Document:

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Exhibit 10 (a)

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT 

     This Second Amendment to Sixth Amended and Restated Credit Agreement (this “Second
Amendment”) is entered into effective as of the 7th day of October, 2008 (the
“Effective Date”), by and among Denbury Onshore, LLC, a Delaware limited liability company
(“Borrower”), Denbury Resources Inc., a Delaware corporation (“Parent”), JPMorgan
Chase Bank, N.A., as Administrative Agent (“Administrative Agent”), and the financial
institutions parties hereto as Banks (“Banks”).

W I T N E S S E T H

     WHEREAS, Borrower, Parent, Administrative Agent, the other agents a party thereto and Banks
are parties to that certain Sixth Amended and Restated Credit Agreement dated as of September 14,
2006 (as amended, the “Credit Agreement”) (unless otherwise defined herein, all terms used
herein with their initial letter capitalized shall have the meaning given such terms in the Credit
Agreement); and

     WHEREAS, pursuant to the Credit Agreement, Banks have made a Revolving Loan to Borrower and
provided certain other credit accommodations to Borrower; and

     WHEREAS, Parent and Borrower have requested that the Credit Agreement be amended to (i)
increase the Total Commitment from $350,000,000 to $750,000,000 to be reflected in a new Schedule
2.1 to the Credit Agreement and (ii) amend certain other terms of the Credit Agreement in certain
respects as provided in this Second Amendment; and

     WHEREAS, Parent and Borrower have requested that The Bank of Nova Scotia, Keybank National
Association and U.S. Bank National Association (each of the foregoing financial institutions are
herein referred to as a “New Bank”) become new Banks under the Credit Agreement with
Commitments as shown on Schedule 2.1 to the Credit Agreement (as amended hereby); and

     WHEREAS, Borrower, as buyer, and Wapiti Energy, LLC, a Texas limited liability company, Wapiti
Operating, LLC, a Texas limited liability company and Wapiti Gathering, LLC a Texas limited
liability company (collectively, “Seller”), as seller, entered into that certain Purchase
and Sale Agreement dated as of August 19, 2008 (as amended from time to time, the “Conroe
Purchase Agreement”), pursuant to which Borrower has agreed to purchase, directly or
indirectly, from Seller certain oil and gas properties more particularly described therein (such
acquisition, the “Conroe Acquisition” and such properties, the “Conroe
Properties”); and

     WHEREAS, Borrower expects to structure the Conroe Acquisition to qualify for reverse like-kind
exchange treatment under Section 1031 of the Code and the regulations and revenue procedures
promulgated thereunder, including Rev. Proc. 2000-37; and

     WHEREAS, in furtherance of the reverse like-kind exchange, Borrower will assign the Conroe
Purchase Agreement to Denbury Conroe LLC, a Delaware limited liability company

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(“Denbury Conroe”), that is not affiliated with Borrower, and will lend to Denbury
Conroe up to $600,000,000 from the proceeds of the Borrowings under the Credit Agreement (as
amended hereby) (the “Conroe Loan”); and

     WHEREAS, the Conroe Loan will be evidenced by a promissory note issued by Denbury Conroe in
favor of Borrower (the “Denbury Conroe Note”), which Denbury Conroe Note will be
subsequently collaterally assigned and pledged by Borrower to Administrative Agent, for the benefit
of itself, the Banks and their Affiliates for whom Obligations may be owed from time to time; and

     WHEREAS, the assignment of the Conroe Purchase Agreement to Denbury Conroe, the Conroe
Acquisition, the making of the Conroe Loan, the pledging of the Denbury Conroe Note to
Administrative Agent and all other transactions relating to or arising out of the foregoing are
collectively referred to herein as the “Conroe Transactions”; and

     WHEREAS, the Parent and the Borrower have requested that the Administrative Agent and the
Required Banks issue their consent to the Conroe Transactions and waive certain provisions of the
Credit Agreement with respect to the Conroe Transactions; and

     WHEREAS, subject to and upon the terms and conditions set forth herein, Banks have agreed to
Parent’s and Borrower’s requests.

     NOW THEREFORE, for and in consideration of the mutual covenants and agreements herein
contained and other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged and confessed, Parent, Borrower, Administrative Agent and Banks hereby agree as
follows:

Section 1. Amendments. In reliance on the representations, warranties, covenants and
agreements contained in this Second Amendment, and subject to the satisfaction of the conditions
precedent set forth in Section 4 hereof, the Credit Agreement shall be amended effective as
of the Effective Date in the manner provided in this Section 1.

     1.1 Deleted Definitions. Section 2.1 of the Credit Agreement shall be amended to
delete the definitions of “2005 Bond Exposure” and “Additional Permitted Revenue Bond
Exposure” in their entirety, and all references in the Credit Agreement to such terms are
deleted.

     1.2 Additional Definitions. Section 2.1 of the Credit Agreement shall be amended to
add thereto in alphabetical order the following definitions which shall read in full as follows:

     “Barnett Shale Assets” means all of Borrower’s oil and
gas properties owned by Borrower on October 7, 2008 and located in
Parker, Wise, Tarrant and Johnson Counties, Texas.

     “Conroe Loan” has the meaning ascribed to such term in
the Second Amendment.

     “Net Proceeds” means, with respect to any event, (a)
the cash proceeds received in respect of such event including any
cash

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received in respect of any non-cash proceeds (including any
cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or purchase price
adjustment receivable or otherwise, but excluding any interest
payments), but only as and when received, net of (b) the sum of (i)
all reasonable fees and out-of-pocket expenses paid to third parties
(other than Affiliates) in connection with such event and (ii) the
amount of all taxes paid (or reasonably estimated to be payable)
during the year that such event occurred or the next succeeding year
and that are directly attributable to such event (as determined
reasonably and in good faith by a Financial Officer).

     “Prepayment Event” means, at any time the Obligations
are outstanding, any sale, transfer or other disposition of an asset
permitted by Section 10.5(e).

     “Second Amendment” means that certain Second Amendment
to Sixth Amended and Restated Credit Agreement dated as of October
7, 2008 among Borrower, Parent, Administrative Agent and Banks.

     “Senior Managing Agent” means Comerica Bank in its
capacity as Senior Managing Agent for Banks hereunder or any
successor thereto.

     “Additional Exchange Properties” means those certain
oil and gas properties (other than the Conroe Properties (as defined
in the Second Amendment)) that Borrower may contract for and acquire
(through a qualified intermediary) within 180 days of the
consummation of the sale of the Barnett Shale Assets utilizing the
proceeds from the disposition of the Barnett Shale Assets in excess
of those required to conclude the Conroe Transactions.

     1.3 Amendment to Definitions. The definitions of “Additional Permitted Revenue
Bonds”, “Agent”, “Applicable Margin”, “Commitment Fee Percentage”,
“Documentation Agent”, “Loan Papers”, “Obligations”, “Permitted
Investments”, “Permitted Subordinate Debt” and “Syndication Agent” contained in
Section 2.1 of the Credit Agreement shall be amended and restated to read in full as follows:

     “Additional Permitted Revenue Bonds” means, whether one
or more, Bond Issuer’s taxable industrial development revenue bonds
issued after the date hereof in connection with an Additional
Permitted Revenue Bond Transaction, which Additional Permitted
Revenue Bonds shall (a) be in a maximum aggregate principal amount
of not greater than $200,000,000, (b) bear interest at rates
identical to the interest rates set forth in this Agreement, (c)
have a maturity date that is two (2) years following the issuance
thereof,

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and (d) provide that Bond Purchaser’s obligation to make
advances of the proceeds thereof shall expire two (2) years from the
date of issuance of such Additional Permitted Revenue Bonds.
Subject to the terms and conditions set forth in this Agreement,
upon the date of any issuance and subsequent purchase by Bond
Purchaser of any Additional Permitted Revenue Bonds pursuant to an
Additional Permitted Revenue Bond Transaction, Bond Purchaser shall
be deemed to have sold to each Bank, and each Bank shall be deemed
to have unconditionally and irrevocably purchased from Bond
Purchaser, a participation in such Additional Permitted Revenue
Bonds equal to such Bank’s Commitment Percentage of any such
Additional Permitted Revenue Bonds.

     “Agent” means Administrative Agent, each Syndication
Agent, each Documentation Agent, Senior Managing Agent, Sole Lead
Arranger or Book Manager, and “Agents” means Administrative
Agent, each Syndication Agent, each Documentation Agent, Senior
Managing Agent, Sole Lead Arranger and Book Manager, collectively.

     “Applicable Margin” means, on any date, with respect to
each Type of Loan, an amount determined by reference to the ratio of
Outstanding Credit to the Total Commitment on such date in
accordance with the table below:

	 	 	 	 	 	 	 	 	 
	Ratio of Outstanding	 	Applicable	 	Applicable
	Credit to Total	 	Margin for	 	Margin for Base
	Commitment	 	Eurodollar Loans	 	Rate Loans
	< .50 to 1

	 	 	1.250	%	 	 	0	%
	> .50 to 1 and < .75 to 1

	 	 	1.500	%	 	 	0.250	%
	> .75 to 1 and < .90 to 1

	 	 	1.750	%	 	 	0.500	%
	> .90 to 1

	 	 	2.000	%	 	 	0.750	%

     “Commitment Fee Percentage” means, on any date, the
percentage determined by reference to the ratio of Outstanding
Credit to the Total Commitment on such date in accordance with the
table below:

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	Ratio of Outstanding Credit	 	Commitment Fee
	to Total Commitment	 	Percentage
	< .50 to 1

	 	 	.300	%
	> .50 to 1 and < .75 to 1

	 	 	.300	%
	> .75 to 1 and < .90 to 1

	 	 	.375	%
	> .90 to 1

	 	 	.375	%

     “Documentation Agent” means Union Bank of California,
N.A. or Bank of America, N.A. in its capacity as Documentation Agent
for Banks hereunder or any successor thereto, and “Documentation
Agents” means Union Bank of California, N.A. and Bank of
America, N.A., collectively, in their capacities as Documentation
Agents for Banks hereunder.

     “Loan Papers” means this Agreement, the First
Amendment, the Second Amendment, the Notes, each Facility Guaranty
which may now or hereafter be executed, each Parent Pledge Agreement
which may now or hereafter be executed, each Subsidiary Pledge
Agreement which may now or hereafter be executed, the Existing
Mortgages (as amended by the Amendments to Mortgages), all Mortgages
now or at any time hereafter delivered pursuant to Section
6.1, the Amendments to Mortgages, and all other certificates,
documents or instruments delivered in connection with this
Agreement, as the foregoing may be amended from time to time.

     “Obligations” means all present and future
indebtedness, obligations and liabilities, and all renewals and
extensions thereof, or any part thereof, of each Credit Party to
Administrative Agent or to any Bank or any Affiliate of any Bank
arising pursuant to (a) the Loan Papers, (b) pursuant to any Hedge
Agreement or Hedge Transaction entered into with any Bank or any
Affiliate of any Bank and (c) the Bond Documents and (d) each and
any of the following bank services provided by any Bank or any
Affiliate of any Bank to a Credit Party: (i) commercial credit
cards, (ii) stored value cards, (iii) treasury management services
(including, without limitation, controlled disbursement, automated
clearinghouse transactions, return items, overdrafts and interstate
depository network services), and all interest accrued on any of the
indebtedness, obligations and liabilities arising pursuant to
clauses (a), (b), (c) and/or (d) above in this definition, and
costs, expenses, and attorneys’ fees incurred in the enforcement or
collection of any of the indebtedness, obligations and liabilities
arising pursuant to clauses (a), (b), (c) and/or (d) above in this
definition, regardless of

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whether such indebtedness, obligations and liabilities are
direct, indirect, fixed, contingent, liquidated, unliquidated,
joint, several or joint and several.

     “Permitted Investments” means (a) readily marketable
direct obligations of the United States of America (or investments
in mutual funds or similar funds which invest solely in such
obligations), (b) demand or time deposit accounts, certificates of
deposit and money market deposits with maturities of one year or
less of any commercial bank operating in the United States having
capital and surplus in excess of $500,000,000, (c) commercial paper
of a domestic issuer if at the time of purchase such paper is rated
in one of the two highest ratings categories of Standard and Poor’s
Corporation or Moody’s Investors Service, (d) money market funds
that invest substantially all of their assets in securities of the
types described in clauses (a) through (c) above, (e) Investments by
any Credit Party in a Subsidiary of Parent that has provided a
Facility Guaranty and the Equity of which has been pledged to
Administrative Agent pursuant to a Parent Pledge Agreement or a
Subsidiary Pledge Agreement, and (f) other Investments;
provided, that, the aggregate amount of all other
Investments made pursuant to this clause (f) outstanding at any time
shall not exceed $10,000,000 (measured on a cost basis).

     “Permitted Subordinate Debt” means, collectively, (i)
Debt of Borrower resulting from a single issue of Borrower’s 7.5%
Senior Subordinated Notes Due 2013 in an aggregate outstanding
principal balance of not greater than $225,000,000, and which Debt
has been assumed by Parent as a co-obligor with Borrower pursuant to
that certain First Supplemental Indenture, dated as of December 29,
2003, (ii) Debt of Parent resulting from the issue of Parent’s 7.5%
Senior Subordinated Notes Due 2015 in an aggregate outstanding
principal amount of not greater than $300,000,000 and (iii) either
(A) subordinate unsecured Debt of up to $600,000,000 with an
interest rate no greater than 10.0% and a maturity date that is no
less than 7 years from the date such Debt is incurred or (B)
subordinate unsecured Debt of up to $600,000,000 with an interest
rate no greater than 9.0%, a maturity date that is no less than 5
years from the date such Debt is incurred and which is convertible
into Equity of Parent; provided that in each case such Debt issued
pursuant to this clause (iii) is issued on or prior to April 1,
2009.

     “Syndication Agent” means Wells Fargo Bank, N.A. or
Fortis Capital Corp., in its capacity as Syndication Agent for Banks
hereunder or any successor thereto, and “Syndication Agents”
means Wells Fargo Bank, N.A. and Fortis Capital Corp.,

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collectively, in their capacities as Syndication Agents for
Banks hereunder.

     1.4 Amendment to Definition of Additional Permitted Revenue Bond Transaction. Clause
(b) of the definition of “Additional Permitted Revenue Bond Transaction” contained in
Section 2.1 of the Credit Agreement shall be amended and restated to read in full as follows:

	 	(b)	 	such transaction is on substantially similar
terms, and pursuant to substantially similar Additional
Permitted Revenue Bond Documents, as the transaction evidenced
by the 2005 Bond Offering and the Bond Documents executed and
delivered in connection therewith, which terms shall provide
that any obligation of Bond Purchaser to purchase Additional
Permitted Revenue Bonds shall be limited to the amount of
Borrowings that are then available under and in accordance with
the terms of this Agreement;

     1.5 Amendment to Letter of Credit Sublimit Provision. Clause (b)(i)(B) of Section 3.1
of the Credit Agreement is hereby amended to delete the reference to “ten percent (10%)” set forth
therein and to insert a reference to “five percent (5%)” in lieu thereof.

     1.6 Amendment to Mandatory Prepayments Provision. Section 3.6 of the Credit Agreement
is hereby deleted and replaced in its entirety with the following:

     Section 3.6 Mandatory Prepayments. Upon the occurrence
of any Borrowing Base Deficiency, Borrower shall make the mandatory
prepayments of the Revolving Loan required by Section 5.4
hereof. Additionally, if at any time the Outstanding Credit is in
excess of the Total Commitment (as used in this Section 3.6,
a “deficiency”), Borrower shall immediately make a principal
payment on the Revolving Loan sufficient to cause the principal
balance of the Revolving Loan then outstanding to be equal to or
less than the Total Commitment then in effect. If a deficiency
cannot be eliminated pursuant to this Section 3.6 by
prepayment of the Revolving Loan (as a result of outstanding Letter
of Credit Exposure), Borrower shall also deposit cash with
Administrative Agent, to be held by Administrative Agent to secure
outstanding Letter of Credit Exposure in the manner contemplated by
Section 3.1(b). In addition to the foregoing, in the event
and on each occasion that any Net Proceeds are received by or on
behalf of any Credit Party in respect of any Prepayment Event, the
Borrower shall, immediately after such Net Proceeds are received by
any Credit Party, prepay the Obligations in an aggregate amount
equal to 100% of such Net Proceeds; provided, that
so long as the Borrower intends that the Net Proceeds from such
Prepayment Event (or a portion thereof), are to be applied

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within 180 days after such Prepayment Event, to acquire
Additional Exchange Properties to be used in the business of the
Borrower, and no Event of Default has occurred and is continuing,
then such immediate prepayment shall be limited to the outstanding
balance of the Conroe Loan, provided, further,
that to the extent any of such remaining Net Proceeds have
not been so applied by the end of such 180 day period, a prepayment
shall be required at such time in an amount equal to such Net
Proceeds that have not been so applied. There shall be no
corresponding reduction in the Borrowing Base or in the Total
Commitment as a result of a prepayment of the type described in the
immediately preceding sentence.

     1.7 Amendment to Asset Dispositions Provision. Section 10.5 of the Credit Agreement
is hereby deleted and replaced in its entirety with the following:

     Section 10.5 Asset Dispositions. Parent and Borrower
will not, nor will Parent and/or Borrower permit any other Credit
Party to, sell, lease, transfer, abandon or otherwise dispose of any
asset other than (a) the sale in the ordinary course of business of
Hydrocarbons produced from Borrower’s Mineral Interests, (b) the
sale, lease, transfer, abandonment, exchange or other disposition of
other assets, provided, that the aggregate value
(which, in the case of assets consisting of Mineral Interests, shall
be the Recognized Value of such Mineral Interests and in the case of
any exchange, shall be the net value or net Recognized Value
realized or resulting from such exchange) of all assets sold,
leased, transferred or disposed of pursuant to this clause (b) in
any period between Scheduled Redeterminations shall not exceed five
percent (5%) of the Borrowing Base then in effect (for purposes of
this clause (b) the Closing Date will be deemed to be a Scheduled
Redetermination), (c) the sale, lease, transfer, abandonment or
disposition of Unproved Reserves, (d) the sale of volumetric
production payments of carbon dioxide pursuant to the express terms
of the Genesis Transaction Documents and (e) the sale, assignment,
lease, license, transfer, exchange or other disposition by any
Credit Party of all or substantially all of its right, title and
interest in the Barnett Shale Assets; provided, that, with respect
to any disposition of the Barnett Shale Assets, Administrative Agent
shall have received certified copies of any and all documents
related to a like-kind exchange or reverse like-kind exchange
involving the Barnett Shale Assets under Section 1031 of the Code.
In no event will Parent, Borrower or any other Credit Party sell,
transfer or dispose of any Equity in any Restricted Subsidiary nor
will any Credit Party (other than Parent) issue or sell any Equity
or any option, warrant or other right to acquire such Equity or
security convertible into such Equity to any Person other than

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the Credit Party which is the direct parent of such issuer on
the Closing Date.

     1.8 Amendment to Agent Provision. Section 13.16 of the Credit Agreement is hereby
deleted and replaced in its entirety with the following:

     Section 13.16 Agents. None of the Banks identified in
this Agreement as a “Documentation Agent”, a “Syndication Agent”
and/or a “Senior Managing Agent shall have any right, power,
obligation, liability, responsibility or duty under this Agreement
other than those applicable to all Banks as such. Without limiting
the foregoing, none of such Documentation Agents, Syndication Agents
or Senior Managing Agent shall have or be deemed to have a fiduciary
relationship with any Bank. Each Bank hereby makes the same
acknowledgments with respect to such Documentation Agents,
Syndication Agents and Senior Managing Agent as it makes with
respect to Administrative Agent in Section 13.11.

     1.9 Amendment to Expenses Provision. Clause (a) of Section 15.3 of the Credit
Agreement is hereby amended by deleting the reference therein to “(other than any Documentation
Agent or Syndication Agent)” and inserting “(other than any Documentation Agent, Syndication Agent
or Senior Managing Agent)” in lieu thereof.

     1.10 Amendment to Amendments and Waiver Provision. Section 15.5 of the Credit
Agreement is hereby amended by adding the following language at the beginning of such Section:

“Subject to the provisions of Section 15.10(f),”.

     In addition, the word “Any” immediately following such added language is hereby deleted and
replaced with “any”.

     1.11 Replacement of Schedule 2.1. Schedule 2.1 to the Credit Agreement shall be
replaced in its entirety with Schedule 2.1 to this Second Amendment and Schedule
2.1 hereto shall be deemed to be attached as Schedule 2.1 to the Credit Agreement.

     1.12 Borrowing Base. Effective as of the Effective Date, the Borrowing Base shall be
reaffirmed at $1,000,000,000. Notwithstanding anything to the contrary contained in the Credit
Agreement, the Borrowing Base shall remain at $1,000,000,000 until the Scheduled Redetermination
scheduled for April 1, 2009, unless there is a Special Redetermination prior to such time. There
shall be no Scheduled Redetermination of the Borrowing Base on or about October 1, 2008. Borrower
and Banks agree that the Redetermination provided for in this Section 1.8 shall not be
construed or deemed to be a Special Determination for the purposes of Section 5.3 of the Credit
Agreement.

     1.13 Joinder. Each New Bank hereby joins in, becomes a party to, and agrees to comply
with and be bound by the terms and conditions of the Credit Agreement as a Bank thereunder and
under each and every other Loan Paper to which any Bank is required to be

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bound by the Credit Agreement, to the same extent as if such New Bank were an original
signatory thereto. Each New Bank hereby appoints and authorizes each Agent to take such action as
agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are
delegated to each such Agent by the terms thereof, together with such powers and discretion as are
reasonably incidental thereto.

Section 2. Eurodollar Loans. Notwithstanding anything to the contrary set forth in the
Credit Agreement, Borrower agrees that, during the period from the Effective Date through and
including the date that is thirty (30) days following the Effective Date, all Borrowings made
during such 30-day period shall be Base Rate Borrowings and the Banks shall be under no obligation
to make additional Eurodollar Loans, to Continue Eurodollar Loans or Convert Revolving Loans of any
other Type into Eurodollar Loans. Borrower shall, during such 30-day period, on the last day(s) of
the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such
Eurodollar Loans or Convert such Eurodollar Loans into another Type of Revolving Loan in accordance
with the terms of the Credit Agreement.

Section 3. Consent and Waiver. In reliance on the representations, warranties, covenants
and agreements contained in this Second Amendment, and subject to the satisfaction of the
conditions precedent set forth in Sections 3 and 5 hereof, Required Banks consent
to Borrower’s consummation of the Conroe Transactions, and waive compliance by Borrower and Parent
with each provision of the Credit Agreement and the other Loan Papers including, without
limitation, Section 10.8 of the Credit Agreement, to the extent, but only to the extent, that the
Conroe Transactions (or any term contained in the documents governing and evidencing the Conroe
Transactions) violate such provisions or result in a Default or Event of Default under the Credit
Agreement or the other Loan Papers.

Section 4. Conditions Precedent to Amendment, Consent and Waiver. The amendments contained
in Section 1 hereof and the Consent and Waiver contained in Section 3 hereof are
subject to the satisfaction of each of the following conditions precedent:

     4.1 Counterparts. The Administrative Agent shall have received counterparts hereof
duly executed by the Borrower, Parent, Required Banks, each New Bank and each Bank whose Commitment
is increasing hereunder (or, in the case of any party as to which an executed counterpart shall not
have been received, telegraphic, telex, or other written confirmation from such party of execution
of a counterpart hereof by such party).

     4.2 Fees. Borrower shall have paid to Administrative Agent any and all reasonable
fees payable to Administrative Agent or the New Banks pursuant to or in connection with this Second
Amendment in consideration for the agreements set forth herein.

     4.3 Notes. Each Bank that is a New Bank or whose Commitment is increasing hereunder
shall have received a duly completed and executed Note, payable to the order of such Bank.

     4.4 Legal Opinion. An opinion of Baker & Hostetler LLP, special counsel for the
Credit Parties, dated the Effective Date, favorably opining as to the enforceability of this Second

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Amendment and covering such other matters relating to the Credit Parties and the Loan Papers
as the Administrative Agent shall reasonably request.

     4.5 Organizational Documents and Certificates. The Administrative Agent shall have
received such documents and certificates as the Administrative Agent or its counsel may reasonably
request relating to the organization, existence and good standing in its jurisdiction of
organization of each of the Credit Parties, the authorization of the execution of this Second
Amendment and any other legal matters relating to the Borrower, the other Credit Parties, the
Credit Agreement or this Second Amendment, all in form and substance reasonably satisfactory to the
Administrative Agent and its counsel.

     4.6 Break Funding Payments. If, on the Effective Date, any Eurodollar Loans are
outstanding and if the Effective Date is not the last day of the Interest Period(s) in respect of
such Eurodollar Loans, the Borrower shall have paid any compensation required under Section 14.5 of
the Credit Agreement.

     4.7 No Material Adverse Effect. There shall not have occurred since December 31, 2007
any events that, individually or in the aggregate, have had a Material Adverse Effect.

     4.8 No Default. No Default or Event of Default shall have occurred which is
continuing.

     4.9 Other Documents. Administrative Agent shall have been provided with such
documents, instruments and agreements, and Parent and Borrower shall have taken such actions, in
each case as Administrative Agent may reasonably require in connection with this Second Amendment
and the transactions contemplated hereby.

Section 5. Conditions Precedent to Consent and Waiver. The consent and waiver contained in
Section 3 hereof are subject to Administrative Agent having received, prior to or
contemporaneously with the closing of the Conroe Transactions, from Borrower (a) a security
agreement duly executed by the Borrower, in form and substance reasonably satisfactory to
Administrative Agent, pursuant to which Borrower collaterally assigns and grants a security
interest in the Denbury Conroe Note to Administrative Agent, for its benefit and on behalf the
Banks and their Affiliates for whom Obligations may be owed from time to time, (b) the original
Denbury Conroe Note, duly endorsed by Borrower in favor of the Administrative Agent, (c) a true and
complete copy of the fully-executed Conroe Purchase Agreement, together with any disclosure
schedules delivered pursuant thereto, and (d) true and complete copies of the Exchange
Accommodation Titleholder documents relating to the Conroe Transactions.

Section 6. Representations and Warranties. To induce Banks and Administrative Agent to
enter into this Second Amendment, Parent and Borrower hereby jointly and severally represent and
warrant to Banks and Administrative Agent as follows:

     6.1 Reaffirm Existing Representations and Warranties. Each representation and
warranty of Parent and Borrower contained in the Credit Agreement and the other Loan Papers is true
and correct in all material respects on the date hereof and will be true and correct in all
material respects after giving effect to the amendments set forth in Section 1 hereof.

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     6.2 Due Authorization; No Conflict. The execution, delivery and performance by Parent
and Borrower of this Second Amendment are within Parent’s and Borrower’s corporate or
organizational powers, have been duly authorized by all necessary action, require no action by or
in respect of, or filing with, any governmental body, agency or official and do not violate or
constitute a default under any provision of applicable law or any Material Agreement binding upon
Parent, Borrower or their Subsidiaries or result in the creation or imposition of any Lien upon any
of the assets of Parent, Borrower or their Subsidiaries except Permitted Encumbrances.

     6.3 Validity and Enforceability. This Second Amendment constitutes the valid and
binding obligation of Parent and Borrower enforceable in accordance with its terms, except as (i)
the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditor’s rights generally, and (ii) the availability of equitable remedies may be limited by
equitable principles of general application.

Section 7. Representations and Warranties of New Banks. Each New Bank (a) represents and
warrants that (i) it has full power and authority, and has taken all action necessary, to execute
and deliver this Second Amendment, to consummate the transactions contemplated hereby and to become
a Bank under the Credit Agreement, (ii) from and after the Effective Date, it shall be bound by the
provisions of the Credit Agreement as a Bank thereunder, (iii) it has received a copy of the Credit
Agreement, together with copies of the most recent financial statements delivered pursuant to
Section 9.1 thereof, as applicable, and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this Second Amendment and to
become a Bank on the basis of which it has made such analysis and decision independently and
without reliance on the Administrative Agent or any other Bank, and (iv) attached hereto is any
U.S. Internal Revenue Service or other documentation required to be delivered by it pursuant to
Section 14.6 of the Credit Agreement, duly completed and executed by the New Bank; and (b) agrees
that (i) it will, independently and without reliance on the Administrative Agent or any other Bank,
and based on such documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the Loan Papers, and (ii) it
will perform in accordance with their terms all of the obligations which by the terms of the Loan
Papers are required to be performed by it as a Bank.

Section 8. Miscellaneous.

     8.1 Reaffirmation of Loan Papers. Any and all of the terms and provisions of the
Credit Agreement and the Loan Papers shall, except as amended and modified hereby, remain in full
force and effect. The amendments contemplated hereby shall not limit or impair any Liens securing
the Obligations, each of which are hereby ratified, affirmed and extended to secure the Obligations
as they may be increased pursuant hereto.

     8.2 Parties in Interest. All of the terms and provisions of this Second Amendment
shall bind and inure to the benefit of the parties hereto and their respective successors and
assigns.

     8.3 Legal Expenses. Borrower hereby agrees to pay on demand all reasonable fees and
expenses of counsel to Administrative Agent incurred by Administrative Agent in

12

 

connection with the preparation, negotiation and execution of this Second Amendment and all
related documents.

     8.4 Counterparts. This Second Amendment may be executed in counterparts, and all
parties need not execute the same counterpart; however, no party shall be bound by this Second
Amendment until Parent, Borrower, Required Banks, each New Bank and each Bank whose Commitment is
increasing hereunder have executed a counterpart. Facsimiles shall be effective as originals.

     8.5 Complete Agreement. THIS SECOND AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER
LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN OR AMONG THE PARTIES.

     8.6 Headings. The headings, captions and arrangements used in this Second Amendment
are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify or
modify the terms of this Second Amendment, nor affect the meaning thereof.

     IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed
by their respective authorized officers on the date and year first above written.

[Signature Pages to Follow]

13

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 
	 	PARENT:

DENBURY RESOURCES INC.,

a Delaware corporation

 	 
	 	By:  	/s/ Phil Rykhoek
 	 
	 	 	Phil Rykhoek, 	 
	 	 	Senior Vice President and

Chief Financial Officer 	 
	 
	 	BORROWER:

DENBURY ONSHORE, LLC,

a Delaware limited liability company

 	 
	 	By:  	/s/ Phil Rykhoek
 	 
	 	 	Phil Rykhoek, 	 
	 	 	Senior Vice President and

Chief Financial Officer 	 
	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

     Each of the undersigned (i) consent and agree to this Second Amendment, and (ii) agree that
the Loan Papers to which it is a party shall remain in full force and effect and shall continue to
be the legal, valid and binding obligation of such Person, enforceable against it in accordance
with its terms.

	 	 	 	 	 
	 	DENBURY MARINE, L.L.C.,

a Louisiana limited liability company

 	 
	 	By:  	/s/ Phil Rykhoek
 	 
	 	 	Phil Rykhoek, 	 
	 	 	Senior Vice President and

Chief Financial Officer 	 
	 
	 	DENBURY OPERATING COMPANY,

a Delaware corporation

 	 
	 	By:  	                      /s/ Phil Rykhoek
 	 
	 	 	Phil Rykhoek, 	 
	 	 	Senior Vice President and

Chief Financial Officer 	 
	 
	 	TUSCALOOSA ROYALTY FUND LLC,

a Mississippi limited liability company

 	 
	 	By:  	                 /s/ Phil Rykhoek
 	 
	 	 	Phil Rykhoek, 	 
	 	 	Senior Vice President and

Chief Financial Officer 	 
	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 
	 	DENBURY GATHERING & MARKETING, INC.,

a Delaware corporation

 	 
	 	By:  	/s/ Phil Rykhoek
 	 
	 	 	Phil Rykhoek, 	 
	 	 	Senior Vice President and

Chief Financial Officer 	 
	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 
	 	ADMINISTRATIVE AGENT/BANK:

JPMORGAN CHASE BANK, N.A.,

as Administrative Agent and a Bank

 	 
	 	By:  	                    /s/ Brian Orlando
 	 
	 	 	Brian Orlando 	 
	 	 	Vice President 	 
	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	FORTIS CAPITAL CORP.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ David Montgomery	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	David Montgomery	 	 
	 

	 	Title:
	 	Director	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Darrell Holley	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Darrell Holley	 	 
	 

	 	Title:
	 	Managing Director	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	CALYON NEW YORK BRANCH	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	COMERICA BANK	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Rebecca L. Wilson
	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Rebecca L. Wilson	 	 
	 

	 	Title:
	 	Assistant Vice President	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	UNION BANK OF CALIFORNIA, N.A.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Timothy Brendel	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Timothy Brendel	 	 
	 

	 	Title:
	 	Assistant Vice President	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Jarrod Bourgeois	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Jarrod Bourgeois	 	 
	 

	 	Title:
	 	Vice President	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	BANK OF AMERICA, N.A.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Stephen J. Hoffman	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Stephen J. Hoffman	 	 
	 

	 	Title:
	 	Managing Director	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	BANK OF SCOTLAND	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	COMPASS BANK	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Greg Determann	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Greg Determann	 	 
	 

	 	Title:
	 	Vice President	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	WELLS FARGO BANK, N.A.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Tom K. Martin
	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Tom K. Martin	 	 
	 

	 	Title:
	 	Vice President	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	THE BANK OF NOVA SCOTIA	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ David G. Mills	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	David G. Mills	 	 
	 

	 	Title:
	 	Director	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	KEYBANK NATIONAL ASSOCIATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Todd Coker
	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Todd Coker	 	 
	 

	 	Title:
	 	Assistant Vice President	 	 

[Signature Page]

 

 

SIGNATURE PAGE TO

SECOND AMENDMENT TO SIXTH AMENDED

AND RESTATED CREDIT AGREEMENT

	 	 	 	 	 	 	 
	 	 	BANKS:	 	 
	 
	 	 	 	 	 	 
	 	 	U.S. BANK NATIONAL ASSOCIATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Mark E. Thompson	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Mark E. Thompson	 	 
	 

	 	Title:
	 	Senior Vice President	 	 

[Signature Page]

 

 

SCHEDULE 2.1

FINANCIAL INSTITUTIONS

	 	 	 	 	 	 	 	 	 
	 	 	Commitment	 	Commitment
	Banks	 	Amount	 	Percentage
	JPMorgan Chase Bank, N.A.
	 	$	100,000,000.00	 	 	 	13.333333	%
	Fortis Capital Corp.
	 	$	100,000,000.00	 	 	 	13.333333	%
	Bank of America, N.A.
	 	$	100,000,000.00	 	 	 	13.333333	%
	Wells Fargo Bank, N.A.
	 	$	100,000,000.00	 	 	 	13.333333	%
	Union Bank of California, N.A.
	 	$	75,000,000.00	 	 	 	10.000000	%
	Comerica Bank
	 	$	50,000,000.00	 	 	 	6.666667	%
	Keybank National Association
	 	$	50,000,000.00	 	 	 	6.666667	%
	U.S. Bank National Association
	 	$	40,000,000.00	 	 	 	5.333333	%
	Calyon New York Branch
	 	$	35,000,000.00	 	 	 	4.666667	%
	Bank of Scotland
	 	$	35,000,000.00	 	 	 	4.666667	%
	Compass Bank
	 	$	35,000,000.00	 	 	 	4.666667	%
	The Bank of Nova Scotia
	 	$	30,000,000.00	 	 	 	4.000000	%
	Totals:
	 	$	750,000,000.00	 	 	 	100.000000	%

 

 

SCHEDULE 2.1

FINANCIAL INSTITUTIONS

	 	 	 	 	 	 	 
	Banks	 	Domestic Lending Office	 	Eurodollar Lending Office	 	Address for Notice
	JPMorgan Chase Bank, NA

	 	10 S. Dearborn 19th Floor
	 	10 S. Dearborn 19th Floor
	 	2200 Ross Avenue, 3rd Floor
	 

	 	Mail Code — IL1-0010
	 	Mail Code — IL1-0010
	 	Mail Code: TX1-2911
	 

	 	Chicago, Illinois 60603
	 	Chicago, Illinois 60603
	 	Dallas, Texas 75201
	 

	 	Attn : Cely T. Navarro
	 	Attn : Cely T. Navarro
	 	Attn: Wm. Mark Cranmer
	 

	 	Tel. No. (312) 385-7058
	 	Tel. No. (312) 385-7058
	 	Tel. No. (214) 965-3225
	 

	 	Fax No. (312) 385-7107
	 	Fax No. (312) 385-7107
	 	Fax No. (214) 965-3280
	 
	 	 	 	 	 	 
	Fortis Capital Corp.

	 	Three Stamford Plaza
	 	Three Stamford Plaza
	 	15455 North Dallas Parkway
	 

	 	301 Tressa Blvd.
	 	301 Tressa Blvd.
	 	Suite 1400
	 

	 	Stamford, Connecticut 06901
	 	Stamford, Connecticut 06901
	 	Addison, Texas 75001
	 
	 	 	 	 	 	 
	Bank of America, N.A.

	 	901 Main Street, 67th Floor
	 	901 Main Street, 67th Floor
	 	901 Main Street, 67th Floor
	 

	 	Dallas, Texas 75202
	 	Dallas, Texas 75202
	 	Dallas, Texas 75202
	 
	 	 	 	 	 	 
	Wells Fargo Bank, N.A.

	 	1740 Broadway
	 	1740 Broadway
	 	1445 Ross Avenue, Suite 2360
	 

	 	MAC# C7300-034
	 	MAC# C7300-034
	 	MAC# T5303-233
	 

	 	Denver, Colorado 80274
	 	Denver, Colorado 80274
	 	Dallas, Texas 75202
	 
	 	 	 	 	 	 
	Union Bank of California, N.A.

	 	1980 Saturn Street, V03-251
	 	1980 Saturn Street, V03-251
	 	500 North Akard, Suite 4200
	 

	 	Monterey Park, California 91755
	 	Monterey Park, California 91755
	 	Dallas, Texas 75201
	 
	Comerica Bank

	 	39200 West 6 Mile Road
	 	39200 West 6 Mile Road
	 	Comerica Bank Tower
	 

	 	Lavonia, Michigan 48152
	 	Lavonia, Michigan 48152
	 	1717 Main Street, 4th Floor, MC6593
	 

	 	 	 	 	 	Dallas, Texas 75201
	 
	 	 	 	 	 	 
	Keybank National Association
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	U.S. Bank National Association
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Calyon New York Branch

	 	1301 Avenue of the Americas
	 	1301 Avenue of the Americas
	 	1000 Louisiana, Suite 5360
	 

	 	New York, New York 10019
	 	New York, New York 10019
	 	Houston, Texas 77002
	 
	 	 	 	 	 	 
	Bank of Scotland

	 	565 Fifth Avenue, 5th Floor
	 	565 Fifth Avenue, 5th Floor
	 	565 Fifth Avenue, 5th Floor
	 

	 	New York, New York 10017
	 	New York, New York 10017
	 	New York, New York 10017
	 
	 	 	 	 	 	 
	Compass Bank

	 	24 Greenway Plaza, Suite 1400A
	 	24 Greenway Plaza, Suite 1400A
	 	24 Greenway Plaza, Suite 1400A
Houston, Texas 77046
	 

	 	Houston, Texas 77046
	 	Houston, Texas 77046
	 	 
	 
	 	 	 	 	 	 
	The Bank of Nova Scotia
	 	 	 	 	 	 

Administrative Agent — Address:

2200 Ross Avenue, 3rd Floor

Mail Code: TX1-2911

Dallas, Texas 75201

Tel No. (214) 965-3225

Fax No. (214) 965-3280exv10wxby

Exhibit 10 B

Option Agreement

By and Between

TEXCAL ENERGY SOUTH TEXAS, L.P.

(“Optionor”)

and

DENBURY ONSHORE, LLC

(“Optionee”)

dated

November 1, 2006

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	ARTICLE 1	 	DEFINITIONS
	 	 	1	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 2	 	OPTION TO PURCHASE
	 	 	13	 
	 	 	 	 	 
	 	 	 	 
	 	2.1	 	 	Option to Purchase
	 	 	13	 
	 	2.2	 	 	Term of Option
	 	 	14	 
	 	2.3	 	 	Initial Term Installments
	 	 	14	 
	 	2.4	 	 	Exercise of Option to Purchase
	 	 	14	 
	 	2.5	 	 	Payment for Assets
	 	 	14	 
	 	2.6	 	 	Closing
	 	 	16	 
	 	2.7	 	 	Development Plan and Capital Expenditure Commitment
	 	 	16	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 3	 	OPERATIONS
	 	 	17	 
	 	 	 	 	 
	 	 	 	 
	 	3.1	 	 	Operations of Hastings Field Prior to Exercise of Option
	 	 	17	 
	 	3.2	 	 	Operations After Option Exercise
	 	 	18	 
	 	3.3	 	 	Simultaneous Use of Surface
	 	 	18	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 4	 	OPTIONOR’S REPRESENTATIONS AND WARRANTIES
	 	 	19	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 5	 	OPTIONEE’S REPRESENTATIONS AND WARRANTIES
	 	 	21	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 6	 	ACCESS TO INFORMATION AND INSPECTIONS
	 	 	22	 
	 	 	 	 	 
	 	 	 	 
	 	6.1	 	 	Title Files
	 	 	22	 
	 	6.2	 	 	Other Files
	 	 	22	 
	 	6.3	 	 	Confidentiality Agreement
	 	 	23	 
	 	6.4	 	 	Inspections
	 	 	23	 
	 	6.5	 	 	No Warranty or Representation on Optionor’s Information
	 	 	24	 
	 	6.6	 	 	Amendments to Exhibits
	 	 	24	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 7	 	ENVIRONMENTAL MATTERS AND ADJUSTMENTS
	 	 	24	 
	 	 	 	 	 
	 	 	 	 
	 	7.1	 	 	Investigation
	 	 	24	 
	 	7.2	 	 	Waiver of Defects
	 	 	25	 
	 	7.3	 	 	Remedy
	 	 	25	 
	 	7.4	 	 	Default Basket
	 	 	25	 
	 	7.5	 	 	Closing
	 	 	26	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 8	 	TITLE DEFECTS AND ADJUSTMENTS
	 	 	26	 
	 	 	 	 	 
	 	 	 	 
	 	8.1	 	 	Existing Title; Definitions
	 	 	26	 

-i-

 

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	 	8.2	 	 	Notice of Title Defects
	 	 	29	 
	 	8.3	 	 	Title Defect Adjustment
	 	 	30	 
	 	8.4	 	 	Environmental Defect and Title Defect Values
	 	 	31	 
	 	8.5	 	 	Title Warranty
	 	 	32	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 9	 	PREFERENTIAL PURCHASE RIGHTS AND CONSENTS OF THIRD PARTIES
	 	 	33	 
	 	 	 	 	 
	 	 	 	 
	 	9.1	 	 	Actions and Consents
	 	 	33	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 10	 	COVENANTS OF OPTIONOR AND OPTIONEE
	 	 	34	 
	 	 	 	 	 
	 	 	 	 
	 	10.1	 	 	Covenants of Optionor Pending Closing
	 	 	34	 
	 	10.2	 	 	Limitations on Optionor’s Covenants Pending Closing
	 	 	35	 
	 	10.3	 	 	Covenents of Optionee Following Exercise of Option
	 	 	36	 
	 	10.4	 	 	Hastings Field Call on CO2
	 	 	36	 
	 	10.5	 	 	Ownership of CO2
	 	 	36	 
	 	10.6	 	 	Environmental Liabilities Related to Events and Activities Occuring
Prior to October 1, 2004
	 	 	36	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 11	 	CLOSING CONDITIONS
	 	 	37	 
	 	 	 	 	 
	 	 	 	 
	 	11.1	 	 	Optionor’s Closing Conditions
	 	 	37	 
	 	11.2	 	 	Optionee’s Closing Conditions
	 	 	37	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 12	 	CLOSING
	 	 	38	 
	 	 	 	 	 
	 	 	 	 
	 	12.1	 	 	Closing
	 	 	38	 
	 	12.2	 	 	Optionor’s Closing Obligations
	 	 	38	 
	 	12.3	 	 	Optionee’s Closing Obligations
	 	 	39	 
	 	12.4	 	 	Joint Closing Obligations
	 	 	39	 
	 	12.5	 	 	Final Settlement/Purchase Price Adjustments
	 	 	39	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 13	 	LIMITATIONS ON WARRANTIES AND REMEDIES
	 	 	41	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 14	 	CASUALTY LOSS AND CONDEMNATION
	 	 	41	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 15	 	DEFAULT AND REMEDIES
	 	 	42	 
	 
	 	15.1	 	 	Optionor’s Remedies
	 	 	42	 
	 	15.2	 	 	Optionee’s Remedies
	 	 	42	 
	 	15.3	 	 	Effect of Termination
	 	 	42	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 16	 	ASSUMPTION AND INDEMNITY
	 	 	42	 
	 
	 	16.1	 	 	Assumed Obligations; Pre-Closing Liabilities
	 	 	42	 
	 	16.2	 	 	Optionee’s Indemnity
	 	 	43	 

ii

 

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	 	16.3	 	 	Optionor’s Indemnity
	 	 	43	 
	 	16.4	 	 	Negligence
	 	 	44	 
	 	16.5	 	 	Broker or Finder’s Fee
	 	 	44	 
	 	16.6	 	 	Threshold and Maximum Amounts
	 	 	44	 
	 	16.7	 	 	Claim Procedures
	 	 	44	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 17	 	GAS IMBALANCES
	 	 	45	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 18	 	PREFERENTIAL RIGHT TO PURCHASE AND AREA OF MUTUAL INTEREST PROVISION
	 	 	46	 
	 	 	 	 	 
	 	 	 	 
	 	18.1	 	 	Preferential Right to Purchase
	 	 	46	 
	 	18.2	 	 	Area of Mutual Interest Provision
	 	 	47	 
	 	 	 	 	 
	 	 	 	 
	ARTICLE 19	 	MISCELLANEOUS
	 	 	49	 
	 	 	 	 	 
	 	 	 	 
	 	19.1	 	 	Receivables and other Excluded Funds
	 	 	49	 
	 	19.2	 	 	Public Announcements
	 	 	49	 
	 	19.3	 	 	Filing and Recording of Assignments, etc
	 	 	50	 
	 	19.4	 	 	Further Assurances and Records
	 	 	50	 
	 	19.5	 	 	Notices
	 	 	51	 
	 	19.6	 	 	Incidental Expenses
	 	 	52	 
	 	19.7	 	 	Waiver
	 	 	52	 
	 	19.8	 	 	Binding Effect; Assignment
	 	 	53	 
	 	19.9	 	 	Taxes
	 	 	53	 
	 	19.10	 	 	Audits
	 	 	54	 
	 	19.11	 	 	Governing Law
	 	 	54	 
	 	19.12	 	 	Mediation and Arbitration
	 	 	54	 
	 	19.13	 	 	Entire Agreement
	 	 	54	 
	 	19.14	 	 	Severability
	 	 	54	 
	 	19.15	 	 	Exhibits
	 	 	55	 
	 	19.16	 	 	Survival
	 	 	55	 
	 	19.17	 	 	Subsequent Adjustments
	 	 	55	 
	 	19.18	 	 	Counterparts
	 	 	55	 
	 	19.19	 	 	Subrogation
	 	 	55	 
	 	19.20	 	 	Suspended Monies
	 	 	56	 
	 	19.21	 	 	Optionee as Operator
	 	 	56	 

iii

 

EXHIBITS

	 	 	 
	Exhibit A-1

	 	West Hastings Unit Leases
	 
	 	 
	Exhibit A-2

	 	East Hastings Leases
	 
	 	 
	Exhibit A-3

	 	Mineral Deeds, Royalty Deeds in West Hastings Unit
	 
	 	 
	Exhibit A-4

	 	Mineral Deeds, Royalty Deeds in East Hastings Field
	 
	 	 
	Exhibit A-5

	 	Surface Leases and Surface Deeds in West Hastings Unit
	 
	 	 
	Exhibit A-6

	 	Surface Leases and Surface Deeds in East Hastings Field
	 
	 	 
	Exhibit A-7

	 	Easements and Rights-of-Way in West Hastings Unit
	 
	 	 
	Exhibit A-8

	 	Easements and Rights-of-Way in East Hastings Field
	 
	 	 
	Exhibit B-1

	 	West Hastings Unit Wells
	 
	 	 
	Exhibit B-2

	 	East Hastings Field Wells
	 
	 	 
	Exhibit C

	 	Lease Ownership; Ownership and Unit Participation of Tracts in
West Hastings Unit
	 
	 	 
	Exhibit D-1

	 	West Hastings Unit and East Hastings Field Map
	 
	 	 
	Exhibit E

	 	West Hastings Unit Operating Agreement
	 
	 	 
	Exhibit F-1

	 	Contracts and Agreements for West Hastings Unit
	 
	 	 
	Exhibit F-2

	 	Contracts and Agreements for East Hastings Field
	 
	 	 
	Exhibit G

	 	Option Exercise Notice
	 
	 	 
	Exhibit H

	 	Claims and Suits
	 
	 	 
	Exhibit I

	 	Assignment and Conveyance
	 
	 	 
	Exhibit J

	 	Assignment of Volumetric Production Payment
	 
	 	 
	Exhibit K

	 	Waivers, Consents, Rights of First Refusal and Preferential
Rights to Purchase
	 
	 	 
	Exhibit L

	 	Gas Imbalances
	 
	 	 
	Exhibit M

	 	Non-foreign Affidavit

iv

 

	 	 	 
	Exhibit N

	 	Reporting and Accounting Memorandum
	 
	 	 
	Exhibit O

	 	Area of Mutual Interest Plat
	 
	 	 
	Exhibit O-1

	 	Area of Mutual Interest Lands
	 
	 	 
	Exhibit P

	 	Dispute Resolution Procedure
	 
	 	 
	Exhibit Q

	 	Joint Operating Agreement

v

 

OPTION AGREEMENT

          This Option Agreement (“Agreement”), dated as of November 1, 2006, is by and between TexCal
Energy South Texas, L.P. whose address is 1021 Main Street, Suite 2500, Houston, Texas 77002
(“Optionor”), and Denbury Onshore, LLC, whose address is 5100 Tennyson Parkway, Suite 1200, Plano,
Texas 75024 (“Optionee”). Optionor and Optionee are sometimes together referred to herein as
“Parties”.

R E C I T A L S

          WHEREAS, Optionor owns certain oil and gas leasehold interests and related assets more fully
described on the exhibits hereto; and

          WHEREAS, Optionor desires to grant, and Optionee desires to acquire, the right and option to
purchase these interests and related assets on the terms and conditions hereinafter provided;

          NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth,
Optionor and Optionee hereby agree as follows:

ARTICLE 1. — DEFINITIONS

     1.1. “Acquiring Party” has the meaning specified in Section 18.2(b).

     1.2. “Agreement” shall mean this Option Agreement between Optionor and Optionee.

     1.3. “Agreement Effective Time” shall mean 7:00 a.m., Central Standard Time, on November 1,
2006.

     1.4. “Area of Mutual Interest” has the meaning specified in Section 18.2(a)

     1.5. “Asset Operating Expense” has the meaning specified in Section 2.5(b)(i)(3).

     1.6. “Asset Payout Amount” has the meaning specified in Section 1.26(d)(4).

     1.7. “Assets” shall mean the following described assets and properties (except to the extent
constituting Excluded Assets):

     (a) the Leases;

     (b) the Personal Property and Incidental Rights;

     (c) the Inventory Hydrocarbons;

1

 

     (d) the West Hastings Unit; and

     (e) the East Hastings Field.

     1.8. “Assumed Obligations” shall mean with respect to the Assets:

     (a) all Environmental Obligations or Liabilities (i) related to, or arising from, events first
occurring after the Exercise Effective Time, and (ii) related to, or arising from, events first
occurring or in existence prior to October 1, 2004, to the extent and as set out in Section 10.6;

     (b) all obligations with respect to gas production, sales or, subject to Article 17,
processing imbalances with third parties;

     (c) all liabilities, duties, and obligations that arise out of the ownership, operation or use
of the Assets after the Exercise Effective Time, other than Environmental Obligations or
Liabilities, including, but not limited to, all liabilities, duties, and obligations, express or
implied, imposed upon Optionor herein under the provisions of the Leases and any and all
assignments, subleases, farmout agreements, assignments of overriding royalty, joint operating
agreements, easements, rights-of-way, and all other contracts, agreements and instruments affecting
the Leases, or the premises covered thereby, whether recorded or unrecorded, and under all
applicable laws, rules, regulations, orders and ordinances, excluding the claims and suits set
forth in Exhibit “H” and any claims or suits identified in the Option Exercise Notice which relate
to liabilities incurred after the Agreement Effective Time and prior to Closing.

     1.9. “Capital Costs” has the meaning specified in the definition of Excluded Assets.

     1.10. “Cash Payment” has the meaning specified in Section 2.5.

     1.11.
“Casualty Loss” has the meaning specified in Article 14.

     1.12. “Claims” has the meaning specified in Sections 16.2.

     1.13. “Closing” has the meaning specified in Section 12.1.

     1.14. “Closing Date” has the meaning specified in Section 12.1

     1.15. “Conditions Precedent” has the meaning specified in Section 2.1.

     1.16. “Consents” has the meaning specified in Section 9.1(b)

     1.17. “Cure Period” has the meaning specified in Section 8.3(a)

     1.18.
“D&M” has the meaning specified in Section 2.5(b)

     1.19. “D&M Report” has the meaning specified in Section 2.5(b)

2

 

     1.20. “Defensible Title”, subject to and except for the Permitted Encumbrances has the meaning
specified in Section 8.1(a).

     1.21. “Designated Interest” shall mean: (i) as to the West Hastings Unit, a working interest
of 89.33682% and a net revenue interest of 78.94105%; (ii) as to the East Hastings Field, a working
interest of 100% and a net revenue interest of 87.5%; (iii) as to a Lease in the West Hastings
Unit, the working interest and net revenue interest set forth for such Lease in Exhibit “C”; (iv)
as to a Lease in the East Hastings Field, the working interest and net revenue interest set forth
for such Lease in Exhibit “C”; as to a well in the West Hastings Unit, the working interest and net
revenue interest set forth for such well in Exhibit “B-1”; as to a well in the East Hastings Field,
the working interest and net revenue interest set forth for such well in Exhibit “B-2”; and, as to
any other Asset, the ownership interest of Optionor in such Asset to be conveyed to Optionee, less
and except the Optionor’s reserved overriding royalty interest as set forth in Section 1.27(a). If
following the Agreement Effective Time and prior to the Option Exercise Date Optionor acquires
additional interests in the Hastings Field, the Designated Interests shall be adjusted to reflect
such acquisitions(s). The Designated Interests for all of the above Assets are referred to
collectively as the “Designated Interests.”

     1.22. “Development Plan” has the meaning set forth in Section 2.7.

     1.23. “Environmental Defect Notice Date” has the meaning set forth in Section 7.1.

     1.24. “Environmental or Title Defect Value” has the meaning set forth in Section 8.4.

     1.25. “East Hastings Field” shall refer to those lands falling within the geographic outline
depicted on the plat in Exhibit
“D-1”.

     1.26. “Environmental Defect” shall mean: (i) a condition or activity with respect to an Asset
that is in material violation, or reasonably likely to materially violate, any federal, state or
local statute, or any rule, order, ruling or regulation entered, issued or made by any court,
administrative agency, or other governmental body or entity, federal, state, or local, or any
arbitrator (“Environmental Law”), or surface or mineral lease obligation relating to natural
resources, conservation, the environment, or the emission, release, storage, treatment, disposal,
transportation, handling or management of industrial or solid waste, hazardous waste, hazardous or
toxic substances, chemicals or pollutants, petroleum, including crude oil, natural gas, natural gas
liquids, or liquefied natural gas, and any wastes associated with the exploration and production of
oil and gas (“Regulated Substances”); or (ii) the presence of Regulated Substances in the soil,
groundwater, or surface water in, on, at or under an Asset in any manner or quantity which is
required to be remediated by Environmental Law or by any applicable action or guidance levels or
other standards published by any governmental agency with jurisdiction over the Assets, or by a
surface or mineral lease obligation. Optionee and Optionor agree that for a condition to be in
violation of any statute or regulation it

3

 

shall not be necessary that Optionor shall be under notice of violation from a federal or
state regulatory agency or lessor.

          The Parties agree and acknowledge that Optionee will be provided an opportunity to examine the
Assets for potential naturally occurring radioactive materials (“NORM”), and any potential
obligations with respect to NORM and that the presence of NORM on any of the Assets, except with
respect to inactive wells, facilities, pipelines and other equipment, may not be raised by Optionee
as the subject of an Environmental Defect.

     1.27. “Environmental Law” shall be as defined in Section 1.26 above.

     1.28. “Environmental Obligations or Liabilities” shall mean all liabilities, obligations,
expenses (including, without limitation, all attorneys’ fees), fines, penalties, costs, claims,
suits or damages (including natural resource damages) of any nature, associated with the Assets,
and attributable to or resulting from: (i) pollution or contamination of soil, groundwater or air,
on, in or under the Assets or lands in the vicinity thereof, and any other contamination of or
adverse effect upon the environment, (ii) underground injection activities and waste disposal,
(iii) clean-up responses, remedial, control or compliance costs, including the required cleanup or
remediation of spills, pits, lakes, ponds, or lagoons, including any subsurface or surface
pollution caused by such spills, pits, lakes, ponds, or lagoons, (iv) noncompliance with applicable
land use, permitting, surface disturbance, licensing or notification requirements, including those
in a surface or mineral lease, whether an express or implied obligation, (v) all obligations,
whether pursuant to an Environmental Law or a surface or mineral lease obligation, whether express
or implied, for plugging, replugging and abandoning any wells, the restoration of any well sites,
tank battery sites and gas plant sites, and any other surface locations or sites, the proper
removal, disposal and abandonment of any wastes or fixtures, and the proper capping and burying of
all flow lines, which are included in the Assets; (vi) violation of any federal, state or local
Environmental Law or land use law, or surface or mineral lease obligation, whether an express or
implied obligation, and (vii) any other violation which could qualify as an Environmental Defect.
Notwithstanding anything to the contrary set forth in, or implied by, this Section 1.28,
“Environmental Obligations or Liabilities” does not include (i) personal injury or wrongful death
occurring prior to the Exercise Effective Time or (ii) offsite waste disposal occurring prior to
the Exercise Effective Time.

     1.29. “Excluded Assets” shall mean the following:

     (a) an overriding royalty interest from the Exercise Effective Time in production from the
Assets equal to an undivided two percent of eight-eighths (2% of 8/8ths), which overriding royalty
interest shall be reserved by Optionor. Said reserved overriding royalty interest shall be free of
(i) any and all costs and expenses associated with the exploration, production or operation of
wells producing from the Assets, and (ii) post production costs associated with removing CO2 from
the production stream, and shall be paid in the same manner as provided for with respect to
lessors. In the event Optionor exercises its option to receive the Reversionary Interest set forth
in Section 1.29 (d) 

4

 

below, then Optionor’s Reversionary Interest will bear its proportionate share of the
reserved overriding royalty interest.

     (b) all interests in the surface estate in Hastings Field Lands, including but not limited to
those described in Exhibits “A-5” and “A-6”;

     (c) all of Optionor’s leasehold, fee mineral and royalty interests in the Hastings Field, as
such interests relate to horizons above the top of, and below the base of, the Frio Zone.

     (d) a reversionary working interest of an undivided twenty-five percent (25%) in and to the
Assets assigned hereunder, (the “Reversionary Interest”), at such time as the Optionee has achieved
Payout. “Payout” shall mean that point in time when Optionee has received from Net Revenues from
the Assets an amount equal to (i) one hundred percent (100%) of the sum of Operating Costs plus the
Asset Payout Amount plus (ii) one hundred thirty percent (130%) of all Capital Costs expended to
conduct enhanced recovery operations on the Assets. It being the intent of the Parties that the
Optionor shall convey to Optionee at Closing the Designated Interest (less Optionor’s reserved
overriding royalty interest) as to the Assets, subject to the Optionor’s Reversionary Interests.
Optionor’s Reversionary Interests as set forth above will be proportionately adjusted to correspond
with Optionee’s actual working interest and/or net revenue interest, respectively, acquired by
virtue of this Agreement. Subject to Optionor’s post Payout election as provided in Section
1.26(d)(11) below, Optionor’s Reversionary Interests shall automatically revert to the Optionor
once Payout has been achieved, without any further action on the part of the Optionor. Optionor’s
Reversionary Interests will be effective on the first day of the month next succeeding the point in
time in which Payout has occurred. Within thirty (30) days after Payout has occurred, and subject
to Optionor’s right to reject reversion, Optionee shall provide Optionor with an Assignment of the
Optionor’s Reversionary Interests, which will be free and clear of all liens and encumbrances of
any kind and shall be substantially in the form of the Assignment and Conveyance attached hereto as
Exhibit “I”.

Calculation of Payout and Optionor’s Reversionary Interests shall be subject to the following
additional terms and provisions:

     (1) As used herein, “Net Revenues” shall mean with respect to the Assets, gross
revenues from the Designated Interest share of production from the Assets from and after
the Exercise Effective Time less any applicable federal, state and local taxes (including
excise, production, severance, sales, and ad valorem taxes, but excluding any income based
taxes) and less payments from gross revenues attributable to Optionor’s reserved overriding
royalty interest, and any other overriding royalty interests, production payments, net
profit interest and similar interests or burdens of record against the Assets existing as of
the Agreement Effective Time and paid after the Exercise Effective Time.

5

 

     (2) As used herein, “Operating Costs” shall mean with respect to the Assets from and
after the Exercise Effective Time, the Designated Interest share of (i) operating costs and
expenses (including administrative overhead charges) for the operation of wells, facilities,
equipment and flowlines located on and/or used in conjunction with the Assets, actually
incurred and expended by Optionee and/or the Operator and charged to the joint account by
Optionee and/or the Operator, as set forth in the Accounting Procedure of the West Hastings
Unit Operating Agreement or the applicable operating agreement for any East Hastings Field
wells (in the event there is no applicable operating agreement, the Accounting Procedure of
the West Hastings Unit Operating Agreement shall be utilized) and (ii) CO2 Costs.

     (3) As used herein, “Capital Costs” shall mean with respect to the Assets, the
Designated Interest share of all capital costs actually incurred and expended by the
Operator for enhanced oil recovery operations and charged to the joint account by Optionee
and/or the Operator from and after the Exercise Effective Date, including for the
construction of facilities, field development, conversion of wells for injection purposes,
drilling, completion, reworking, recompletion of wells, construction of flowlines located on
and/or used in conjunction with such Assets, and such other costs as are incurred under the
Development Plan and credited towards the Required Cumulative Capital Expenditure Amounts
provided in Section 2.7(a) below.

     (4) As used herein, “Asset Payout Amount” shall mean the sum of the predicted “annual
future net revenue” (as such terms are currently used by D&M in the reserve report prepared
for Optionor dated July 31, 2006) for the first four years following the Exercise Effective
Time, as shown in the D&M Report used to determine the Purchase Price for the Assets.

     (5) As used herein, “CO2 Costs” shall mean the direct cost of acquiring (commodity
cost) and delivering (transportation cost) CO2 to the Assets.

     (i) transportation costs (before and after Payout) shall be (x) the actual
costs on a per mcf basis charged by unaffiliated third party transporters, or (y) in
the event Optionee owns the pipeline transporting CO2 to the Assets, a per mcf fee
not to exceed the amount necessary to amortize the actual cost of constructing and
operating that portion of the line on which the CO2 is transported to the Assets,
based on a capacity throughput of 400 MMcf/d over a twenty (20) year period, at a
discount rate of six hundred fifty basis points over the one year LIBOR (if the one
year LIBOR is five and one-half percent (5.5%) the discount rate used to amortize
the pipeline would be 12%), but in no event shall the discount rate be less than
12%.

     (ii) commodity costs (before and after Payout) shall be the lower of (x) the
average direct cost of CO2 in Optionee’s or third party’s pipeline from which CO2 is
acquired for the Assets and (y) the lowest price

6

 

charged for CO2 by Optionee in sales to third party users or consumers in
Texas. In no event shall the average cost per mcf of CO2 delivered to the Assets
exceed one percent (1%) of the average NYMEX oil closing price per barrel during the
month of delivery; provided the foregoing cap on CO2 prices shall never be less than
$.30 per mcf. A “mcf” of CO2 shall be 1000 cubic feet of CO2 at standard conditions.
Optionee shall deliver CO2 to the Assets at a pipeline pressure of not less than
1100 psi.

     (iii) Any CO2 charged to the Assets and used by Optionee for any purpose other
than with respect to the development of the Assets shall be credited as Net Revenues
at the same cost that the CO2 is charged as provided above.

     (6) Costs associated with building, owning, operating and maintaining CO2 pipelines
used by Optionee to deliver CO2 to the Hastings Field shall not be considered Capital Costs
or Operating Costs for purposes of determining Payout. Nor shall such costs be considered
in computing Required Cumulative Capital Expenditure Amounts. Nothwithstanding the
foregoing, actual transportation costs incurred in transporting CO2 to the Hastings Field,
as set forth in Section 1.29(d)(5)(i), shall be considered for purposes of determining
Payout.

     (7) Optionor’s Reversionary Interests in the Assets, after it reverts, shall be subject
to the terms and provisions of the West Hastings Unit Operating Agreement and/or any other
applicable agreements. After such Reversionary Interests revert to Optionor, Optionor shall
be liable for and shall assume and pay its proportionate working interest share of all
subsequent costs associated with its working interest attributable to the reverted and
reassigned interests, including capital costs.

     (8) If for any reason Optionor desires not to accept the Reversionary Interests
provided for in this Section 1.29 (d), and the obligations and liabilities associated with
such Reversionary Interests, Optionor may decline to accept such Interests by notifying
Optionee in writing on or before thirty (30) days after Optionor is notified, in writing,
of the effective date of reversion. After receipt of such a notice, Optionor’s right to the
Reversionary Interests will terminate effective as of the date of the reversion.

     (9) Prior to Payout, Optionee shall provide to Optionor (i) on a monthly basis
operating reports covering revenues, operating expenses, capital expenditures, production
and injection volumes and product prices received; and (ii) a quarterly statement (with all
supporting documentation) identifying the status of Payout; and (iii) Optionee shall further
provide Optionor with quarterly reports including historical and prospective technical
information relating to the Assets including, but not limited to injection and production
data on a field and well basis, well logs, cores, tests and any other data necessary for
Optionor to perform its own technical analysis; and (iv) the right to request an annual
technical presentation to be presented to Optionor by the appropriate technical

7

 

staff of Optionee. Optionor shall have the right to conduct an annual audit of the
accounts and records of Optionee (at a mutually convenient time during Assignor’s normal
business hours and in accordance with the Council of Petroleum Accountants Society
guidelines and practices for audits by working interest owners) to verify the accounting for
Payout. Such audits may be performed by Optionor directly or through an independent
accounting firm of its choice, but in each case at the Optionor’s sole cost and expense.
Notwithstanding the above, all Payout accounting by Optionee during any calendar year shall
conclusively be presumed true and correct after twenty four (24) months following the end of
any such calendar year, unless within the said twenty four (24) month period, Optionor takes
written exception thereto and makes claim on Optionee for adjustments.

     (e) (i) all trade credits, accounts receivable, notes receivable and other receivables
attributable to Optionor’s interest in the Assets with respect to any period of time prior to the
Exercise Effective Time; (ii) all deposits, cash, checks in process of collection, cash equivalents
and funds attributable to Optionor’s interest in the Assets with respect to any period of time
prior to the Exercise Effective Time; and (iii) all proceeds, benefits, income or revenues accruing
with respect to the Subject Acreage prior to the Exercise Effective Time;

     (f) all corporate, financial, and tax records of Optionor; however, Optionee shall be entitled
to receive copies of any tax records which directly relate to any Assumed Obligations, or which are
necessary for Optionee’s ownership, administration, or operation of the Assets;

     (g) all claims and causes of action of Optionor arising from acts, omissions or events, or
damage to or destruction of the Assets, occurring prior to the Exercise Effective Time; provided,
however, Optionor shall transfer to Optionee all claims and causes of action of Optionor against
prior owners of the Assets or third parties for Environmental Obligations or Liabilities that are
not Retained Environmental Obligations or Liabilities;

     (h) except as otherwise provided in Section 14 all rights, titles, claims and interests of
Optionor relating to the Assets prior to the Exercise Effective Time (i) under any policy or
agreement of insurance or indemnity; (ii) under any bond; or (iii) to any insurance or condemnation
proceeds or awards;

     (i) all Hydrocarbons produced from or attributable to the Assets with respect to all periods
prior to the Exercise Effective Time, together with all proceeds from or of such Hydrocarbons,
except the Inventory Hydrocarbons and the unsold inventory of gas plant products, if any,
attributable to the Leases as of the Exercise Effective Time;

     (j) claims of Optionor for refund of or loss carry forwards with respect to production,
windfall profit, severance, ad valorem or any other taxes attributable to any period prior to the
Exercise Effective Time, or income or franchise taxes;

8

 

     (k) all amounts due or payable to Optionor as adjustments or refunds under any contracts or
agreements (including take-or-pay claims) affecting the Assets with respect to any period prior to
the Exercise Effective Time;

     (l) all amounts due or payable to Optionor as adjustments to insurance premiums related to the
Assets with respect to any period prior to the Exercise Effective Time;

     (m) all proceeds, benefits, income or revenues accruing (and any security or other deposits
made) with respect to the Assets, and all accounts receivable attributable to the Assets, prior to
the Exercise Effective Time; and

     (n) all of Optionor’s intellectual property, including, but not limited to, proprietary
computer software, patents, trade secrets, copyrights, names, marks and logos.

     (o) all depths above the top and below the base of the Frio Zone.

     1.30.
“Exercise Effective Time” has the meaning specified” shall be defined in Section 2.4.

     1.31.
“Final Settlement” has the meaning specified in Section 12.5

     1.32.
“ Final Settlement Statement” has the meaning specified in Section 12.5.

     1.33.
“Frio Zone” means the stratigraphic interval or its correlative equivalent between the
depths of 5,390 feet and 6,840 feet in the Amoco Production Company L.F. McKibben A-6 located on
the McKibben “A” Lease of the HT&B Survey 29, Brazoria County, Texas as defined on the Dual
Induction-Electric-Lateralog-Sonic Logs run on November 6, 15, 26, and 28, 1977.

     1.34. “Hastings Field” shall refer, collectively, to the East Hastings Field and the West
Hastings Unit.

     1.35.
 “Hydrocarbons” shall mean crude oil, natural gas (including CO2), casinghead
gas, condensate, sulphur, natural gas liquids and other liquid or gaseous hydrocarbons, and shall
also refer to all other minerals of every kind and character which may be covered by or included in
the Leases and Assets.

     1.36. “Indemnified Party” has the meaning set forth in Section 16.7.

     1.37. “Indemnifying Party” has the meaning set forth in Section 16.7.

     1.38. “Initial Option Payment” has the meaning specified in Section 2.3 (a)

     1.39. “Inventory Hydrocarbons” shall mean all merchantable oil and condensate (for oil or
liquids in storage tanks, being only that oil or liquids physically above the top of the inlet
connection into such tanks) produced from or attributable to

9

 

the Leases prior to the Exercise Effective Time which have not been sold by Optionor and are
in storage at the Exercise Effective Time.

     1.40. “Leases” shall mean, except to the extent constituting Excluded Assets, any and all
interests owned by Optionor, including but without limitation those set forth on Exhibits “A-1”,
“A-2”, “A-3” and “A-4”, or which Optionor is entitled to receive by reason of any participation,
joint venture, farmin, farmout, joint operating agreement, unitization agreement, or other
agreement, in and to the oil, gas and/or mineral leases, permits, licenses, concessions, leasehold
estates, royalty interests, overriding royalty interests, net revenue interests, executory
interests, net profit interests, working interests, reversionary interests, mineral interests, and
any other interests of Optionor in Hydrocarbons, in the West Hastings Unit, in the West Hastings
Unit Lands, and in East Hastings Field, it being the intent hereof that the leases, properties and
interests and the legal descriptions and depth limitations set forth on Exhibits “A-1” through
“A-4”, inclusive, or in instruments described in
Exhibits “A-1” through
“A-4”, inclusive, if any,
are for information only and the term “Leases” includes all of Optionor’s right, title and interest
in the above described Hydrocarbon interests in the West Hastings Unit, in the West Hastings Unit
Lands, and in the East Hastings Field, other than the Excluded Assets, including but not limited to
those described on Exhibits “A-1” through “A-4”, inclusive, or in instruments described in Exhibits
“A-1” through “A-4”, inclusive, even though such interests may be incorrectly described in Exhibits
“A-1” through “A-4”, inclusive, or omitted from Exhibits “A-1” through “A-4”, inclusive.

     1.41. “mcf” has the meaning specified in the definition of Excluded Assets.

     1.42. “Net Proved Reserves” has the meaning specified in Section 2.5(b)(i)(1)

     1.43. “Net Revenues” has the meaning specified in the definition of Excluded Assets.

     1.44. “NORM” has the meaning set forth in the definition of Environmental Defects.

     1.45. “Oil and Gas Interest” has the meaning specified in Section 18.2(g).

     1.46. “Oil and Gas Interests” has the meaning specified in Section 18.2(b) and 18.2(h).

     1.47. “Operating Costs” has the meaning specified in the definition of Excluded Assets.

     1.48. “Option Exercise Date” has the meaning specified in Section 2.4

     1.49. “Option Exercise Notice” has the meaning given in Section 2.4 .

     1.50. “Option to Purchase” has the meaning specified in Section 2.1.

     1.51. “Option Year” has the meaning specified in Section 2.2.

10

 

     1.52. “Optionee” has the meaning specified in the Preamble.

     1.53. “Optionee’s Credits” has the meaning specified in Section 12.5(b).

     1.54. “Optionor” has the meaning specified in the Preamble.

     1.55. “Optionor’s Credits” has the meaning specified in Section 12.5(a).

     1.56. “Participating Party” has the meaning specified in Section 18.2(f).

     1.57. “Parties” has the meaning specified in the Preamble.

     1.58. “Payout” shall be as defined in the definition of Excluded Assets.

     1.59. “Permitted Encumbrances” shall mean specified in Section 8.1(c).

     1.60. “Personal Property and Incidental Rights” shall mean all right, title and interest of
Optionor in and to or derived from the following insofar as the same do not constitute Excluded
Assets and are attributable to, appurtenant to, incidental to, or used for the operation of the
Leases:

     (a) all easements, rights-of-way, surface leases, permits, licenses, servitudes or other
interests relating to the use of the surface, including but not limited to those described in
Exhibits “A-5,” “A-6,” “A-7,” and “A-8”, or in instruments described in Exhibits “A-5,” “A-6,”
“A-7,” and “A-8”;

     (b) all wells, including but not limited to those listed in Exhibits “B-1” and “B-2” attached
hereto, whether or not such wells are active or inactive, along with all equipment and other
personal property, inventory, spare parts, tools, fixtures, pipelines, dehydration facilities,
platforms, tank batteries, appurtenances, and improvements situated upon the Leases as of the
Exercise Effective Time and used or held for use in connection with the development or operation of
the Leases or the production, treatment, storage, compression, processing or transportation of
Hydrocarbons from or in the wells or Leases;

     (c) all unit agreements, orders and decisions of state and federal regulatory authorities
establishing units, joint operating agreements, enhanced recovery and injection agreements, farmout
agreements and farmin agreements, options, drilling agreements, exploration agreements, assignments
of operating rights, working interests, subleases and rights above or below certain footage depths
or geological formations, to the extent same is attributable to the Assets, as of the Exercise
Effective Time, including but not limited to those described on Exhibits “F-1” and “F-2”;

     (d) all contracts, agreements, and title instruments to the extent attributable to and
affecting the Assets in existence at Closing, including all Hydrocarbon sales, purchase, gathering,
transportation, treating, marketing, exchange, processing, disposal and fractionating contracts,
joint operating agreements, including but not limited to those described on Exhibits “F-1” and
“F-2”; and

11

 

     (e) copies of all lease files, land files, well files, production records, division order
files (including paysheets and supporting files), abstracts, title opinions, and contract files,
insofar as the same are directly related to the Leases; including, without limitation, all
geological, information and data, to the extent that such data is not subject to any third party
restrictions, but excluding Optionor’s proprietary interpretations of same, subject to the
provisions of Section 6.1.

     1.61. “Proved Reserves” shall mean the reserves attributable to the interest being evaluated
based on the definition of “proved oil and gas reserves” as set forth in Rule 4-10 of Regulation
S-X of the Securities and Exchange Act of 1934, as amended; provided that Hydrocarbon prices and
operating costs set forth in section 2.5 shall be used in such determination.

     1.62. “Preferential Purchase Rights” has the meaning specified in Section 9.1(b).

     1.63. “Purchase Price” has the meaning specified in Section 2.5.

     1.64. “Receiving Party” has the meaning specified in Section 18.1(a).

     1.65. “Regulated Substances” has the meaning specified in the definition of Environmental
Defects.

     1.66. “Required Cumulative Capital Expenditure Amounts” has the meaning specified in Section
2.7(b).

     1.67. “Retained Environmental Obligations or Liabilities” shall mean, any Environmental
Obligations or Liabilities of any nature (i) related to the Excluded Assets, and (ii) related to,
or arising from, events first occurring or in existence prior to October 1, 2004, to the extent and
as set out in Section 10.6.

     Notwithstanding anything herein to the contrary, Retained Environmental Obligations or
Liabilities shall not include any Environmental Obligations or Liabilities that (a) relate to NORM,
or (b) relate to the plugging and abandonment of the wells in the Hastings Field existing at the
Exercise Effective Time and any related surface restoration of these well sites, or (c) resulted
from or relate to an activity or a condition on or regarding the Assets first occurring after the
Exercise Effective Time .

     1.68. “Retained Obligations” shall mean all liabilities, duties, and obligations that arise
out of the ownership, operation or use of the Assets prior to the Exercise Effective Time, other
than Environmental Obligations or Liabilities but including, without limitation, all liabilities,
duties, and obligations, express or implied, imposed upon Optionor herein under the provisions of
the Leases and any and all assignments, subleases, farmout agreements, assignments of overriding
royalty, joint operating agreements, easements, rights-of-way, and all other contracts, agreements
and instruments affecting the Leases, or the premises covered thereby, whether recorded or
unrecorded, and under all applicable laws, rules, regulations, orders and ordinances, except for
those specifically included in the definition of “Assumed Obligations.”

12

 

     1.69. “Reversionary Interest” has the meaning specified in the definition of Excluded Assets.

     1.69. “Residual Asset Reserve Value” has the meaning specified in Section 2.5(b)(ii)(3).

     1.70. “Selling Party” has the meaning specified in Section 18.1(a).

     1.71. “Shortage Payment” has the meaning specified in Section 2.7(b).

     1.72. “Third Party Interests” has the meaning specified in Section 9.1(c).

     1.73. “Title Defect” has the meaning specified in Section 8.1(b).

     1.74. “Title Defect Notice Date” has the meaning specified in Section 8.2.

     1.75. “Volumetric Production Payment” has the meaning specified in Section 2.5.

     1.76. “West Hastings Unit” shall be as described in and governed by Unit Agreement, West
Hastings Unit, Brazoria and Galveston Counties, Texas, dated July 24, 1984, recorded in Volume 218,
Page 637 of the Official Records of Brazoria County, TX and recorded as Instrument #8550106 of the
Official Public Records of Galveston County, TX, as amended, and as depicted on the plat in Exhibit
“D-1”. Those lands located within the aerial boundaries of the West Hastings Unit are referred to
as the “West Hastings Unit Lands.” Exhibit “D-1” also depicts the unit tracts within the West
Hastings Unit. The ownership of these unit tracts and the participation factors for these tracts
in the Unit are set forth in Exhibit “C”.

     1.77. “West Hastings Unit Lands” has the meaning specified in the definition of West Hastings
Unit.

     1.78. “West Hastings Unit Operating Agreement” shall mean that certain Unit Operating
Agreement, West Hastings Unit, Brazoria and Galveston Counties, Texas unit operating agreement
dated December 20, 1984, covering the West Hastings Unit, as may be amended, and which is attached
hereto as Exhibit “E.”

ARTICLE 2. — OPTION TO PURCHASE

     2.1. Option to Purchase. Subject to the terms and conditions of this Agreement and
the satisfaction of the Conditions Precedent on or before December 1, 2006, Optionor does hereby
grant and convey unto Optionee the right and option to purchase the Assets according to the terms
and provisions set forth below (the “Option to Purchase”). As used herein, the term “Conditions
Precedent” mean (a) with respect to Optionor, the receipt by Optionor of the written consent and
approval of the lenders under Optionor’s revolving credit facility to the grant of this Option to
Purchase and the transactions contemplated hereby, on
terms satisfactory to Optionor and (b) with respect to Optionee, confirmation by Optionee that
there are no material Title Defects

13

 

and Environmental Defects associated with the Assets. If the
Conditions Precedent have not been satisfied or waived by December 1, 2006 this Agreement shall
automatically terminate and neither party shall have any further obligation hereunder.

     Each Party shall notify the other in writing on or before November 30, 2006 whether or not the
Conditions(s) Precedent for that party have been satisfied.

     2.2. Term of Option. The initial term of the Option to Purchase shall commence on the
Agreement Effective Time and end October 31, 2009. The initial option payment, subject to the
Conditions Precedent, shall be paid by Optionee on or before December 1, 2006. Optionee may extend
the term of the Option to Purchase beyond October 31, 2009 on a year by year basis (i.e., through
the anniversary date, October 31, of the following year), by, on or before each anniversary date,
paying Optionor the sum of thirty million dollars ($30,000,000.00). The maximum term of the Option
to Purchase shall be ten (10) years (i.e., ending October 31, 2016). Each year the Option to
Purchase is in effect is hereinafter referred to as an “Option Year”.

     2.3. Initial Term Installments. The consideration for the initial term of the Option
to Purchase shall be fifty million dollars ($50,000,000) paid by Optionee to Optionor by wire
transfer in the following installments:

     (a) Thirty-seven and one-half million dollars ($37,500,000.00) on or before December 1, 2006;

     (b) Seven and one-half million dollars ($7,500,000.00) on or before November 1, 2007; and

     (c) Five million dollars ($5,000,000.00) on or before November 1, 2008.

     2.4. Exercise of Option to Purchase. During the term of the Option to Purchase,
Optionee may exercise its Option to Purchase by giving notice of its exercise of said Option to
Purchase (“Option Exercise Notice”) as provided herein. The Option Exercise Notice shall be made
utilizing the form of Option Exercise Notice attached hereto as Exhibit “G” and shall be given on
or before September 1 of any year during the term of this Option and shall be deemed exercised as
of November 1 of such year (the “Option Exercise Date”). Without Optionor’s written consent, no
Option Exercise Notice may be given prior to September 1, 2008. The effective date for the
purchase of the Assets shall be 7:00 a.m., Central Standard Time, on January 1 following such
Option Exercise Date (“Exercise Effective Time”). Optionee’s right to utilize the Asset shall be
effective as of the Exercise Effective Time.

     2.5. Payment for Assets. The consideration due Optionor by Optionee for the purchase
of the Assets (the
“Purchase Price”) shall be either (i) a cash payment (“Cash Payment”), or (ii) a volumetric
production payment (“Volumetric Production Payment”), to be determined as set forth below.

     (a) Optionor and Optionee shall have until the end of the month of November following an
Option Exercise Date to negotiate and agree upon, based upon the

14

 

remaining amount and value of Net
Proved Reserves attributable to the Assets, the Cash Payment amount to be paid by Optionee or the
terms of the Volumetric Production Payment to be conveyed to Optionor, with respect to the Assets.

     (b) In the event Optionor and Optionee are unable to agree as provided under Section 2.5(a),
above, then, on or before December 1 of such year, either Party may request that DeGolyer and
MacNaughton (“D&M”) furnish the Parties with a report (the “D&M Report”) setting forth the
following:

     (i) A Cash Payment amount equal to the present value of Net Proved Reserves, determined
as follows:

     (1) D&M’s estimate of Net Proved Reserves for the Assets as of the end of the year in
which the option is exercised (as utilized herein, “Net Proved Reserves” shall refer to
Proved Reserves, net to the Designated Interest, i.e., the applicable net revenue interest,
and after further deducting Optionor’s retained overriding royalty interest);

     (2) Pricing based upon a five (5) year forward strip as determined on the last trading
day of the oil futures contracts on the NYMEX for the year in which the option is
exercised, with prices for year six (6) and beyond based on the average NYMEX price for the
fifth year of the strip;

     (3) Operating expenses for the calculation of the Cash Payment shall be based upon a
review and average of Optionor’s operating expenses attributable to the Assets for twelve
(12) months prior to the Exercise Effective Time on a dollar per BOE basis (“Asset Operating
Expense”); and

     (4) A net present value discount rate of ten (10%) percent.

     (ii) The following Volumetric Production Payment terms:

     (1) Net Proved Reserve volume schedule for the Assets for the ten (10) years following
the Exercise Effective Time;

     (2) The Asset Operating Expense; and

     (3) The Residual Asset Reserve Value for the Proved Reserves attributable to time
periods after said ten (10) year period, calculated in the same manner as provided under
Section 2.5(b)(i), above, and paid in a lump sum.

Both Parties may furnish D&M with any data and information they feel pertinent to the
determination. D&M shall deliver the D&M Report to both Parties no later than January 15 of the
calendar year following the Option Exercise Date. D&M’s determinations on the above shall be final
and nonappealable. In the event D&M is not in existence at the time the Option Exercise Notice is
given, the successor company to D&M shall be utilized, and should no successor company exist, then
the Parties shall agree on an

15

 

independent reserve analysis company to make the above determinations
in lieu of D&M.

     (c) Optionor shall have fifteen (15) days after receipt of the D&M Report to notify Optionee
of its election whether to receive a Cash Payment or a Volumetric Production Payment. In the event
Optionor fails to elect within said time period, Optionor shall be deemed to have elected to
receive a Cash Payment.

     2.6. Closing. The closing of the purchase of the Assets shall occur at Optionor’s
offices on January 31 of the calendar year following the Option Exercise Date (or the next business
day, if such January 31 falls on a weekend or legal holiday) or such other time and place as may be
agreed upon by the Parties. At such Closing, (i) Optionor shall execute an Assignment and
Conveyance in the form substantially the same as the form attached as Exhibit “I”, and (ii)
depending upon Optionor’s election, Optionee shall either pay the Cash Payment or execute an
Assignment of Volumetric Production Payment in substantially the same form as the form attached as
Exhibit “J”.

     2.7. Development Plan and Capital Expenditure Commitment.

     (a) In the event Optionee exercises its option to purchase the Assets, contemporaneous with
Optionee’s option exercise, Optionee shall (i) submit to Optionor a development plan for the CO2
flood of the West Hastings Unit (the “Development Plan”), which plan shall include various
milestones including completion of a pipeline connecting the Jackson Dome Field in Mississippi to
the Hastings Field via Donaldsonville, Louisiana, or other pipeline or alternative delivery system
that would result in a lower CO2 cost to the Hastings Field, a framework for spending the Required
Cumulative Capital Expenditure Amounts, and the commencement of CO2 injection in the West Hastings
Unit and (ii) commit to spend one hundred seventy-eight million six hundred seventy four thousand
dollars ($178,674,000.00) of cumulative capital expenditures (the “Required Cumulative Capital
Expenditure Amounts”) as outlined in the Development Plan for field development and facilities for
enhanced production operations in the West Hastings Unit. Optionee shall spend the Required
Cumulative Capital Expenditures Amounts on or before the Commitment Dates set forth below:

	 	 	 	 	 
	“Commitment Date”	 	“Required Cumulative Capital
	By end of Calendar Year	 	Expenditure Amount”
	1
	 	$	26,801,000	 
	2
	 	$	71,469,000	 
	3
	 	$	107,204,000	 
	4
	 	$	142,939,000	 
	5
	 	$	178,674,000	 

Year 1 shall begin with the Exercise Effective Time. If the Optionee spends in excess of one
hundred seventy-eight million six hundred seventy four thousand dollars ($178,674,000.00) prior to
the end of Year 5, the development obligation has been fulfilled.

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     (b) In the event Optionee fails to spend the Required Cumulative Capital Expenditure Amount by
the Commitment Dates set forth in (a) above, Optionee shall pay Optionor a cash payment equal to
ten percent, (10.0%) of the difference between (i) the Required Cumulative Capital Expenditure
Amount for the applicable Commitment Date and (ii) the cumulative capital expenditures actually
expended by Optionee from the Closing Date through such applicable Commitment Date (hereinafter
referred to as the “Shortage Payment”). Said Shortage Payment shall be paid by Optionee to
Optionor within thirty (30) days after each Commitment Date.

     (c) If Optionee is not injecting at least an average of 50 mmcf/day of CO2 (total of purchased
plus recycled) in the West Hastings Unit (“Minimum Injection Rate”), which gas shall be delivered
to the Hastings Field via the Donaldsonville to Hastings pipeline or other pipeline or alternative
delivery system that would result in a lower CO2 cost to the Hastings Field, for the 90 day period
preceding the third anniversary of the Exercise Effective Time, Optionee shall, within 30 days of
such third anniversary, either (i) relinquish its rights to initiate (or continue) tertiary
operations and reassign to Optionor all Assets previously assigned to Optionee, for the value of
such Assets at that time based on the methodology outlined in Section 2.5, except the NPV discount
rate described in Section 2.5(b)(i)(4) shall be twenty percent (20%) rather than ten percent (10%),
or (ii) begin making additional Shortage Payments to Optionor in an amount equal to twenty million
dollars ($20,000,000.00) less Shortage Payments paid during that year pursuant to Section 2.7(b)
for the first year, and thirty million dollars ($30,000,000.00) less Shortage Payments paid during
that year pursuant to Section 2.7(b) per year thereafter until the CO2 injection in the Hasting
Field equals or exceeds the Minimum Injection Rate. If Optionee elects to relinquish its rights as
set forth herein and Optionor accepts such relinquishment, Optionee shall have no further rights or
obligations with respect to the Assets. Notwithstanding the relinquishment option described in
this Section 2.7(c), Optionor shall have the option to reject such relinquishment, in which case
Optionee shall retain the Assets and the Shortage Payment shall be deemed waived for that year and
the Minimum Injection Rate requirement will be deferred until the next anniversary of the Exercise
Effective Time.

ARTICLE 3. — OPERATIONS

     3.1. Operations of Hastings Field Prior to Option Exercise. Prior to the Exercise
Effective Time Optionor agrees (i) to act as a reasonable prudent operator, (ii) during the term
the Option to Purchase is in effect, not to undertake any tertiary operations, including, but not
limited to CO2 flooding, fire flooding, polymer flooding, miscible or non-miscible gas flooding
other than CO2, high pressure air injection, steam flooding or microbial injection, and (iii)
during the term the Option to Purchase is in effect, to notify Optionee in writing at least sixty
(60) days prior to the lapse of any Leases which Optionor does not intend to maintain. As to any
Leases under “(iii)” above, Optionee shall have the right and option within ten (10) days after
receipt of said notice to elect to obtain Optionor’s interest in any such Leases at no cost to
Optionor so that Optionee may attempt to maintain any such Leases. Any costs expended by

17

 

Optionee
to maintain any such Leases shall be included in the costs for purposes of calculating Payout and
not be subject to the provisions of Section 18.2.

     3.2. Operations After Option Exercise

     (a) In the event Optionee exercises its Option to Purchase, Optionor shall use its reasonable
efforts to have Optionee appointed as Operator of West Hastings Unit, both under the West Hastings
Unit Operating Agreement and with the appropriate regulatory or administrative agencies. In the
event Optionor is not able to secure the formal appointment of Optionee as Operator for the West
Hastings Unit, then Optionor and Optionee shall cooperate and enter into such contractual
relationship as is necessary or shall otherwise allow Optionee to conduct its Development Plan and
conduct all other operations Optionee could otherwise conduct as Operator in the Hastings Field.

     (b) In the event the Optionee exercises its Option to Purchase the Assets, the Parties shall
execute a Joint Operating Agreement covering the East Hastings Field and any lands located outside
the West Hasting Unit. The Joint Operating Agreement shall be in substantially the same form as
set forth in Exhibit “Q.”

     (c) In no event shall the Optionor in any manner be liable for or incur any costs or expenses
associated with the CO2 operations of the Optionee until such time as Optionor has accepted its
Reversionary Interest.

     3.3. Simultaneous Use of Surface-Option to Purchase.

     (a) In the event Optionee exercises its Option to Purchase, Optionee shall have (i) the right
to use all easements and surface rights of Optionor in the Hastings Field acquired from third
parties or resulting from its ownership of the Leases, and (ii) the right to use Optionor’s surface
and surface estate rights in lands in which Optionor owns all of the surface fee estate or an
undivided interest in the surface fee estate (“Optionor’s Surface Estate Lands”), so long as (i)
Optionee’s use is reasonably necessary for its operations and activities with respect to the Assets
and (ii) Optionee’s
use does not conflict with Optionor activities existing as of the Exercise Effective Time.
After Optionee’s exercise of its Option to Purchase, Optionor shall be entitled to new uses of all
surface rights and interests in the Hastings Field, so long as such new use does not conflict with
current or reasonably anticipated future use by Optionee. For the purposes of this Section 3.3,
surface or surface estate rights shall also mean and include all rights appurtenant to the surface
estate, including, but not limited to, rights to drill water wells, salt water disposal wells and
injection wells.

     (b) Subject to the provision of subsection (a) above, after Optionee’s exercise of its Option
to Purchase, Optionee shall be entitled to such easements, rights-of-way, and other uses of the
surface of Optionor’s Surface Estate Lands in conjunction with Optionee’s operations and activities
related to the operation of the Assets as Optionee, acting as a reasonably prudent operator, deems
necessary and appropriate. Optionee shall pay Optionor for the following, and only the following,
usages of Optionor’s Surface Estate Lands (all other usages being without cost to Optionee), and

18

 

in
the amounts stated: (i) new roads-$1.25 per linear rod; (ii) drill site locations, including areas
for drill site pad, pits, and other equipment-$1500.00 per acre.

     (c) Subject to the prior usage restrictions in subsection (a) above, after Optionee’s exercise
of its Option to Purchase and for a period of five (5) years after the applicable initial Exercise
Effective Date, Optionee shall also have the right to purchase from Optionor up to twenty (20)
acres of surface estate, selected by Optionee, out of Optionor’s Surface Estate Lands, to be used
for a central plant facility, for a purchase price of $1,500.00 per acre.

     (d) Optionor and Optionee agree to execute any instruments or other documents as may be
reasonably requested in order to vest in Optionee the rights and interests provided for in this
Section 3.3.

ARTICLE
4. — OPTIONOR’S REPRESENTATIONS AND WARRANTIES

          Optionor represents and warrants to Optionee as of the date hereof, that:

     (a) Optionor is a limited partnership duly organized, validly existing, and in good standing
under the laws of the State of Texas, and is duly qualified to carry on its business in Texas;

     (b) Optionor has all requisite power and authority to carry on its business as presently
conducted, to enter into this Agreement and the other documents and agreements contemplated hereby,
and to perform its obligations under this Agreement and the other documents and agreements
contemplated hereby. Effective as of the date hereof the consummation of the transactions
contemplated by this Agreement do not and will not violate, nor be in conflict with, any provision
of its governing documents or any agreement or instrument to which it is a party or by which it is
bound (except as set forth hereinbelow and in any provision contained in agreements customary in
the oil and gas industry relating to (1) the Preferential Purchase Rights (defined below) as to all
or
any portion of the Assets; (2) required consents to transfer and related provisions; (3)
maintenance of uniform interest provisions; and (4) any other third-party approvals or consents
contemplated herein), or any judgment, decree, order, statute, rule, or regulation applicable to
Optionor;

     (c) This Agreement, and all documents and instruments required hereunder to be executed and
delivered by Optionor constitute legal, valid and binding obligations of Optionor in accordance
with its respective terms, subject to applicable bankruptcy and other similar laws of general
application with respect to creditors;

     (d) There are no bankruptcy, reorganization or receivership proceedings pending, being
contemplated by, or to the actual knowledge of Optionor threatened against Optionor;

     (e) The execution, delivery and performance of this Agreement, and the transaction
contemplated hereunder have been duly and validly authorized by all requisite authorizing action,
corporate, partnership or otherwise, on the part of Optionor.

19

 

     (f) Optionor has not incurred any obligation or liability, contingent or otherwise, for
brokers’ or finders’ fees in connection with this Agreement or the transaction provided herein;

     (g) Other than as set forth in Exhibit “H”, to the best of Optionor’s knowledge, there are no
claims, investigations, demands, actions, suits, or administrative, legal or arbitration
proceedings (including condemnation, expropriation, or forfeiture proceedings) pending, or to the
best of Optionor’s knowledge, threatened, against Optionor or any of its affiliates, or any Asset:
(i) seeking to prevent the consummation of the transactions contemplated hereby, or (ii) which,
individually or in the aggregate, would materially and adversely affect the Assets.

     (h) Optionor has not intentionally or willfully misrepresented or omitted any material
information requested by Optionee in writing about the Assets;

     (i) Subject to satisfaction of the Condition Precedent, the granting of the Option to Purchase
and the transfer of the Assets to Optionee contemplated hereby does not violate any covenants or
restrictions imposed on Optionor by any bank or other financial institution in connection with a
mortgage or other instrument, and will not result in the creation or imposition of a lien on any
portion of the Assets;

     (j) Except as disclosed by Optionor in writing, if Optionor is the operator of an Asset, to
the best of Optionor’s knowledge, it is in material compliance with all laws, rules, regulations
and orders pertaining to such Assets, including Environmental Laws;

     (k) Except as disclosed by Optionor in writing, if Optionor is the operator of an Asset, to
the best of Optionor’s knowledge, it has all governmental permits necessary for the operation of
the Asset and is not in material default under any permit, license or agreement relating to the
operation and maintenance of the Assets;

     (l) Except as set forth on Exhibit “K”, there are no waivers, consents to assign, approvals or
similar rights owned by third parties and required in connection with granting of the Option to
Purchase or the conveyance of the Assets from Optionor to Optionee;

     (m) Except as set forth on Exhibit “K”, , there are no rights of first refusal, preferential
rights, preemptive rights or contracts, or other commitments or understandings of a similar nature
to which Optionor is a party or to which the Assets are subject;

     (n) No Hydrocarbons produced or to be produced from the Leases are subject to any oil or gas
sales contracts other than those identified on Exhibits “F-1” and “F-2” and, no third party has any
call upon, option to purchase, dedication rights or similar rights with respect to the Hydrocarbons
produced to be produced from Optionor’s interest in the Leases;

     (o) Other than as set forth in Exhibit “H”, to the best of Optionor’s knowledge there are no
claims, investigations, demands, actions, suits, or administrative, legal or

20

 

arbitration
proceedings (including condemnation, expropriation, or forfeiture proceedings) pending, or to the
best of Optionor’s knowledge threatened, against Optionor or any of its affiliates seeking to
prevent the consummation of the transactions contemplated hereby; and

     (p) Except as set forth on Exhibit “L”, there are no oil or gas production imbalances with
respect to the Leases;

     The above representations and warranties by Optionor shall be continuing in nature during the
term of this Agreement or as otherwise provided, and Optionor shall notify Optionee of any material
change with respect thereto.

ARTICLE 5. — OPTIONEE’S REPRESENTATIONS AND WARRANTIES

          Optionee represents and warrants to Optionor as of the date hereof that:

     (a) Optionee is a limited liability company duly organized, validly existing, and in good
standing under the laws of the state of Delaware, and is duly qualified to carry on its business in
Texas;

     (b) Optionee has all requisite power and authority to carry on its business as presently
conducted, to enter into this Agreement and the other documents and agreements contemplated hereby,
and to perform its obligations under this Agreement and the other documents and agreements
contemplated hereby. This Agreement and the consummation of the transactions contemplated by this
Agreement do not and will not violate, nor be in conflict with, any provision of Optionee’s
articles of incorporation, partnership agreement(s), by-laws or governing documents or any
agreement or instrument to which it is a party or by which it is bound, or any judgment, decree,
order, statute, rule, or regulation applicable to Optionee;

     (c) the execution, delivery and performance of this Agreement and the transactions
contemplated hereunder have been duly and validly authorized by all requisite authorizing action,
corporate, partnership or otherwise, on the part of Optionee;

     (d) this Agreement, and all documents and instruments required hereunder to be executed and
delivered by Optionee at Closing, constitute legal, valid and binding obligations of Optionee in
accordance with their respective terms, subject to applicable bankruptcy and other similar laws of
general application with respect to creditors;

     (e) there are no bankruptcy, reorganization or receivership proceedings pending, being
contemplated by, or to the actual knowledge of Optionee threatened against Optionee;

     (f) Optionee has not incurred any obligation or liability, contingent or otherwise, for
brokers’ or finders’ fees in connection with this Agreement or the transaction provided herein;

21

 

     (g) Optionee is an experienced and knowledgeable investor and operator in the oil and gas
business. Prior to entering into this Agreement, Optionee was advised by and has relied solely on
its own expertise and legal, tax, reservoir engineering, accounting, and other professional counsel
concerning this Agreement, the Assets and the value thereof;

     (h) Other than as set forth in Exhibit “H”, to the best of Optionee’s knowledge, there are no
claims, investigations, demands, actions, suits, or administrative, legal or arbitration
proceedings (including condemnation, expropriation, or forfeiture proceedings) pending, or to the
best of Optionee’s knowledge, threatened, against Optionee or any of its affiliates, or any Asset:
seeking to prevent the consummation of the transactions contemplated hereby.

     (i) Optionee has the financial resources to close the transaction contemplated by this
Agreement, whether by third party financing or otherwise; and

     (j) Optionee acknowledges the existence of the claims and suits described in Exhibit “H” and
that these claims and suits are Permitted Encumbrances as set forth in Section 8.1(c). Optionee
further acknowledges that Optionee has, or by Closing will have, legal counsel of its choice fully
review those claims and suits identified on Exhibit “H”.

The above representations and warranties by Optionee shall be continuing in nature during the term
of this Agreement or as otherwise provided, and Optionee shall notify Optionor of any material
change with respect thereof.

ARTICLE 6. — ACCESS TO INFORMATION AND INSPECTIONS

     6.1. Title Files.

          Promptly after the execution of this Agreement and during the term of this Agreement, Optionor
shall permit Optionee and its representatives at reasonable times during normal business hours to
examine, in Optionor’s offices at their actual location, all abstracts of title, title opinions,
title files, ownership maps, lease files, assignments, division orders, payout statements, title
curative, other title materials and agreements pertaining to the Assets by Optionee, within a
reasonable period of time, insofar as the same may now or in the future be in existence and in the
possession of Optionor. No warranty of any kind is made by Optionor as to the information so
supplied, and Optionee agrees that any conclusions drawn therefrom are the result of its own
independent review and judgment. Optionee shall be entitled to copies of all files related to the
Assets other than files containing privileged communications or attorney work product.

     6.2. Other Files.

          Promptly after the execution of this Agreement and during the term of this Agreement, Optionor
shall permit Optionee and its representatives at reasonable times during normal business hours to
examine, in Optionor’s offices at their actual location,

22

 

all production, well, regulatory,
engineering and geological information, accounting information, environmental information,
inspections and reports, and other information, files, books, records, and data pertaining to the
Assets as requested by Optionee, insofar as the same may now or in the future be in existence and
in the possession of Optionor, excepting economic evaluations and Optionor’s proprietary
interpretations of same, reserve reports and any such information that is subject to
confidentiality agreements or to the attorney/client and work product privileges. No warranty of
any kind is made by Optionor as to the information so supplied, and Optionee agrees that any
conclusions drawn therefrom are the result of its own independent review and judgment. Optionee
shall be entitled to copies of all files related to the Assets other than files containing
privileged communications or attorney work product.

     6.3 Confidentiality Agreement.

          All information made available to Optionee pursuant to Article 6 shall be maintained
confidential by Optionee until the Closing Date. The information protected by such confidentiality
obligation does not include any information that (i) at the time of disclosure is generally
available to and known by the public (other than as a result of a disclosure by Optionee), or which
after such disclosure comes into the public domain through no fault of Optionee or its
representatives, or (ii) is or was available to Optionee on a nonconfidential basis, or (iii) is
already known to Optionee on a nonconfidential basis, as evidenced by Optionee’s written records,
at the time of its disclosure by Optionor to Optionee. Optionee may disclose the information or
portions thereof to
those employees, agents or representatives of Optionee who need to know such information for
the purpose of assisting Optionee in connection with its performance of this Agreement, including
to D&M, or its successor or replacement, for the purposes of Section 2.5 of this Agreement.
Further, in the event that Optionee is requested or required (by deposition, interrogatory, request
for documents, subpoena, civil investigative demand or similar process) to disclose any of the
information, Optionee shall provide Optionor with prompt written notice of such request or
requirement, so that Optionor may seek such protective order or other appropriate remedy as it may
desire. Optionee shall further take reasonable steps to ensure that Optionee’s employees,
consultants and agents comply with the provisions of this Section 6.3. Notwithstanding the
foregoing, nothing contained within this Section 6.3 shall preclude either the Optionor or Optionee
from disclosing its internal reports, analyses, compilations, studies or evaluations based upon
information that is generally known or available in the public domain.

     6.4. Inspections.

          Promptly after the execution of this Agreement and during the term of this Agreement,
Optionor, subject to any necessary third-party operator approval, shall permit Optionee and its
representatives at reasonable times and at their sole risk, cost and expense, to conduct reasonable
inspections of the Assets for all purposes,
including any Environmental Defects.

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     6.5. No Warranty or Representation on Optionor’s Information.

          EXCEPT AS SET FORTH IN THIS AGREEMENT, OPTIONOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS
OR IMPLIED, WITH RESPECT TO THE ACCURACY, COMPLETENESS, OR MATERIALITY OF THE INFORMATION, RECORDS,
AND DATA NOW, HERETOFORE, OR HEREAFTER MADE AVAILABLE TO OPTIONEE IN CONNECTION WITH THE ASSETS OR
THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY DESCRIPTION OF THE ASSETS, QUALITY OR QUANTITY
OF HYDROCARBON RESERVES, IF ANY, PRODUCTION RATES, RECOMPLETION OPPORTUNITIES, DECLINE RATES, GAS
BALANCING INFORMATION, ALLOWABLES OR OTHER REGULATORY MATTERS, POTENTIAL FOR PRODUCTION OF
HYDROCARBONS FROM THE ASSETS, OR ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM ANY OTHER MATERIAL
FURNISHED TO OPTIONEE BY OPTIONOR. ANY AND ALL SUCH DATA, INFORMATION AND MATERIAL FURNISHED BY
OPTIONOR IS PROVIDED AS A CONVENIENCE ONLY AND ANY RELIANCE ON OR USE OF SAME IS AT OPTIONEE’S SOLE
RISK.

     6.6. Amendments to Exhibits.

          Optionor and Optionee acknowledge that Optionee’s inspection of Optionor’s records and files,
or further review by Optionor, prior to Closing may indicate that some or all of the Exhibits
attached to this Agreement were not complete or entirely
correct at the time of execution of this Agreement. Accordingly, Optionor and Optionee agree
to revise and amend the Exhibits, as needed, so that they will be complete and accurate for any
Closing and shall be given effect as if made on the Closing Date. It is understood, however, that
such revisions or amendments shall not otherwise be taken into account in giving effect to any
representations, rights, options, conditions, covenants and obligations of the Parties contained in
this Agreement as originally executed and shall not be used to negate any representation or
covenant previously made.

ARTICLE 7. — ENVIRONMENTAL MATTERS AND ADJUSTMENTS

     7.1. Investigation.

     Prior to December 1, 2006, Optionee shall have the right, at reasonable times during normal
business hours, to conduct its investigation into the status of the physical and environmental
condition of the Assets. Upon payment of the initial option payment described in Section 2.3(a),
Optionee accepts the physical and environmental condition of the Assets existing as of the
Agreement Effective Time. Subsequent to the execution of this Agreement, during the month of
November following the Option Exercise Date, Optionee shall have the right, at reasonable times
during normal business hours, to conduct further investigation into the status of the physical and
environmental condition of the Assets. If, in the course of conducting such investigation, Optionee
discovers that any Asset is subject to a material Environmental Defect not existing as of the
Agreement Effective Time, Optionee may raise such Environmental Defect in the

24

 

manner set forth
below. For purposes hereof, the term “material” shall mean that the Optionee’s good faith
estimate, supported by documentation, of the cost of remediating any single Environmental Defect,
or the net reduction in value of the Asset affected by such Defect, whichever is lesser, exceeds
fifty thousand dollars ($50,000.00), the Parties agreeing that such amount will be a per Asset
deductible rather than a threshold. No later than 5:00 p.m. Central Standard Time on December
1st following the Option Exercise Date (the “Environmental Defect Notice Date”),
Optionee shall notify Optionor in writing specifying such Environmental Defects, if any, the Assets
affected thereby, and Optionee’s good faith estimate of the costs of remediating such Defects, or
the net reduction in value of the Assets affected by such Defects, whichever is lesser, together
with supporting documentation. Optionor may, but shall be under no obligation to, correct at its
own cost and expense such Defects on or before the Closing Date, in which case there shall be no
reduction to the Cash Payment, nor any payment by Optionor to Optionee. Prior to Closing, Optionee
shall treat all information regarding any environmental conditions as confidential, whether
material or not, and shall not make any contact with any governmental authority or third party
regarding same without the prior written consent of Optionor unless required by law.

     7.2. Waiver of Defects.

     If Optionee fails to notify Optionor prior to or on the Environmental Defect Notice Date, of
any Environmental Defects, all defects, whether known or unknown, will be
deemed waived for purposes of adjustments pursuant to this Article 7, the Parties shall proceed
with the Closing, Optionor shall be under no obligation to correct the defects, and Optionee shall
assume the risks, liability and obligations associated with such defects, unless such defects
constitute Retained Environmental Obligations or Liabilities of Optionor.

     7.3. Remedy.

     In the event any Environmental Defect, for which notice has been timely given as provided
hereinabove, remains uncured as of the Closing, Optionor, at its sole option, shall, (i) agree to
cure or remediate any Defect within a reasonable time after Closing and without any reduction or
offset to any Cash Payment in a manner acceptable to both Parties, or (ii) reduce the Cash Payment
by the amount of the Environmental Defect Value as determined pursuant to Section 8.4, and subject
to application of the fifty thousand dollars ($50,000.00) deductible in Section 7.1; or (iii) if
the Purchase Price does not consist of a Cash Payment (but rather a Volumetric Production Payment),
pay Optionee at the Closing the amount of the Environmental Defect Value as determined pursuant to
Section 8.4, and subject to application of the fifty thousand dollars ($50,000.00) deductible.

     7.4. Default Basket.

     The Parties agree that adjustments to the Purchase Price under this Article 7 and Article 8
shall only occur to the extent that the aggregate Environmental Defects and Title Defects,
collectively, exceed two hundred fifty thousand dollars ($250,000.00)

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(the “Aggregate Defect
Basket”) after taking the applicable materiality deductible into account. For the avoidance of
doubt and by way of example only, if there are a total of two (2) Environmental Defects of two
hundred thousand dollars ($200,000.00) and one hundred fifty thousand dollars ($150,000.00) and two
(2) Title Defects of seventy five thousand dollars ($75,000.00) and five thousand dollars
($5,000.00), the total adjustment would be twenty five thousand dollars ($25,000.00) [being one
hundred fifty thousand dollars ($150,000.00) for Environmental Defect #1, plus one hundred thousand
dollars ($100,000.00) for Environmental Defect #2, plus twenty five thousand dollars ($25,000.00)
for Title Defect #1 and zero ($0) for Title Defect #2, minus two hundred fifty thousand dollars
($250,000.00) for the Aggregate Defect Basket].

     7.5. Closing.

     In the event any adjustment to the Cash Payment or payment by Optionor to Optionee is made due
to an Environmental Defect raised by Optionee, the Parties shall proceed with the Closing, Optionor
shall be under no obligation to correct the Defect, and the Defect shall become an Assumed
Obligation of Optionee.

ARTICLE 8. — TITLE DEFECTS AND ADJUSTMENTS

     8.1. Existing Title; Definitions.

     Upon payment of the initial option payment as set forth in Section 2.3(a), Optionee accepts
title to the Assets as it exists as of the Agreement Effective Time, subject to its right to
examine issues related to defects to title arising or occuring during the time after the Agreement
Effective Time until the Closing Date, as set forth below.

     For purposes hereof, the terms set forth below shall have the meanings assigned thereto.

     (a) “Defensible Title”, subject to and except for the Permitted Encumbrances means:

     (1) Such title held by Optionor and reflected by appropriate documentation properly
filed in the official records of the jurisdiction in which the Lease or Leases are located
that (a) as to the Leases, entitles Optionor and will entitle Optionee, after Closing, to
own and receive and retain the Designated Interests (subject to the Excluded Assets) in such
Leases, without suspension, reduction or termination, excluding Permitted Encumbrances; (b)
as to wells, entitles Optionor and will entitle Optionee, after Closing, to own and receive
and retain the Designated Interests (subject to the Excluded Assets) in such wells, without
suspension, reduction or termination, excluding Permitted Encumbrances; (c) as to the West
Hastings Unit and East Hastings Field, obligates Optionor, and will obligate Optionee after
Closing, to bear 89.33682% of the costs and expenses relating to the maintenance,
development and operation of such West Hastings Unit and 100% as to the East Hastings Field;

26

 

(d) as to the West Hastings Unit, reflects the ownership and unit participation of the
tracts within the unit area as set forth in Exhibit “C”; (e) the Leases and wells are free
and clear of any liens, claims or encumbrances of any kind or character as of the Closing,
except Permitted Encumbrances; and (f) is not encumbered by any default by Optionor
incurred after the Agreement Effective Time under a material provision of any Lease, Unit
Operating Agreement, or other contract or agreement affecting the Leases;

     (2) As to personal property included in the Assets, title to such property is free and
clear of any liens, claims or encumbrances of any kind or character as of Closing, except
Permitted Encumbrances; and

     (3) As to all other Assets, (a) such Assets are free and clear of any liens, claims or
encumbrances of any kind or character incurred after the Agreement Effective Time as of
Closing except for Permitted Encumbrances; and (b) the Optionor is not in default under a
material provision of any Lease, operating agreement, or other contract or agreement
affecting such Assets.

     (b) “Title Defect” shall mean (i) any matter which causes Optionor to have less than
Defensible Title to any of the Assets as of the Closing Date, or (ii) any matter that causes one or
more of the following statements to be untrue as of the Closing Date, except for Permitted
Encumbrances and matters in existence at, or occurring prior to, the Agreement Effective Time:

     (1) Optionor has not received written notice from any governmental authority or any
other person (including employees) claiming any material violation of any law, rule,
regulation, ordinance, order, decision or decree of any governmental authority with respect
to the such Assets.

     (2) Optionor, or the Operator of an Asset, has complied in all material respects with
the provisions and requirements of all orders, regulations and rules issued or promulgated
by governmental authorities having jurisdiction with respect to such Assets and has filed
for and obtained all material governmental certificates, permits and other authorizations
necessary for Optionor’s current operation of such Assets other than permits, consents and
authorizations required for the sale and transfer of such Assets to Optionee;

     (3) Optionor has not materially defaulted or materially violated any agreement to which
Optionor is a party or any obligation to which Optionor is bound affecting or pertaining to
such Assets other than as disclosed hereunder or on any exhibit attached hereto;

     (4) The Leases included within such Assets are in full force and effect; and

27

 

     (5) All taxes, rentals, royalties, operating costs and expenses, and other costs and
expenses related to such Assets which are due from or are the responsibility of Optionor
have been paid.

     (c) “Permitted Encumbrances” shall mean any of the following matters:

     (1) defects in the early chain of title consisting of failure to recite marital status
or the omission of succession or heirship proceedings;

     (2) defects or irregularities arising out of uncancelled mortgages, judgments or liens,
the inscriptions of which, on their face, have expired as a matter of law prior to the
Effective Time, or prior unreleased oil and gas leases which, on their face, expired more
than ten (10) years prior to the Agreement Effective Time and have not been maintained in
force and effect by production or operations pursuant to the terms of such leases;

     (3) tax liens and operator’s liens for amounts not yet due and payable, or those that
are being contested in good faith by Optionor in the ordinary course of business;

     (4) to the extent any of the following do not materially diminish the value of, or
impair the conduct of operations on, any of the Assets and do not impair Optionor’s right to
receive the revenues attributable thereto: (i) easements, rights-of-way, servitudes,
permits, surface leases and other rights in respect of surface operations, pipelines,
grazing, hunting, fishing, logging, canals, ditches, lakes, reservoirs or the like, (ii)
easements for streets, alleys, highways, pipelines, telephone lines, power lines, railways
and other similar rights-of-way, on, over or in respect of property owned or leased by
Optionor or over which Optionor owns rights of way, easements, permits or licenses, and
(iii) the terms and conditions of all leases, agreements, orders, instruments and documents
pertaining to the Assets;

     (5) all lessors’ royalties, overriding royalties, net profits interests, carried
interest, production payments, reversionary interests and other burdens on or deductions
from the proceeds of production if the net cumulative effect of such burdens or deductions
does not reduce the net revenue interest of Optionor in any well affected thereby to the
extent that Optionor will not be able to deliver to Optionee at Closing, the Designated
Interests in production (net revenue interests);

     (6) preferential rights to purchase and required third party consents to assignments
and similar agreements with respect to which waivers or consents are obtained from the
appropriate parties, or the appropriate time period for asserting the rights has expired
without an exercise of the rights prior to the Closing Date;

28

 

     (7) all rights to consent by, required notices to, filings with, or other actions by
governmental entities and tribal authorities in connection with the sale or conveyance of
oil and gas leases or interests if they are customarily obtained subsequent to the sale or
conveyance;

     (8) defects or irregularities of title arising out of events or transactions which have
been barred by limitations or by acquisitive or liberative prescription;

     (9) any encumbrance or other matter having an aggregate adverse effect on the value of
the Assets of less than fifty thousand dollars ($50,000), the Parties agreeing that such
amount will be a per Asset deductible rather than a threshold;

     (10) rights reserved to or vested in any municipality or governmental, statutory or
public authority to control or regulate any of the Assets in any manner, and all applicable
laws, rules and orders of governmental authority; and

     (11) any encumbrance or other matter (whether or not constituting a Title Defect)
expressly waived in writing by Optionee or listed on Exhibit “H”.

     (12) liens related to Optionor’s bank indebtedness which will be released at
Closing.

     (13) any matters which would otherwise constitute Title Defects that existed as of
the Agreement Effective Date.

     8.2. Notice of Title Defects.

     No later than 5:00 p.m. Central Standard Time on December 1st following the Option
Exercise Date (a “Title Defect Notice Date”), Optionee may provide Optionor written notice of any
Title Defect along with a description of those matters which, in Optionee’s reasonable opinion,
constitute Title Defects and setting forth in detail Optionee’s calculation of the value for each
Title Defect determined pursuant to Section 8.4. Optionor may elect, at its sole cost and expense,
but without obligation, to cure all or any portion of such Title Defects prior to Closing, in a
manner acceptable to both Parties, in which case no reduction or offset in any Cash Payment, or
payment by Optionor to Optionee, shall be made. Optionee’s failure to deliver to Optionor such
notice on or before the Title Defect Notice Date shall be deemed a waiver by Optionee of all Title
Defects with respect to the Assets, known or unknown, that Optionor does not have notice of from
Optionee on such date. Any defect or deficiency concerning Optionor’s title to the Assets not
asserted by Optionee in a Title Defect Notice on or prior to the Title Defect Notice Date shall be
deemed waived by Optionee for purposes of any adjustment to the Cash Payment or payment by Optionor
to Optionee, the Parties shall proceed with Closing, Optionor shall be under no obligation to
correct the defects, and Optionee shall assume the risks, liability and obligations associated with

29

 

such defects. However, such waiver shall not effect or impair the warranties of Optionor set forth
in Section 8.5 or the indemnity obligations of Optionor as set forth in Article 16.

     8.3. Title Defect Adjustment. 

     (a) In the event any Title Defect, for which notice has been timely given as provided
hereinabove, remains uncured as of Closing, Optionor shall have the opportunity to cure, until
sixty (60) days after Closing (“Cure Period”), such Title Defect. In the alternative, Optionor may
elect to (i) indemnify Optionee against any damages, claims or expenses that may arise out of such
Title Defect, subject to the provisions of Section 8.3(c) below, with no reduction in the Cash
Payment or payment to Optionee; or (ii) reduce the Cash Payment by an amount equal to the Title
Defect Value as determined pursuant to Section 8.4, and subject to application of the fifty
thousand dollars ($50,000.00) deductible described in Section 8.1(c) (9); or, (iii) if the Purchase
Price does not consist of a Cash Payment (but rather a volumetric production payment), pay Optionee
at Closing the amount of the Title Defect Value as determined pursuant to
Section 8.4, and subject to application of the fifty thousand dollars ($50,000.00) deductible.
Should Optionor elect alternative “(i)” (indemnity) or “(ii)” (price reduction) or “(iii)” (payment
to Optionee) in this Section 8.3(a), those Assets affected by the Title Defect shall be transferred
to Optionee at Closing.

     (b) If Optionor elects to attempt to cure a Title Defect after Closing, the Closing with
respect to the portion of the Assets affected by such Title Defect will proceed along with all
other Assets as provided in this Agreement. If Optionor fails or refuses to cure any Title Defect
prior to the expiration of the Cure Period, Optionor shall notify Optionee in writing of such
failure or refusal promptly upon the expiration of the Cure Period. In this event, Optionee shall
within seven (7) days after receipt by Optionee of Notice from Optionor of such failure or refusal
to cure any such Title Defect, pay Optionee an amount equal to the subject Title Defect Value. In
the event that any such property is retained by Optionor and such property has been receiving
revenue, without complaint, for a period in excess of two (2) years, then Optionee agrees (i) not
to take any action to interfere with such revenue stream, and (ii) to the extent that Optionee
becomes payor of such revenue, to pay Optionor such revenue upon receipt of an indemnity agreement
from Optionor.

     (c) The following provisions shall apply to an election by Optionor under Section 8.3(a)(i) to
indemnify Optionee with regard to such Title Defect:

     (1) Optionor’s indemnity shall be limited to a period of two (2) years from the
Effective Time.

     (2) In no event shall Optionor’s indemnity exceed the amount of the Title Defect Value
as determined under Section 8.4 hereof.

     (3) Optionor’s indemnity shall be freely transferable by Optionee to its successors and
assigns of the Assets affected by such Title Defect, including

30

 

without limitation, any
lender to Optionee and any purchaser of such Assets, whether directly from Optionee or
through any foreclosure proceeding; and

     (4) If the Title Defect Value, as determined under Section 8.4 hereof, individually or
in the aggregate, for one or more Title Defects to be covered by the Optionor’s indemnity
exceeds two hundred fifty thousand dollars ($250,000.00) (after application of the
appropriate deductible(s) provided for in Section 8.1(c)(9), Optionor shall have no right
under the second sentence of Section 8.3(a)(iii) to indemnify Optionee with regard to such
Title Defects without Optionee’s consent.

     (d) In the event any adjustment to the Cash Payment, or payment by Optionor to Optionee, is
made due to a Title Defect raised by Optionee, the Parties shall proceed with Closing, Optionor
shall be under no obligation to correct the Title Defect, and such Title Defect shall become an
Assumed Obligation of Optionor.

     8.4. Environmental Defect and Title Defect Values. 

     Upon timely delivery of notice of an Environmental or Title Defect, Optionee and Optionor
shall use their best efforts to agree on the validity and value of the claim for the purpose of
making any adjustment to the Purchase Price based on the provisions herein (“Environmental or Title
Defect Value”). In determining the Value of an Environmental or Title Defect, it is the intent of
the Parties to include, to the extent possible, only that portion of the lands, Leases and wells,
or other Assets, whether an undivided interest, separate interest or otherwise, materially and
adversely affected by the Defect. The following guidelines shall be followed by the Parties in
establishing the Value of any Environmental or Title Defect for the purpose of adjusting a Cash
Payment or establishing an amount to be paid by Optionor to Optionee for such a Defect if (a) the
validity of the claim is agreed to by the Parties, (b) proper notice has been timely given, and (c)
subject to (i) application of the appropriate deductibles as set forth in this Agreement for
Environmental Defects and Title Defects:

     (a) If the Title Defect is based on a difference in net revenue interest or expense interest
from the Designated Interests for the affected property, then the Title Defect Value shall be the
amount of the reduction or increase as the case may be.

     (b) If the Environmental or Title Defect is liquidated in amount (for example, but not limited
to, a lien, encumbrance, charge or penalty), then the Defect Value shall be the lesser of (1) the
sum necessary to be paid to the obligee to remove the Defect from the property, or (2) the decrease
in the fair market value of the Asset as a result of the Defect.

     (c) If the Environmental or Title Defect represents an obligation or burden upon the affected
property for which the economic detriment is not liquidated but can be estimated with reasonable
certainty as agreed to by the Parties, the Defect Value shall be the sum necessary to compensate
Optionee at Closing for the adverse economic effect which the Environmental or Title Defect will
have on the affected property. This

31

 

sum shall be the lesser of (1) the cost of remediating the
Defect, or (2) the decrease in the fair market value of the Asset as a result of the Defect. The
fair market value determination shall be made by the Parties in good faith taking into account all
relevant factors, including, but not limited to, the following:

     (1) the value of the Leases, lands, wells and other Assets affected by the
Environmental or Title Defect;

     (2) the productive status of the affected Asset (i.e., proved developed producing,
etc.) and the present value of the future income expected to be produced therefrom;

     (3) if the Title Defect represents only a possibility of title failure, the probability
that such failure will occur; and

     (4) the economic effect of the Environmental or Title Defect.

     (d) If the Value of the Environmental or Title Defect cannot be determined using the above
guidelines, and if the Parties cannot otherwise agree on the amount of an adjustment to the Cash
Payment or payment by Optionor to Optionee, or if the validity of the claim as to an Environmental
or Title Defect cannot be agreed upon, then the Closing shall nevertheless include the Asset(s)
affected thereby. If the validity of the claim is in dispute, there shall be no adjustment to the
Cash Payment or a payment by Optionor to Optionee at Closing. If the value of the claim is in
dispute, the Cash Payment or payment by Optionor to Optionee at Closing shall be adjusted by an
amount being the average of Optionor’s and Optionee’s good faith estimates of the value thereof.
In either case, Optionor and Optionee shall each have the right, exercisable within ninety (90)
days after the Closing Date, to refer the disputed matter to mediation and arbitration in
accordance with the dispute resolution procedures set forth in Exhibit “P.” After the expiration of
said ninety (90) day period the right to refer the matter to mediation and arbitration shall
terminate. Subject to the terms of Exhibit “P”, the decision of the arbitrator regarding any
Environmental or Title Defect Dispute shall be final as between the Parties.

     8.5. Title Warranty.

     OPTIONOR SHALL CONVEY OPTIONOR’S INTERESTS IN AND TO THE ASSETS TO OPTIONEE AS PROVIDED IN THE
FORM OF CONVEYANCE, ASSIGNMENT AND BILL OF SALE ATTACHED AS EXHIBIT “I” HERETO. THE CONVEYANCE,
ASSIGNMENT AND BILL OF SALE SHALL BE MADE WITHOUT WARRANTY OF TITLE, EITHER EXPRESS, IMPLIED,
STATUTORY OR OTHERWISE, AND WITHOUT RECOURSE, EVEN AS TO THE RETURN OF THE PURCHASE PRICE OR OTHER
CONSIDERATION (EXCEPT AS SPECIFICALLY PROVIDED HEREIN), EXCEPT THAT OPTIONOR SHALL WARRANT TITLE TO
THE ASSETS AGAINST ALL CLAIMS, LIENS, BURDENS AND ENCUMBRANCES ARISING BY, THROUGH OR UNDER
OPTIONOR, BUT NOT OTHERWISE AND NOT WITH RESPECT TO ANY IMPAIRMENT OR FAILURE OF TITLE RELATED TO
ANY

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LACK OF PRODUCTION IN PAYING QUANTITIES. THE CONVEYANCE, ASSIGNMENT AND BILL OF SALE SHALL BE
MADE WITH FULL SUBSTITUTION AND SUBROGATION TO OPTIONEE IN AND TO ALL COVENANTS AND WARRANTIES BY
OTHERS HERETOFORE GIVEN OR MADE TO OPTIONOR WITH RESPECT TO THE ASSETS.

     IMBALANCES WITH RESPECT TO OIL OR NATURAL GAS ARE GOVERNED BY ARTICLE 17 HEREOF. THE PARTIES
AGREE THAT THE EXISTENCE OF ANY SUCH IMBALANCES SHALL NOT BE DEEMED A TITLE DEFECT.

ARTICLE 9. — PREFERENTIAL PURCHASE RIGHTS 

AND CONSENTS OF THIRD PARTIES

     9.1. Actions and Consents.

     (a) Optionor and Optionee agree that each shall use all reasonable efforts to take or cause to
be taken all such action as may be necessary to consummate and make effective the transaction
provided in this Agreement and to assure that it will not be under any material corporate, legal,
or contractual restriction that could prohibit or delay the timely consummation of such
transaction.

     (b) Prior to the execution of this Agreement, Optionor and Optionee will satisfy themselves
that the execution of this Agreement will not in and of itself trigger (i) any preferential rights
to purchase, or any rights of first refusal to purchase, any of the Assets (“Preferential Purchase
Rights”), or (ii) any rights of consent or approval to the Agreement or transactions contemplated
by the Agreement (“Consents”). In the event that Optionor and Optionee determine before or after
the execution of this Agreement that a Preferential Purchase Right or Consent is triggered by the
execution of this Agreement, they will endeavor to obtain a waiver of such right, or such consent,
as applicable, and failing which, will negotiate an agreed upon reduction or reimbursement of the
initial installment of the consideration for the initial term of the Option to Purchase payable
upon execution of this Agreement.

     (c) Promptly after the Option Exercise Date, Optionor shall notify all holders of Preferential
Purchase Rights and Consents of such terms and conditions of this Agreement to which the holders of
such rights are entitled. Optionor shall promptly notify Optionee if any Preferential Purchase
Rights are exercised, any consents or approvals denied, or if the requisite period has elapsed
without said rights having been exercised or consents or approvals having been received. If prior
to Closing, any such Preferential Purchase Rights are timely and properly exercised, or Optionor is
unable to obtain a necessary consent or approval prior to Closing, the interest or part thereof so
affected shall be treated in the same manner as an uncured Title Defect. If any additional
Preferential Purchase Rights are discovered after Closing, or if a third party Preferential
Purchase Rights holder alleges improper notice, then Optionee agrees to cooperate with Optionor in
giving effect to any such valid third party Preferential Purchase Rights. In the event any such
valid third party preferential purchase rights are

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validly exercised after Closing, Optionee’s sole
remedy against Optionor shall be payment by Optionor to Optionee of the value of that portion of
the Assets on which such rights are exercised and lost by Optionee to such third party determined
in the same manner as a Title Defect Value.

     (d) With respect to any portion of the Assets for which a Preferential Purchase Right has not
been asserted prior to Closing, or a consent or other approval to assign has not been granted and
for which the time for election to exercise such Preferential Purchase Right or to grant such
consent has not expired, the Closing with respect to the portion of the Assets subject to such
outstanding obligations will nevertheless proceed
along with the Closing of other Assets as provided in this Agreement. In the event that within
ninety (90) days after Closing any such Preferential Purchase Right is not waived or consent or
approval is not obtained or the time for election to purchase or to deliver a consent or approval
does not pass (such that under the applicable documents, Optionor may not sell the affected third
party interest to Optionee), then Optionee shall reassign same to Optionor and Optionor will
promptly pay to Optionee the value of such third party interests.

ARTICLE 10. — COVENANTS OF OPTIONOR AND OPTIONEE

     10.1. Covenants of Optionor Pending Closing.

     (a) From and after the date of execution of this Agreement and until Closing, and subject to
Section 10.2 and the constraints of applicable operating and other agreements, Optionor shall
operate, manage, and administer the Assets as a reasonable and prudent operator and in a good and
workmanlike manner consistent with its past practices, and shall carry on its business with respect
to the Assets in substantially the same manner as before execution of this Agreement. Prior to
Closing, Optionor shall use all commercially reasonable efforts to preserve in full force and
effect all Leases, operating agreements, easements, rights-of-way, permits, licenses, and
agreements which relate to the Assets in which Optionor owns an interest, and shall perform all
material obligations of Optionor in or under all such agreements relating to the Assets; provided,
however, Optionee’s sole remedy for Optionor’s breach of its obligations under this Section 11.1(a)
shall be limited to the relative amount of the Purchase Price the parties agree should be allocated
to that portion of the Assets affected by such breach, and if the parties cannot agree, the matter
shall be submitted to mediation and arbitration procedures set forth in Exhibit “P” Optionor shall,
except for emergency action taken in the face of serious risk to life, property, or the environment
(1) submit to Optionee, for prior written approval, all proposed contracts, agreements or
amendments to contracts relating to the Assets to the extent same could be binding upon Optionee’s
exercise of its Option to Purchase; (2) submit to Optionee, for Optionee’s information, all AFE’s
relating to the Assets in excess of One Hundred Thousand Dollars ($100,000.00); (3) consult with,
inform, and advise Optionee regarding all material matters concerning the operation, management,
and administration of the Assets; (4) notify Optionee of any written voting under any

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operating,
unit, joint venture, partnership or similar agreement relating to the Assets; and (5) not approve
or elect to go nonconsent as to any proposed well or plug and abandon or agree to plug and abandon
any well without Optionee’s prior written approval. On any matter requiring Optionee’s approval
under this Section 11.1(a), Optionee shall respond within five (5) days to Optionor’s request for
approval and failure of Optionee to respond to Optionor’s request for approval within such time
shall release Optionor from the obligation to obtain Optionee’s approval before proceeding on such
matter. With respect to emergency actions taken by Optionor in the face of serious risk
to life, property, or the environment, without prior approval of Optionee pursuant to the
provisions above, Optionor will advise Optionee of its actions as promptly as reasonably possible
and consult with Optionee as to any further related actions.

     (b) From and after the date of execution of this Agreement until this Option terminates,
Optionor may not enter into any agreement, or amend, supplement or change any existing agreement
that would have a material adverse effect on Optionee’s option rights hereunder, without Optionee’s
consent, which consent shall not be unreasonably withheld.

     (c) Optionor shall promptly notify Optionee of any suit, material lessor demand action, or
other proceeding before any court, arbitrator, or governmental agency and any cause of action which
pertains to the Assets or which reasonably would be expected to result in material impairment or
loss of Optionor’s interest in any portion of the Assets or which might hinder or impede the
operation of the Assets in any material respect.

     (d) Except for Permitted Encumbrances, Optionor shall not alienate, encumber, transfer,
abandon or release any of the Assets during the term of this Agreement without the prior written
consent of Optionee.

     (e) Subject to the terms and conditions of this Agreement, Optionor will use commercially
reasonable efforts to cause (a) its respective representations and warranties set forth in this
Agreement to be true and correct on and as of the Closing Date except to the extent such
representations and warranties expressly relate to an earlier date, and (b) all of the conditions
precedent to the obligations of the other Party (to the extent they are within the control of
Optionor) to be satisfied on or prior to each Closing Date.

     10.2. Limitations on Optionor’s Covenants Pending Closing.

     To the extent Optionor is not the operator of any of the Assets, the obligations of Optionor
in Section 10.1 concerning operations or activities which normally or pursuant to existing
contracts are carried out or performed by the operator, shall be construed to require only that
Optionor use all commercially reasonable efforts (without being obligated to incur any expense or
institute any cause of action) to cause the operator of such Assets to take such actions or render
such performance as would a reasonable prudent operator and within the constraints of the
applicable operating agreements and other applicable agreements.

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     10.3. Covenants of Optionee Following Exercise of Option.

     Optionee shall act as a reasonable prudent operator in delivering CO2 to the Assets in a
timely manner and in sufficient quantities to efficiently conduct operations to enhance oil
production, under the terms of this Agreement, including but not limited to, Sections 1.26(d)(2),
1.26(d)(3) and 1.26(d)(5).

     10.4. Hastings Field Call on CO2.

     The Assets shall have first call on the CO2 in Optionee’s pipeline proposed to be constructed
from a point near Donaldsonville, Louisiana to the Hastings Field, up to a maximum of 200 MMcf/d
for so long as the Hastings Field requires 200 MMcf/d of additional CO2 above then existing recycle
volumes. The call on CO2 shall be based on 8 MMcf/d times the toal number of CO2 injectors until
such time as the total number of injectors times 8 MMcf/d exceed 200 MMcf/d. Optionor agrees that
the call on CO2 is based on the assumption that individual injection wells will inject on average 8
MMcf/d per well. If the actual average injection rate is lower than 8 MMcf/d, the 200 MMcf/d
call on CO2 shall be adjusted downward based on the actual average injection rate divided by 8
MMcf/d. This call is on CO2 from whatever source in Optionee’s pipeline, but is not a call on any
particular source of CO2.

     10.5. Ownership of CO2.

     All CO2 injected into the Hastings Field for which the working interest owners are charged
shall be owned by the working interest owners proportionate to their ownership interest in the West
Hastings Unit or the East Hastings Field, as the case may be.

     10.6. Environmental Liabilities Related to Events and Activities occurring prior to
October 1, 2004.

          Notwithstanding anything to the contrary contained herein, Optionor and Optionee agree that
from and after the Exercise Effective Date all Environmental Obligations and Liabilities related
to, or arising from, events or conditions first occurring prior to October 1, 2004, shall be shared
equally between Optionor and Optionee and their respective successors and assigns. The provisions
of Section 16.6 and Section 16.7 shall apply to any claim for shared payment under this Section
10.6, except that Optionor and Optionee shall each have equal rights to participate in the defense
of all Environmental Obligations and Liabilities subject to this Section 10.6 and no third-party
claim in respect of such Environmental Obligations and Liabilities shall be compromised or settled
without the prior written consent of both Optionor and Optionee, which consent shall not be
unreasonably withheld or delayed.

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ARTICLE 11. — CLOSING CONDITIONS

     11.1. Optionor’s Closing Conditions.

          The obligations of Optionor under this Agreement are subject, at the option of Optionor, to
the satisfaction, at or prior to Closing, of the following conditions:

     (a) all representations and warranties of Optionee contained in this Agreement shall be true
and accurate in all material respects at and as of Closing as if such representations and
warranties were made at and as of Closing, and Optionee shall have performed, satisfied and
complied in all material respects with all agreements
and covenants required by this Agreement to be performed, satisfied and complied with by
Optionee at or prior to Closing;

     (b) the execution, delivery, and performance of this Agreement and the transactions
contemplated thereby have been duly and validly authorized by all necessary action, corporate,
partnership or otherwise, on the part of Optionee, and an officer’s certificate of Optionee
confirming the same;

     (c) all necessary consents of and filings with any state or federal governmental authority or
agency relating to the consummation of the transactions contemplated by this Agreement shall have
been obtained, accomplished or waived, except to the extent that such consents and filings are
normally obtained, accomplished or waived after Closing; and

     (d) as of the Closing Date, no suit, action or other proceeding (excluding any such matter
initiated by Optionor) shall be pending or threatened before any court or governmental agency
seeking to restrain Optionor or prohibit the Closing or seeking damages against Optionor as a
result of the consummation of this Agreement.

     11.2. Optionee’s Closing Conditions.

          The obligations of Optionee under this Agreement are subject, at the option of Optionee, to
the satisfaction, at or prior to Closing, of the following conditions:

     (a) all representations and warranties of Optionor contained in this Agreement shall be true,
accurate in all material respects at and as of Closing as if such representations and warranties
were made at and as of Closing, and Optionor shall have performed, satisfied and complied in all
material respects with all agreements and covenants required by this Agreement to be performed,
satisfied and complied with by Optionor at or prior to Closing;

     (b) the execution, delivery, and performance of this Agreement and the transactions
contemplated thereby have been duly and validly authorized by all necessary action, corporate,
partnership or otherwise, on the part of Optionor, and an officer’s certificate of Optionor
confirming the same;

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     (c) all necessary consents of and filings with any state or federal governmental authority or
agency relating to the consummation of the transactions contemplated by this Agreement shall have
been obtained, accomplished or waived, except to the extent that such consents and filings are
normally obtained, accomplished or waived after Closing; and

     (d) as of the Closing Date, no suit, action or other proceeding (excluding any such matter
initiated by Optionee) shall be pending or threatened before any court or governmental agency
seeking to restrain Optionee or prohibit the Closing or seeking damages against Optionee as a
result of the consummation of this Agreement.

ARTICLE
12. — CLOSING

     12.1. Closing.

          The closing of the purchase of the Assets following the exercise of the option granted herein
(the “Closing”) shall be held at the offices of Optionee on the date provided in Section 2.6 above,
or at such earlier date or place as the Parties may agree in writing (herein called “Closing
Date”). Time is of the essence and the Closing Date shall not be extended unless by written
agreement of the Parties. On or before five (5) business days prior to Closing, Buyer and Seller
shall use their best efforts to provide each other copies of all closing documents.

     12.2. Optionor’s Closing Obligations.

          At Closing Optionor shall deliver to Optionee the following:

     (a) the Assignment and Conveyance substantially in the form attached hereto as Exhibit “I” and
such other documents as may be reasonably necessary to convey all of Optionor’s interest in the
Assets to Optionee in accordance with the provisions hereof ;

     (b) a non-foreign affidavit executed by Optionor in the form attached as Exhibit “M”;

     (c) appropriate regulatory forms appointing Optionee as the operator for those Assets which
Optionor operates;

     (d) copies of all third-party waivers, consents, approvals, permits and actions obtained;

     (e) subject to existing operating agreements and Optionor’s rights to continued use and access
as set forth in Section 3.3, exclusive possession of the Assets;

     (f) letters-in-lieu of transfer orders in form acceptable to Optionor and Optionee;

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     (g) a Reporting and Accounting Memorandum executed by Optionor in the form attached as Exhibit
“N”; and

     (h) releases of all mortgages, liens and similar encumbrances burdening the Assets in form and
substance reasonably satisfactory to Optionee.

     12.3. Optionee’s Closing Obligations.

          At Closing, (i) Optionor shall execute an Assignment and Conveyance, the form of which shall
be substantially the same as the form attached hereto as Exhibit “I”, and (ii) depending upon
Optionor’s election, Optionee shall either pay the Cash Payment or execute an Assignment of
Volumetric Production Payment, the form of which shall be substantially the same as the form
attached hereto as Exhibit “J”.

     12.4. Joint Closing Obligations.

          Both Parties at Closing shall execute a Settlement Statement evidencing any amount actually
wire transferred or the Volumetric Production Payment assigned and all adjustments to the
consideration taken into account at Closing. All events of the Closing shall each be deemed to
have occurred simultaneously with the other, regardless of when actually occurring, and each shall
be a condition precedent to the other.

     12.5. Final Settlement/Purchase Price Adjustments.

          Within one hundred twenty (120) days after Closing, Optionor shall provide to Optionee, for
Optionee’s concurrence, an accounting (the “Final Settlement Statement”) of the actual amounts of
Optionor’s and Optionee’s Credits for the adjustments set out in this Section 12.5. Optionee shall
have the right for thirty (30) days after receipt of the Final Settlement Statement to audit and
take exceptions to such adjustments. The Parties shall attempt to resolve any disagreements on a
best efforts basis. Those credits agreed upon by Optionee and Optionor shall be netted and the
final settlement shall be paid as directed in writing by the receiving party, on final adjustment
by the party owing it (the “Final Settlement”).

          The Purchase Price shall be adjusted as follows:

     (a) The Purchase Price shall be adjusted upward by the following (“Optionor’s Credits”):

     (1) the value of (i) all Inventory Hydrocarbons attributable to the Assets, such value
to be based upon the existing contract price for crude oil in effect as of the Effective
Time, less severance taxes, transportation fees and other fees deducted by the purchaser of
such oil, such oil to be measured at the Exercise Effective Time by the operators of the
Assets; and (ii) the value of all of Optionor’s unsold inventory of gas plant products, if
any, attributable to the Assets at the Effective Time valued in the same manner as if such
products had been sold under the contract then in existence between Optionor and the

39

 

purchaser of such products or, if there is no such contract, valued in the same manner as if
said products had been sold at the posted price in the field for said products;

     (2) the amount of all production expenses, operating expenses and all expenditures
attributable to the operation of the Assets after the Exercise Effective Time and accrued by
Optionor prior to Closing Date in accordance with generally accepted accounting principles
and Section 11.1;

     (3) an amount equal to the sum of any upward adjustments provided elsewhere in this
Agreement applicable to the Assets; and

     (4) any other amount agreed upon by Optionor and Optionee in writing prior to Closing.

     (b) The Purchase Price shall be adjusted downward by the following (“Optionee’s Credits”):

     (1) the total collected sales value of all Hydrocarbons sold by the Optionor after the
Exercise Effective Time which are attributable to the Assets, and any other monies collected
by the Optionor with respect to the ownership of the Assets after the Exercise Effective
Time, but excepting interest income.

     (2) the amount of all unpaid ad valorem, property, production, excise, severance and
similar taxes and assessments (but not including income taxes), which taxes and assessments
become due and payable or accrue to the Assets prior to the Exercise Effective Time, which
amount shall, where possible, be computed based upon the tax rate and values applicable to
the tax period in question; otherwise, the amount of the adjustment under this paragraph
shall be computed based upon such taxes assessed against the applicable portion of the
Assets for the immediately preceding tax period just ended;

     (3) an amount equal to the sum of any downward adjustments provided elsewhere in this
Agreement; and

     (4) any other amount agreed upon by Optionor and Optionee in writing prior to Closing.

     (c) Optionor shall prepare and deliver to Optionee, at least five business days prior to
Closing, Optionor’s estimate of the adjusted Purchase Price to be paid at Closing, together with a
preliminary statement setting forth Optionor’s estimate of the amount of each adjustment to the
Purchase Price to be made pursuant to this Section 12.5. The Parties shall negotiate in good faith
and attempt to agree on such estimated adjustments prior to Closing. In the event any estimated
adjustment amounts are not agreed upon prior to Closing, the estimate of the adjusted Purchase
Price for purposes of Closing shall be calculated based on Optionor’s and Optionee’s agreed upon
estimated adjustments and Optionor’s good faith estimate of any disputed amounts (and

40

 

any such
disputes shall be resolved by the Parties in connection with the resolution of the Final Settlement
Statement).

     (d) In the event the Purchase Price is not a Cash Payment, but is in the form of a Volumetric
Production Payment, any and all adjustments in the Purchase Price shall be made and payable in
cash.

ARTICLE 13. — LIMITATIONS ON WARRANTIES AND REMEDIES

          THE EXPRESS REPRESENTATIONS AND WARRANTIES OF OPTIONOR CONTAINED IN THIS AGREEMENT ARE
EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED OR
STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE
QUALITY, QUANTITY OR VOLUME OF THE RESERVES, IF ANY, OF OIL, GAS OR OTHER HYDROCARBONS IN OR UNDER
THE LEASES, OR THE ENVIRONMENTAL CONDITION OF THE ASSETS. THE ITEMS OF PERSONAL PROPERTY,
EQUIPMENT, IMPROVEMENTS, FIXTURES AND APPURTENANCES CONVEYED AS PART OF THE ASSETS ARE SOLD
HEREUNDER “AS IS, WHERE IS, AND WITH ALL FAULTS” AND NO WARRANTIES OR REPRESENTATIONS OF ANY KIND
OR CHARACTER, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF QUALITY, MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR CONDITION, ARE GIVEN BY OR ON BEHALF OF OPTIONOR. IT IS UNDERSTOOD AND
AGREED THAT PRIOR TO CLOSING OPTIONEE SHALL HAVE INSPECTED THE ASSETS FOR ALL PURPOSES AND HAS
SATISFIED ITSELF AS TO THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, AND
THAT OPTIONEE ACCEPTS SAME IN ITS “AS IS, WHERE IS AND WITH ALL FAULTS” CONDITION. OPTIONEE HEREBY
WAIVES ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONDITION, OR CONFORMITY TO SAMPLES.

ARTICLE 14. — CASUALTY LOSS AND CONDEMNATION

          If, prior to Closing, all or any material portion of the Assets is destroyed by fire or other
casualty or if any material portion of the Assets shall be taken by condemnation or under the right
of eminent domain (all of which are herein called “Casualty Loss” and limited to property damage or
taking only), Optionee and Optionor must agree prior to Closing either that (i) If the value of the
Casualty Loss is in dispute, the Cash Payment or payment by Optionor to Optionee at Closing shall
be adjusted by an amount equal to the average of Optionor’s and Optionee’s good faith estimates of
the value of the Casualty Loss, or (ii) Optionee shall proceed with the purchase of such Assets,
notwithstanding any such destruction or taking (without reduction of the Purchase Price)in which
case Optionor shall pay, at Closing, to Optionee all sums paid to Optionor by third parties by
reason of the destruction or taking of such Assets and

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shall assign, transfer and set over unto
Optionee all insurance proceeds received by
Optionor as well as all of the right, title and interest of Optionor in and to any claims,
causes of action, unpaid proceeds or other payments from third parties arising out of such
destruction or taking. In either case, Optionor and Optionee shall each have the right, exercisable
within ninety (90) days after the Closing Date, to refer the disputed matter to mediation and
arbitration in accordance with the dispute resolution procedures set forth in Exhibit “P”. After
the expiration of said ninety (90) day period the right to refer the matter to mediation and
arbitration shall terminate. Prior to Closing, Optionor shall not voluntarily compromise, settle
or adjust any amounts payable by reason of any Casualty Loss without first obtaining the written
consent of Optionee, which consent shall not be unreasonably withheld.

ARTICLE 15. — DEFAULT AND REMEDIES

     15.1. Optionor’s Remedies.

          Upon failure of Optionee to timely make the payments described in Section 2.3, or to
materially comply with other material terms contained in the Agreement, Optionor, at its sole
discretion, and in addition to any other remedies it may have at law or equity, may (i) enforce
specific performance, or (ii) terminate this Agreement and retain any and all previous payments
made hereunder.

     15.2. Optionee’s Remedies.

          Upon failure of Optionor to materially comply with all material terms contained in this
Agreement, Optionee, at its sole option and in addition to any other remedies it may have at law or
equity, may (i) enforce specific performance, or (ii) terminate this Agreement.

     15.3. Effect of Termination.

          In the event of termination of this Agreement under this Article 15, the transaction shall not
close and neither Optionee nor Optionor shall have any further obligations, remedies, liabilities,
rights or duties to the other hereunder, except as expressly provided herein.

ARTICLE 16. — ASSUMPTION AND INDEMNITY

     16.1. Assumed Obligations; Pre-Closing Liabilities.

          Upon and after Closing, Optionee shall own the Assets, together with all the rights, duties,
obligations, and liabilities accruing with respect thereto, including the Assumed Obligations and
Optionee’s indemnity obligations hereunder. Optionee agrees to assume and pay, perform, fulfill
and discharge all Assumed Obligations and Optionee’s indemnity obligations. Optionor agrees to
retain and pay, perform, fulfill and discharge all Retained Obligations, and Optionor’s indemnity
obligations.

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     16.2. Optionee’s Indemnity.

          OPTIONEE AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONOR AND OPTIONOR’S EMPLOYEES, OFFICERS AND
DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LOSSES, DAMAGES, PUNITIVE DAMAGES,
COSTS, EXPENSES, CAUSES OF ACTION OR JUDGMENTS OF ANY KIND OR CHARACTER INCLUDING, WITHOUT
LIMITATION, ANY INTEREST, PENALTY, REASONABLE ATTORNEYS’ FEES AND OTHER COSTS AND EXPENSES INCURRED
IN CONNECTION THEREWITH OR THE DEFENSE THEREOF (COLLECTIVELY THE “CLAIMS”), WITH RESPECT TO ALL
LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES AND OBLIGATIONS CAUSED BY, RELATED
TO, ATTRIBUTABLE TO, OR ARISING OUT OF THE ASSUMED OBLIGATIONS.

          IN ADDITION TO THE FOREGOING, OPTIONEE AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONOR AND
OPTIONOR’S EMPLOYEES, OFFICERS AND DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS,
LOSSES, DAMAGES, PUNITIVE DAMAGES, COSTS, EXPENSES, CAUSES OF ACTION OR JUDGMENTS OF ANY KIND OR
CHARACTER INCLUDING, WITHOUT LIMITATION, ANY INTEREST, PENALTY, REASONABLE ATTORNEYS’ FEES AND
OTHER COSTS AND EXPENSES INCURRED IN CONNECTION THEREWITH OR THE DEFENSE THEREOF (COLLECTIVELY THE
“CLAIMS”), WITH RESPECT TO ALL LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES AND
OBLIGATIONS CAUSED BY, RELATED TO, ATTRIBUTABLE TO, OR ARISING OUT OF OPTIONEE’S OPERATIONS AS TO
THE ASSETS AS OF THE EXERCISE EFFECTIVE TIME.

     16.3 Optionor’s Indemnity.

          OPTIONOR AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONEE AND OPTIONEE’S EMPLOYEES, OFFICERS AND
DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS WITH RESPECT TO ALL LIABILITIES AND
OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES AND OBLIGATIONS CAUSED BY, RELATED TO,
ATTRIBUTABLE TO, OR ARISING OUT OF (A) THE RETAINED OBLIGATIONS and (B) TO THE EXTENT NOT ACCOUNTED
FOR IN THE CALCULATION OF THE PURCHASE PRICE PURSUANT TO SECTION 2.5, ENVIRONMENTAL OBLIGATIONS AND
LIABILITIES THAT FIRST AROSE FROM OR OUT OF EVENTS OR CONDITIONS FIRST OCCURRING BETWEEN OCTOBER
1, 2004 AND THE EXERCISE EFFECTIVE DATE.

          IN ADDITION TO THE FOREGOING, OPTIONOR AGREES TO INDEMNIFY, DEFEND AND HOLD OPTIONEE AND
OPTIONEE’S EMPLOYEES, OFFICERS AND DIRECTORS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS,
LOSSES, DAMAGES, PUNITIVE DAMAGES, COSTS, EXPENSES, CAUSES OF ACTION OR JUDGMENTS OF ANY KIND OR
CHARACTER INCLUDING, WITHOUT LIMITATION, ANY INTEREST, PENALTY, REASONABLE ATTORNEYS’ FEES AND
OTHER COSTS AND EXPENSES INCURRED IN

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CONNECTION THEREWITH OR THE DEFENSE THEREOF (COLLECTIVELY THE “CLAIMS”), WITH RESPECT TO ALL
LIABILITIES AND OBLIGATIONS OR ALLEGED OR THREATENED LIABILITIES AND OBLIGATIONS (IN EITHER CASE,
OTHER THAN ENVIRONMENTAL OBLIGATIONS AND LIABILITIES ASSUMED BY OPTIONEE PURSUANT TO SECTION 10.6)
CAUSED BY, RELATED TO, ATTRIBUTABLE TO, OR ARISING OUT OF OPTIONOR’S OPERATIONS AS TO THE ASSETS
PRIOR TO THE EXERCISE EFFECTIVE TIME.

     16.4. Negligence.

          THE INDEMNIFICATION, RELEASE AND ASSUMPTION PROVISIONS PROVIDED FOR IN THIS AGREEMENT SHALL BE
APPLICABLE WHETHER OR NOT THE LOSSES, COSTS, EXPENSES AND DAMAGES IN QUESTION AROSE SOLELY OR IN
PART FROM THE ACTIVE, PASSIVE, COMPARATIVE, OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER
FAULT OF THE PARTIES HERETO.

     16.5 Broker or Finder’s Fee.

          Each party hereby agrees to indemnify and hold the other harmless from and against any claim
for a brokerage or finder’s fee or commission in connection with this Agreement or the transactions
contemplated by this Agreement to the extent such claim arises from or is attributable to the
actions of such indemnifying party, including, without limitation, any and all losses, damages,
punitive damages, attorneys’ fees, costs and expenses of any kind or character arising out of or
incurred in connection with any such claim or defending against the same.

     16.6 Threshold and Maximum Amounts.

          No claim may be made against an Indemnifying Party pursuant to this Article 16 unless, and
only to the extent that, the aggregate amount of all Claims exceeds $100,000. The maximum
aggregate liability of an Indemnifying Party under this Article 16 shall be an amount equal to the
Purchase Price.

     16.7 Claim Procedures.

          Each Person entitled to indemnification under this Article 16 (the “Indemnified Party”) shall
give written notice setting forth in reasonable detail the basis of any Claim to the Party required
to provide indemnification (the “Indemnifying Party”) promptly, but not later than fifteen (15)
days, after such Indemnified Party becomes aware of a Claim or receives written notice of any Claim
asserted by any person who is not a Party (or a successor to a Party) to this Agreement (a
“Third-Party Claim”) that is or may give rise to an indemnification claim; provided that the
failure of the Indemnified Party to give notice as provided in this Section 16.7 shall not relieve
any Indemnifying Party of its obligations under Section 16.7, except to the extent that such
failure prejudices the rights of any such Indemnifying Party. The Indemnifying Party may elect to
assume the defense of any Third-Party Claim or any litigation resulting therefrom;
provided that counsel for the Indemnifying Party, who shall in such case conduct the

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defense of such claim, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such defense at the
Indemnified Party’s expense, and may retain counsel of its choice at its own expense; provided
further that the Indemnified Party shall have the right to employ, at the Indemnifying Party’s
expense, one firm of counsel of its choice, to represent the Indemnified Party if, in the
Indemnified Party’s reasonable judgment, there exists a conflict of interest between the
Indemnified Party and the Indemnifying Party, or if the Indemnifying Party (1) elects not to
defend, compromise or settle a Third-Party Claim, (2) fails to notify the Indemnified Party within
ten (10) Business Days of its election to defend after receipt of written notice of such
Third-Party Claim, or (3) having timely elected to defend a Third-Party Claim, fails adequately to
prosecute or pursue such defense, then in each case the Indemnified Party may defend such
Third-Party Claim on behalf of and for the account and risk of the Indemnifying Party. The
Indemnifying Party, in the defense of any Third-Party Claim, shall not, except with the prior
written approval of the Indemnified Party, consent to entry of any judgment or entry into any
settlement that does not include as an unconditional term thereof the giving by the claimant or
plaintiff to the Indemnified Party of a release from all liability with respect thereto. The
Indemnified Party shall not settle or compromise any such claim without the prior written approval
of the Indemnifying Party, which approval shall not be unreasonably withheld. The Indemnified
Party shall make its employees available and furnish such information regarding itself or the Claim
in question as the Indemnifying Party may reasonably request in writing and as shall reasonably be
required in connection with the defense of a Third-Party Claim.

ARTICLE 17. — GAS IMBALANCES

          Optionor and Optionee will use their best efforts to update (to the Exercise Effective Time)
the gas imbalance volume amounts listed on Exhibit “L.” If, prior to the Final Settlement Date,
either party hereto notifies the other party hereto that the volumes set forth in Exhibit “L” are
incorrect, then Optionee or Optionor will pay the other at the Final Settlement, as appropriate, an
amount equal to the NYMEX price at the end of the month in which the variance occurs, per net mmbtu
variance from the net imbalance shown on Exhibit “L.” Subject to such adjustment on the Final
Settlement Date, as of the Closing Optionee agrees to assume any liability and obligation for gas
production imbalances (whether over or under) attributable to the Assets. Except as set forth in
this Article 17, in assuming this liability at Closing, Optionee shall not be obligated to make any
additional payment over the Purchase Price to Optionor, and Optionor shall not be obligated to
refund any of said price to reimburse Optionee for any over-balances existing at the time of sale.

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ARTICLE 18. — PREFERENTIAL RIGHT TO PURCHASE

AND AREA OF MUTUAL INTEREST PROVISION

     18.1 Preferential Right to Purchase.

     This Agreement is also made expressly subject to a preferential right to Purchase, the terms
and conditions of which are as follows:

     (a) In the event Optionor or Optionee receives a bona fide offer from a third party to
purchase all or a part of the interests of Optionor (reserved overriding royalty interest,
Volumetric Production Payment (if any) or reversionary working interest, before or after reversion)
or Optionee (the “Selling Party”) in the West Hastings Unit, the West Hastings Unit Lands or the
Hastings Field lands, or other jointly owned lands within the Area of Mutual Interest (including
interests hereafter owned or acquired), and once the Selling Party and a proposed transferee have
fully negotiated the principal terms and conditions of a transfer (which principal terms shall
include all material terms and conditions necessary for a purchaser to make an informed decision
including, but not necessarily limited to, price, timing, scope, character and description of the
interests to be transferred, agreed indemnities, reservations and exclusions), Selling Party shall
disclose such principal terms and conditions in detail to the other party to this Agreement (the
“Receiving Party”) in a written notice. Receiving Party shall have the right to acquire the
interest proposed to be transferred from the Selling Party on the same terms and conditions agreed
to by the proposed transferee if, within ten (10) Days after receipt of Selling Party’s written
notice, the Receiving Party delivers to the Selling Party a counter-notification that Receiving
Party accepts the agreed upon terms and conditions of the transfer without reservations or
conditions. If the Receiving Party does not deliver such counter-notification, the transfer to the
proposed transferee may be made, subject to the provisions of this Agreement, under terms and
conditions no more favorable to the transferee than those set forth in the notice to Receiving
Party, provided that the transfer shall be concluded within one hundred eighty (180) days from the
date of Optionee’s receipt of Selling Party’s written notice. In the event the proposed sale of
the interest to a third party is timely consummated, the preferential right to purchase shall no
longer attach to the interest transferred to the third party. In the event the proposed sale of
the interest to the third party is not consummated, then the preferential right to purchase such
interest shall be reinstated as to any future offers to purchase the interest.

     (b) In the event Selling Party’s proposed transfer of part or all of its interest in the West
Hastings Unit, the West Hastings Unit Lands or the Hastings Field lands, or other jointly owned
lands within the Area of Mutual Interest, involves consideration other than cash or involves other
properties included in a wider asset sale transaction (package deal), then the interest to be
assigned by Selling Party (or part thereof) shall be allocated a reasonable and justifiable cash
value in the notification to Receiving
Party. Receiving Party may satisfy the requirements of this Article 18.1 by agreeing to pay
such cash value in lieu of the consideration payable in the third-party offer.

46

 

     (c) The preferential right to purchase shall be applicable to any transfer of all or a portion
of either Parties’ interest in the West Hastings Unit, the West Hastings Unit Lands or the Hastings
Field lands, or other jointly owned lands within the Area of Mutual Interest, including the
transfer of the reserved overriding royalty interest and/or the Reversionary Interest, whether
directly or indirectly by assignment, merger, consolidation, or sale of stock, or other conveyance,
other than such transfers that are made to (i) an affiliate, subsidiary, or parent company existing
as of the date of this Agreement or (ii) a new affiliated entity created after the date of this
Agreement for the express purpose of forming a master limited partnership, which master limited
partnership is controlled by the new affiliate, Venoco, Inc. or Denbury Resources Inc. for a
minimum of twelve (12) months following the transfer.

     (d) A sale or merger involving Optionor’s parent, Venoco, Inc., or the sale of all or
substantially all of Venoco’s assets through merger, business combination or other transaction,
including transactions involving Optionor are hereby expressly excluded from the terms of this
Article 18. Likewise, a sale or merger involving Optionee’s parent, Denbury Resources Inc., or the
sale of all or substantially all of Denbury Resources Inc.’s assets through merger, business
combination or other transaction, including transactions involving Optionee are hereby expressly
excluded from the terms of this Article 18.

     18.2. Area of Mutual Interest Provision.

     (a) The Parties hereby agree to the establishment of an Area of Mutual Interest which shall
encompass all of those lands within the area outlined in blue on the plat attached hereto as
Exhibit “O”, and which are more fully described on Exhibit “O-1” hereto, which area shall
hereinafter sometimes be referred to as an “Area of Mutual Interest”.

     If, after the Agreement Effective Time, either party to this Agreement (“Acquiring Party”)
acquires either an oil and gas lease or mineral interest (or any interest therein), royalty
interest, or an option to acquire an oil and gas lease, or any other oil and/or gas interest
covering lands lying within the Area of Mutual Interest, including oil, gas and mineral leases
acquired pursuant to the exercise of any options (all of the foregoing hereinafter sometimes being
referred to as “Oil and Gas Interests”), or if the Acquiring Party enters into any type of
agreement by which an Oil and Gas Interest may be acquired or otherwise earned by conducting
drilling, seismic, or other operations on the lands lying within the Area of Mutual Interest, then
the Acquiring Party shall promptly notify the other party of such acquisition or such agreement.
If either party to this Agreement acquires an Oil and Gas Interest covering lands within the
geographical confines of the Area of Mutual Interest, the other party shall have the right to
participate in any such acquisition of such Oil and Gas Interest as set forth below. If, after the
Effective Time of this Agreement, additional parties acquire an interest from the original
Parties in the Area of Mutual Interest, in the event not all parties elect to participate in
an acquisition, then any such non-participating party’s interests shall be offered in writing to
the other participating parties in the proportions that their ownership interests in the Area of
Mutual Interest at the time of the acquisition bear to the total of the

47

 

ownership interests of all
participating parties in the acquisition. In the event any acquired Oil and Gas Interest includes
lands within and outside the Area of Mutual Interest, the entire Oil and Gas Interest shall be
included within the AMI.

     (b) The notification provided for in Paragraph (b) above shall contain all available title
information and copies of leases, agreements by which the Oil and Gas Interest may be acquired, and
all other pertinent instruments and information regarding the proposed acquisition. It shall also
describe in detail the cost and expense of such acquisition and any other obligation that may be
incurred pursuant thereto.

     (c) If the acquisition requires drilling, seismic, or other operations on the lands lying
within the Area of Mutual Interest, the election of a party to participate in such operations shall
constitute an election to participate in the agreement governing such operations, to the extent
necessary to acquire the interest. No party shall be required to make such an election more than
sixty (60) days or less than thirty (30) days prior to the commencement of initial operations.

     (d) To receive an assignment of its proportionate share of the Oil and Gas Interest acquired
as a result of conducting drilling, seismic, or other operations on the Area of Mutual Interest, a
Participating Party must have:

     (1) Participated in all operations necessary for the acquisition of the Oil and Gas
Interest, and also must have paid all costs and expenses incurred in connection therewith;

     (2) Participated in any previous drilling, seismic, or other operations that were
necessary or were a condition precedent to the operations resulting in the acquisition of
the Oil and Gas Interest; and

     (3) Participated in accordance with the terms, provisions, covenants, and conditions of
the agreements governing the acquisition of an Oil and Gas Interest.

     (e) If drilling, seismic, or other operations are not required to acquire the Oil and Gas
Interest, the party entitled to receive notice set forth in Section 18.2(b) shall have thirty (30)
days from receipt of written notice thereof in which to elect to participate in such acquisition as
set forth hereinbelow and in Section 18.2(h). Failure to give written notice to the Acquiring
Party of its election, as specified herein, shall constitute an election not to participate. If a
party elects to participate in such acquisition as set forth herein, such party (“Participating
Party”) shall reimburse the Acquiring Party for its proportionate share of the costs thereof within
fifteen (15) days of receipt of an invoice from the Acquiring Party setting forth in detail the
cost and expense of such acquisition. The Acquiring Party shall, within thirty (30) days after
receipt of payment
from a Participating Party, assign to the Participating Party the Participating Party’s
proportionate interest in the acquisition, subject to any applicable burdens on such Participating
Party’s interest in the acquisition.

48

 

     (f) All Participating Parties shall be entitled to participate in any acquisition within the
Area of Mutual Interest on a ground floor basis and subject to no additional burdens placed on an
acquisition by the Acquiring Party. For purposes of this Agreement the Optionor’s interest in the
Area of Mutual Interest shall be twenty-five percent (25%) and Optionee’s interest seventy-five
percent (75%).

     (g) In the event the Parties acquire any Oil and Gas Interest within the Area of Mutual
Interest prior to the Exercise Effective Time, then any Oil and Gas Interest acquired by the
Optionor shall be included in the Designated Interests to be acquired by the Optionee and shall be
valued and conveyed in accordance with the terms of this Agreement. Additionally, should the
Optionee acquire any Oil and Gas Interest in the Area of Mutual Interest and elect not to exercise
its Option to Purchase the Assets, Optionee shall give Optionor the right to acquire any such
acquired Oil and Gas Interest at its offered cost as set forth hereinabove.

     (h) For purposes of this Section 18.2, the term “Oil and Gas Interest” shall also include
surface rights or interests (including easements, rights-of-way, and surface ownership) in lands
lying within the Area of Mutual Interest, and options to acquire such surface rights or interests,
and any surface rights or interests acquired pursuant to the exercise of any options.
Notwithstanding the foregoing, Optionor and Optionee specifically exclude from this Area of Mutual
Interest any surface rights or interests (including easements, rights-of-way, and surface
ownership) acquired by Optionee for the sole purpose of constructing and operating a CO2 pipeline
to deliver CO2 to the Hastings Field.

     (i) The terms of this Section 18.2. shall remain in full force and effect covering the lands
lying within the Area of Mutual Interest for a period of ten (10) years commencing from the
Agreement Effective Time, unless extended for an additional period or terminated earlier by written
agreement of the Parties.

ARTICLE 19. — MISCELLANEOUS

     19.1. Receivables and other Excluded Funds.

          Optionee shall be under no obligation to collect on behalf of Optionor any receivables or
other funds included in the Excluded Assets and described in Section 1.29(e) above. With respect
to receivables, Optionee shall be free to treat the interests of any party with a delinquent
receivable in any manner deemed appropriate by Optionee.

     19.2. Public Announcements.

          Each Party hereto may publicly disclose information with respect to the transaction
contemplated by this Agreement (i) to any state or federal governmental authority or agency to the
extent required by applicable law or by any applicable rules, regulations or orders of any
governmental authority or agency having jurisdiction; or (ii) as may be necessary to comply with
disclosure requirements of the Securities and

49

 

Exchange Commission and the New York Stock Exchange
or other recognized exchange and any other applicable securities laws.

     19.3. Filing and Recording of Assignments, etc.

          Optionee shall be solely responsible for all filings and the prompt recording of assignments
and other documents related to the Assets and for all fees connected therewith, including the fees
charged by any regulatory authority in connection with the change of operator, and Optionee shall
furnish certified copies of all such filed and/or recorded documents to Optionor within ten (10)
days of Optionee’s receipt of the recorded instruments. Optionor shall not be responsible for any
loss to Optionee because of Optionee’s failure to file or record documents correctly or promptly.
Optionee shall not be responsible for any loss to Optionor because of Optionor’s failure to record
this document correctly or promptly. Optionee shall promptly file all appropriate forms,
declarations or bonds with federal and state agencies relative to its assumption of operations and
Optionor shall cooperate with Optionee in connection with such filings.

     19.4. Further Assurances and Records.

     (a) Each of the Parties will execute, acknowledge and deliver to the other such further
instruments, and take such other action, as may be reasonably requested in order to more
effectively assure to said party all of the respective properties, rights, titles, interests,
estates, and privileges intended to be assigned, delivered or inuring to the benefit of such party
in consummation of the transactions contemplated hereby. Without limiting the foregoing, in the
event Exhibits “A-1” through “A-4”, inclusive, incorrectly or insufficiently describes or
references or omits the description of a property or interest intended to be conveyed hereby as
described in Sections 1.34 (Leases) or 1.54 (Personal Property) above, Optionor agrees to, within
twenty (20) days of Optionor’s receipt of Optionee’s written request, together with supporting
documentation satisfactory to Optionor, correct such Exhibit and/or execute an amended assignment
or other appropriate instruments necessary to transfer the property or interest intended to be
conveyed hereby to Optionee.

     (b) Optionee agrees to maintain the files and records of Optionor that are acquired pursuant
to this Agreement for seven (7) years after the Closing. Optionee shall provide Optionor and its
representatives reasonable access to and the right to copy such files and records for the purposes
of (i) preparing and delivering any
accounting provided for under this Agreement and adjusting, prorating and settling the charges
and credits provided for in this Agreement; (ii) complying with any law, rule or regulation
affecting Optionor’s interest in the Assets prior to the Closing Date; (iii) preparing any audit of
the books and records of any third party relating to Optionor’s interest in the Assets prior to the
Closing Date, or responding to any audit prepared by such third parties; (iv) preparing tax
returns; (v) responding to or disputing any tax audit; or (vi) asserting, defending or otherwise
dealing with any claim or dispute under this Agreement or as to the Assets.

50

 

     (c) Optionor agrees that within thirty (30) days after Closing or within thirty (30) days
after operations are actually transferred of record with the Texas Railroad Commission, whichever
is later, it will remove or cause to be removed its signs and the names and marks used by Optionor
and all variations and derivatives thereof and logos relating thereto from the Assets and will not
thereafter make any use whatsoever of such names, marks and logos.

     (d) Optionor agrees to continue to use all reasonable efforts, but without any obligation to
incur any cost or expense in connection therewith, and to cooperate with Optionee’s efforts to
obtain for Optionee (i) access to files, records and data relating to the Assets in the possession
of third parties; and (ii) access to wells constituting a part of the Assets operated by third
parties for purposes of inspecting same.

     (e) Optionee shall comply with all current and subsequently amended applicable laws,
ordinances, rules, and regulations applicable to the Assets and shall promptly obtain and maintain
all permits required by governmental authorities in connection with the Assets.

     19.5. Notices.

          Except as otherwise expressly provided herein, all communications required or permitted under
this Agreement shall be in writing and may be given by personal delivery, facsimile, US mail
(postage prepaid), or commercial delivery service, and any communication hereunder shall be deemed
to have been duly given and received when actually delivered to the address of the Parties to be
notified as set forth below and addressed as follows:

     If to Optionor, as follows:

	 	 	 	 	 
	 	 	TexCal Energy South Texas L.P.
	 	 	c/o Venoco, Inc.
	 	 	370 17th Street
	 	 	Suite 2950
	 	 	Denver, Colorado 80202
	 

	 	Attention:
	 	William Schneider

President
	 

	 	Telephone:

Facsimile:
	 	(303) 626-8318

(303) 626-8315
	 
	 	 	 	 
	 

	with copies to:	 	 
	 
	 	 	 	 
	 	 	TexCal Energy South Texas L.P.
	 	 	1020 Main Street, Suite 2500
	 	 	Houston, Texas 77002
	 

	 	Attention:
	 	Jeffrey T. Janik
	 

	 	 	 	Senior Vice President
	 

	 	Telephone:
	 	(713) 533-4000
	 

	 	Facsimile:
	 	(713) 533-4060

51

 

	 	 	 	 	 
	 

	and	 	 
	 	 	Venoco, Inc.
	 	 	6267 Carpinteria Ave.
	 	 	Carpinteria, CA 93013
	 

	 	Attention:
	 	General Counsel
	 

	 	Telephone:
	 	(805) 745-2253
	 

	 	Facsimile:
	 	(805) 745-1816
	 
	 	 	 	 
	 

	If to Optionee, as follows:	 	 
	 
	 	 	 	 
	 	 	Denbury Onshore, LLC
	 	 	5100 Tennyson Parkway
	 	 	Suite 1200
	 	 	Plano, Texas 75024
	 

	 	Attention:
	 	Ray Dubuisson
	 

	 	 	 	Vice President-Land
	 

	 	Telephone:
	 	(972)-673-2044
	 

	 	Facsimile:
	 	(972)-673-2299

Provided, however, that any notice required or permitted under this Agreement will be effective if
given verbally within the time provided, so long as such verbal notice is followed by written
notice thereof in the manner provided herein within twenty-four (24) hours following the end of
such time period. Any party may, by written notice so delivered to the other, change the address
to which delivery shall thereafter be made.

     19.6. Incidental Expenses.

          Optionee shall bear and pay (i) all state or local government sales, transfer, gross proceeds,
or similar taxes incident to or caused by the transfer of any of the Assets to Optionee, (ii) all
documentary, transfer and other state and local government taxes incident to the transfer of any of
the Assets to Optionee; and (iii) all filing, recording or registration fees for any assignment or
conveyance delivered hereunder. Each party shall bear its own respective expenses incurred in
connection with the negotiation and closing of this transaction, including it own consultants’
fees, attorneys’ fees, accountants’ fees, and other similar costs and expenses.

     19.7. Waiver.

          Any of the terms, provisions, covenants, representations, warranties or conditions hereof may
be waived only by a written instrument executed by the party waiving compliance. Except as
otherwise expressly provided in this Agreement, the failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect such party’s right to enforce
the same. No waiver by any party of any condition, or of the breach of any term, provision,
covenant, representation or warranty contained in this Agreement, whether by conduct or otherwise,
in any one or

52

 

more instances, shall be deemed to be or construed as a further or continuing waiver
of any such condition or breach or a waiver of any other condition or of the breach of any other
term, provision, covenant, representation or warranty.

     19.8. Binding Effect; Assignment.

          All the terms, provisions, covenants, obligations, indemnities, representations, warranties
and conditions of this Agreement shall be covenants running with the land and shall inure to the
benefit of, and be binding upon, and shall be enforceable by, the parties hereto and their
respective successors and assigns. The rights of Optionee under this Agreement to acquire the
Assets are personal and this Agreement may not be assigned or transferred by Optionee to any other
party, firm, corporation or other entity, without the prior, express and written consent of
Optionor, and such consent may be withheld for any reason, including convenience. Any attempt to
assign this Agreement by Optionee over the objection or without the express written consent of the
Optionor shall be absolutely void. Optionor may condition its consent to assign this Agreement on
Optionee providing Optionor with an appropriate guarantee of its assignee’s performance. Any
subsequent transfer of this Agreement or of all or any part of the Assets shall be made expressly
subject to the terms and provisions of this Agreement.

     19.9. Taxes.

     (a) Optionor and Optionee agree that this transaction may be subject to the reporting
requirement of Section 1060 of the Internal Revenue Code of 1986, as amended, and that, therefore,
IRS Form 8594, Asset Acquisition Statement, will be filed for this transaction. The Parties will
confer and cooperate in the preparation and filing of their respective forms to reflect a
consistent reporting of the agreed upon allocation.

     (b) Optionor shall be responsible for all state, local and federal property, ad valorem,
excise, and severance taxes attributable to or arising from the ownership or operation of the
Assets prior to the Exercise Effective Time. Optionee shall be responsible for all property and
severance taxes attributable to or arising from the ownership or operation of the Assets after the
Exercise Effective Time. Any party which pays such taxes for the other party shall be entitled to
prompt reimbursement upon evidence of such payment. Each party shall be responsible for its own
federal and state income taxes, if any, as may result from this transaction.

     (c) If this transaction is determined to result in state sales or transfer taxes, Optionee
shall be solely responsible for any and all such taxes due on the Assets acquired by Optionee by
virtue of this transaction. If Optionee is assessed such taxes, Optionee shall promptly remit same
to the taxing authority. If Optionor is assessed such taxes, Optionee shall reimburse Optionor for
any such taxes paid by Optionor to the taxing authority.

53

 

     19.10. Audits.

          It is expressly understood and agreed that Optionor retains its right to receive its
proportionate share of the proceeds from any audits relating to activities prior to the Exercise
Effective Time, and Optionor shall likewise pay its share of any costs attributable to the period
prior to the Effective Time resulting from any such audits.

     19.11. Governing Law.

          THIS AGREEMENT SHALL BE GOVERNED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS OTHERWISE APPLICABLE TO SUCH
DETERMINATIONS.

     19.12. Mediation and Arbitration.

          The Parties stipulate and agree that any and all claims and/or controversies arising between
Optionor and Optionee which relate to and arise out of this Agreement shall be resolved in
accordance with the mediation and arbitration procedures set forth in Exhibit “P.” The prevailing
party in any legal proceeding or arbitration may be entitled to recover all arbitration costs and
reasonable attorneys’ fees from the non-prevailing party, as determined by the arbitrators in
accordance with the procedures set forth in Exhibit “P.”

     19.13. Entire Agreement.

          This Agreement, including the Exhibits attached hereto, embodies the entire agreement between
the Parties and replaces and supersedes all prior agreements, arrangements and understandings
related to the subject matter hereof, whether written or oral. No other agreement, statement, or
promise made by any party, or to any employee, officer or agent of any party, which is not
contained in this Agreement, shall be binding or valid. This Agreement may be supplemented,
altered, amended, modified or revoked by a writing only, signed by the Parties hereto. The
headings herein are for convenience only and shall have no significance in the interpretation
hereof. The Parties stipulate and agree that this Agreement shall be deemed and considered for all
purposes, as prepared through the joint efforts of the Parties, and shall not be construed against
one party or the other as a result of the preparation, submittal or other event of negotiation,
drafting or execution thereof. It is understood and agreed that there shall be no third-party
beneficiary of this Agreement,
and that the provisions hereof do not impart enforceable rights in anyone who is not a direct,
initial party hereto.

     19.14. Severability.

          If any provision of this Agreement is found by a court of competent jurisdiction to be invalid
or unenforceable, that provision will be deemed modified to the extent necessary to make it valid
and enforceable, and if it cannot be so modified, it

54

 

shall be deemed deleted and the remainder of
the Agreement shall continue and remain in full force and effect.

     19.15. Exhibits.

          All Exhibits attached to this Agreement, and the terms of those Exhibits which are referred to
in this Agreement, are made a part hereof and incorporated herein by reference.

     19.16. Survival.

          Unless otherwise specifically provided in this Agreement, all of the representations,
warranties, indemnities, covenants and agreements of or by the Parties hereto shall survive the
execution and delivery of the each Conveyance, Assignment and Bill of Sale. Additionally, those
provisions set forth in Section 6.3 shall survive the execution and delivery of the Conveyance,
Assignment and Bill of Sale, and shall be deemed as between the Parties, there successors and
assigns to be covenants running with the land.

     19.17. Subsequent Adjustments.

          Regardless of the date set for the Final Settlement, Optionee and Optionor agree that their
intent is to allow for the earliest practical forwarding of revenue and reimbursement of expenses
between them, and Optionor and Optionee recognize that either may receive funds or pay expenses
after the Final Settlement Date which are properly the property or obligation of the other.
Therefore, upon receipt of net proceeds or payment of net expenses due to or payable by the other
party hereto, whichever occurs first, Optionor or Optionee, as the case may be, shall submit a
statement to the other party hereto showing the relevant items of income and expense with
supporting documentation. Payment of any net amount due by Optionor or Optionee, as the case may
be, on the basis thereof shall be made within ten (10) days of receipt of the statement.

     19.18. Counterparts.

          This Agreement may be executed in any number of counterparts, and each and every counterpart
shall be deemed for all purposes one (1) agreement.

     19.19. Subrogation.

          To the fullest extent allowed by law and the applicable agreements with third parties,
Optionor grants Optionee a right of subrogation in all claims or rights Optionor may have against
third parties to the extent they relate to the Assumed Obligations.

55

 

     19.20. Suspended Monies.

          At Closing, Optionor shall deliver to Optionee the monies held in suspense by Optionor for the
account of third parties, or relate to a title dispute or question as to ownership, along with any
documentation in Optionor’s possession or available to Optionor in support of such suspended funds.
Any additional monies of this nature received by Optionor after Closing shall be remitted to
Optionee within one hundred twenty (120) days after the Closing hereof. At Closing, Optionee shall
assume the obligation for the payment of these monies.

     19.21. Optionee as Operator.

After the Closing Date, Optionee shall operate, manage, and administer the Assets as a reasonable
prudent operator and in a good and workmanlike manner in accordance with the West Hastings Unit
Operating Agreement. The Parties acknowledge that changes and amendments to the West Hastings Unit
Operating Agreement may become necessary and required by both Parties and will be negotiated as
needed. These changes and amendments may be in the form of changes and amendments to the existing
West Hastings Unit Operating Agreement, a new unit operating agreement, or a side letter agreement.

          IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above
written.

	 	 	 	 	 
	 	TEXCAL ENERGY SOUTH TEXAS, L.P.

     By: TEXCAL ENERGY (GP) LLC.

 	 
	 	By:  	/s/ William Schneider
 	 
	 	 	William Schneider 	 
	 	 	President 	 

	 	 	 	 	 
	 	DENBURY ONSHORE, LLC

 	 
	 	By:  	/s/ H. Raymond Dubuisson
 	 
	 	 	H. Raymond Dubuisson 	 
	 	 	Vice President-Land 	 
	 

56

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