipment and
                           pipelines as of the Effective Date and no separate
                           investment recovery charge shall be made against
                           Farmoutee for same.

                  7.2.5.   The Contract Fee does not include any costs and
                           expenses of any and all Adverse Events arising out of
                           the Contract Operations, and all such costs and
                           expenses (including but not limited to awarded
                           damages, fines, penalties, judgments and costs of
                           defense) shall, be charged to the well (or equally to
                           each well) served by the specific Contract Operations
                           out of

                                    Page 30

<PAGE>   31

                           which such Adverse Event arose and all said costs and
                           expenses so charged to said well or wells shall be
                           paid and borne by the Parties in proportion to their
                           operating interests, or participating interests if
                           different, in said well or wells. Each Party shall be
                           given prompt but reasonable notice under the
                           circumstances of the occurrence of any and all
                           Adverse Event potentially chargeable in whole or part
                           to such Party and each such Party shall have the
                           opportunity to promptly participate in the defense
                           and the resolution of same. No settlement or
                           compromise shall be entered into which causes any
                           Party to assume or bear any obligation or make any
                           payment without such Party's written consent.

                  7.2.6.   The Contract Fee is based on Farmoutor's current
                           practices and methods in place in the Farmout Area
                           for operation of its own wells and production in a
                           manner similar to the Contract Operations and on
                           current conditions assuming normal cost escalations
                           under normal market conditions, all as of the
                           Effective Date. Given the foregoing, Farmoutor, under
                           certain demonstrable economic hardships, shall have
                           the option to notify Farmoutee of the particulars
                           (including but not limited to the nature of the
                           hardship and an estimate of the associated costs,
                           expenses and economic circumstances supporting such
                           claim), and enter into good faith negotiations to
                           amend the terms in this Agreement to provide for
                           continued Contract Operations and compensate
                           Farmoutor for additional costs and expenses; however,
                           in no event shall Farmoutor be entitled to recover
                           more than Farmoutee's pro rata share of same given
                           the ownership of the production benefiting, or to
                           benefit, therefrom. If the Parties are unable to
                           agree upon and enter into such a mutually acceptable
                           amendment, each Party shall have the right to
                           terminate the Contract Operations by and upon six (6)
                           month's prior written notice to the other Party;
                           provided, however, any and all obligations accrued
                           prior to such termination shall remain in force and
                           effect until performed, fulfilled and satisfied.
                           Those certain circumstances are as follows:

                           7.2.6.1. Additional costs and expenses are, or would
                                    have to be, incurred in order to bring the
                                    Contract Operations into compliance with, or
                                    to modify the Contract Operations as
                                    necessary to be in compliance with,
                                    applicable laws, orders, permits, rules,
                                    regulations and governmental requirements.
                                    Farmoutor considers its processes and
                                    methods to be utilized to perform the
                                    Contract Operations to be in compliance with
                                    applicable laws, orders, rules, regulations
                                    and requirements existing as of Effective
                                    Date, but Farmoutor does not represent or
                                    warrant the same because of the volume and
                                    complexity of such laws, orders, rules,
                                    regulations and governmental requirements
                                    taken together with the varying
                                    interpretations within government and
                                    industry.

                           7.2.6.2. Additional costs and expenses are, or would
                                    have to be, incurred in the event of any
                                    unusual fluctuation in a market or a change
                                    in the regulations causes or results in a
                                    greater than normal escalation of prices for
                                    chemicals, materials, goods, services and/or
                                    labor.

                           7.2.6.3. Additional costs and expenses are, or would
                                    have to be, incurred because a well or
                                    production therefrom is of an unfit quality
                                    for performance of the Contract Operations.

                           7.2.6.4. Additional costs and expenses in excess of
                                    $50,000 per occasion or situation are, or
                                    would have to be, incurred in order to
                                    mitigate or eliminate circumstances, arising
                                    for reasons other than those itemized
                                    hereinabove, which prevent or limit

                                    Page 31

<PAGE>   32

                                    performance of the Contract Operations
                                    without incurring such additional costs and
                                    expenses.

                           7.2.6.5. It becomes uneconomic for the Farmoutor to
                                    continue to perform the Contract Operations.

                  7.2.7.   Notwithstanding anything contained herein or
                           elsewhere in this Agreement, if Farmoutor is rendered
                           unable to perform the Contract Operations by reason
                           of, due to or to the extent of any laws, orders,
                           permits, rules, regulations and requirements
                           promulgated by any commission or governmental agency
                           of the United States or of the State of Louisiana or
                           subdivision thereof in which operations are being
                           conducted, or any governmental demand or requisition,
                           or of the action, judgment, or decree of any court of
                           law, or floods, storms, lightning, earthquake,
                           washouts, high water, fires, acts of God or public
                           enemies, wars, blockades, epidemics, riots,
                           insurrections, strikes, labor troubles, accidents,
                           explosions, freezing of wells or facilities, bursting
                           of pipes or vessels, breakdowns, repairs,
                           modifications or installations of equipment, delays
                           caused by Farmoutor's co-owners in Lease OCS 0166,
                           any actual or attempted removal of Farmoutor as
                           operator under the Operating Agreement, failures of
                           manufacturers to deliver material or carriers to
                           transport the same, or any similar cause, which
                           forbids or prevents the performance of all or any
                           part of such work or acts to be performed by
                           Farmoutor under Section 7.2 of this Agreement, such
                           performance of the Contract Operations shall be
                           suspended for the period of continuance upon receipt
                           of notice by the other party. It is, however,
                           expressly agreed and understood that promptness of
                           performance of the Contract Operations is of the
                           essence of the Contract Operations and that
                           reasonable efforts will be made to avoid delay or
                           suspension of any work or acts to be performed under
                           Section 7.2 of this Agreement; provided, however,
                           Farmoutor shall not be required to incur costs in
                           excess of $50,000 per occasion or situation nor to
                           settle any labor dispute against its best interests
                           in order to restore the Contract Operations.

                  7.2.8.   In the event that any facilities, equipment, piping
                           or property in, on, upstream or downstream of the
                           Farmout Area are wholly or partially destroyed or
                           damaged or become obsolete so as to render same unfit
                           for performance or continuance of the Contract
                           Operations or are not replaced at the election of the
                           Farmoutor, Farmoutor shall be under no obligation to
                           incur costs or expenses in excess of $50,000 per
                           occasion or situation to repair or replace same or to
                           continue performance or continuance of the Contract
                           Operations.

         7.3.     Subject to Section 7.4, the terms for Processing shall
                  include the following provisions:

                  7.3.1.   Farmoutor agrees to provide Farmoutee with
                           Processing capacity for Farmoutee's production from
                           the Farmout Area to the extent that excess processing
                           capacity exists above and beyond that needed by
                           Farmoutor and/or its co-owners at the time of
                           hook-up, providing that, prior to restricting
                           Farmoutee's access to any excess processing capacity,
                           the Parties agree to meet in good faith and attempt
                           to determine if any mutually acceptable options are
                           available (e.g., purchase or leasing of capacity or
                           facilities, etc.) that would allow Farmoutee to
                           continue to access all or a portion of Farmoutor's
                           excess processing capacity.

                           In the event of curtailment of Processing is required
                           below capacity made available to Farmoutee at the
                           time of hook-up, curtailments of sales volumes shall
                           be made ratably between the Parties upstream of the
                           constraint(s) or limitation(s) from which such
                           curtailment arises and such curtailment shall be
                           based on the capabilities of wells which are upstream

                                     Page 32

<PAGE>   33

                           of the constraint(s) or limitation(s) from which such
                           curtailment arises to the extent that same can be
                           accomplished without adverse affect upon Farmoutor's
                           co-owners. Such well capabilities shall be determined
                           based upon equivalent barrels of production according
                           to the most recent well tests. As used in this
                           Agreement, six (6) MCF of natural gas shall be
                           considered equivalent to one (1) barrel of oil or
                           condensate when calculating equivalent barrels of
                           production.

                  7.3.2.   Said Processing capacity shall not be required to be
                           provided to Farmoutee by Farmoutor in case of force
                           majeure (including but not limited any delays caused
                           by Farmoutor's co-owners in Lease OCS 0166 or any
                           actual or attempted removal of Chevron as operator)
                           or in any instance where facilities costs are
                           necessary to provide and guarantee said capacity and
                           said costs would exceed $50,000.00 per instance of
                           installation, repair, upgrade or modification, or if
                           it becomes uneconomic for Farmoutor to continue to
                           provide said capacity.

                  7.3.3.   Farmoutee may, at its own cost and expense to be
                           recovered through Payout without penalty, add
                           facilities to ensure sufficient throughput capacity
                           for the Earned Areas and/or the Farmout Well if
                           Farmoutor approves any such additions or
                           modifications on or to its facilities, equipment or
                           piping. Farmoutor shall not unreasonably withhold
                           such approval.

                  7.3.4.   Notwithstanding the terms and conditions of the
                           Operating Agreement and its Accounting Procedure,
                           Farmoutor shall bear all costs and expenses of the
                           Processing except as expressly provided otherwise in
                           this Section 7, and, as compensation for the
                           Processing, Farmoutor shall charge to Farmoutee and
                           Farmoutee shall pay to Farmoutor the Processing Fees
                           applicable to Farmoutee's share of production
                           volumes.

                  7.3.5.   The Processing Fees are subject to annual adjustment
                           effective April 1st each year beginning April 1,
                           2000. The adjustment shall be computed by multiplying
                           the Processing Fees then currently in use by the
                           percentage increase recommended by COPAS each year.
                           The adjusted Processing Fees shall be the Processing
                           Fees currently in use, plus or minus the computed
                           adjustment. If any dispute arises over acceptance of
                           any adjustment to the Processing Fees requested and
                           if such dispute remains unresolved for one hundred
                           twenty (120) days, Farmoutor shall thereafter have
                           the right to suspend the Processing until Farmoutee
                           pays the Processing Fees in use prior to such dispute
                           plus at least 75% of the disputed adjustment, and the
                           Parties shall diligently strive to resolve such
                           dispute in good faith as soon as possible.

                  7.3.6.   The Processing Fees do include Farmoutor's extra
                           overhead for performing and accounting for the
                           Processing; provided, however, that Farmoutor's basic
                           overhead as operator under the Accounting Procedure
                           attached to the Operating Agreement shall be an
                           additional charge under the Operating Agreement.

                  7.3.7.   The Processing Fees includes recovery of Farmoutor's
                           existing investment in facilities, equipment and
                           pipelines as of the Effective Date and no separate
                           investment recovery charge shall be made against
                           Farmoutee for same.

                  7.3.8.   The Processing Fees do not include any costs and
                           expenses of any and all Adverse Events arising out of
                           the Processing and all such costs and expenses
                           (including but not limited to awarded damages, fines,
                           penalties, judgments and costs of defense) shall be
                           charged to the well (or equally to each well) served
                           by the specific Processing out of which such Adverse
                           Event arose and all said costs and expenses so
                           charged to said well or

                                     Page 33

<PAGE>   34

                           wells shall be paid and borne by the Parties in
                           proportion to their operating interests, or
                           participating interests if different, in said well or
                           wells. Each Party shall be given prompt but
                           reasonable notice under the circumstances of the
                           occurrence of any and all Adverse Event potentially
                           chargeable in whole or part to such Party and each
                           such Party shall have the opportunity to promptly
                           participate in the defense and the resolution of
                           same. No settlement or compromise shall be entered
                           into which causes any Party to assume or bear any
                           obligation or make any payment without such Party's
                           written consent.

                  7.3.9.   The Processing Fees are based on Farmoutor's current
                           practices and methods in place for processing its own
                           production from the Farmout Area through its existing
                           facilities in a manner similar to the Processing and
                           on current conditions assuming normal cost
                           escalations under normal market conditions, all as of
                           the Effective Date. Given the foregoing, the
                           Farmoutor, under certain demonstrable economic
                           hardships, shall have the option to notify Farmoutee
                           of the particulars (including but not limited to the
                           nature of the hardship and an estimate of the
                           associated costs, expenses and economic circumstances
                           supporting such claim), and enter into good faith
                           negotiations to amend this Agreement to provide for
                           continued Processing and to compensate Farmoutor for
                           additional costs and expenses; however, in no event
                           shall Farmoutor be entitled to recover more than
                           Farmoutee's pro rata share of same given the
                           ownership of the production benefiting, or to
                           benefit, therefrom. If the Parties are unable to
                           agree upon and enter into such a mutually acceptable
                           amendment, each Party shall have the right to
                           terminate performance of the Processing, irrespective
                           of any other provisions hereof, by and upon six (6)
                           month's prior written notice to the other Party;
                           provided, however, any and all obligations accrued
                           prior to such termination shall remain in force and
                           effect until performed, fulfilled and satisfied.
                           Those certain circumstances are as follows:

                           7.3.9.1. Additional costs and expenses are, or would
                                    have to be, incurred in order to bring the
                                    Processing into compliance with, or to
                                    modify the Processing as necessary to be in
                                    compliance with, applicable laws, orders,
                                    permits, rules, regulations and governmental
                                    requirements. Farmoutor considers the
                                    facilities, equipment, processes and
                                    methods to be utilized to perform the
                                    Processing to be in compliance with
                                    applicable laws, orders, rules, regulations
                                    and requirements existing as of the
                                    Effective Date, but the Farmoutor does not
                                    represent or warrant the same because of the
                                    volume and complexity of such laws, orders,
                                    rules, regulations and governmental
                                    requirements taken together with the varying
                                    interpretations within government and
                                    industry.

                           7.3.9.2. Additional costs and expenses are, or would
                                    have to be, incurred if treating of oil,
                                    condensate or produced water becomes
                                    necessary in the future in order to deliver
                                    Farmoutee's production to Chevron Pipe Line
                                    Company or other regulated common carrier
                                    pipelines and facilities. The Parties
                                    acknowledge that treating of oil, condensate
                                    and produced water are not included in the
                                    Processing or the Processing Fees.

                           7.3.9.3. Additional costs and expenses are, or would
                                    have to be, incurred in the event of any
                                    unusual fluctuation in a market or a change
                                    in the regulations causes or results in a
                                    greater than normal escalation of prices for
                                    chemicals, materials, goods, services
                                    and/or labor.

                                     Page 34

<PAGE>   35

                           7.3.9.4. Additional costs and expenses are, or would
                                    have to be, incurred because the production
                                    is of an unfit quality for performance of
                                    the Processing through existing pipelines,
                                    facilities and equipment.

                           7.3.9.5. Additional costs and expenses in excess of
                                    $50,000 per occasion or situation are, or
                                    would have to be, incurred in order to
                                    mitigate or eliminate circumstances, arising
                                    after initial commencement of the Processing
                                    for reasons other than those itemized
                                    hereinabove, which prevent or limit
                                    performance of the Processing without
                                    further modifications, additions,
                                    installations, repairs, restorations and/or
                                    replacements of facilities, equipment or
                                    piping by the Farmoutor costing in excess of
                                    $50,000 per occasion or situation.

                           7.3.9.6. It becomes uneconomic for the Farmoutor to
                                    continue to perform the Processing.

                  7.3.10.  Notwithstanding anything contained herein or
                           elsewhere in this Agreement, if Farmoutor is
                           rendered unable to perform the Processing or
                           Farmoutee is rendered unable to deliver its
                           production to Farmoutor for Processing by reason of,
                           due to or to the extent of any laws, orders, permits,
                           rules, regulations and requirements promulgated by
                           any commission or governmental agency of the United
                           States or of the State of Louisiana or subdivision
                           thereof in which operations are being conducted, or
                           any governmental demand or requisition, or of the
                           action, judgment, or decree of any court of law, or
                           floods, storms, lightning, earthquake, washouts, high
                           water, fires, acts of God or public enemies, wars,
                           blockades, epidemics, riots, insurrections, strikes,
                           labor troubles, accidents, explosions, freezing of
                           wells or facilities, bursting of pipes or vessels,
                           breakdowns, repairs, modifications or installations
                           of equipment, delays caused by Farmoutor's co-owners
                           in Lease OCS 0166, any actual or attempted removal of
                           Chevron as operator, failures of manufacturers to
                           deliver material or carriers to transport the same,
                           or any similar cause, which forbids or prevents the
                           performance of all or any part of such work or acts
                           to be performed by any party or parties under Section
                           7.3 of this Agreement, such performance of the
                           Processing or delivering of the Production to the
                           Farmoutor for Processing shall be suspended for the
                           period of continuance upon receipt of notice by the
                           other party. It is, however, expressly agreed and
                           understood that promptness of performance of the
                           Processing is of the essence of the Processing and
                           that reasonable efforts will be made to avoid delay
                           or suspension of any work or acts to be performed
                           under Section 7.3 of this Agreement; provided,
                           however, neither Party shall be required to make any
                           repairs, restorations, replacements, modifications,
                           additions nor installations of facilities, equipment
                           or piping costing in excess of $50,000 per occasion
                           or situation nor to settle any labor dispute against
                           its best interests in order to restore the
                           Processing.

                  7.3.11.  In the event that any facilities, equipment, piping
                           or property in, on, upstream or downstream of the
                           Farmout Area are wholly or partially destroyed or
                           damaged or become obsolete so as to render same unfit
                           for performance or continuance of the Processing or
                           are not replaced at the election of the Farmoutor, no
                           party or parties to this Agreement shall be under any
                           obligation to incur cost in excess of $50,000 per
                           occasion or situation to repair or replace same or to
                           continue performance or continuance of the
                           Processing.

                  7.3.12.  Farmoutee shall bear in kind its direct and
                           reasonably allocated operating rights interest, or
                           participating interest if different, share of
                           shrinkage, loss, fuel, including but not limited to
                           compressor fuel, and emergency or

                                     Page 35

<PAGE>   36

                           temporary flare resulting from, consumed, released or
                           lost by, during or in direct connection or
                           association with the Processing. Farmoutee shall bear
                           and pay Farmoutor for any such natural gas so used on
                           Farmoutee's behalf in the event that Farmoutee's
                           produced natural gas volumes are insufficient to bear
                           same in kind.

                  7.3.13.  Gas and liquid hydrocarbon production and produced
                           water from the Earned Areas shall be commingled with
                           other production at facilities existing in or
                           adjacent to the Farmout Area for delivery to Chevron
                           Pipe Line Company or other regulated common carrier
                           pipelines and facilities for transportation to market
                           and for further treating and handling.

                  7.3.14.  Whether (a) paid and borne by Farmoutee (and/or its
                           purchaser other than Farmoutor) or (b) paid by
                           Farmoutor and billed to and paid by Farmoutee or
                           deducted from Farmoutee's proceeds under Section 14
                           and 15 or otherwise, Farmoutee (rather than
                           Farmoutor) shall bear any and all cost of
                           transportation and any treating charges or other
                           charges or penalties incurred against Farmoutee or
                           Farmoutee's share of production downstream of
                           delivery to Chevron Pipe Line Company or other
                           regulated common carrier pipelines and facilities.

                  7.3.15.  Farmoutee shall bear and be responsible for any
                           increase in (or credited with any decrease to)
                           Farmoutor's revenues caused by Farmoutee's share of
                           production due to changes in the "per unit" price
                           (inclusive of transportation costs) received by
                           Farmoutor for its share of production as a result of
                           the commingled processing and transportation of
                           production from Farmout Wells and other production.

                  7.3.16.  From time to time as necessary for prudent and
                           efficient performance of the Processing, Farmoutor
                           shall remove and dispose of sand, sediments and scale
                           (hereafter "Sand") accumulating in the Farmoutor's
                           equipment and piping as a result of performance of
                           the Processing. Said removal and disposal shall be
                           performed at the expense of the Parties hereto as
                           allocated to the well (or equally to wells) served
                           thereby since the date last cleaned out and in
                           accordance with each Party's operating interest, or
                           participating interest if different, in said well or
                           wells. Notwithstanding the foregoing, removal and
                           disposal of such Sand with non-exempt levels of
                           naturally occurring radioactive material ("NORM")
                           which requires removal, handling or disposal by
                           methods more costly than removal, handling or
                           disposal of Sand with exempt NORM levels shall be
                           performed at the expense of the parties hereto as to
                           the well (or equally to wells) served thereby since
                           the date last cleaned out and in accordance with each
                           Party's operating interest, or participating interest
                           if different, from only said well or wells which
                           produced Sand with such non-exempt o levels of NORM.
                           For purposes of this subsection, the terms
                           "non-exempt" and "exempt" shall be used as defined
                           under the provisions of La. Rev. Stat. 33.XV:1404.

         7.4.     Commencing four (4) years after the Effective Date, each Party
                  shall have the right to terminate Contract Operations and the
                  Processing by and upon six (6) month's prior written notice to
                  the other Party; provided, however, that such matters shall
                  thereafter be handled under the terms of this Agreement (less
                  this Section 7) and the Operating Agreement, and further
                  provided that any and all obligations accrued prior to such
                  termination shall remain in force and effect until performed,
                  fulfilled and satisfied.

8.       INFORMATION REQUIREMENTS

         8.1.     GEOLOGICAL AND WELL INFORMATIONAL REQUIREMENTS

                  Farmoutee shall comply with the requirements of Exhibit B,
                  attached hereto and made a part hereof for all purposes, and
                  shall furnish Farmoutor the materials

                                     Page 36

<PAGE>   37

                  therein specified for all wells drilled in the Farmout Area
                  pursuant to this Agreement.

         8.2.     ACCESS

                  Each Party shall make a reasonable effort to allow the other
                  Party access to review all pertinent geological, geophysical,
                  drilling and completion data covering any well drilled,
                  recompleted or worked over in the Farmout Area during or
                  prior to the term of this Agreement to the extent either Party
                  possesses same and has the right to allow the other Party
                  access thereto; provided, however, that the Party Conducting
                  Well Operations shall be responsible to verify the accuracy
                  and completeness of all such pertinent geological,
                  geophysical, drilling and completion data it receives from the
                  other Party and that Farmoutee shall maintain the
                  confidentiality thereof while not public information.

         8.3.     HAZARD AND SURVEYS

                  Farmoutor shall make a reasonable effort to allow Farmoutee
                  access to review its pertinent surface and underwater hazard
                  information during and until termination of this Agreement;
                  provided, however, Farmoutee shall be responsible to verify
                  the accuracy and completeness of all such pertinent surface
                  and underwater hazard information and to determine the
                  existence of and to avoid all surface and underwater hazards
                  in conducting its operations.

9.        REPORTS AND STATEMENTS

          9.1.    NOTICE OF COMMENCEMENT

                  Prior to moving any drilling or other equipment for purposes
                  of performing Well Operations on any well under this
                  Agreement, Farmoutee shall give a 24-hour prior notice to:

                  Chevron U.S.A. Inc.
                  Attention: Mid-Shelf Profit Center
                  Bay Marchand Team Leader
                  935 Gravier Street
                  New Orleans, LA 70112

         9.2.     NOTICES AND REPORTS

                  9.2.1.   FARMOUTEE-PREPARED REPORTS

                           For each well drilled hereunder, Farmoutee will
                           forward to Farmoutor, at the addresses listed below,
                           the following reports:

                           9.2.1.1. EVIDENCE OF ROYALTY PAYMENT

                                    Copies of documentation of payment of
                                    royalties paid by Farmoutee for each month's
                                    or certain month's production upon written
                                    request from Farmoutor.

                           9.2.1.2. WELL & EQUIPMENT COSTS

                                    The final and total costs, including
                                    drilling, testing, and completion costs, and
                                    all costs associated with the equipping of
                                    each well.

                           9.2.1.3. REGULATORY REPORTS

                                    Copies of any and all reports filed by
                                    Farmoutee that are required by the
                                    regulatory body or bodies having
                                    jurisdiction.

                           9.2.1.4. REPORT ON WELL STATUS

                                    A monthly statement showing all wells in
                                    which Well Operations are being performed
                                    pursuant to the terms hereof, and the values
                                    and proceeds realized from the sale of
                                    production of said wells.

                                    Page 37
<PAGE>   38
                           9.2.1.5. PAYOUT STATEMENTS

                                    A monthly statement showing a comparison of
                                    the revenues and expenses associated with
                                    activity in the Farmout Area, on a
                                    well-by-well basis.

                           9.2.1.6. MAILING ADDRESSES

                                    Such costs, copies, statements, reports and
                                    notices shall be mailed to Farmoutor at the
                                    following addresses:

                                    Chevron U.S.A. Inc.
                                    Attention: Mid-Shelf Profit Center
                                    Bay Marchand Team Leader
                                    935 Gravier Street
                                    New Orleans, LA 70112

                                    Chevron U.S.A. Inc.
                                    Comptroller's Department
                                    Attention: Joint Interest Accounting,
                                    Net Profits and Payouts Group
                                    Post Office Box J, Section 731
                                    Concord, CA 94524-2060

                  9.2.2.   FARMOUTOR-PREPARED REPORTS

                           For each well drilled hereunder, Farmoutor will
                           forward to Farmoutee, at the addressed listed below,
                           the following reports:

                           9.2.2.1. EVIDENCE OF ROYALTY PAYMENT

                                    Copies of documentation of payment of
                                    royalties paid by Farmoutor for each month's
                                    or certain month's production upon written
                                    request from Farmoutee.

                           9.2.2.2. REGULATORY REPORTS

                                    Copies of any and all reports required by
                                    the regulatory body or bodies having
                                    jurisdiction, including, but not limited to,
                                    copies of monthly producer's reports or
                                    operator's reports on wells producing oil
                                    and/or gas.

                           9.2.2.3. REPORT ON WELL STATUS

                                    A monthly statement showing all wells
                                    drilled or being drilled pursuant to the
                                    terms hereof, the status of all such wells
                                    and current production information for all
                                    producing wells.

                           9.2.2.4. MAILING ADDRESSES

                                    Such costs, copies, statements, reports and
                                    notices shall be mailed to Farmoutee at the
                                    following addresses:

                                    Hughes-Rawls, L.L.C.
                                    Attention: Mr. James H. Rawls
                                    Mtel Centre South, Suite 800
                                    200 South Lamar St.
                                    Jackson, MS 39201
                                    Fax No. (601) 353-4331

10.      CESSATION OR SHUT IN OF PRODUCTION

         10.1.    If any Farmout Well subject to this Agreement should cease
                  production or become uneconomic to either Party for any cause
                  at any time or times after Farmoutee has earned operating
                  rights interests pursuant to Section 5.1, Farmoutor shall
                  notify Farmoutee within ten (10) working days of said
                  cessation. If production should cease from all Farmout Well(s)
                  in the Earned Areas for a period in excess of six (6) months
                  or should the said well(s) become uneconomic to either Party,
                  Farmoutee shall thereupon formally reassign all of its earned
                  operating rights interests to Farmoutor, and all of
                  Farmoutee's rights under this Agreement shall

                                    Page 38
<PAGE>   39

                  thereupon terminate, subject to final settlement of accounts
                  and fulfillment of all accrued obligations.

         10.2.    If Farmoutor's sole but good faith opinion of production from
                  any individual Farmout Well is that it is or has become
                  uneconomic to either Party and is or should be shut in, and if
                  Farmoutee desires that the well be produced from its then
                  present completion in the Earned Areas, Farmoutor and
                  Farmoutee shall have the option to agree in writing to
                  continue to produce the well from its then present completion
                  in the Earned Areas under terms which Farmoutee thereupon and
                  thereafter shall bear and participate in all of Farmoutor's
                  operating rights interest and participating interest in the
                  well, at and from that time subject to Farmoutor thereupon and
                  thereafter having TWENTY-FIVE PERCENT OF ONE HUNDRED PERCENT
                  (25% of 100%) of its operating rights interest and
                  participating interest in the well, at that time, as a working
                  interest in oil and gas (excluding water) production from its
                  then present completion in the Earned Areas free of all costs
                  and expenses (except lessor's royalties, additional tax
                  royalties, severance taxes and production taxes) upstream of
                  delivery to Chevron Pipeline Company or other regulated common
                  carrier pipelines and facilities, but including the right to
                  take Farmoutor's share of product in kind; provided, however,
                  Farmoutor shall have the option to participate to the full
                  extent of Farmoutor's operating rights interest and
                  participating interest in any Subsequent Well Operation in the
                  well.

11.      ROYALTIES AND MINIMUM ROYALTIES

         11.1.    Except as otherwise hereinafter agreed, the Party(s) taking,
                  marketing and receiving the resulting proceeds for production
                  from each well pursuant to this Agreement shall pay all
                  lessor's royalty payments, additional tax royalty payments,
                  severance taxes and production taxes accruing pursuant to said
                  production so taken and marketed after the effective date of
                  this Agreement, and shall provide the other Party with the
                  details of and documentation supporting each such payment upon
                  written request from the other Party. Each Party must give its
                  co-owners in each well produced pursuant to this Agreement
                  written notice within fifteen (15) days of any royalty
                  obligation date which will not be met, and the royalty paying
                  Party(s) shall have the option (except in case of a dispute
                  between the non-paying Parties and the royalty recipients) to
                  remit such payment on behalf of the non-paying Party(s), which
                  shall obligate the non-paying Party(s) to reimburse the paying
                  Party(s) for said payment within thirty (30) days of a
                  receipt from the paying Party(s) of an invoice requesting
                  payment.

         11.2.    Farmoutor shall make any minimum royalty payment which becomes
                  due on the Farmout Lease. Farmoutor shall allocate and charge
                  same equally to each well which produced from the Farmout
                  Lease during the lease year for which said minimum royalty
                  payment is due. Said charge to each such well shall be borne
                  and paid by the operating rights interests owners of said well
                  in proportion to their ownership of operating rights
                  interests, or participating interests if different, in said
                  well.

12.      CALL ON OIL

         12.1.    INITIAL EXERCISE
                  With respect to "crude oil" as hereinafter defined, Farmoutee
                  shall give thirty (30) days' written notice to Farmoutor of
                  Farmoutee's anticipated date of first production. Upon receipt
                  of such notice Farmoutor shall have the option to purchase
                  Farmoutee's share of the crude oil (the term "crude oil" as
                  used herein shall include condensate and other liquid
                  hydrocarbons) produced from or attributable to the Earned
                  Areas for a period of three (3) years commencing the date of
                  first production. Within ten (10) days of the anticipated date
                  of first production, Farmoutor shall inform Farmoutee whether
                  it will purchase Farmoutee's share of crude oil. Should
                  Farmoutor elect not to purchase Farmoutee's share of crude oil
                  hereunder, Farmoutor reserves the option,

                                     Page 39

<PAGE>   40

                  exercisable at the time of its election not to purchase for
                  its own account, and exercisable in accordance with the terms
                  of this Section 14, to designate, the person, firm, or
                  corporation to which such crude oil shall be sold. Only after
                  Farmoutee has so notified Farmoutor and Farmoutor has elected
                  not to purchase such crude oil or to designate a purchaser
                  therefor, can Farmoutee dispose of any crude oil produced from
                  or attributable to the Earned Areas.

         12.2.    PRICING
                  With respect to crude oil, Farmoutor, or its designated
                  purchaser, shall pay for Farmoutee's share of crude oil the
                  posted price per barrel in the field or at the first pipeline
                  terminal to which such production is transported, less the
                  cost of transportation to such terminal and any treating
                  charges or any other charges incurred against Farmoutee's
                  share of production at such terminal or downstream of delivery
                  to Chevron Pipe Line Company or other regulated common carrier
                  pipelines and facilities for transportation to market and for
                  further treating and handling. The posted price in the field
                  or at the terminal shall mean the average of the three highest
                  prices being paid in the area by crude oil purchasers for
                  crude oil of like quantity and quality.

         12.3.    SUBSEQUENT EXERCISE OF CALL

                  12.3.1.  SUBSEQUENT PERIODS
                           Farmoutor or its designated purchaser shall also have
                           the option to purchase Farmoutee's share of crude oil
                           for successive additional periods of three (3) years
                           each, the first of which shall commence at the end of
                           the initial three-year period referred to in this
                           Section 14. Farmoutor shall inform Farmoutee at least
                           three (3) months in advance of the commencement of
                           any three-year period following the initial period
                           whether Farmoutor, or a purchaser designated by
                           Farmoutor, will purchase Farmoutor's proportionate
                           share of Farmoutee's share of crude oil during such
                           three-year period.

                  12.3.2.  PRICE FOR SUBSEQUENT PERIODS
                           The price provisions applicable under this Section 14
                           to the initial three-year period shall be applicable
                           to subsequent three-year periods.

                  12.3.3.  NO ONE-TIME ELECTION
                           Farmoutor's election for any reason not to purchase
                           Farmoutee's share of crude oil during any three-year
                           period, or not to designate a purchaser for such
                           share of crude oil during any three-year period,
                           shall not affect Farmoutor's option to purchase or to
                           designate a purchaser for subsequent three-year
                           periods.

         12.4.    SEPARATE DISPOSITION IF NO CALL
                  During any three-year period in which Farmoutor or its
                  designated purchaser is not purchasing Farmoutee's share of
                  crude oil produced from the Earned Areas, Farmoutee shall be
                  obligated to take in kind or separately dispose of its share
                  of such crude oil and shall bear all costs and expenses of
                  doing so. If and so long as Farmoutee fails to take in kind or
                  separately dispose of its share of crude oil, Farmoutor may
                  dispose of Farmoutee's share of crude oil at the best price
                  obtainable (not to exceed the price Farmoutor receives for its
                  own production from the Earned Areas) and at Farmoutee's sole
                  risk, cost, and expense. Farmoutee shall be bound by delivery
                  obligations incurred by Farmoutor for such purpose; however,
                  any contract made by Farmoutor for the sale of Farmoutee's
                  share of crude oil shall bear a term no longer than is
                  commensurate with the minimum needs of the industry under the
                  circumstances and in no event for a term exceeding one (1)
                  year.

         12.5.    DISPOSITION OF FARMOUTOR'S SHARE
                  Farmoutor shall have the right to take in kind and separately
                  dispose of its share of oil produced from or attributable to
                  the Earned Areas.

                                     Page 4O

<PAGE>   41

         12.6.    SEVERANCE TAXES
                  Farmoutee shall bear any severance taxes owing on its share of
                  production.

         12.7.    SUBSIDIARIES AND AFFILIATES
                  This Section 12 shall include and apply separately to not only
                  Farmoutor but also any one of its subsidiaries or affiliates.

13.      CALL ON GAS

         13.1.    EXERCISE
                  With respect to natural gas, Farmoutee shall notify Farmoutor
                  in writing immediately upon the receipt from a responsible
                  third party of a bona fide offer to purchase any natural gas
                  owned by Farmoutee in the Earned Areas. Prior to Farmoutee's
                  completing a sale of such natural gas to said third party,
                  Farmoutor will have the option of purchasing Farmoutee's share
                  of such natural gas, or of designating a purchaser for such
                  sale of gas from Farmoutee, on overall terms and conditions as
                  favorable as those set out in the offer from said third party,
                  by notifying Farmoutee in writing within ten (10) days after
                  receiving Farmoutee's notice of Farmoutor's desire to purchase
                  such natural gas, or identifying the purchaser designated by
                  Farmoutor. Failure by such Farmoutor to give such written
                  notice to Farmoutee within the aforesaid ten (10) day period
                  will be considered an election by such Farmoutor not to
                  purchase and not to designate a purchaser for such gas. If,
                  however, Farmoutor timely elects to purchase Farmoutee's
                  share of such natural gas or to designate a purchaser
                  therefor, Farmoutor or its designated purchaser will, as soon
                  as possible thereafter, enter into a gas purchase contract
                  with Farmoutee on terms and conditions as favorable as those
                  set out in the offer from said third party. Farmoutee shall
                  not be required to give Farmoutor notice if Farmoutee's
                  natural gas is being sold on the spot market in a contract for
                  a term of forty-five (45) days or less.

         13.2.    DISPOSITION IF NO CALL
                  If Farmoutor elects not to purchase Farmoutee's share of
                  natural gas, and elects not to designate a purchaser therefor,
                  Farmoutee may then enter into a gas purchase contract with
                  said third party on terms and conditions no more favorable to
                  said third party than those submitted by Farmoutee to
                  Farmoutor. However, if Farmoutee does not execute a gas
                  purchase contract with said third party within one hundred and
                  twenty (120) days after Farmoutor's election not to purchase,
                  Farmoutor's prior rights to purchase such natural gas from
                  Farmoutee, or to designate a purchaser for such gas, will be
                  reinstated.

         13.3.    FARMOUTOR'S OFFER TO PURCHASE
                  At any time prior to receiving written notice from Farmoutee
                  that Farmoutee has received from a responsible third party a
                  bona fide contract offer, Farmoutor or its designated
                  purchaser may submit to Farmoutee in writing an offer to
                  purchase Farmoutee's share of such natural gas. Within ten
                  (10) days after receipt of Farmoutor's or its designated
                  purchaser's offer, Farmoutee may either accept Farmoutor's or
                  its designated purchaser's offer to purchase, in which event
                  Farmoutee and Farmoutor or its designated purchaser will enter
                  into a gas purchase contract embodying the terms and
                  conditions of said offer; or confer with Farmoutor or its
                  designated purchaser in order to negotiate the terms and
                  conditions of the purchase of such natural gas by Farmoutor
                  or its designated purchaser. If such terms and conditions
                  cannot be agreed upon within the aforesaid ten (10) day
                  period, Farmoutee may thereafter dispose of its share of the
                  natural gas after submitting to Farmoutor any bona fide offer
                  from a responsible third party in accordance with this Section
                  13.

         13.4.    SUBSEQUENT ELECTIONS
                  Upon termination of the primary term of any gas purchase
                  contract consummated under the applicable provisions of this
                  Section 13, Farmoutor's right to purchase Farmoutee's share of
                  any remaining natural gas reserves within the dedicated zone
                  and area of such gas purchase contract, or to designate a
                  purchaser therefor, will

                                     Page 4l

<PAGE>   42

                  be automatically reinstated and both the Farmoutee and the
                  Farmoutor will be subject to the provisions of this Section
                  13.

         13.5.    DISPOSITION OF FARMOUTOR'S SHARE

                  Farmoutor shall have the right to take in kind and separately
                  dispose of its share of gas produced from or attributable to
                  the Earned Areas.

         13.6.    SEVERANCE TAXES

                  Farmoutee shall bear any severance taxes owing on its share
                  of production.

         13.7.    SUBSIDIARIES AND AFFILIATES

                  This Section 13 shall include and apply separately to not only
                  Farmoutor but also to any one of its subsidiaries or
                  affiliates.

         13.8.    GAS PLANT PROCESSING

                  Farmoutor's interest in the property covered by this Agreement
                  is subject to that certain Natural Gas Processing Agreement -
                  Gulf of Mexico, effective September 1, 1996, between Farmoutor
                  and Warren Petroleum Company (now called "Dynegy Midstream
                  Services, Limited Partnership") (the "Chevron GPA"). Upon or
                  immediately following any assignment to Farmoutee under this
                  Agreement, Farmoutee shall enter into a separate Natural Gas
                  Processing Agreement with Dynegy Midstream Services, Limited
                  Partnership, covering the interest assigned to Farmoutee
                  hereunder and containing terms and provisions that are
                  otherwise identical to those in the Chevron GPA.

14.      PARTNERSHIP OR JOINT VENTURE

         Notwithstanding anything herein to the contrary, the transfer by
         Farmoutor of an interest in the Farmout Well and interests therein, as
         hereinabove provided, shall be considered as a contribution of
         leasehold interests by Farmoutor to the pool of capital for the
         development of the mineral interests by the Parties only, and the
         drilling of any well under the terms of this Agreement is not to be
         considered for the account of Farmoutor or as a partnership or a joint
         venture.

15.      TAX MATTERS

         As to all operations hereunder, the Parties elect not to be excluded
         from the application of Subchapter K, Chapter 1, Subtitle A, Internal
         Revenue Code of 1986, as amended, as permitted and authorized by
         Article 761 of said Code and the regulations promulgated thereunder,
         and similar provisions of applicable state laws. The tax partnership
         shall be governed by Exhibit C attached hereto and made a part hereof
         for all purposes.

16.      COMPLIANCE

         All operations performed by Farmoutee pursuant to this Agreement shall
         be conducted in accordance with all the terms, provisions, and
         conditions of the mineral lease covering the Farmout Area and in
         compliance with all applicable laws, rules, and regulations of state
         and federal governments, or any agency thereof. Without limiting the
         generality of the foregoing, Farmoutee shall comply with all provisions
         of Sections 202 (1) through (7), inclusive, of Executive Order 11246,
         as revised, and the other requirements set forth in Exhibit D, attached
         hereto and made a part hereof for all purposes.

17.      INSURANCE REQUIREMENTS

         17.1.    Farmoutee shall maintain the following insurance and all
                  insurance that may be required under the applicable laws,
                  ordinances and regulation of any governmental authority having
                  jurisdiction:

                  17.1.1.  Worker's Compensation insurance in statutory limits
                           as prescribed by applicable law, covering all
                           liabilities owed for compensation and other benefits
                           under the relevant worker's compensation laws of any
                           state or of the federal government, and Coverage B
                           Employer's Liability Insurance in the amount of
                           $1,000,000.00, both the aforementioned statutory
                           coverage and Coverage B containing endorsements
                           naming Farmoutor as Alternate Employer, providing for
                           voluntary compensation coverage and providing

                                    Page 42

<PAGE>   43

                           for occupational disease coverage. Should the work
                           provided under this contract involve maritime
                           activities, the use of maritime workers or vessels
                           owned or not owned by the Farmoutee, then Farmoutee
                           shall also obtain Maritime Coverage B for all of the
                           above coverage's and including transportation, wages,
                           maintenance and cure, covering liability under the
                           Longshore and Harbor Worker's Compensation Act, the
                           Jones Act, the Outer Continental Shelf Lands Act, the
                           General Maritime Law, and specifically including
                           coverage for claims of masters and members of crews
                           of vessels and claims under 33 U.S.C.A. 905 (b)
                           against any vessel. All policies will provide that
                           claims "in rem" shall be treated as claims against
                           the Farmoutee.

                  17.1.2.  Comprehensive or Commercial General Liability (Bodily
                           Injury and Property Damage) Insurance including the
                           following supplementary coverages: (a) Contractual
                           Liability to cover liability assumed under this
                           Agreement; (b) Products hazards coverage for any and
                           all products provided or furnished by or on behalf of
                           Farmoutee during the course of services rendered by
                           Farmoutee hereunder; (c) Completed operations hazard
                           coverage, for any claims relating to defects or
                           deficiencies in goods, products, materials or
                           services used or rendered by Farmoutee in connection
                           with its operations at the worksite; (d) Broad Form
                           Property Damage Liability Insurance, and (e) Coverage
                           for explosion, collapse and underground hazards, for
                           work performed by Farmoutee involving equipment or
                           materials of a volatile, incendiary or explosive
                           nature or involving excavation, drilling or
                           subsurface activity. The limit of liability for such
                           insurance shall not be less than $1,000,000.00
                           combined single limit per occurrence. All policies
                           will provide that claims "in rem" shall be treated as
                           claims against the Farmoutee.

                  17.1.3.  Automobile Bodily Injury and Property Damage
                           Liability Insurance. Such insurance shall extend to
                           owned, non-owned, and hired automobiles used in the
                           performance of this Agreement. The limits of
                           liability of such insurance shall not be less than
                           $500,000.00 per person/$1,000,000.00 per occurrence
                           for bodily injury and $300,000.00 per occurrence for
                           Property Damage.

                  17.1.4.  Hull and Machinery Insurance, including collision
                           liability, on all vessels and barges owned or not
                           owned, if any, used by Farmoutee in the performance
                           of this Agreement with a limit equal to or greater
                           than the fair market value of each vessel and barge.

                  17.1.5.  Should the work provided under this contract involve
                           Maritime activities, the use of maritime workers or
                           vessels or work aboard vessels owned or not owned by
                           the Farmoutee, Protection and Indemnity Insurance,
                           [including but not limited to coverage for injuries
                           to or death of masters, mates and crews of vessels
                           used in the performance of this Agreement. For each
                           vessel including barges used in the performance of
                           this contract, whether owned by Farmoutee or a third
                           party, liability insurance in the amount of
                           $10,000,000.00 for pollution occurrences insuring the
                           liability of Farmoutee and said third party arising
                           under (i) the Oil Pollution Act of 1990 as it may be
                           amended, (ii) the Comprehensive Environmental
                           Response, Compensation, and Liability Act of 1980, as
                           amended and reauthorized, and (iii) Third party
                           bodily Injury and Cargo Liabilities. All policies
                           required to be obtained by this Section 17.1.5 shall
                           have deleted therefrom the phrase "as required by
                           contract" and the phrase "as owners of the vessel
                           named herein" and all similar phrases purporting to
                           limit the underwriter liability to that of an owner.
                           The limits of liability of such insurance shall not
                           be less than $5,000,000.00 per occurrence. All
                           policies will provide that claims "in rem" shall be
                           treated as claims against the Farmoutee.

                                    Page 43
<PAGE>   44

                  17.1.6.  If work to be performed hereunder requires Farmoutee
                           to furnish aircraft (including helicopters),
                           Farmoutee shall maintain or require owners of such
                           aircraft to maintain Aircraft Liability (bodily
                           injury) including liability to passengers and
                           Property Damage insurance with an overall combined
                           single limit per occurrence of not less than
                           $10,000,000.00.

                  17.1.7.  Sudden and Accidental Pollution Liability Insurance
                           and Control of Well Insurance. The separate limits
                           for each such type insurance required by this Section
                           17.1.7 shall not be less than $25,000,000 per
                           occurrence.

                  17.1.8.  Umbrella Liability Insurance and/or Excess Liability
                           Insurance in the amount of $25,000,000 per accident
                           and in the aggregate.

         17.2.    Except for the insurance required by Section 17.1.1, the
                  policies providing the insurance called for in this Section
                  17 shall expressly include Farmoutor as an additional assured,
                  and all policies provided for in this Section 17 shall contain
                  an endorsement waiving underwriters' rights of subrogation
                  against Farmoutor. The insurers shall acknowledge that
                  Farmoutor has no liability for the payment of premiums for
                  such insurance. Such inclusion of Farmoutor as an additional
                  assured and such endorsements waiving underwriters' rights of
                  subrogation against Farmoutor shall be of no avail whenever,
                  and to the extent that, they are void or otherwise
                  unenforceable under applicable law in effect on or validly
                  retroactive to the date of this Agreement, there being no
                  intent to circumvent any such statutory limitations or
                  prohibitions. Farmoutor agrees to waive subrogation in favor
                  of Farmoutee on all insurance or qualified insurance programs
                  carried by Farmoutor and/or obtain such waiver from
                  Farmoutor's insurance carrier if so required by such insurance
                  contract. If such waiver is not obtained, Farmoutor shall
                  indemnify Farmoutee for any claim by Farmoutor's insurance
                  carrier arising out of subrogation.

         17.3.    The insurance policies set forth in this Section 17 shall be
                  endorsed to provide that the coverage afforded is primary
                  irrespective of the existence of other applicable insurance.

         17.4.    The insurance coverage provided for in this Section 17 shall
                  be with insurance companies and on policy forms acceptable to
                  Farmoutor. Farmoutee's obligation to obtain such insurance
                  coverage is separate and distinct from the other obligations
                  assumed by Farmoutee hereunder or under applicable law. By
                  execution of this agreement Farmoutor represents that it has
                  reviewed and accepted the insurance companies and policy forms
                  of Farmoutee provided that the insurance coverages, policies
                  and forms conform to the information disclosed to Farmoutor in
                  a certificate of insurance which Farmoutee shall provide to
                  Farmoutor prior to Farmoutor's execution of this Agreement.

         17.5.    Prior to Farmoutor's execution of this Agreement and quarterly
                  thereafter, Farmoutee shall furnish Farmoutor with documentary
                  evidence showing that such insurance required by this
                  Section 17 is in effect and will not be canceled for any cause
                  whatsoever or materially changed without thirty (30) days
                  prior written notice to Farmoutor.

18.      INDEMNITY

         18.1.    As to Farmoutee's operating rights interests and participating
                  interests in costs, risks, liabilities and/or expenses
                  pursuant to this Agreement and any other costs, risks,
                  liabilities and/or expenses which Farmoutee has agreed to bear
                  pursuant to this Agreement, Farmoutee agrees to protect,
                  defend, indemnify, and hold harmless Farmoutor from any and
                  all claims, losses, and expenses (including and without
                  limitation all costs, demands, damages, suits, judgments,
                  liabilities, fines, penalties, damages, attorneys' fees, costs
                  of defense and all causes of action of whatsoever nature or
                  character) incurred by operation of Section 2702 of the Oil
                  Pollution Act of 1990 ("OPS" 33 U.S.C. Sections 2710 et seq.)
                  or arising in favor of any entity or person, including without
                  limitation, Farmoutee, its employees,

                                    Page 44

<PAGE>   45

                  agents, contractors, contractor's employees or otherwise, on
                  account of illness, disease, bodily injury or death, property
                  loss or damage, environmental damage or pollution in any way
                  directly or indirectly arising out of or related to operations
                  and/or activities contemplated and/or performed, including but
                  not limited to acts or omissions, under this Agreement or any
                  agreement entered into pursuant to this Agreement on or after
                  the Effective Date, even though caused by the fault or strict
                  liability of Farmoutor, its employees, but except to the
                  extent caused by gross negligence or willful misconduct by
                  Farmoutor or its employees. This indemnity extends to
                  Farmoutor's parent and affiliated corporations, their
                  directors, officers, employees, agents and contractors and
                  their employees.

         18.2.    As to Farmoutor's operating rights interests and participating
                  interests in costs, risks, liabilities and/or expenses
                  pursuant to this Agreement and any other costs, risks,
                  liabilities and/or expenses which Farmoutor has agreed to bear
                  pursuant to this Agreement, Farmoutor agrees to protect,
                  defend, indemnify, and hold harmless Farmoutee from any and
                  all claims, losses, and expenses (including and without
                  limitation all costs, demands, damages, suits, judgments,
                  liabilities, fines, penalties, damages, attorneys' fees, costs
                  of defense and all causes of action of whatsoever nature or
                  character) incurred by operation of Section 2702 of the Oil
                  Pollution Act of 1990 ("OPS" 33 U.S.C. Sections 2710 et seq.)
                  or arising in favor of any entity or person, including without
                  limitation, Farmoutee, its employees, agents, contractors,
                  contractor's employees or otherwise, on account of illness,
                  disease, bodily injury or death, property loss or damage,
                  environmental damage or pollution in any way directly or
                  indirectly arising out of or related to operations and/or
                  activities contemplated and/or performed, including but not
                  limited to acts or omissions, under this Agreement or any
                  agreement entered into pursuant to this Agreement on or after
                  the Effective Date, even though caused by the fault or strict
                  liability of Farmoutee or its employees, but except to the
                  extent caused by gross negligence or willful misconduct by
                  Farmoutee or its employees. This indemnity extends to
                  Farmoutee's parent and affiliated corporations, their
                  directors, officers, employees, agents and contractors and
                  their employees.

         18.3.    Except to the extent of gross negligence or willful
                  misconduct on the part of a party to be indemnified
                  ("Indemnitee"), the indemnities contained in this Agreement
                  shall apply whether or not the respective party to be
                  indemnified was or is claimed to be passively, concurrently,
                  actively or solely negligent, and regardless of whether
                  liability without fault, including but not limited to claims
                  for strict liability, is imposed or sought to be imposed upon
                  such party to be indemnified.

         18.4.    Each party to be called in indemnity ("Indemnitor") under
                  this Agreement, shall be given prompt but reasonable notice
                  under the circumstances of any and all losses, claims, suits,
                  controversies, liability or expenses potentially giving rise
                  to a call in indemnity under this Agreement and each such
                  Indemnitor shall have the opportunity to promptly participate
                  in the defense and the resolution of same. No settlement or
                  compromise shall be entered into which causes any Indemnitee
                  to assume or bear any obligation or make any payment without
                  such party's written consent.

         18.5.    Notwithstanding any other provisions of this Agreement,
                  neither Party to this Agreement shall be responsible to the
                  other Party hereto, and each Party hereto hereby waives any
                  right it holds or may hold in recourse, recovery or
                  indemnification, for any indirect, punitive, special or
                  consequential damages including, but not limited to those
                  arising from subsurface damages to reservoirs or formations,
                  loss of profits, loss of use, loss of hire, and the loss or
                  deferral of production.

19.      PRIOR OBLIGATIONS MAINTAINED

         The termination of this Agreement, or the retransfer of interests held
         or earned by Farmoutee, in whole or in part, for any reason whatsoever,
         shall not relieve Farmoutee of any obligation theretofore incurred or
         which may subsequently occur as a result of its

                                     Page 45

<PAGE>   46

         acceptance of this Agreement, any operations hereunder, or the
         noncompliance with any of the provisions of this Agreement. Farmoutee
         hereby undertakes and agrees to indemnify Farmoutor and to hold
         Farmoutor free and harmless from and against any obligation or
         liability incurred by Farmoutee pursuant to Section 18 of this
         Agreement, except if caused by the gross negligence or willful
         misconduct of Farmoutor.

20.      NO LIENS OR ENCUMBRANCES

         Each Party agrees to maintain the Farmout Well, the affected Farmout
         Area premises and all permanently installed equipment used in
         connection with its operations hereunder free of debts, charges, liens,
         or other encumbrances resulting from its operations under this
         Agreement.

21.      PAYMENT OF DEBTS AND CHARGES

         Farmoutee agrees to pay or satisfy all such debts and charges incurred
         in its operations hereunder within sixty (60) days after such become
         due and payable except to the extent said debts and charges are being
         disputed in good faith. Farmoutee must immediately notify Farmoutor of
         any such dispute.

22.      BREACH

         Any failure by the Parties to comply, or substantially comply, with any
         material obligation hereunder shall be considered an active and
         material breach of this Agreement, and in the event of any such failure
         by Farmoutee, Farmoutor shall notify Farmoutee in writing of such
         failure and, unless remedied within sixty (60) days, Farmoutor may
         terminate this Agreement in whole or in part by notifying Farmoutee in
         writing of such termination, without prior notice or demand being made
         upon Farmoutee and without the necessity of placing Farmoutee in
         default; provided, however, the failure by Farmoutor to exercise at any
         time or from time to time such right of termination shall not effect a
         waiver of any breach or of Farmoutor's right subsequently to terminate
         this Agreement. The termination of this Agreement shall not result in
         the loss by Farmoutee of any rights and interests earned by Farmoutee
         in the Farmout Area prior to the date of termination.

23.      OTHER RIGHTS AND REMEDIES RESERVED

         No provision contained herein providing for the termination of this
         Agreement or termination of the right to earn any interest or
         termination of any transfer of interest executed pursuant hereto shall
         be construed as precluding, nor shall it preclude, Farmoutor or
         Farmoutee from asserting its respective rights to specific performance,
         damages, or any other rights or remedies to which it may be entitled.
         In all instances herein where liquidated damages are provided for by a
         circumstance or set of facts, those liquidated damages as provided for
         shall be the only damages recoverable by the damaged party resulting
         from such set of circumstances including, without limitation, (i)
         failure to timely perform the Obligation Wells as provided for in
         Section 4.2 and (ii) failure to obtain Farmoutor's approval to abandon
         a Farmout Well as provided for in Section 4.9.

24.      NO WAIVER

         Failure by Farmoutor or Farmoutee to enforce any of the provisions of
         this Agreement shall not effect a waiver of any violation thereof nor
         preclude enforcement of that or any other provisions hereof at that or
         any other time.

25.      AUDIT RIGHTS

         Upon reasonable written notice to the other Party, during normal
         business hours, each Party may audit the accounts and records of the
         other Party related to operations conducted under the terms of this
         Agreement for any calendar year, within the twenty-four month (24)
         period following the end of such calendar year. Where there are two or
         more parties, the non-operating parties shall make every reasonable
         effort to conduct a joint audit in a manner which will result in a
         minimum of inconvenience to the party being audited. The party being
         audited shall not bear a portion of the non-operating parties' audit
         costs incurred. The audit of a party's accounts and records shall not
         be conducted more than once each year without, the prior approval of
         the party being audited and shall be made at the expense of the parties
         approving such audit. The lead audit company's audit report shall be
         issued within one hundred eighty (180) days after completion of the
         audit field work; provided, however, the one hundred eighty (180) day

                                    Page 46

<PAGE>   47

         time period shall not extend the twenty-four (24) month requirement for
         taking specific detailed exception. All exceptions shall be supported
         with sufficient documentation. Failure to issue the report within the
         prescribed time or to take specific written exception within the
         twenty-four (24) month period will preclude the parties from taking
         written exception to any accounting transaction within the time frame
         audited. The audited Party shall reply in writing to an audit report
         and any audit exceptions contained therein within one hundred eighty
         (180) days after receipt of such audit report.

26.      ASSIGNMENTS

         This Agreement, and the transfer or retransfer of an interest in and to
         the Farmout Area, the Earned Areas, if any, the Farmout Well or any
         other well which is drilled under the terms of this Agreement shall
         inure to the benefit of and be binding upon the Parties hereto and
         their heirs, successors, sublessees, and assigns; provided, however,
         Farmoutee may not transfer, assign, or sublease all or any proportion
         of its interest in this Agreement or in its interests earned in the
         Farmout Well or the Earned Areas without Farmoutor's prior written
         consent which shall not be unreasonably withheld. Farmoutor agrees to
         provide prior written notice of a transfer of its interest. Any
         transferee, assignee or sublessee of all or any proportion of
         Farmoutee's or Farmoutor's rights or interests which are subject to
         this Agreement shall agree in writing to be bound by all of the terms
         and provisions contained in this Agreement and shall assume all or such
         proportion of the duties and obligations of its transferor, assignor or
         sublessor as set forth in and arising from this Agreement, and any such
         transfer, assignment or sublease shall so provide; provided, however,
         no such transfer, assignment or sublease shall relieve Farmoutee of any
         of the obligations and duties assumed by Farmoutee under this Agreement
         or under the mineral lease covering the Farmout Area, and Farmoutor
         shall look solely to Farmoutee for the performance of all obligations
         and duties so assumed by Farmoutee.

27.      UNIFORM INTEREST AND PREFERENTIAL RIGHT

         27.1.    Farmoutor and Farmoutee acknowledge the possibility that any
                  party to the Operating Agreement may have (i) a right during a
                  fifteen (15) day period after receipt of notice under Article
                  XII. of the Operating Agreement to elect to exercise a
                  preferential right to take, and to exercise and take, the
                  farmout under this Agreement as farmoutee(s) upon the same
                  terms and conditions as set forth in this Agreement or (ii)
                  some objection to the farmout contemplated by this Agreement.

         27.2.    During the last week of July, 1998, a representative of
                  Farmoutor informally questioned representatives of the other
                  parties to the Operating Agreement about whether there were a
                  preferential right applicable to or objections to the farmout
                  contemplated by this Agreement. The representatives of said
                  co-owners orally advised that their preference was to receive
                  formal notice of the farmout contemplated by this Agreement
                  for consideration.

         27.3.    No later than five (5) days after execution of this Agreement,
                  but preferably upon or prior to execution of this Agreement,
                  Farmoutor will send notice letters to said co-owners providing
                  the particulars of the farmout under this Agreement or a copy
                  of this Agreement, referencing Section XII. of the Operating
                  Agreement, and providing a fifteen (15) day period after
                  receipt to provide return notice of any election to exercise a
                  claimed preferential right to take the farmout under this
                  Agreement as farmoutee(s) upon the same terms and conditions
                  as set forth in this Agreement. Said notice letters shall be
                  drafted by Farmoutor in a form mutually acceptable to the
                  Parties. If, within said fifteen (15) day period, all of said
                  co-owners sign preferential right waivers for the farmout
                  under this Agreement and none of said co-owners object to the
                  farmout under this Agreement, the Parties shall proceed with
                  the farmout under this Agreement.

         27.4.    If, within said fifteen (15) day period, one or more of said
                  co-owners notify either Party of any objection to the farmout
                  under this Agreement, the Party receiving any such
                  objection(s) shall immediately notify the other Party in
                  writing. If (i) any and all such objection(s) received within
                  said fifteen (15) day period are resolved

                                    Page 47
<PAGE>   48

                  to the mutual satisfaction of the Parties and the objecting
                  party(ies) within twenty (20) days of the receipt of the
                  objection(s) and (ii) any and all failures to sign
                  preferential right waivers for the farmout under this
                  Agreement are resolved to the mutual satisfaction of the
                  Parties within twenty (20) days after the end of said fifteen
                  (15) day period, the Parties shall proceed with the farmout
                  pursuant to this Agreement. If (i) any and all such
                  objection(s) received within said fifteen (15) day period are
                  not resolved to the mutual satisfaction of the Parties and the
                  objecting party(ies) within said twenty (20) day period or
                  (ii) any and all failures to sign preferential right waivers
                  for the farmout under this Agreement are not resolved to the
                  mutual satisfaction of the Parties within twenty (20) days
                  after the end of said fifteen (15) day period, certain terms
                  shall apply as follows:

                  27.4.1.  Farmoutee shall turn over its operations, if any, of
                           and assign any contracts for all Well Operations in
                           progress to Farmoutor as soon as reasonably practical
                           within five (5) days after said twenty (20) day
                           period and Farmoutor shall thereupon take over and
                           assume such operations.

                  27.4.2.  Within forty-five (45) days after said twenty (20)
                           day period, Farmoutee shall invoice Farmoutor for all
                           of Farmoutee's cost of Well Operations under this
                           Agreement as accounted for according to the
                           Accounting Procedure attached to the Operating
                           Agreement, Farmoutor shall pay same to Farmoutee
                           within thirty (30) days of invoice receipt, and
                           Farmoutor shall bear all of Farmoutee's cost, risk
                           liability and expense arising directly or indirectly
                           out of said Well Operations.

                  27.4.3.  Farmoutee shall be deemed not to have earned any
                           interests pursuant to this Agreement, each Party
                           shall be released from further obligation to or claim
                           by the other Party, and this Agreement shall
                           thereupon terminate, subject to final settlement of
                           accounts.

         27.5.    If, within said fifteen (15) day period, one or more of said
                  co-owners notify Farmoutor of an election to exercise a
                  claimed preferential right to take the farmout under this
                  Agreement as farmoutee(s) upon the same terms and conditions
                  as set forth in this Agreement, Farmoutor shall immediately so
                  notify Farmoutee in writing and certain terms shall apply
                  between Farmoutor and Farmoutee as follows:

                  27.5.1.  Such exercising party(ies) shall be allowed to and
                           expected to takeover and proceed with the farmout
                           contemplated by this Agreement as farmoutee(s) upon
                           the same terms and conditions as set forth in this
                           Agreement. Farmoutee shall turn over its operations,
                           if any, of and assign any contracts for all Well
                           Operations in progress to Farmoutor as soon as
                           reasonably practical within five (5) days after
                           Farmoutor's notice to Farmoutee of a preferential
                           right election. Farmoutor shall thereupon take over
                           any such operations by Farmoutee and Farmoutor shall
                           turnover all such Well Operations (whether by
                           Farmoutee or by Farmoutor on behalf of Farmoutee) to
                           the exercising party(ies) as soon as reasonably
                           practical within another five (5) days.

                  27.5.2.  Within forty-five (45) days after receipt of
                           Farmoutor's notice to Farmoutee of a preferential
                           right election, Farmoutee shall invoice Farmoutor for
                           all of Farmoutee's cost of Well Operations under this
                           Agreement as accounted for according to the
                           Accounting Procedure attached to the Operating
                           Agreement. Farmoutor shall pay same to Farmoutee
                           within thirty (30) days of invoice receipt, and
                           Farmoutor shall bear all of Farmoutee's cost, risk
                           liability and expense arising directly or indirectly
                           out of said Well Operations in the event and to the
                           extent that such are not paid and borne by the
                           exercising party(ies). Farmoutor shall invoice the
                           exercising party(ies) for same plus all of

                                    Page 48
<PAGE>   49

                           Farmoutor's cost of Well Operations on behalf of
                           Farmoutee under this Agreement as accounted for
                           according to the Accounting Procedure attached to the
                           Operating Agreement and such exercising o party(ies)
                           shall be expected to pay same to Farmoutor within
                           thirty (30) days of invoice receipt.

                  27.5.3.  Farmoutee shall be deemed not to have earned any
                           interests pursuant to this Agreement, each Party
                           shall be released from further obligation to or claim
                           by the other Party, and this Agreement shall
                           thereupon terminate, subject to final settlement of
                           accounts.

28.      APPOINTMENT OF AGENT

         If at any time the interest of Farmoutor or Farmoutee is divided among
         or is assigned to and owned by four or more co-owners or an entity in
         which equity ownership is held by four or more co-owners, any Party
         hereto may, at its discretion, require such co-owners to designate in
         writing a trustee, mandatary or agent with full authority and all
         rights necessary to settle, compromise, dismiss, or release on behalf
         of such co-owners any loss, expense, claim, damage, penalty, fine,
         lawsuit, or similar matter arising from operations hereunder, including
         full authority to act for all said co-owners as insureds under or with
         respect to any policy of insurance relevant to such matters.

29.      NOTICES

         All notices and demands provided for under this Agreement shall be in
         writing and shall be given by certified mail, return receipt requested,
         telecopy, facsimile, air courier guaranteeing overnight delivery or
         personal delivery to the following addressees:

                                   Chevron U.S.A. Inc.
                                   Attention: Land Manager
                                   935 Gravier Street
                                   New Orleans, LA 70112
                                   Fax No. (504) 592-7110

                                   Hughes-Rawis, L.L.C.
                                   Attention: Mr. James H. Rawls
                                   Mtel Centre South, Suite 800
                                   200 South Lamar St.
                                   Jackson, MS 39201
                                   Fax No. (601) 353-4331

         or to such other address as Farmoutor and Farmoutee designate in
         writing. All other communication may be by regular mail. All notices
         shall be deemed to have been duly given: at the time delivered by hand,
         if personally delivered; at the time delivered according to the return
         receipt if sent by certified mail, return receipt requested; when
         receipt acknowledged, if telecopied or sent by facsimile; and on the
         next business day if timely delivered to an air courier guaranteeing
         overnight delivery.

30.      AMENDMENTS

         This Agreement shall not be modified or amended except by mutual
         agreement of the Parties in writing, and no action or failure to act on
         the part of either Party hereto shall be construed as a modification or
         amendment to, or a waiver of, any of the provisions of this Agreement;

31.      ENTIRE AGREEMENT

         This Agreement, in conjunction with that certain Confidentiality
         Agreement and AMI dated April 29, 1998, by and between Hughes-Rawls.
         L.L.C. and Chevron U.S.A. Inc. and that certain Letter Agreement dated
         August 25, 199$ between Hughes-Rawls, L.L.C., Energy Partners, LTD. and
         Chevron U.S.A. Inc. relating to Farmoutor's consent to Farmoutee's
         assignment to Energy Partners, Ltd. of an undivided thirty percent
         (30%) of all of Farmoutee's rights, actions and interest in and to this
         Agreement, shall constitute the entire agreement between the Parties
         with respect to the subject matter hereof and supercedes all prior
         contracts or agreements with respect to the subject matter hereof
         whether oral or written.

                                    Page 49

<PAGE>   50

32.      APPLICABLE LAW

         This Agreement is and shall remain subject to all valid and applicable
         federal, state and local laws, rules and regulations. Each party shall
         be entitled to rely on all laws, orders, permits, rules, regulations
         and requirements issued by any federal, state or local regulatory body
         as valid and may act in accordance therewith until such time as the
         same may be invalidated by final judgment in a court of competent
         jurisdiction. This Agreement shall be interpreted according to the laws
         of the State of Louisiana and shall extend to and be binding upon the
         successors and assigns of the parties hereto.

33.      PLURALS

         Reference herein to the plural of a noun or pronoun shall, whenever
         appropriate, include the singular and vice versa.

34.      AUTHORITY

         Each Party represent and warrants that it has, holds or has obtained
         all the necessary approvals, power and authority from its respective
         corporate (or company, in the case of Farmoutee) board of directors,
         officers, executives and management (and its partners, in the case of
         Farmoutee) to execute, deliver and perform its obligations under this
         Agreement; and its execution, delivery and performance of this
         Agreement has been duly authorized by all the necessary action on its
         part; and this Agreement constitutes its legal, valid and binding
         obligations, enforceable in accordance with its terms, except as such
         enforceability may be limited by bankruptcy, insolvency, fraudulent
         transfer and similar laws affecting creditor's rights generally or by
         general principles of equity.

IN WITNESS WHEREOF, this Agreement is executed by each Party on the date of the
acknowledgment of its signature below.

WITNESSES:                                          FARMOUTOR:

                                                    CHEVRON U.S.A. INC.

/s/ Witness
---------------------                               By: /s/ J. G. LARRE
                                                    -------------------------
---------------------
                                                    Title: Assistant Secretary
                                                          ----------------------

WITNESSES:                                          FARMOUTEE:

/s/ Witness                                         HUGHES-RAWLS, L.L.C.
---------------------
                                                    By: /s/ JAMES H. RAWLS
---------------------                                  -------------------------

                                                    Title: President
                                                           ---------------------

                                    Page 50
<PAGE>   51

STATE OF LOUISIANA )
                   )
PARISH OF ORLEANS  )

         On this 25th day of August, 1998, before me appeared J.G. Larre, to me
personally known, who, being by me duly sworn, did say that he is the Assistant
Secretary of Chevron U.S.A. Inc., a Pennsylvania corporation, and that said
instrument was signed on behalf of said corporation by authority of its Board of
Directors, and said appearer acknowledged that he executed the same as the free
act and deed of said corporation.

           IN WITNESS WHEREOF, I have hereunto set my official hand and seal on
the date herein above written.

                                             /s/ WITNESS
                                             -----------------------------
                                             Notary Public in and for
                                             State of Louisiana

My commission expires at death.

    STATE OF LOUISIANA )
                       )
    PARISH OF ORLEANS  )

         On this 25th day of August, 1998, before me appeared James H. Rawls, to
me personally known, who, being by me duly sworn, did say that he is the
President of Hughes-Rawls, L.L.C., a Delaware limited liability company, and
that said instrument was signed on behalf of said company by authority of its
Board of Directors, and said appearer acknowledged that he executed the same as
the free act and deed of said company.

         IN WITNESS WHEREOF, I have hereunto set my official hand and seal on
the date herein above written.

                                             /s/ WITNESS
                                             -----------------------------
                                             Notary Public in and for
                                             State of Louisiana

My commission expires at death.

                                    Page 51<PAGE>   1
                                                                   EXHIBIT 10.37

                                SECOND AMENDMENT
                                       TO
                       REDUCING REVOLVING CREDIT AGREEMENT

         This Second Amendment to Reducing Revolving Credit Agreement dated
March 30, 2000 (the "Second Amendment"), by and among ENERGY PARTNERS, LTD., a
Delaware corporation (the "Borrower"), the undersigned banks and financial
institutions that are parties to the Credit Agreement (the "Banks"), and BANK
ONE, TEXAS, N.A., a national banking association ("Bank One"), as a Bank, as the
LC Issuer and as Administrative Agent for the Banks, is dated effective as to
the Borrower and Bank One as of the effective date of the Credit Agreement and
as to each other Bank as of the date it became a party to the Credit Agreement:

                                   WITNESSETH:

         WHEREAS, Borrower, the Banks, the LC Issuer and the Administrative
Agent are parties to that certain Reducing Revolving Credit Agreement dated
March 30, 2000, as amended by that certain First Amendment to Reducing Revolving
Credit Agreement dated August 10, 2000 (the "Credit Agreement"); and

         WHEREAS, the parties desire to amend the Credit Agreement as set forth
herein.

         NOW, THEREFORE, in consideration of the premises and for Ten Dollars
($10.00) and other good and valuable consideration received by each party
hereto, and each intending to be legally bound hereby, the parties agree as
follows:

 I.      Specific Amendments to Credit Agreement.

         Article I. DEFINITIONS, of the Credit Agreement is hereby amended by
adding the following definitions thereto:

Agreement.

                  "First Amendment" means the First Amendment to the Credit
         Agreement.

                  "Second Amendment" means the Second Amendment to the Credit
Agreement.

         Subsection (L) of the definition of "Permitted Encumbrances" in the
Credit Agreement is hereby amended by replacing the text of such subsection (L)
with the following text:

         (L) Liens and other obligations created by the documents listed on
         Schedule 1.01(c) attached hereto.

<PAGE>   2

         Section 9.22, Loan Documents Subject to Other Agreements, is hereby
amended by adding the following text at the end of that Section:

                  Certain of the Borrowing Base Oil and Gas Properties were
                  assigned to Borrower pursuant to certain assignments from
                  Ocean Energy, Inc. ("Ocean") to Borrower executed and
                  delivered on March 31, 2000 and made effective as of 7:00 a.m.
                  Lafayette, Louisiana time on January 1, 2000. Each of such
                  assignments contains a provision which requires that each
                  subsequent sale, assignment, sublease, transfer, alienation,
                  mortgage, security interest and encumbrance be made subject to
                  the covenants, terms, conditions, exceptions, obligations,
                  indemnities and reservations contained in the Purchase and
                  Sale Agreement between Ocean and Borrower dated effective as
                  of the Effective Time regarding the East Bay Complex (the
                  "Purchase and Sale Agreement"). This Agreement and all other
                  Loan Documents, insofar as they pertain to the properties
                  covered by the Purchase and Sale Agreement, specifically
                  hereby reference and are made subject to said Purchase and
                  Sale Agreement and the covenants, terms, conditions,
                  exceptions, obligations, indemnities and reservations
                  contained therein. Any subsequent sales, assignments,
                  subleases, transfers or other alienations pursuant to this
                  Agreement or any of the Loan Documents shall specifically
                  provide that such vendees, assignees, sublessees, transferees,
                  or grantees acquiring under such instruments expressly assume
                  the Buyer's Assumed Obligations (as defined in the Purchase
                  and Sale Agreement) and all other obligations of Buyer under
                  the Purchase and Sale Agreement to the extent of the interest
                  acquired.

         Schedule 1.01(c), Certain Permitted Liens, attached to the Credit
Agreement is hereby amended to include the reference to the following additional
document:

                  Assignment of Overriding Royalty Interest executed on March
                  31, 2000 and made effective January 1, 2000 by Energy
                  Partners, Ltd. in favor of Chase Bank of Texas, as Trustee
                  (recorded in the records of Plaquemines Parish, Louisiana on
                  April 3, 2000 at COB 968, Folio 507 and in the records of the
                  Minerals Management Service on April 18, 2000).

         II. Conditions Precedent in Connection with the Second Amendment. The
Second Amendment shall not be binding on the Banks until satisfaction of the
following conditions precedent:

                  A. Administrative Agent shall have received fully executed
         counterparts, in the number of multiple originals requested by
         Administrative Agent, of the Second Amendment duly executed by an
         authorized officer for Borrower.

                  B. The representations and warranties contained in Article IV
         of the Credit Agreement, as amended hereby, shall be true and correct
         in all material respects on the date of the Second Amendment with the
         same effect as though such representations and

                                      -2-

<PAGE>   3

warranties had been made on such date; and no Event of Default shall have
occurred and be continuing or will have occurred upon the execution of the
Second Amendment.

                  C. All legal matters incident to the consummation of the
         transactions contemplated by the Second Amendment shall be reasonably
         satisfactory to the firm of Porter & Hedges, L.L.P., special counsel
         for Bank.

                  D. All reasonable and documented legal fees owed by Bank to
         Porter & Hedges, L.L.P. in connection with the Second Amendment shall
         have been paid by Borrower.

         III. Reaffirmation of Representations and Warranties. To induce the
Banks to enter into this Second Amendment, the Borrower hereby reaffirms, as of
the date hereof, its representations and warranties contained in Article IV of
the Credit Agreement, as amended hereby, and in all other documents executed
pursuant thereto and additionally represents and warrants as follows:

                  A. The execution and delivery of this Second Amendment and the
         performance by the Borrower of its obligations under this Second
         Amendment are within the Borrower's power, have been duly authorized by
         all necessary corporate action, have received all necessary
         governmental approval (if any shall be required), and do not and will
         not contravene or conflict with any provision of law or of the charter
         or by-laws of the Borrower or of any agreement binding upon the
         Borrower.

                  B. The Credit Agreement as amended by this Second Amendment
         represents the legal, valid and binding obligations of the Borrower,
         enforceable against the Borrower in accordance with their respective
         terms subject as to enforcement only to bankruptcy, insolvency,
         reorganization, moratorium or other similar laws affecting the
         enforcement of creditors' rights generally.

                  C. No Event of Default or Unmatured Event of Default has
         occurred and is continuing as of the date hereof.

         IV. Defined Terms. Except as amended hereby, terms used herein that are
defined in the Credit Agreement shall have the same meanings herein.

         V. Reaffirmation of Credit Agreement. This Second Amendment shall be
deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as
further amended hereby, is hereby ratified, approved and confirmed in each and
every respect. All references to the Credit Agreement herein and in any other
document, instrument, agreement or writing shall hereafter be deemed to refer to
the Credit Agreement as amended hereby.

         VI, Entire Agreement. The Credit Agreement, as hereby amended, embodies
the entire agreement between the Borrower and the Banks and supersedes all prior
proposals, agreements and understandings relating to the subject matter hereof.
The Borrower certifies that it is relying on no representation, warranty,
covenant or agreement except for those set forth in the Credit Agreement,

                                      -3-

<PAGE>   4

as hereby amended, and in the other documents previously executed or executed of
even date herewith.

         VII. Governing Law. THIS SECOND AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA. This Second Amendment has been entered
into in Harris County, Texas, and it shall be performable for all purposes in
Harris County, Texas. Courts within the State of Texas shall have jurisdiction
over any and all disputes between the Borrower and the Bank, whether in law or
equity, including, but not limited to, any and all disputes arising out of or
relating to this Second Amendment or any other Security Instrument; and venue in
any such dispute whether in federal or state court shall be laid in Harris
County, Texas.

         VIII. Severability. Whenever possible each provision of this Second
Amendment shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Second Amendment shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Second Amendment.

         IX. Execution in Counterparts. This Second Amendment may be executed in
any number of counterparts and by the different parties on separate
counterparts, and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same agreement.

         X. Section Captions. Section captions used in this Second Amendment are
for convenience of reference only, and shall not affect the construction of this
Second Amendment.

         XI. Successors and Assigns. This Second Amendment shall be binding upon
the Borrower and the Banks and their respective successors and assigns, and
shall inure to the benefit of the Borrower and the Banks, and the respective
successors and assigns of the Banks.

         XII. Non-Application of Chapter 346 of Texas Finance Codes. In no event
shall Chapter 346 of the Texas Finance Code (which regulates certain revolving
loan accounts and revolving tri-party accounts) apply to this Credit Agreement
as hereby further amended or any other Loan Documents or the transactions
contemplated hereby.

         XIII. NOTICE. THIS SECOND AMENDMENT TOGETHER WITH THE CREDIT AGREEMENT,
AND THE OTHER SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.

                                      -4-

<PAGE>   5

         IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the day set forth below their respective
signatures.

                             BORROWER:

                             ENERGY PARTNERS, LTD.

                             By: /s/ SUZANNE V. BAER
                                ---------------------------------------
                                Suzanne V. Baer
                                Vice President, Chief Financial Officer

                             Date:                    , 2000
                                  -------------------

                             ADMINISTRATIVE AGENT, LC ISSUER AND BANK:

                             BANK ONE, TEXAS, N.A.

                             By: /s/STEVE SHATTO
                                ---------------------------------------
                                Steve Shatto
                                Vice President

                             Date: September 29, 2000

                             SYNDICATION AGENT AND BANK:

                             THE CHASE MANHATTAN BANK

                             By: /s/ ROBERT C. MERTENSOTTO
                                ---------------------------------
                             Name: Robert C. Mertensotto
                                  -------------------------------
                             Title: Managing Director
                                   ------------------------------
                             Date: October 2, 2000

                                      -5-

<PAGE>   6

DOCUMENTATION AGENT AND BANK:

BNP PARIBAS

By: /s/ BRIAN M. MALONE  DOUGLAS R. LIFTMAN
   -----------------------------------------
Name: Brian M. Malone  Douglas R. Liftman
     ---------------------------------------
Title:    Director           Director
      --------------------------------------

Date: October 2, 2000

BANK:

WHITNEY NATIONAL BANK

By: /s/ KEVIN P. RAFFERTY
   -------------------------------
Name: Kevin P. Rafferty
     -----------------------------
Title: Senior Vice President
      ----------------------------

Date: October 3, 2000

                                      -6-

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