Document:

TRD-DP-063/01

                              SETTLEMENT AGREEMENT
                              --------------------

     THIS SETTLEMENT AGREEMENT (this "Agreement"), dated as of March 1, 2002, by
and between P.M.I. Trading Limited ("PMI") and Penn Octane Corporation ("POCC").

     WHEREAS,  POCC  believes  that  is  has  claims  against  PMI  for  alleged
shortfalls  and  other  damages arising under or related to any contracts or any
amendments  thereto  commencing  on  or about April 1, 2000 and concluding on or
about  March 31, 2001 for the sale of LPG Mix by POCC to PMI for delivery of the
product  to  PMI at (a) Matamoros, Tamaulipas, Mexico (the "Matamoros Contract")
and  (b) Saltillo, Coahuila, Mexico (the "Saltillo Contract") (collectively, the
Matamoros  and  Saltillo  Contacts");

     WHEREAS,  POCC  claims  that  in  or about April 2001 a contract was formed
between the Parties (the "Alleged April 2001 Contract") and believes that it has
claims  for  damages  against  PMI  arising  under  such  contract;

     WHEREAS,  PMI refutes all of POCC's claims and denies owing POCC any monies
or  other  damages  to POCC under either the Matamoros and Saltillo Contracts or
the  Alledged  April  2001  contract;

     WHEREAS,  PMI  and  POCC  desire  to  settle  all  claims arising under the
Matamoros  and  Saltillo  Contracts  and the Alleged April 2001 Contract and, in
connection therewith, enter into a contract the ("Contract") for the sale of LPG
Mix  by  POCC  to  PMI  on the terms and conditions mutually satisfactory to the
Parties  (such  actions,  collectively,  the  "Settlement");  and

     WHEREAS,  PMI previously purchased from POCC 39,555,216 gallons of propane,
which  propane was stored at storage facilities leased by POCC and which propane
has  been  delivered to PMI pursuant to an exchange agreement or agreements, and
subject  to  certain  Guaranty  and  Reimbursement Agreements (such Guaranty and
Reimbursement  Agreements  attached  hereto  as  Exhibit A).  The aforementioned
propane  delivered  to  PMI  shall  be  referred  to  as  "Exchanged  Propane."

     NOW,  THEREFORE,  in consideration of the premises and the mutual covenants
contained  and  agreements  contained  herein,  and for other goods and valuable
consideration,  receipt  of  which  is  hereby acknowledged, PMI and POCC hereby
agrees  as  follows:

     1.   RECITALS.  The  foregoing  recitals  are  true  and  correct.

     2.   DEFINITIONS.  Capitalized terms used but not defined herein shall have
          the  meaning  ascribed  to  the  same  in  the  Contract.

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<PAGE>
     3.   NO  ADMISSION. Neither this Agreement not anything provided for herein
          shall  act  as  or  constitute an admission by PMI or POCC that any of
          them,  or  their  respective  past  or  present  officers,  directors,
          shareholders,  agents,  employees, accountants or attorneys, committed
          any  wrongful  act, or violated or breached the terms of any agreement
          or  duty  owed,  whether  statutory  or  otherwise. It is specifically
          understood  and agreed that this represents a compromise settlement of
          disputed  claims  and  that  any  liability  is  denied.

     4.   REPRESENTATIONS  AND  WARRANTIES  OF  POCC

          4.1  Corporate  Authorization.  POCC  has  full corporate power and
               ------------------------
               authority  to  execute and deliver this Agreement, and to perform
               its  obligations  hereunder.  The  execution,  delivery  and
               performance  by  POCC of this Agreement has been duly and validly
               authorized  and  no additional corporate authorization or consent
               is  required  in  connection  with  the  execution,  delivery and
               performance  by  it  of  this  Agreement.

          4.2  Consents  and  Approvals.  No  consent,  approval,  waiver  or
               ------------------------
               authorization  is  required  to  be obtained by POCC from, and no
               notice  of filing is required to be given by POCC or made by POCC
               with, any federal, state, local or foreign governmental authority
               or  other  person  in connection with the execution, delivery and
               performance  of  this  Agreement.

          4.3  Non-Contravention.  The execution, delivery and performance by
               -----------------
               POCC  of this Agreement, and the consummation of the transactions
               contemplated  hereby,  do  not  and  will  not  (i)  violate  any
               provision  of  the organizational documents of POCC (ii) conflict
               with,  or  result in breach of, or constitute a default under, or
               result  in the termination, cancellation or acceleration (whether
               after  the  filing or notice or the lapse of time or both) of any
               right  or  obligations of POCC under, or to a loss of any benefit
               to  which POCC is entitled under, any contact; or (iii) result in
               a breach of or constitute a default under any law of any court or
               governmental  authority  to  which  POCC  is  subject.

          4.4  Binding  Effect.  This  Agreement  constitutes  a  valid  and
               ---------------
               legally  binding  obligation  of POCC enforceable against POCC in
               accordance  with  the  terms  of  this  Agreement,  subject  to
               bankruptcy,  insolvency,  reorganization,  moratorium and similar
               laws of general applicability relating to or affecting creditors'
               rights  and  to  general  equity  principles.

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<PAGE>
     5.   REPRESENTATIONS  AND  WARRANTIES  OF  PMI.

          5.1  Corporation  Authorization.  PMI  has full corporate power and
               --------------------------
               authority  to  execute and deliver this Agreement, and to perform
               its  obligations  hereunder.  The  execution,  delivery  and
               performance  by  PMI  of this Agreement has been duly and validly
               authorized  and  no additional corporate authorization or consent
               is  required  in  connection  with  the  execution,  delivery and
               performance  by  it  of  this  Agreement.

          5.2  Consents  and  Approvals.  No  consent,  approval,  waiver  or
               ------------------------
               authorization  is  required  to  be  obtained by PMI from, and no
               notice  or  filing  is required to be given by PMI or made by PMI
               with,  any  federal,  state,  local,  or  foreign  governmental
               authority  or  other  person  in  connection  with  the execution
               delivery  and  performance  of  this  Agreement.

          5.3  Non-Contravention.  The execution, delivery and performance by
               -----------------
               PMI  of  this Agreement, and the consummation of the transactions
               contemplated  hereby,  do  not  and  will  not  (i)  violate  any
               provision  of  the organizational; documents of PMI (ii) conflict
               with,  or result in the breach of, or constitute a default under,
               or  result  in  the  termination,  cancellation  or  acceleration
               (whether after the filing of notice or the lapse of time or both)
               of  any  right  or  obligation  of PMI under, or to a loss of any
               benefit  to  which  PMI is entitled under, any contract; or (iii)
               result  in  a  breach of or constitute a default under any law of
               any  court  or  governmental  authority  to which PMI is subject.

          5.4  Binding  Effect.  This  Agreement  constitutes  a  valid  and
               ---------------
               legally  binding  obligation  of  PMI  enforceable against PMI in
               accordance  with  the  terms  of  this  Agreement,  subject  to
               bankruptcy,  insolvency,  reorganization,  moratorium and similar
               laws of general applicability relating to or affecting creditors'
               rights  and  to  general  equity  principles.

     6.   EXCHANGED  PROPANE.

          6.1  The  Exchanged  Propane  has  been  delivered  to  PMI by POCC
               pursuant  to  an exchange agreement or agreements, and subject to
               certain  Guaranty and Reimbursement Agreements attached hereto as
               Exhibit  A.

          6.2  POCC  and  PMI agree and acknowledge  that, with respect  to  all
               Exchanged  Propane  delivered  by  POCC  to  PMI from the Markham
               Storage  Facility  to  Matamoros,  Mexico,  PMI  has  paid  (i) a
               transportation  fee  of  US $XXXX  per Gallon, and (ii) a through

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<PAGE>
               put-out  fee  of  US$XXXX  per  Gallon. After  March 1, 2002, PMI
               shall  not  be  liable  nor shall it pay any other fee, including
               without  limitation,  any  storage  fee  with  respect to propane
               previously  purchased  and paid for by PMI, stored at the Markham
               Storage  Facility,  and  owed  to  PMI  by  POCC.

          6.3  POCC  and  PMI  further  agree and acknowledge that, with respect
               to  all  Exchanged  Propane  delivered by POCC to PMI at the Mont
               Belvieu  Storage  Facility,  PMI  has  paid a fee of  US$XXXX per
               Gallon  for  all  such  Exchanged Propane. The aforementioned fee
               constituted  payment  in  full  for (i) the through put-out costs
               from  the Markham Storage Facility, (ii) the transportation costs
               from  the  Markham  Storage  Facility to the Mont Belvieu Storage
               Facility, (iii) all storage costs for storage at the Mont Belvieu
               Storage  Facility,  and  (iv) any other or additional cost or fee
               that  POCC may incur as a result of placing the Exchanged Propane
               in  the  Mont  Belvieu Storage Facility. After March 1, 2002, PMI
               shall  not  be  liable  nor shall it pay any other fee, including
               without  limitation,  any  storage  fee  with  respect to propane
               previously  purchased  and  paid  for  by PMI, stored at the Mont
               Belvieu  Storage  Facility,  and  owed  by  PMI  by  POCC.

     7.   CONTRACT.  As  part  of the Settlement, PMI and POCC are entering into
          a  contract  for the purchase of the LPG Mix by PMI from POCC, of even
          date  herewith,  on  terms and conditions mutually satisfactory to the
          Parties  (the  "Contract"),  the  effectiveness  of  which  shall  be
          expressly subject to and conditioned upon the execution by the Parties
          thereto  of  this  Settlement  Agreement.

     8.   POCC  RELEASE.  POCC  releases  and  discharges PMI, its shareholders,
          officers,  directors,  agents,  employees, insurers, parent companies,
          subsidiary  companies,  predecessors,  successors  and  assigns
          (hereinafter in this paragraph collectively referred to as Releasees),
          from all actions, causes of action, suits, debts, dues, sums of money,
          accounts,  reckonings,  bonds,  bills,  specialties,  convenants,
          contracts, controversies, agreements, promises, variances, trespasses,
          damages,  judgments,  extents,  executions,  claims  and  demands
          whatsoever, in law, admiralty or equity (collectively, "Claims"), that
          POCC, its successors or assigns ever had or now have against Releasees
          for,  upon, or by reason of any matter, cause or thing whatsoever from
          the  beginning  of  the  world  to the day of the date of this Release
          arising  under  or  related  to  the  Matamoros Contract, the Saltillo
          Contract  and/or  the  Alleged April 2001 Contract. POCC represents to
          PMI  that  as of the date of this Release it does not know of nor does
          it have information upon which to believe that it has any other Claims
          arising  from  or  relating  to  the  Matamoros Contract, the Saltillo

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<PAGE>
          Contract  and/or  the Alleged April 2001 Contract. Notwithstanding the
          foregoing  Release  the  Parties  specifically agree that this Release
          does not release claims that may arise with respect to delivery of the
          Exchanged  Propane  in  accordance  with  the terms of this Agreement.

     9.   PMI  RELEASE.  PMI  releases  and  discharges  POCC,  it shareholders,
          officers,  directors,  agents,  employees, insurers, parent companies,
          subsidiary  companies,  predecessors,  successors  and  assigns
          (hereinafter  in this paragraph collectively referred to as Releasees)
          from  all  Claims  that  PMI, it successors or assigns ever had or now
          have against Releasees for, upon, or by reason of any matter, cause or
          thing  whatsoever  from  the  beginning of the world to the day of the
          date  of  this  Release, including, without limitation, Claims arising
          under  or  related  to  the  Matamoros Contract, the Saltillo Contract
          and/or the Alleged April 2001 Contract. PMI represents to POCC that as
          of  the  date  of  this  Release  it does not know of nor does it have
          information upon which to believe that it has any other Claims arising
          from  or  relating  to  the  Matamoros Contract, the Saltillo Contract
          and/or  the Alleged April 2001 Contract. Notwithstanding the foregoing
          Release,  the  Parties  specifically  agree that this Release does not
          release  claims  that  may  arise  with  respect  to  delivery  of the
          Exchanged  Propane  in  accordance  with  the terms of this Agreement.

     10.  COUNTERPARTS.  This  Agreement  may  be  executed  in  any  number  of
          counterparts,  each of which shall deemed or original and all of which
          taken  together  shall  constitute  one of the same instrument. Manual
          delivery  of  an  executed  counterpart  of  a  signature page to this
          Agreement  by telecopier shall be effective as delivery of an original
          executed  counterpart  of this Agreement. No modification or amendment
          of  this  Agreement shall be effective unless in writing and singed by
          the  Party  against  whom  it is sought to enforce the modification or
          amendment.

     11.  GOVERNING  LAW;  ARBITRATION.  This Agreement shall be governed by and
          construed  in  accordance  with  the internal laws of the State of New
          York,  without regards to its conflicts of law principles. Any and all
          disputes,  claims  or  controversies arising under or relating to this
          Agreement shall be settled by arbitration administered by the American
          Arbitration Association under its International Arbitration Rules. The
          place of the arbitration shall be New York City, New York. The Parties
          agree  that the number of arbitrators shall be three. Each Party shall
          nominate a neutral and independent arbitrator, and the two arbitrators
          so  appointed  shall  appoint  the  third  neutral  and  independent
          arbitrator,  who  shall  act  as  the  Chairperson. If the arbitrators
          selected  by  the  Parties  are unable or fail to agree upon the third
          arbitrator,  the  third  arbitrator  shall be selected by the American
          Arbitration  Association.  The  award  shall  be  in writing, shall be
          signed by a majority of the arbitrators, and shall include a statement
          regarding  the reasons for the disposition of any claim. A judgment of
          the  court  having jurisdiction may be entered on the award. Except as

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<PAGE>
          may be required by law, neither a Party nor an arbitrator may disclose
          the  existence,  content,  or  results  of  any  arbitration hereunder
          without  the  prior  written  consent  of  both  Parties.

     12.  ENTIRE  AGREEMENT.  This  Agreement,  together  with  the  Contract,
          constitute  the  entire  agreement  between  the  Parties  hereto, and
          supercede  all  prior  agreements  and understanding, both written and
          oral,  among  the  Parties  with respect to the subject matter hereof.

     13.  SEVERABILITY.  The  provisions  of  this  Agreement  shall  be  deemed
          severable  and  the  invalidity  or  unenforceability of any provision
          shall  not  affect  the  validity  or  enforceability  of  the  other
          provisions  hereof.  If  any  provision  of  this  Agreement,  or  the
          application  thereof  to any Person or any circumstance, is invalid or
          unenforceable,  (a)  a  suitable  and  equitable  provision  shall  be
          substituted  therefore  in  order to carry out, so far as may be valid
          and  enforceable,  the  intent  and  purpose  of  such  invalid  or
          unenforceable  provisions  and (b) the remainder of this Agreement and
          the  application  of  such provision to other Persons or circumstances
          shall  not  be  affected  by  such invalidity or unenforceability, nor
          shall  such  invalidity  or  unenforceability  affect  the validity or
          enforceability  of such provisions, or the application thereof, in any
          other  jurisdiction.

     14.  EXPENSES.  Whether  or  not  the  transactions  contemplated  by  this
          Agreement  are  consummated,  all  costs  and  expenses  incurred  in
          connection  with this Agreement and the transactions contemplated here
          shall  be  borne  by  the  party  incurring  such  expenses.

     IN  WITNESS  WHEREOF, the Parties have executed this Agreement effective on
the  date  first  above  written.

P.M.I.  TRADING  LIMITED         PENN  OCTANE  CORPORATION

By:     /s/  Rodrigo  Aranda     By:     /s/  J.  B.  Richter
        --------------------             --------------------
Name:        Rodrigo  Aranda     Name:        J.  B.  Richter
        --------------------             --------------------
Title:             Signatory     Title:             President
        --------------------             --------------------

                                       6/6
<PAGE>June 5, 2002

<<FirstName>> <<LastName>>
<<Company>>
<<Company1>>
<<Address1>>
<<Address2>>
<<City>>, <<State>> <<Zip>>

     RE:   AMENDMENT -  PROMISSORY NOTE ("NOTE") OF PENN OCTANE CORPORATION (THE
           "COMPANY") CURRENTLY HELD BY YOU WITH A DUE DATE OF JUNE 15, 2002 AND
           RELATED AGREEMENTS  AND  INSTRUMENTS

Dear Holder Of The Promissory Notes:

     Reference  is made to the promissory note(s) which is currently held by you
in  connection  with one or more of the following transactions with the Company:

     i.)       The  promissory  note(s)  originally  issued  by  the  Company in
               connection  with  the private placement on or around December 17,
               1999  (the  "Original  Notes"),  as  amended  (the  "Restructured
               Notes"),
     ii.)      The  promissory  note(s)  originally  issued  by  the  Company
               contemporaneously  with  the  issuance of the Original Notes (the
               "Original  Other  Notes"),  as  amended  (the "Other Restructured
               Notes"),  and/or
     iii.)     The  promissory  note(s)  originally  issued  by  the  Company
               contemporaneously  with  the  restructuring of the Original Notes
               and  the  Original  Other  Notes  (the  "New  Notes").

     The  Restructured Notes, the Other Restructured Notes and the New Notes are
     collectively  referred  to  as  the  "Promissory  Notes"  and  all  of  the
     underlying  agreements  pertaining  to  the Promissory Notes, including the
     purchase  agreement,  the note agreement, the common stock purchase warrant
     agreement,  the  registration rights agreement, and all related amendments,
     if  any,  are  collectively  referred  to  as  the  "Original  Documents".

     The Promissory Notes, including unpaid interest are due and payable on June
15, 2002.  The Company is currently attempting to close a transaction related to
the sale of an asset which would enable the Company to satisfy the June 15, 2002
payment  date.  However,  the Company would prefer to extend the payment date of
the Promissory Notes in order to finalize the transaction in a form satisfactory
to the Company.  Therefore the Company is willing to extend the payment due date
on  the  Promissory  Notes  until any one of the following trigger dates, at the
Company's  sole option:  August 15, 2002, October 15, 2002 or December 15, 2002,
continue interest payments on the Promissory Notes at a rate of 16.50% per annum
and  pay  you  a  1.5%  fee.

<PAGE>
     For  good  and valuable consideration, the receipt and sufficiency of which
are  hereby  acknowledged,  the  Company and you hereby agree that your Original
Documents  shall  be, and hereby are, amended, effective from and after June 15,
2002,  to  the  fullest  extent  necessary  to  effectuate  the  following:

     1.   Promissory  Notes. The Promissory Notes held by you are hereby amended
          -----------------
          to  the  full  extent  necessary  to  effectuate  the  following:

          (a)  Extend  the  payment  due date from "June 15, 2002" to any one of
               the  following  dates,  at the Company's sole option: "August 15,
               2002,  October  15,  2002  or  December  15,  2002".
          (b)  Pay  interest  on  the Promissory Notes at the rate of 16.50% per
               annum  on July 1, 2002, August 15, 2002, October 15, 2002 (if the
               Notes  have  not already been paid) and December 15, 2002 (if the
               Notes  have  not  already  been  paid).

     2.   Additional Payment. The Company will pay to you a fee equal to 1.5% of
          ------------------
          the  amount  of  your  Promissory Notes which are extended pursuant to
          this amendment letter. The fee will be paid on July 1, 2002 as well as
          any  unpaid  interest  due  on the Promissory Notes as of July 1, 2002
          (see  1(b)  above).

     3.   Declining  Noteholders.  Notwithstanding  anything  to  the  contrary
          ----------------------
          contained  in  your  Original Documents, you hereby agree that, to the
          extent  that any other holders of the Promissory Notes do not agree to
          this  amendment  letter by June 15, 2002 (collectively, the "Declining
          Promissory  Noteholders"), the Company shall be entitled to repay such
          Declining  Promissory  Noteholders all amounts owing by the Company to
          such  Declining Promissory Noteholders under their respective Original
          Documents  without,  by  virtue  thereof,  in  any  way  breaching  or
          otherwise being in default of any of your Original Documents. Any such
          amounts  paid,  shall  be  excluded from the definition of "Financing"
          provided  for  in  your  Original  Documents.

                                        2
<PAGE>
     If  you  are  in  agreement with the terms of this amendment letter, please
indicate  so  by  signing  below  and faxing an executed copy to Ian Bothwell at
(760)  772-8588  no  later  than  the  close  of  business  on  June  10,  2002.

Very truly yours,

Penn Octane Corporation

By:
     ------------------------------------------
Its: Vice President and Chief Financial Officer

                                        3
<PAGE>
     The  undersigned holder of the Promissory Note and other Original Documents
referred  to  in this amendment letter hereby acknowledges his/her/its agreement
to  all of the provisions of this amendment letter and intention to be so bound.
The  undersigned  also  agrees to keep the contents of this amendment letter and
any documents or discussions regarding the same strictly confidential and not to
use  the  same for any purpose pending public disclosure thereof by the Company;
provided,  however, that the undersigned may consult with his, her or its agents
and  advisors  with  respect  to  the  transactions  contemplated hereby and, in
connection  therewith,  disclose the terms and contents of this amendment letter
and  any  other  documents  relating  to  the  subject matter thereof or hereof.

<<FirstName>> <<LastName>>
<<Company>>
<<Company1>>

By: ___________________________________

Its: __________________________________

Date:

Promissory Note Amount:    $<<NoteAmt>>
                            -----------

Name and Telephone Number of Holder:

______________________________________

______________________________________

______________________________________

                                        4
<PAGE>

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