Document:

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                                                                    Exhibit 10.1

                               STOCK OPTION PLAN
                                      OF
                           CANAAN ENERGY CORPORATION
                        (effective January ____, 2000)

1.   Purpose of the Plan

     This Stock Option Plan (the "Plan") is intended as an incentive to
managerial and other key employees of Canaan Energy Corporation (the "Company"),
and its subsidiaries.  Its purposes are to retain employees with a high degree
of training, experience, and ability, to attract new employees whose services
are considered unusually valuable, to encourage the sense of proprietorship of
such persons, and to stimulate the active interest of such persons in the
development and financial success of the Company.  Options granted under the
Plan may be either "incentive stock options" as provided by Section 422 of the
Internal Revenue Code of 1986, as amended, and as may be further amended from
time to time ( the "Internal Revenue Code" or "Code") or options which do not
qualify as incentive stock options.

2.   Administration of the Plan

     (a) Administration.  The Plan shall be administered by the Board of
         --------------
Directors of the Company, or if the Board so authorizes, by a committee (the
"Committee") of the Board of Directors consisting of not less than two (2)
members of the Board of Directors.  Unless the context otherwise requires,
references herein to the Committee shall be references to the Board of Directors
or the Committee.  Members of the Committee shall serve at the pleasure of the
Board, and the Board may from time to time remove members from, or add members
to, the Committee.  A majority of the members of the Committee shall constitute
a quorum for the transaction of business.  Action approved in writing by a
majority of the members of the Committee then serving shall be fully effective
as if the action had been taken by unanimous vote at a meeting duly called and
held.

     (b) Authority.  The Committee is authorized to construe and interpret the
         ---------
Plan, to promulgate, amend and rescind rules and regulations relating to the
implementation of the Plan and to make all other determinations necessary or
advisable for the administration of the Plan.  The Committee may designate
persons other than members of the Committee to carry out its responsibilities
under such conditions and limitations as it may prescribe, except that the
Committee may not delegate its authority with regard to selection for
participation of, and the granting of options to, persons subject to Sections
16(a) and 16(b) of the Exchange Act.  Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration, or application of the Plan shall be final, conclusive and
binding upon all persons participating in the Plan and any person validly
claiming under or through persons participating in the Plan.  The Company shall
effect the granting of options under the Plan in accordance with the
determinations made by the Committee, by execution of instruments in writing in
such form as approved by the Committee.
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3.   Designation of Participants

     Persons eligible for options under the Plan shall consist of managerial and
other key employees of the Company and/or its subsidiaries who hold positions of
significant responsibilities or whose performance or potential contribution, in
the sole judgment of the Committee, will benefit the future success of the
Company.

4.   Shares Subject to the Plan

     Subject to adjustment as provided in Paragraph 8 hereof, there shall be
subject to the Plan five hundred thousand (500,000) shares of common stock of
the Company, par value $0.01 per share. The shares subject to the Plan shall
consist of authorized but unissued shares or treasury shares held by the
Company.  Any of such shares that may remain unsold and that are not subject to
outstanding options at the termination of the Plan shall cease to be subject to
the Plan, but until termination of the Plan, the Company shall at all times make
available a sufficient number of shares to meet the requirements of the Plan.
Should any option expire or be canceled prior to its exercise in full, or a
portion of an option is surrendered in payment for the exercise of an option or
satisfaction of any tax withholding obligations, the shares theretofore subject
to such options may again be subjected to an option under the Plan.  Any shares
not subject to outstanding options at the expiration of the Plan or at any time
during the life of the Plan may be dedicated to other plans that the Company may
adopt and to the extent so dedicated, such shares shall not be subject to this
Plan.

5.   Option Price

     (a) Price.  The purchase price for each share placed under option pursuant
         -----
to the Plan shall be determined by the Committee, but shall in no event be less
than 100% of the Fair Market Value (as defined below) of such share on the date
the option is granted.

     (b) Fair Market Value.  "Fair Market Value" means the average of the high
         -----------------
and low sales prices of the shares of Common Stock on any national securities
exchange on which the shares are listed on the day on which such value is to be
determined or, if no shares were traded on such day, on the next preceding day
on which shares were traded, as reported by such exchange, by National Quotation
Bureau, Inc. or other national quotation service.  If the Common Stock is not
listed on a national securities exchange, Fair Market Value means the average of
the closing "bid" and "asked" prices of the shares of Common Stock in the over-
the-counter market on the date on which such value is to be determined or, if
such prices are not available, the last sales price on such day or, if no shares
were traded on such day, on the next preceding day on which the shares were
traded, as reported by the National Association of Securities Dealers Automatic
Quotation System (NASDAQ) or other national quotation service.  If at any time
shares of Common Stock are not traded on an exchange or in the over-the-counter
market, Fair Market Value shall be the value determined by the Committee, taking
into consideration those factors affecting or reflecting value that they deem
appropriate.  For purposes of determining the purchase price of an incentive
stock option, Fair Market Value shall in any event be determined in accordance
with Section 422 of the Code.

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6.   Terms and Exercise of Options

     (a) General.  The Committee, in granting options hereunder, shall have
         -------
discretion to determine the times when, and the terms upon which, options shall
be exercisable, including such provisions as deemed advisable to permit
qualification as "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code, as the same may from time to time be amended for
options intended to qualify as such, and incentive stock options outstanding
under the Plan may be amended, if necessary, to permit such qualification.  The
Committee shall designate at the time of granting of any option whether such
option or any portion thereof shall be an "incentive stock option."  Each option
shall be evidenced by an agreement between the Company and the optionee
containing provisions consistent with this Plan and such other provisions as the
Committee may determine as provided herein.  Unless otherwise determined by the
Committee at the time of grant, all options shall become exercisable at the rate
of 25% of the total shares subject to the option on each of the first four (4)
anniversary dates of the date of grant.  The Committee shall also be entitled to
accelerate the date any outstanding option becomes exercisable at any time.

     (b) Term.  In the event of the death of an optionee while in the employ of
         ----
the Company, any unvested portion of the option as of the date of death shall be
vested as of the date of death and the option shall be exercisable in full by
the heirs or other legal representatives of the optionee within twelve (12)
months following the date of death.  In the event of termination of employment
for any reason other than death or termination for cause (and except as
otherwise provided in subsection (e) below) such option shall be exercisable by
the employee or his legal representative within three (3) months of the date of
termination as to all then vested portions.  In addition, the Committee may in
its sole discretion, approve acceleration of the vesting of any unvested
portions of the option.  If an optionee's employment with the Company is
terminated for cause, the option shall terminate as of the date of such
termination of employment and the optionee shall have no further rights to
exercise any portion of the option.  "Termination for cause" means any discharge
for violation of the policies and procedures of the Company or for other job
performance or conduct that is detrimental to the best interests of the Company,
as determined by the Committee in its sole discretion.  Notwithstanding any of
the foregoing, in no event may an option be exercised more than ten (10) years
after the date of its grant.

     (c) Method of Exercise.  Options may be exercised, whether in whole or in
         ------------------
part, by written notification to the Company accompanied by cash or a certified
check for the aggregate purchase price of the number of shares being purchased,
or upon exercise of an option, the optionee shall be entitled (unless otherwise
provided in the agreement evidencing the option), without the requirement of
further approval or other action by the Committee, to pay for the shares (i) by
tendering stock of the Company that has been owned by the optionee for at least
six (6) months with such stock to be valued at the Fair Market Value (as
determined under Section 5) on the date immediately preceding the date of
exercise or (ii) with a combination of cash and stock that has been owned by the
optionee for at least six (6) months as provided above.

     In addition, upon exercise of an option, the optionee may, with the prior
approval of the Committee, pay for the shares (a) by tendering stock of the
Company already owned by the optionee

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but that has not been held by the optionee for at least six (6) months with such
             ---
stock to be valued at the Fair Market Value (as determined under Section 5) on
the date immediately preceding the date of exercise, (b) surrendering a portion
of the option with such surrendered option to be valued based on the difference
between the Fair Market Value (as determined under Section 5) of the shares
surrendered on the date immediately preceding the date of exercise and the
aggregate option purchase price of the shares surrendered ("Surrender Value"),
or (c) with a combination of cash, stock of the Company that has not been held
                                                                 ---
by the optionee for at least six (6) months or surrender of options.

     The Committee may also permit optionees, either on a selective or aggregate
basis, to simultaneously exercise options and sell the shares of common stock
thereby acquired, pursuant to a brokerage or similar arrangement, approved in
advanced by the Committee, and use the proceeds from such sale as payment of the
purchase price of the shares being acquired upon exercise of any option.

     (d) Limitations Applicable To Incentive Options.  To the extent the
         -------------------------------------------
aggregate Fair Market Value of stock (determined as of the date of grant) with
respect to which incentive stock options are exercisable for the first time by
any individual during any calendar year (under all Company plans) exceeds one
hundred thousand dollars ($100,000), such options shall be treated as options
that are not incentive stock options.  Options intended to be incentive options
shall have such additional terms and provisions as required by the Internal
Revenue Code.

     (e) Continued Service as a Director.  Any provisions of the Plan to the
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contrary notwithstanding, for purposes of Section 6(b) above, in the event an
optionee who is also a director of the Company ceases to be employed by the
Company but continues to serve as a director of the Company, the Committee, in
its sole discretion, may determine that all or a portion of such optionee's
options shall not expire three (3) months following the date of termination of
employment with the Company as is provided in Section 6(b) above, but instead
shall continue in full force and effect until the such optionee ceases to be a
director of the Company, but in no event beyond the stated expiration date of
the options as set forth in the applicable option agreement.  Termination of any
such option in connection with the optionee's termination of service as a
director shall be in accordance with the provisions of Section 6(b) above;
provided, however, that (i) the terms "employ" and "employment" as used therein
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shall be replaced with the terms "service" and "service on the Board of
Directors," respectively, and (ii) the phrase "termination for cause" shall mean
any removal from the Board of Directors for cause in accordance with applicable
law and the Certificate of Incorporation and By-Laws of the Company.

     (f) Individual Limitation.  Subject to adjustment from time to time, as
         ---------------------
provided in Section 8, not more than two hundred thousand (200,000) shares of
common stock of the Company may be made subject to Options under the Plan to any
individual in the aggregate in any one (1) calendar year, such limitations to be
applied in a manner consistent with the requirements of, and only to the extent
required for compliance with, the exclusion from the limitation or deductibility
of compensation under Section 162(m) of the Code.

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<PAGE>

7.   Assignability

     During an optionee's lifetime, an option may be exercisable only by the
optionee and options granted under the Plan and the rights and privileges
conferred thereby shall not be subject to execution, attachment or similar
process and may not be transferred, assigned, pledged or hypothecated in any
manner (whether by operation of law or otherwise) other than by will or by the
applicable laws of descent and distribution.  Notwithstanding the foregoing or
any other provisions of the Plan, to the extent permitted by applicable law, the
Committee may, in its sole discretion, permit recipients of options that do not
qualify as incentive stock options under Section 422 of the Internal Revenue
Code to transfer such non-incentive options by gift or other means pursuant to
which no consideration is given for such transfer.  The Committee shall impose
in connection with any non-incentive options transferred pursuant to the
foregoing sentence such limitations and restrictions as it deems appropriate.
Any other attempt to transfer, assign, pledge, hypothecate or otherwise dispose
of any option under the Plan or of any right or privilege conferred thereby,
contrary to the provisions of the Plan, or the sale or levy or any attachment or
similar process upon the rights and privileges conferred thereby, shall be null
and void ab initio.

8.   Changes in Capitalization

     (a) No Effect on Company Rights.  Subject to the other provisions of this
         ---------------------------
Plan, the existence of the Plan and the options granted hereunder shall not
affect or restrict in any way the right or power of the Board or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of bonds, debentures, preferred or prior preference stocks ahead of or affecting
the Company's capital stock or the rights thereof, any issue of shares of Common
Stock or shares of any other class of capital stock or warrants or rights to
acquire such shares, the dissolution or liquidation of the Company or any sale
or transfer of all or any part of its assets or business, or any other corporate
act or proceeding.

     (b) Changes in Capitalization.  In the event of any change in
         -------------------------
capitalization affecting the common stock of the Company, such as a stock
dividend, stock split, recapitalization, merger, consolidation, split-up,
combination or exchange of shares or other form of reorganization, liquidation,
sale of assets or any other change affecting the common stock ("Change in
Capitalization"), such proportionate adjustments, shall be made with respect to
the aggregate number of shares of common stock for which options may be granted
under the Plan, the number of shares of common stock (or other securities)
covered by each outstanding option, and the price per share of outstanding
options to the end that the optionee shall be entitled to receive the same
number and kind of stock, securities, cash, property or other consideration as
if such option had been exercised immediately preceding such Change in
Capitalization.

     (c) Other Distributions.  The Committee may also make such adjustments in
         -------------------
the number of shares covered by, and the price or other value of any outstanding
options in the event of a spin-off or other distribution (other than normal cash
dividends) of Company assets to shareholders.

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<PAGE>

9.   Change in Control

     (a) Effect on Options.  In the event of a Change in Control (as defined
         -----------------
below) of the Company, in addition to any adjustments required by Section 8(b):

         (i)    all options outstanding on the date of such Change in Control
     shall become immediately and fully exercisable, and

         (ii)   an optionee will be permitted to surrender for cancellation
     within sixty (60) days after such Change in Control, any option or portion
     of such option to the extent not yet exercised and the optionee will be
     entitled to receive a cash payment in an amount equal to the excess, if
     any, of (A) the Fair Market Value on the date preceding the date of
     surrender, of the shares subject to the option or portion thereof
     surrendered, over (B) the aggregate exercise price for the shares under the
     option or portion thereof surrendered.

     (b) Change in Control.  A "Change in Control" of the Company shall mean the
         -----------------
occurrence after the effective date of the Plan of:

         (i)    An acquisition (other than directly from the Company) of any
     voting securities of the Company (the "Voting Securities") by any "Person"
     (as the term person is used for purposes of Section 13(d) or 14(d) of the
     Exchange Act) immediately after which such Person has "Beneficial
     Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange
     Act) of fifty percent (50%) or more of the combined voting power of the
     Company's then outstanding Voting Securities;

         (ii)   The individuals who, as of the date of adoption of the Plan by
     the Board, are members of the Board (the "Incumbent Board"), cease for any
     reason to constitute at least two-thirds of the members of the Board;
     provided, however, that if the election, or nomination for election by the
     Company's common stockholders, of any new director was approved by a vote
     of at least two-thirds of the Incumbent Board, such new director shall, for
     purposes of this Plan, be considered as a member of the Incumbent Board;
     provided further, however, that no individual shall be considered a member
     of the Incumbent Board if such individual initially assumed office as a
     result of either an actual or threatened 'election contest' (as described
     in Rule 14A-11 promulgated under the Exchange Act) or other actual or
     threatened solicitation of proxies or consents by or on behalf of a Person
     other than the Board (a "Proxy Contest") including by reason of any
     agreement intended to avoid or settle any Election Contest or Proxy
     Contest; or

          (iii) The consummation of:

                (A) A merger, consolidation or reorganization involving the
          Company, unless

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                    (1) the stockholders of the Company, immediately before such
               merger, consolidation or reorganization, own, directly or
               indirectly immediately following such merger, consolidation or
               reorganization, at least sixty percent (60%) of the combined
               voting power of the outstanding voting securities of the
               corporation resulting from such merger or consolidation or
               reorganization (the "Surviving Corporation") in substantially the
               same proportion as their ownership of the Voting Securities
               immediately before such merger, consolidation or reorganization,

                    (2) the individuals who were members of the Incumbent Board
               immediately prior to the execution of the agreement providing for
               such merger, consolidation or reorganization constitute at least
               two-thirds of the members of the board of directors of the
               Surviving Corporation, and

                    (3) no Person, other than the Company, any Subsidiary, any
               employee benefit plan (or any trust forming a part thereof)
               maintained by the Company, the Surviving Corporation, or any
               Subsidiary or any Person who, immediately prior to such merger,
               consolidation or reorganization had Beneficial Ownership of fifty
               percent (50%) or more of the then outstanding Voting Securities,
               has Beneficial Ownership of fifty percent (50%) or more of the
               combined voting power of the Surviving Corporation's then
               outstanding voting securities;

               (B)  A complete liquidation or dissolution of the Company; or

               (C)  An agreement for the sale or other disposition of all or
          substantially all of the assets of the Company to any Person (other
          than a transfer to a Subsidiary).

     Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by the Company that, by
reducing the number of Voting Securities outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Person, provided that if a
Change in Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company, and after such
share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities which increases the percentage of the
then outstanding Voting Securities Beneficially Owned by the Subject Person,
then a Change in Control shall occur or

10.  Registration and Listing

     The Company from time to time shall take such steps as may be necessary to
cause the issuance of shares upon the exercise of options granted under the Plan
to be registered under the Securities Act of 1933, as amended, and such other
federal or state securities laws as may be

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<PAGE>

applicable. The Company shall also from time to time take such steps as may be
necessary to list the shares issuable upon exercise of options granted under the
Plan for trading on such stock exchanges on which the Company's then outstanding
shares are admitted to listed trading.

11.  Effective and Expiration Dates of Plan

     This Plan became effective as of January ____, 2000, the date of its
approval by the Board of Directors and the Shareholders of the Company.  No
options shall be granted pursuant to this Plan after January ___, 2010.

12.  Amendments or Termination

     The Committee may at any time amend, alter or discontinue the Plan in such
manner as it may deem advisable.  Any such amendment or alteration may be
effected without the approval of the shareholders of the Company, except to the
extent such approval may be required by applicable laws or by the rules of any
securities exchange upon which the Company's outstanding shares are admitted to
listed trading.

     No amendment, alteration or discontinuation of the Plan shall adversely
affect any stock option grants made prior to the time of such amendment,
alteration or discontinuation, except with the consent of the holder of the
affected options.

13.  Governmental Regulations

     Notwithstanding any provision hereof, or any option granted hereunder, the
obligation of the Company to sell and deliver shares under any such option shall
be subject to all applicable laws, rules and regulations and to such approvals
by any governmental agencies or national securities exchange as may be required,
and the optionee shall agree that he will not exercise any option granted
hereunder, and that the Company will not be obligated to issue any shares under
any such option, if the exercise thereof or if the issuance of such shares shall
constitute a violation by the optionee or the Company of any applicable law or
regulation.  The Company shall be entitled to require as a condition to the
issuance of any shares of Common Stock upon exercise of an option that the
optionee remit an amount sufficient, in the Company's opinion, to satisfy all
FICA, federal, state or other withholding tax requirements related thereto.
Unless otherwise provided in the Agreement evidencing the option, an optionee
shall be entitled, without the requirement of further approval or other action
by the Committee, to satisfy such obligation in whole or in part (i) by
tendering stock of the Company already owned by the optionee with such stock to
be valued at the Fair Market Value (as determined under Section 5) on the date
immediately preceding the date of exercise of the options, (ii) by surrendering
a portion of his or her option with such surrendered option to be valued at the
Surrender Value (as determined under Section 6(c)), or  (iii) by a combination
of cash, stock of the Company and surrender of options.

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<PAGE>

14.  Governing Law

     The Plan and all actions taken thereunder shall be governed by and
construed in accordance with the laws of the state of Oklahoma and applicable
federal law.

15.  Severability

     If any provision of this Plan is determined to be invalid or unenforceable
for any reason, the remaining provisions of the Plan shall remain in effect and
be interpreted to reasonably effect the intent of the Plan.

                                       9<PAGE>

                                                                    EXHIBIT 10.2

                           CANAAN ENERGY CORPORATION
                           INDEMNIFICATION AGREEMENT
                           -------------------------

          This INDEMNIFICATION AGREEMENT is dated effective as of
[_______][___], [____], by and between Canaan Energy Corporation, an Oklahoma
corporation (the "Company"), and the director of the Company whose name appears
on the signature page of this Agreement ("Indemnitee") with reference to the
following circumstances.

          A.  Highly competent persons are becoming more reluctant to serve
     publicly-held corporations as directors or in other capacities unless they
     are provided with reasonable protection through insurance or
     indemnification against risks of claims and actions against them arising
     out of their service to and activities on behalf of the corporation.

          B.  It is reasonable, prudent and necessary for the Company
     contractually to obligate itself to indemnify such persons to the fullest
     extent permitted by applicable law so that they will serve or continue to
     serve the Company free from undue concern that they will not be so
     indemnified.

          C.  Indemnitee is willing to serve, to continue to serve and to take
     on additional service for or on behalf of the Company on the condition that
     Indemnitee be so indemnified.

          In consideration of the promises and the covenants contained herein,
the Company and Indemnitee hereby agree as follows:

          1.   Definitions.  For purposes of this Agreement:
               -----------

          (a) "Affiliate" shall mean any corporation, partnership, joint
venture, trust or other enterprise in respect of which the Indemnitee is or was
or will be serving as a director, advisory director or board committee member,
officer, trustee or employee at the request of the Company and including, but
not limited to, any employee benefit plan of the Company or any of the
foregoing.

          (b) "Board" shall mean the Board of Directors of the Company.

          (c) "Disinterested Director" shall mean a director of the Company who
is not and was not a party to the Proceeding in respect of which indemnification
is being sought by Indemnitee.

          (d) "Expenses" shall include all attorneys' fees and costs, retainers,
court costs, transcripts, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees and all other disbursements or expenses incurred in
connection with asserting or defending claims.

          (e) "Independent Counsel" shall mean a law firm or lawyer that at the
time of the determination neither is presently nor in the past year has been
retained to represent:  (i) the Company or Indemnitee in any matter material to
any such party or (ii) any other party to the
<PAGE>

Proceeding giving rise to a claim for indemnification hereunder in any matter
material to such other party. Notwithstanding the foregoing, the term
"Independent Counsel" shall not include any firm or person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing the Company or Indemnitee in an action to
determine Indemnitee's right to indemnification under this Agreement.

          (f)  "Losses" shall mean all losses, claims, liabilities, judgments,
fines and amounts paid in settlement in connection with any Proceeding.

          (g)  "Proceeding" includes any action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any other
proceeding whether civil, criminal, administrative or investigative; provided,
                                                                     --------
however, that the term "Proceeding" shall include any action instituted by an
-------
Indemnitee (other than an action to enforce indemnification rights under this
Agreement) only if such action is authorized by the Board.

          2.   Service by Indemnitee.  Indemnitee shall begin or continue to
               ---------------------
serve the Company and any Affiliates as a director, and/or officer and/or
trustee.  Notwithstanding anything contained herein, this Agreement shall not
create a contract of employment between the Company and Indemnitee, and the
termination of Indemnitee's relationship with the Company or an Affiliate by
either party hereto shall not be restricted by this Agreement.

          3.   Indemnification.  The Company shall indemnify Indemnitee for, and
               ---------------
hold Indemnitee harmless from and against, any Losses or Expenses at any time
incurred by or assessed against Indemnitee arising out of or in connection with
the service of Indemnitee as a director, advisory director, Board Committee
member, officer or trustee of the Company or of an Affiliate (collectively
referred to as a "Company Official") to the fullest extent permitted by the laws
of the State of Oklahoma in effect on the date hereof or as such laws may from
time to time hereafter be amended to increase the scope of such permitted
indemnification.  Without diminishing the scope of the indemnification provided
by this Section 3, the rights of indemnification of Indemnitee provided
hereunder shall include but shall not be limited to those rights set forth
hereinafter.

          4.   Action or Proceeding Other Than an Action by or in the Right of
               ---------------------------------------------------------------
the Company.  Indemnitee shall be entitled to the indemnification rights
-----------
provided herein if Indemnitee is a person who was or is made a party or is
threatened to be made a party to any contemplated, pending or completed
Proceeding, other than an action by or in the right of the Company, as the case
may be, by reason of (a) the fact that Indemnitee is or was a Company Official,
or (b) anything done or not done by Indemnitee in any such capacity.  Pursuant
to this Section, Indemnitee shall be indemnified against Losses or Expenses
incurred by Indemnitee or on Indemnitee's behalf in connection with any
Proceeding, if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal Proceeding, had no reasonable cause
to believe his conduct was unlawful.

                                      -2-
<PAGE>

          5.   Actions by or in the Right of the Company.  Indemnitee shall be
               -----------------------------------------
entitled to the indemnification rights provided herein if Indemnitee is a person
who was or is made a party or is threatened to be made a party to any pending,
completed or threatened Proceeding brought by or in the right of the Company to
procure a judgment in its favor by reason of (a) the fact that Indemnitee is or
was a Company Official, or (b) anything done or not done by Indemnitee in any
such capacity.  Pursuant to this Section, Indemnitee shall be indemnified
against Losses or Expenses incurred by Indemnitee or on Indemnitee's behalf in
connection with any Proceeding if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company.  Notwithstanding the foregoing provisions of this Section, no such
indemnification shall be made in respect of any claim, issue or matter as to
which Oklahoma law expressly prohibits such indemnification by reason of an
adjudication of liability of Indemnitee to the Company; provided, however, that
                                                        --------  -------
in such event such indemnification shall nevertheless be made by the Company to
the extent that the court in which such action or suit was brought shall
determine that, despite the adjudication of liability but in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnification.

          6.   Indemnification for Losses and Expenses of Party Who is Wholly or
               -----------------------------------------------------------------
Partly Successful.  Notwithstanding any provision of this Agreement, to the
-----------------
extent that Indemnitee has been wholly successful on the merits or otherwise in
any Proceeding on any claim, issue or matter, Indemnitee shall be indemnified
against all Losses or Expenses incurred by Indemnitee or on Indemnitee's behalf
in connection therewith.  If Indemnitee is not wholly successful in such
Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the Company shall
indemnify Indemnitee to the maximum extent permitted by law, against all Losses
and Expenses incurred by Indemnitee in connection with each successfully
resolved claim, issue or matter.  In any review or Proceeding to determine the
extent of indemnification, the Company shall bear the burden of proving any lack
of success and which amounts sought in indemnity are allocable to claims, issues
or matters that were not successfully resolved.  For purposes of this Section
and without limitation, the termination of any such claim, issue or matter by
dismissal with or without prejudice shall be deemed to be a successful
resolution as to such claim, issue or matter.

          7.   Payment for Expenses of a Witness.  Notwithstanding any other
               ---------------------------------
provision of this Agreement, to the extent that Indemnitee is, by reason of the
fact that Indemnitee is or was a Company Official, a witness in any Proceeding,
the Company shall pay to Indemnitee all Expenses actually and reasonably
incurred by Indemnitee or on Indemnitee's behalf in connection therewith.

          8.   Advancement of Expenses and Costs.  All Expenses incurred by or
               ---------------------------------
on behalf of Indemnitee (or reasonably expected by Indemnitee to be incurred by
Indemnitee within three months) in connection with any Proceeding shall be paid
by the Company in advance of the final disposition of such Proceeding within
twenty days after the receipt by the Company of a statement or statements from
Indemnitee requesting from time to time such advance or advances whether or not
a determination to indemnify has been made under Section 9.  Indemnitee's
entitlement to such advancement of Expenses shall include those incurred in
connection with any Proceeding by

                                      -3-
<PAGE>

Indemnitee seeking an adjudication or award in arbitration pursuant to this
Agreement. Such statement or statements shall evidence such Expenses incurred
(or reasonably expected to be incurred) by Indemnitee in connection therewith
and shall include or be accompanied by a written undertaking in form and
substance satisfactory to the Company and the Indemnitee by or on behalf of
Indemnitee to repay such amount if it shall ultimately be determined that
Indemnitee is not entitled to be indemnified therefor pursuant to the terms of
this Agreement.

          9.   Procedure for Determination of Entitlement to Indemnification.
               -------------------------------------------------------------
(a) When seeking indemnification under this Agreement (which shall not include
in any case the right of Indemnitee to receive payments pursuant to Section 7
and Section 8 hereof, which shall not be subject to this Section 9), Indemnitee
shall submit a written request for indemnification to the Company.  Such request
shall include documentation or information that is reasonably necessary for the
Company to make a determination of Indemnitee's entitlement to indemnification
hereunder and that is reasonably available to Indemnitee.  Determination of
Indemnitee's entitlement to indemnification shall be made promptly, but in no
event later than 90 days after receipt by the Company of Indemnitee's written
request for indemnification.  The Company shall, promptly upon receipt of
Indemnitee's request for indemnification, advise the Board that Indemnitee has
made such request for indemnification.

          (b)  The entitlement of Indemnitee to indemnification under this
Agreement shall be determined in the specific case by a majority vote of a
quorum of the Board consisting of Disinterested Directors.  If such a quorum is
not obtainable or the Board, by the majority vote of Disinterested Directors,
directs, the determination shall be made by Independent Counsel in a written
opinion.

          (c)  In the event the determination of entitlement is to be made by
Independent Counsel, such Independent Counsel shall be selected by the Board and
approved by Indemnitee. Upon failure of the Board to so select such Independent
Counsel or upon failure of Indemnitee to so approve, such Independent Counsel
shall be selected by the American Arbitration Association or such other person
as such Association shall designate to make such selection.  All Expenses of the
Independent Counsel incurred in connection with acting pursuant to this
Agreement shall be borne by the Company.

          (d)  If the person or persons empowered pursuant to Section 9(b)
hereof to make a determination with respect to entitlement to indemnification
shall have failed to make the requested determination within 90 days after
receipt by the Company of such request, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be absolutely entitled to such indemnification, absent (i)
misrepresentation by Indemnitee of a material fact in the request for
indemnification or (ii) a final judicial determination that all or any part of
such indemnification is expressly prohibited by law.

          (e)  The termination of any Proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
                                 ---- ----------
of itself, adversely affect

                                      -4-
<PAGE>

the rights of Indemnitee to indemnification hereunder except as may be
specifically provided herein, or create a presumption that Indemnitee did not
act in good faith and in a manner that Indemnitee reasonably believed to be in
or not opposed to the best interests of the Company or create a presumption that
(with respect to any criminal action or proceeding) Indemnitee had reasonable
cause to believe that Indemnitee's conduct was unlawful.

          (f)  For purposes of any determination of good faith hereunder,
Indemnitee shall be deemed to have acted in good faith if in taking such action
Indemnitee relied on the records or books of account of the Company or an
Affiliate, including financial statements, or on information supplied to
Indemnitee by the officers of the Company or an Affiliate in the course of their
duties, or on the advice of legal counsel for the Company or an Affiliate or on
information or records given or reports made to the Company or an Affiliate by
an independent certified public accountant or by an appraiser, petroleum
engineer or other expert selected with reasonable care by the Company or an
Affiliate.  The Company shall have the burden of establishing the absence of
good faith.  The provisions of this Section 9(f) shall not be deemed to be
exclusive or to limit in any way the other circumstances in which the Indemnitee
may be deemed to have met the applicable standard of conduct set forth in this
Agreement.

          (g)  The knowledge and/or actions, for failure to act, of any
director, officer, agent or employee of the Company or an Affiliate shall not be
imputed to Indemnitee for purposes of determining the right to indemnification
under this Agreement.

          10.  Remedies in Cases of Determination not to Indemnify or to Advance
               -----------------------------------------------------------------
Expenses.  (a) In the event that (i) a determination is made that Indemnitee is
--------
not entitled to indemnification hereunder, (ii) advances are not made pursuant
to Section 8 hereof or (iii) payment has not been timely made following a
determination of entitlement to indemnification pursuant to Section 9 hereof,
Indemnitee shall be entitled to seek a final adjudication either through an
arbitration proceeding or in an appropriate court of the State of Oklahoma or
any other court of competent jurisdiction of Indemnitee's entitlement to such
indemnification or advance.

          (b)  In the event a determination has been made in accordance with the
procedures set forth in Section 9 hereof, in whole or in part, that the
Indemnitee is not entitled to indemnification, any judicial proceeding or
arbitration referred to in paragraph (a) of this Section 10 shall be de novo and
                                                                     -- ----
Indemnitee shall not be prejudiced by reason of any such prior determination
that Indemnitee is not entitled to indemnification, and the Company shall bear
the burdens of proof specified in paragraphs 6 and 9 hereof in such proceeding.

          (c)  If a determination is made or deemed to have been made pursuant
to the terms of Section 9 or 10 hereof that Indemnitee is entitled to
indemnification, the Company shall be bound by such determination in any
judicial proceeding or arbitration in the absence of (i) a misrepresentation of
a material fact by Indemnitee or (ii) a final judicial determination that all or
any part of such indemnification is expressly prohibited by law.

                                      -5-
<PAGE>

          (d)  The Company and Indemnitee shall be precluded from asserting that
the procedures and presumptions of this Agreement are not valid, binding and
enforceable.  The Company and Indemnitee shall stipulate in any such court that
the Company and Indemnitee are bound by all of the provisions of this Agreement
and are precluded from making any assertion to the contrary.

          (e)  To the extent deemed appropriate by the court, interest shall be
paid by the Company to Indemnitee at a reasonable interest rate for amounts that
the Company indemnifies or is obliged to indemnify the Indemnitee for the period
commencing with the date on which Indemnitee requested indemnification (or
reimbursement or advance of an Expense) and ending with the date that such
payment is made to Indemnitee by the Company.

          11.  Expenses Incurred by Indemnitee to Enforce this Agreement.  All
               ---------------------------------------------------------
Expenses incurred by Indemnitee in connection with the preparation and
submission of Indemnitee's request for indemnification hereunder shall be borne
by the Company.  In the event that Indemnitee is a party to or intervenes in any
proceeding in which the validity or enforceability of this Agreement is at issue
or seeks an adjudication to enforce Indemnitee's rights under, or to recover
damages for breach of, this Agreement, Indemnitee, if Indemnitee prevails in
whole in such action, shall be entitled to recover from the Company, and shall
be indemnified by the Company against any Expenses incurred by Indemnitee.  If
it is determined that Indemnitee is entitled to indemnification for part (but
not all) of the indemnification so requested, Expenses incurred in seeking
enforcement of such partial indemnification shall be reasonably prorated among
the claims, issues or matters for which the Indemnitee is entitled to
indemnification and for claims, issues or matters for which the Indemnitee is
not so entitled.

          12.  Non-Exclusivity.  The rights of indemnification and to receive
               ---------------
advances as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, a certificate of incorporation, by-laws, any agreement, a vote of
stockholders or a resolution of directors or otherwise.  To the extent
Indemnitee would be prejudiced thereby, no amendment, alteration, rescission or
replacement of this Agreement or any provision hereof shall be effective as to
Indemnitee with respect to any action taken or omitted by such Indemnitee in
Indemnitee's position with the Company or an Affiliate prior to such amendment,
alteration, rescission or replacement.

          13.  Duration of Agreement.  This Agreement shall apply to any claim
               ---------------------
asserted and any Losses and Expenses incurred in connection with any claim
asserted on or after the effective date of this Agreement and shall continue
until and terminate upon the later of:  (a) ten (10) years after Indemnitee has
ceased to serve as a Company Official; or (b) one (1) year after the final
termination of all pending or threatened Proceedings of the kind described
herein with respect to Indemnitee. This Agreement shall be binding upon the
Company and its successors and assigns and shall inure to the benefit of
Indemnitee and Indemnitee's spouse, assigns, heirs, devisee, executors,
administrators or other legal representatives.

                                      -6-
<PAGE>

          14.  Maintenance of D&O Insurance.  (a) So long as Indemnitee shall
               ----------------------------
continue to serve as a Company Official and thereafter so long as Indemnitee
shall be subject to any possible claim or threatened, pending or completed
Proceeding, whether civil, criminal or investigative, by reason of the fact that
Indemnitee was a Company Official, the Company shall use commercially reasonable
efforts to maintain in full force and effect directors' and officers' liability
insurance issued by reputable insurers and having policy amounts and deductibles
and other provisions as the Company deems to be commercially reasonable under
the circumstances.  The Company will keep the Indemnitee advised of the amount
and terms of any D&O Insurance and will promptly notify Indemnitee of any
proposed non-renewal, cancellation or termination of D&O Insurance as soon as
practicable after receiving notice thereof.

          15.  Severability.  Should any part, term or condition hereof be
               ------------
declared illegal or unenforceable or in conflict with any other law, the
validity of the remaining portions or provisions of this Agreement shall not be
affected thereby, and the illegal or unenforceable portions of the Agreement
shall be and hereby are redrafted to conform with applicable law, while leaving
the remaining portions of this Agreement intact.

          16.  Counterparts.  This Agreement may be executed in several
               ------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.

          17.  Headings.  Section headings are for convenience only and do not
               --------
control or affect meaning or interpretation of any terms or provisions of this
Agreement.

          18.  Modification and Waiver.  No supplement, modification or
               -----------------------
amendment of this Agreement shall be binding unless executed in writing by each
of the parties hereto.

          19.  No Duplicative Payment.  The Company shall not be liable under
               ----------------------
this Agreement to make any payment of amounts otherwise indemnifiable hereunder
if and to the extent that Indemnitee has otherwise actually received such
payment (net of Expenses incurred in collecting such payment) under this
Agreement, any insurance policy, contract, agreement or otherwise.

          20.  Notices.  All notices, requests, demands and other communications
               -------
provided for by this Agreement shall be in writing (including telecopier or
similar writing) and shall be deemed to have been given at the time when mailed
in a registered or certified postpaid envelope in any general or branch office
of the United States Postal Service, or sent by Federal Express or other similar
overnight courier service, addressed to the address of the parties stated below
or to such changed address as such party may have fixed by notice or, if given
by telecopier, when such telecopy is transmitted and the appropriate answerback
is received.

               (a)  If to Indemnitee, to the address on the signature page
hereof.

                                      -7-
<PAGE>

               (b)  If to the Company to:

                         Canaan Energy Corporation
                         119 North Robinson, Suite 600
                         Oklahoma City, Oklahoma 73102

          21.  Governing Law.  The parties agree that this agreement shall be
               -------------
governed by, and construed and enforced in accordance with, the internal laws of
the State of Oklahoma without giving effect to the conflicts of laws principles
thereof.

          22.  Entire Agreement.  Subject to the provisions of Section 12
               ----------------
hereof, this Agreement constitutes the entire understanding between the parties
and supersedes all proposals, commitments, writings, negotiations and
understandings, oral and written, and all other communications between the
parties relating to the subject matter of this Agreement.  This Agreement may
not be amended or otherwise modified except in writing duly executed by all of
the parties.  A waiver by any party of any breach or violation of this Agreement
shall not be deemed or construed as a waiver of any subsequent breach or
violation thereof.

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

                              CANAAN ENERGY CORPORATION

                              By:_______________________________
                              Title:____________________________

                              INDEMNITEE:

                              __________________________________
                              __________________________________

                              Address:__________________________
                              __________________________________

                                      -8-

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