Document:

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EXHIBIT 10.16

                                SECURED TERM NOTE
                                -----------------

                  FOR VALUE RECEIVED, CARNEROS ENERGY, INC., a Delaware
corporation ("CARNEROS"), GOTLAND OIL, INC., a Texas corporation ("GOTLAND"),
and CARNEROS ACQUISITION CORP., a Delaware corporation ("HOLDINGS", and
collectively with Carneros and Gotland, the "COMPANIES" and each a "COMPANY"),
jointly and severally promise to pay to LAURUS MASTER FUND, LTD., c/o M&C
Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the "HOLDER") or
its registered assigns or successors in interest, the sum of Twenty-One Million
Two Hundred Thousand Dollars ($21,200,000), together with any accrued and unpaid
interest hereon, on May 31, 2009 (the "MATURITY DATE") if not sooner paid.

                  Capitalized terms used herein without definition shall have
the meanings ascribed to such terms in that certain Securities Purchase
Agreement dated as of the date hereof by and among the Companies and the Holder
(as amended, modified and/or supplemented from time to time, the "PURCHASE
AGREEMENT").

                  The following terms shall apply to this Secured Term Note
(this "NOTE"):

                                   ARTICLE 1
                         CONTRACT RATE AND AMORTIZATION

                  1.1 CONTRACT RATE. Subject to Sections 2.2 and 3.9, interest
payable on the outstanding principal amount of this Note (the "PRINCIPAL
AMOUNT") shall accrue at a rate per annum equal to the "PRIME RATE" published in
THE WALL STREET JOURNAL from time to time (the "PRIME RATE"), plus two percent
(2%) (the "CONTRACT RATE"). The Contract Rate shall be increased or decreased as
the case may be for each increase or decrease in the Prime Rate in an amount
equal to such increase or decrease in the Prime Rate; each change to be
effective as of the day of the change in the Prime Rate. The Contract Rate shall
not at any time be less than eight percent (8%). Interest shall be (i)
calculated on the basis of a 360 day year, and (ii) payable monthly, in arrears,
commencing on the first day of the month immediately following the date on which
the Holder shall have released from escrow the proceeds from the sale of this
Note (the "First Payment Date"), on the first business day of each consecutive
calendar month thereafter through and including the Maturity Date, and on the
Maturity Date, whether by acceleration or otherwise.

                  1.2 PAYMENTS. Amortizing payments of the aggregate principal
amount outstanding under this Note at any time (the "PRINCIPAL AMOUNT") shall be
jointly and severally made by the Companies on the First Payment Date and on the
first business day of each succeeding month thereafter through and including the
Maturity Date (each, an "AMORTIZATION DATE"). Commencing on the first
Amortization Date, the Companies shall, jointly and severally, make monthly
payments of principal and interest to the Holder on each Amortization Date equal
to the Amortization Amount (as hereafter defined). All such payments shall be
applied by the Holder first to accrued and unpaid interest, fees and expenses
owing by the Companies to the Holder and then to the outstanding principal
balance owing hereunder. In the event the Amortization Amount during any month
is less than $150,000, then the Companies shall nevertheless be jointly and
severally required to make a monthly payment to the Holder during such month in
an amount equal to the difference between $150,000 and the then applicable

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Amortization Amount, which such payment shall be applied by the Holder to
accrued and unpaid interest, fees and expenses owing by any Company to the
Holder. Any outstanding Principal Amount together with any accrued and unpaid
interest and any and all other unpaid amounts which are then owing by any
Company to the Holder under this Note, the Purchase Agreement and/or any other
Related Agreement shall be due and payable on the Maturity Date. For purposes of
this Section, (a) the term "AMORTIZATION AMOUNT" shall mean an amount equal to
seventy-five percent (75%) of the Net Revenue relating to all oil and gas
properties of Carneros and Gotland (collectively, the "OIL AND GAS PROPERTIES")
for the calendar month immediately preceding the Amortization Date; PROVIDED,
HOWEVER, such percentage shall increase to one hundred percent (100%) upon the
occurrence and during the continuance of an Event of Default and (b) "NET
REVENUE" shall mean the gross proceeds paid to Carneros and Gotland in respect
of oil, gas and/or other hydrocarbon production in which it has an interest
whether or not such proceeds are remitted to the lockbox account and/or any
other blocked account established by any Company in connection with the
transactions contemplated hereby net of, in each case, with respect to the
period for which such Net Revenue relates, the reasonable ordinary day to day
expenses associated with Carneros' and Gotland's operation of the leases, wells
and equipment, including fuel, materials, labor, maintenance, routine production
equipment replacement, repairs, routine workover costs to maintain production
from an existing completed well, royalty, severance tax and ad valorem tax, in
each case using accounting practices and procedures ordinary and customary in
the oil and gas industry, all of which shall be subject to the Holder's approval
which shall be provided in the exercise of the Holder's reasonable discretion
based on such supporting documentation from Carneros and Gotland as the Holder
shall request.

                                   ARTICLE 2
                                EVENTS OF DEFAULT

                  2.1 EVENTS OF DEFAULT. The occurrence of any of the following
events set forth in this Section 2.1 shall constitute an event of default
("EVENT OF DEFAULT") hereunder:

                           (a) FAILURE TO PAY. Any Company fails to pay when due
any installment of principal, interest or other fees hereon in accordance
herewith, or any Company fails to pay any of the other Obligations (under and as
defined in the Master Security Agreement) when due, and, in any such case, such
failure shall continue for a period of three (3) business days following the
date upon which any such payment was due.

                           (b) BREACH OF COVENANT. Any Company or any Subsidiary
of any Company breaches any covenant or any other term or condition of this Note
in any material respect and such breach, if subject to cure, continues for a
period of fifteen (15) days after the occurrence thereof.

                           (c) BREACH OF REPRESENTATIONS AND WARRANTIES. Any
representation, warranty or statement made or furnished by any Company or any
Subsidiary of any Company in connection with the transaction contemplated
hereby, by the Purchase Agreement or any other Related Agreement shall at any
time be false or misleading in any material respect on the date as of which made
or deemed made.

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                           (d) DEFAULT UNDER OTHER AGREEMENTS. The occurrence of
any default (or similar term) in the observance or performance of any other
agreement or condition relating to any indebtedness or contingent obligation, in
each case in an aggregate amount of not less than $100,000, of any Company or
any Subsidiary of any Company beyond the period of grace (if any), the effect of
which default is to cause, or permit the holder or holders of such indebtedness
or beneficiary or beneficiaries of such contingent obligation to cause, such
indebtedness to become due prior to its stated maturity or such contingent
obligation to become payable;

                           (e) MATERIAL ADVERSE EFFECT. Any change or the
occurrence of any event which could reasonably be expected to have a Material
Adverse Effect;

                           (f) BANKRUPTCY. Any Company or any Subsidiary of any
Company shall (i) apply for, consent to or suffer to exist the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of creditors, (iii) commence a voluntary case under
the federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated
a bankrupt or insolvent, (v) file a petition seeking to take advantage of any
other law providing for the relief of debtors, (vi) acquiesce to, without
challenge within ten (10) days of the filing thereof, or failure to have
dismissed, within forty-five (45) days, any petition filed against it in any
involuntary case under such bankruptcy laws, or (vii) take any action for the
purpose of effecting any of the foregoing;

                           (g) JUDGMENTS. Attachments or levies in excess of
$100,000 in the aggregate are made upon any Company's or any Company's
Subsidiary's assets or a judgment is rendered against any Company's or any
Company's Subsidiary's property involving a liability of more than $100,000
which shall not have been vacated, discharged, stayed or bonded within forty
(40) days from the entry thereof;

                           (h) INSOLVENCY. Any Company or any Subsidiary of any
Company shall admit in writing its inability, or be generally unable, to pay its
debts as they become due or cease operations of its present business;

                           (i) CHANGE OF CONTROL. A Change of Control (as
defined below) shall occur with respect to any Company, unless Holder shall have
expressly consented to such Change of Control in writing. A "CHANGE OF CONTROL"
shall mean any event or circumstance as a result of which (i) any "PERSON" or
"GROUP" (as such terms are defined in Sections 13(d) and 14(d) of the Exchange
Act, as in effect on the date hereof), other than the Holder, is or becomes the
"BENEFICIAL OWNER" (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange
Act), directly or indirectly, of 35% or more on a fully diluted basis of the
then outstanding voting equity interest of any Company (other than a "PERSON" or
"GROUP" that beneficially owns 35% or more of such outstanding voting equity
interests of such Company on the date hereof), (ii) the Board of Directors of
any Company shall cease to consist of a majority of such Company's board of
directors on the date hereof (or directors appointed by a majority of the board
of directors in effect immediately prior to such appointment) or (iii) any
Company or any Subsidiary of any Company merges or consolidates with, or sells
all or substantially all of its assets to, any other person or entity;

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                           (j) INDICTMENT; PROCEEDINGS. The indictment or
threatened indictment of any Company, any Subsidiary of any Company or any
executive officer of any Company or any Subsidiary of any Company under any
criminal statute, or commencement or threatened commencement of criminal or
civil proceeding against any Company, any Subsidiary of any Company or any
executive officer of any Company or any Subsidiary of any Company pursuant to
which statute or proceeding penalties or remedies sought or available include
forfeiture of any of the property of any Company or any Subsidiary of any
Company; or

                           (k) THE PURCHASE AGREEMENT AND RELATED AGREEMENTS.
(i) An Event of Default shall occur under and as defined in the Purchase
Agreement or any other Related Agreement, (ii) any Company or any Subsidiary of
any Company shall breach any term or provision of the Purchase Agreement or any
other Related Agreement in any material respect and such breach, if capable of
cure, continues unremedied for a period of fifteen (15) days after the
occurrence thereof, (iii) any Company or any Subsidiary of any Company attempts
to terminate, challenges the validity of, or its liability under, the Purchase
Agreement or any Related Agreement, (iv) any proceeding shall be brought to
challenge the validity, binding effect of the Purchase Agreement or any Related
Agreement, (v) the Purchase Agreement or any Related Agreement ceases to be a
valid, binding and enforceable obligation of any Company or any Subsidiary of
any Company (to the extent such persons or entities are a party thereto) or (vi)
an Event of Default shall occur.

                  2.2 DEFAULT INTEREST. Following the occurrence and during the
continuance of an Event of Default, the Companies shall, jointly and severally,
pay additional interest on this Note in an amount equal to two percent (2%) per
month, and all outstanding obligations under this Note, the Purchase Agreement
and each other Related Agreement, including unpaid interest, shall continue to
accrue interest at such additional interest rate from the date of such Event of
Default until the date such Event of Default is cured or waived.

                  2.3 DEFAULT PAYMENT. Following the occurrence and during the
continuance of an Event of Default, the Holder, at its option, may demand
repayment in full of all obligations and liabilities owing by each Company to
the Holder under this Note, the Purchase Agreement and/or any other Related
Agreement and/or may elect, in addition to all rights and remedies of the Holder
under the Purchase Agreement and the other Related Agreements and all
obligations and liabilities of each Company under the Purchase Agreement and the
other Related Agreements, to require the Companies, jointly and severally, to
make a Default Payment ("DEFAULT PAYMENT"). The Default Payment shall be 125% of
the outstanding principal amount of the Note, plus accrued but unpaid interest,
all other fees then remaining unpaid, and all other amounts payable hereunder.
The Default Payment shall be applied first to any fees due and payable to the
Holder pursuant to this Note, the Purchase Agreement, and/or the other Related
Agreements, then to accrued and unpaid interest due on this Note and then to the
outstanding principal balance of this Note. The Default Payment shall be due and
payable immediately on the date that the Holder has exercised its rights
pursuant to this Section 2.3.

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                                    ARTICLE 3
                                  MISCELLANEOUS

                  3.1 CUMULATIVE REMEDIES. The remedies under this Note shall be
cumulative.

                  3.2 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on
the part of the Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.

                  3.3 NOTICES. Any notice herein required or permitted to be
given shall be in writing and shall be deemed effectively given: (a) upon
personal delivery to the party notified, (b) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day, (c) five days after having been sent by registered or
certified mail, return receipt requested, postage prepaid, or (d) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to the Companies at the addresses provided in the Purchase Agreement executed in
connection herewith, and to the Holder at the address provided in the Purchase
Agreement for such Holder, with a copy to John E. Tucker, Esq., 825 Third
Avenue, 14th Floor, New York, New York 10022, facsimile number (212) 541-4434,
or at such other address as any Company or the Holder may designate by ten days
advance written notice to the other parties hereto.

                  3.4 AMENDMENT PROVISION. The term "NOTE" and all references
thereto, as used throughout this instrument, shall mean this instrument as
originally executed, or if later amended or supplemented, then as so amended or
supplemented, and any successor instrument as such successor instrument may be
amended or supplemented.

                  3.5 ASSIGNABILITY. This Note shall be jointly and severally
binding upon the Companies and their respective successors and assigns, and
shall inure to the benefit of the Holder and its successors and assigns, and may
be assigned by the Holder in accordance with the requirements of the Purchase
Agreement. No Company may assign any of its obligations under this Note without
the prior written consent of the Holder, any such purported assignment without
such consent being null and void.

                  3.6 COST OF COLLECTION. In case of any Event of Default under
this Note, the Companies shall, jointly and severally, pay the Holder reasonable
costs of collection, including reasonable attorneys' fees.

                  3.7 GOVERNING LAW, JURISDICTION AND WAIVER OF JURY TRIAL.

                           (a) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.

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                           (b) EACH COMPANY HEREBY CONSENTS AND AGREES THAT THE
STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK
SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES
BETWEEN SUCH COMPANY, ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND,
PERTAINING TO THIS NOTE OR ANY OF THE OTHER RELATED AGREEMENTS OR TO ANY MATTER
ARISING OUT OF OR RELATED TO THIS NOTE OR ANY OF THE RELATED AGREEMENTS;
PROVIDED, THAT EACH COMPANY ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY
HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF
NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR
OPERATE TO PRECLUDE THE HOLDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION
IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT
OR OTHER COURT ORDER IN FAVOR OF THE HOLDER. EACH COMPANY EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED
UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH
COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO SUCH COMPANY AT THE ADDRESS SET FORTH IN THE PURCHASE AGREEMENT AND
THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH
COMPANY'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID.

                           (c) EACH COMPANY DESIRES THAT ITS DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE
BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, EACH
COMPANY HERETO WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR
OTHERWISE BETWEEN THE HOLDER AND SUCH COMPANY ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION
WITH THIS NOTE, ANY OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO
OR THERETO.

                  3.8 SEVERABILITY. In the event that any provision of this Note
is invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision of this
Note.

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                  3.9 MAXIMUM PAYMENTS. Nothing contained herein shall be deemed
to establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum rate
permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by the Companies to the Holder and thus refunded
to the Companies.

                  3.10 SECURITY INTEREST AND MORTGAGE. The Holder has been
granted a security interest (i) in certain assets of the Companies as more fully
described in the Master Security Agreement dated as of the date hereof (as
amended, restated or otherwise modified from time to time), (ii) in the equity
interests of Holdings in Carneros pursuant to the Stock Pledge Agreement dated
as of the date hereof between Holdings and the Holder (as amended, restated or
otherwise modified from time to time), (iii) in the equity interests of Carneros
in Gotland pursuant to the Stock Pledge Agreement dated as of the date hereof
between Carneros and the Holder (as amended, restated or otherwise modified from
time to time) and (iv) in the oil and gas properties of Carneros and Gotland
pursuant to one or more deeds of trust dated as of the date hereof.

                  3.11 CONSTRUCTION. Each party acknowledges that its legal
counsel participated in the preparation of this Note and, therefore, stipulates
that the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Note to favor
any party against the other.

                  3.12 REGISTERED OBLIGATION. This Note is intended to be a
registered obligation within the meaning of Treasury Regulation Section
1.871-14(c)(1)(i) and the Companies (or their agent) shall register this Note
(and thereafter shall maintain such registration) as to both principal and any
stated interest. Notwithstanding any document, instrument or agreement relating
to this Note to the contrary, transfer of this Note (or the right to any
payments of principal or stated interest thereunder) may only be effected by (i)
surrender of this Note and either the reissuance by the Companies of this Note
to the new holder or the issuance by the Companies of a new instrument to the
new holder, or (ii) transfer through a book entry system maintained by the
Companies (or their agent), within the meaning of Treasury Regulation Section
1.871-14(c)(1)(i)(B).

       [Balance of page intentionally left blank; signature page follows]

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                  IN WITNESS WHEREOF, the Companies have caused this Secured
Term Note to be signed in their respective names effective as of this 31st day
of May 2006.

                                                     CARNEROS ENERGY, INC.(1)

                                                     By:________________________
                                                              Name:
                                                              Title:

                                                     GOTLAND OIL, INC.(1)

                                                     By:________________________
                                                              Name:
                                                              Title:

                                                     CARNEROS ACQUISITION CORP.

                                                     By: /S/ DARREN KATIC
                                                         -----------------------
                                                              Name: Darren Katic
                                                              Title: President

WITNESS:

 /S/ JEEVAN ANAND
--------------------------------

___________________
         (1) See Joinder and Amendment Agreement dated as of June 29, 2006 among
the Companies and the Holder pursuant to which Gotland and Carneros join the
Secured Term Note as Companies.

                                       8<PAGE>

Exhibit 10.17

         THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
         THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
         AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON
         STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED
         FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
         REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY
         APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
         SATISFACTORY TO CARNEROS ENERGY, INC. THAT SUCH REGISTRATION IS NOT
         REQUIRED.

                   Right to Purchase Shares of Common Stock of
                              Carneros Energy, Inc.
                   (subject to adjustment as provided herein)

                          COMMON STOCK PURCHASE WARRANT

No. 1                                                 Issue Date:  June 29, 2006

         CARNEROS ENERGY, INC., a corporation organized under the laws of the
State of Delaware (the "Company"), hereby certifies that, for value received,
LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the
terms set forth below, to purchase from the Company at any time or from time to
time following payment in full of all monetary obligations and liabilities owing
by the Company to the Holder in connection with the transactions contemplated by
the Securities Purchase Agreement dated as of the date hereof by and among the
Company, Gotland Oil, Inc., a Texas corporation, Carneros Acquisition Corp., a
Delaware corporation, and the Holder (as amended, modified and supplemented from
time to time, the "Securities Purchase Agreement") and the Related Agreements
(as defined in the Securities Purchase Agreement) (the "Debt Repayment Date"),
up to the Specified Number (as hereinafter defined) of fully paid and
nonassessable shares of Common Stock (as hereinafter defined), $0.01 par value
per share, at the applicable Exercise Price per share (as defined below). The
number and character of such shares of Common Stock and the applicable Exercise
Price per share are subject to adjustment as provided herein.

         As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:

                  (a) The term "Company" shall include Carneros Energy, Inc. and
         any person or entity which shall succeed, or assume the obligations of,
         Carneros Energy, Inc. hereunder.

                  (b) The term "Common Stock" includes (i) the Company's Common
         Stock, par value $0.01 per share; and (ii) any other securities into
         which or for which any of the securities described in the preceding
         clause (i) may be converted or exchanged pursuant to a plan of
         recapitalization, reorganization, merger, sale of assets or otherwise.

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                  (c) The term "Exercise Price" means a price of $0.01 per share
         of Common Stock.

                  (d) The term "Other Securities" refers to any stock (other
         than Common Stock) and other securities of the Company or any other
         person (corporate or otherwise) which the holder of the Warrant at any
         time shall be entitled to receive, or shall have received, on the
         exercise of the Warrant, in lieu of or in addition to Common Stock, or
         which at any time shall be issuable or shall have been issued in
         exchange for or in replacement of Common Stock or Other Securities
         pursuant to Section 4 or otherwise.

                  (e) The term "Specified Number" means (i) subject to the
         following clause "(ii)", 22,425.144 shares of Common Stock and (ii)
         27,521.766 shares of Common Stock in the event on or prior to August 1,
         2006 Pacific Energy Resource Ltd., a Delaware corporation and the
         ultimate parent of the Company ("Parent"), shall have failed to make a
         mandatory prepayment of not less than Three Million Dollars
         ($3,000,000) to the Holder in respect of the Parent's obligations to
         the Holder under the Secured Term Note dated as of December 23, 2005 in
         the original principal amount of Eight Million Dollars ($8,000,000)
         made by Parent in favor of Holder.

         1. EXERCISE OF WARRANT.

                  1.1 NUMBER OF SHARES ISSUABLE UPON EXERCISE. From and after
the Debt Repayment Date, the Holder shall be entitled to receive, upon exercise
of this Warrant in whole or in part, by delivery of an original or fax copy of
an exercise notice in the form attached hereto as Exhibit A (the "Exercise
Notice"), shares of Common Stock of the Company, subject to adjustment pursuant
to Section 4.

                  1.2 COMPANY ACKNOWLEDGMENT. The Company will, at the time of
the exercise of this Warrant, upon the request of the Holder hereof acknowledge
in writing its continuing obligation to afford to such Holder any rights to
which such Holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant. If the Holder shall fail to make
any such request, such failure shall not affect the continuing obligation of the
Company to afford to such Holder any such rights.

                  1.3 TRUSTEE FOR WARRANT HOLDERS. In the event that a bank or
trust company shall have been appointed as trustee for the Holders of this
Warrant pursuant to Subsection 3.2, such bank or trust company shall have all
the powers and duties of a warrant agent (as hereinafter described) and shall
accept, in its own name for the account of the Company or such successor person
as may be entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.

         2. PROCEDURE FOR EXERCISE.

                  2.1 DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. The
Company agrees that the shares of Common Stock purchased upon exercise of this
Warrant shall be deemed to be issued to the Holder as the record owner of such
shares as of the close of business on the date on which this Warrant shall have

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been surrendered and payment made for such shares in accordance herewith. As
soon as practicable after the exercise of this Warrant in full or in part, and
in any event within three (3) business days thereafter, the Company at its
expense (including the payment by it of any applicable issue taxes) will cause
to be issued in the name of and delivered to the Holder, or as such Holder (upon
payment by such Holder of any applicable transfer taxes) may direct in
compliance with applicable securities laws, a certificate or certificates for
the number of duly and validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such Holder shall be entitled on
such exercise, together with any other stock or other securities and property
(including cash, where applicable) to which such Holder is entitled upon such
exercise pursuant to Section 1 or otherwise.

                  2.2 EXERCISE. Payment shall be made either in cash or by
certified or official bank check payable to the order of the Company equal to
the applicable aggregate Exercise Price for the number of Common Shares
specified in such Exercise Notice (as such exercise number shall be adjusted to
reflect any adjustment in the total number of shares of Common Stock issuable to
the Holder in accordance with the terms of this Warrant) and the Holder shall
thereupon be entitled to receive the number of duly authorized, validly issued,
fully-paid and non-assessable shares of Common Stock (or Other Securities)
determined as provided herein.

         3. EFFECT OF REORGANIZATION, ETC.; ADJUSTMENT OF EXERCISE PRICE.

                  3.1 REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at any
time or from time to time the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the Holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such Holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
Holder had so exercised this Warrant, immediately prior thereto, all subject to
further adjustment thereafter as provided in Section 4.

                  3.2 DISSOLUTION. In the event of any dissolution of the
Company following the transfer of all or substantially all of its properties or
assets, the Company, concurrently with any distributions made to holders of its
Common Stock, shall at its expense deliver or cause to be delivered to the
Holder the stock and other securities and property (including cash, where
applicable) receivable by the Holder of this Warrant pursuant to Section 3.1,
or, if the Holder shall so instruct the Company, to a bank or trust company
specified by the Holder and having its principal office in New York, NY as
trustee for the Holder (the "Trustee").

                  3.3 CONTINUATION OF TERMS. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 3, this Warrant shall continue in full force and
effect and the terms hereof shall be applicable to the shares of stock and other

                                       3

<page>

securities and property receivable on the exercise of this Warrant after the
consummation of such reorganization, consolidation or merger or the effective
date of dissolution following any such transfer, as the case may be, and shall
be binding upon the issuer of any such stock or other securities, including, in
the case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 4. In the
event this Warrant does not continue in full force and effect after the
consummation of the transactions described in this Section 3, then the Company's
securities and property (including cash, where applicable) receivable by the
Holder of this Warrant will be delivered to the Holder or the Trustee as
contemplated by Section 3.2.

         4. EXTRAORDINARY EVENTS REGARDING COMMON STOCK. In the event that the
Company shall (a) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock or any preferred stock issued by
the Company, (b) subdivide its outstanding shares of Common Stock, or (c)
combine its outstanding shares of the Common Stock into a smaller number of
shares of the Common Stock, then, in each such event, the Exercise Price shall,
simultaneously with the happening of such event, be adjusted by multiplying the
then Exercise Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event, and the product so obtained shall thereafter be
the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive event or
events described herein in this Section 4. The number of shares of Common Stock
that the Holder of this Warrant shall thereafter, on the exercise hereof as
provided in Section 1, be entitled to receive shall be adjusted to a number
determined by multiplying the number of shares of Common Stock that would
otherwise (but for the provisions of this Section 4) be issuable on such
exercise by a fraction of which (a) the numerator is the Exercise Price that
would otherwise (but for the provisions of this Section 4) be in effect, and (b)
the denominator is the Exercise Price in effect on the date of such exercise
(taking into account the provisions of this Section 4).

         5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or
readjustment in the shares of Common Stock (or Other Securities) issuable on the
exercise of this Warrant, the Company at its expense will promptly cause its
Chief Financial Officer or other appropriate designee to compute such adjustment
or readjustment in accordance with the terms of this Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the Holder of this Warrant and any
Warrant agent of the Company (appointed pursuant to Section 11 hereof).

                                       4

<page>

         6. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANT. The
Company will at all times reserve and keep available, solely for issuance and
delivery on the exercise of this Warrant, shares of Common Stock (or Other
Securities) from time to time issuable on the exercise of this Warrant.

         7. DESIGNATED ACTIONS. Gotland Oil, Inc. ("Gotland"), a wholly owned
subsidiary of the Company, by its signature below, agrees that it shall not (and
the Company agrees that it shall not cause Gotland to) implement or effect (or
otherwise resolve or agree to implement or effect) any of the following actions
without the prior written approval of the Holder:

                  (a) (i) declare or pay any dividends or make any other
         distribution in respect of any of its securities or (ii) make any
         distribution of any nature (including repayment of loans) to any
         person, except, (1) the repayment of loans to the Holder and (2) the
         payment of dividends in accordance with the terms of the Agreement
         dated as of the date hereof among the Company, Carneros Acquisition
         Corp. and the Holder (as the same may be amended, modified and
         supplemented from time to time);

                  (b) sell or dispose of any assets or property, other than in
         the ordinary course of business consistent with past practice;

                  (c) establish, acquire or otherwise become an equity holder
         (including, for greater certainty, a holder of securities convertible
         into equity) in any corporate entity or any partnership, equity joint
         venture or similar arrangements;

                  (d) enter into any transactions outside the ordinary course
         with officers, directors or employees or members of their families or
         other persons with whom they do not act at arm's length;

                  (e) enter into (other than in the ordinary course to fund
         working capital needs) or materially modify any credit facility;

                  (f) create any mortgage, lien, charge or other form of
         encumbrance with respect to any of its assets (other than in favor of
         the Holder);

                  (g) materially alter the fundamental nature of its business or
         otherwise engage in other businesses or activities that are not
         incidental to the businesses or activities presently undertaken by it;

                  (h) enter into any agreement with any third party;

                  (i) issue or sell any capital stock of, or any rights,
         warrants or securities convertible into or exercisable or exchangeable
         for any capital stock of, Gotland, including by way of initial public
         offering;

                  (j) wind up, dissolve or liquidate;

                                       5

<page>

                  (k) continue under the laws of a jurisdiction other than the
         jurisdiction under which it was formed;

                  (l) change its fiscal year;

                  (m) amend its articles or by-laws;

                  (n) merge with or into any other company (other than a merger
         with and into the Company, with the Company as the same surviving
         entity);

                  (o) take any action which would make it impossible to carry on
         its ordinary business;

                  (p) take any action which would place it into bankruptcy; or

                  (q) appoint or replace any outside accountants and/or
         auditors.

         8. ASSIGNMENT; EXCHANGE OF WARRANT. Subject to compliance with
applicable securities laws, this Warrant, and the rights evidenced hereby, may
be transferred by any registered holder hereof (a "Transferor") in whole or in
part. On the surrender for exchange of this Warrant, with the Transferor's
endorsement in the form of Exhibit B attached hereto (the "Transferor
Endorsement Form") and together with evidence reasonably satisfactory to the
Company demonstrating compliance with applicable securities laws, which shall
include, without limitation, the provision of a legal opinion from the
Transferor's counsel (at the Company's expense) that such transfer is exempt
from the registration or equivalent requirements of applicable securities laws,
the Company at its expense (but with payment by the Transferor of any applicable
transfer taxes) will issue and deliver to or on the order of the Transferor
thereof a new Warrant of like tenor, in the name of the Transferor and/or the
transferee(s) specified in such Transferor Endorsement Form (each a
"Transferee"), calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock called for on the face or faces of the Warrant
so surrendered by the Transferor.

         9. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.

         10. WARRANT AGENT. The Company may, by written notice to the each
Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock
(or Other Securities) on the exercise of this Warrant pursuant to Section 1,
exchanging this Warrant pursuant to Section 7, and replacing this Warrant
pursuant to Section 8, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such agent.

                                       6

<page>

         11. TRANSFER ON THE COMPANY'S BOOKS. Until this Warrant is transferred
on the books of the Company, the Company may treat the registered holder hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.

         12. NOTICES, ETC. All notices and other communications from the Company
to the Holder shall be mailed by first class registered or certified mail,
postage prepaid, at such address as may have been furnished to the Company in
writing by such Holder or, until any such Holder furnishes to the Company an
address, then to, and at the address of, the last Holder who has so furnished an
address to the Company.

         13. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS. ANY ACTION BROUGHT CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS
WARRANT SHALL BE BROUGHT ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL
COURTS LOCATED IN THE STATE OF NEW YORK; PROVIDED, HOWEVER, THAT THE HOLDER MAY
CHOOSE TO WAIVE THIS PROVISION AND BRING AN ACTION OUTSIDE THE STATE OF NEW
YORK. The individuals executing this Warrant on behalf of the Company agree to
submit to the jurisdiction of such courts and waive trial by jury. The
prevailing party shall be entitled to recover from the other party its
reasonable attorneys' fees and costs. In the event that any provision of this
Warrant is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
of this Warrant. The headings in this Warrant are for purposes of reference
only, and shall not limit or otherwise affect any of the terms hereof. The
invalidity or unenforceability of any provision hereof shall in no way affect
the validity or enforceability of any other provision hereof. The Company
acknowledges that legal counsel participated in the preparation of this Warrant
and, therefore, stipulates that the rule of construction that ambiguities are to
be resolved against the drafting party shall not be applied in the
interpretation of this Warrant to favor any party against the other party.

                   [BALANCE OF PAGE INTENTIONALLY LEFT BLANK;
                             SIGNATURE PAGE FOLLOWS]

                                       7

<page>

         IN WITNESS WHEREOF, the Company has executed this Warrant as of the
date first written above.

                                             CARNEROS ENERGY, INC.

WITNESS:
                                             By:________________________
                                             Name:______________________
                                             Title:_____________________
__________________________

ACCEPTED AND AGREED TO:

GOTLAND OIL, INC.

By:_______________________
Name:_____________________
Title:____________________

                                       8

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