Document:

<PAGE>
                                                                   Exhibit 10.21

                           LAK RANCH FARMIN AGREEMENT

THIS FARMIN AGREEMENT (the "Agreement") is dated and effective as of January 15,
2004, by and between IVANHOE ENERGY (USA) INC. ("Ivanhoe") and DEREK RESOURCES
(U.S.A.) INC. ("Derek");

WHEREAS Derek is the lessee of the LAK Ranch Leases as set forth in Exhibit "A",
attached hereto and incorporated herein by this reference;

AND WHEREAS pursuant to the SEC Agreement, as defined below, Derek holds an
undivided 5% Working Interest in the LAK Ranch Area in trust for SEC until such
time as Derek has expended the Funds provided by SEC to Derek pursuant to the
SEC Agreement and transfers the aforementioned Working Interest to SEC;

AND WHEREAS Ivanhoe desires to earn a Working Interest in the LAK Ranch Leases
and LAK Ranch Area, subject to the conditions hereof and the requirements and
obligations to be performed by Ivanhoe set out in this Agreement;

AND WHEREAS the Parties desire to possibly further explore and develop the lands
subject to the LAK Ranch Leases and the LAK Ranch Area for the production of
oil, gas and other hydrocarbon substances;

NOW THEREFORE, in consideration of the premises and the mutual covenants and
agreements contained herein, it is understood and agreed by and between the
Parties, as follows:

                                       1
<PAGE>

                                    ARTICLE I

                                   DEFINITIONS

In this Agreement, including the recitals, this Section and the Exhibits, unless
there is something in the context or subject matter inconsistent therewith, the
following terms shall have the meanings hereinafter set forth:

1.1 "Affiliate" - of a Party means any company or other entity that (i)
controls, (ii) is controlled by or (iii) is under common control with such
Party. For the purpose of this definition, control shall mean the ownership,
directly or indirectly, of 50% or more of the stock or other units of ownership
having the right to vote for the election of directors of such company or other
entity.

1.2 "Area of Mutual Interest" or "AMI" - shall have the meaning ascribed in
Article III, Section 3.1.

1.3 "Capital Expenditures" - means expenditures for capital items or purposes as
distinguished from operating costs and expenditures, in accordance with
generally accepted accounting principles generally applied in the United States
oil and gas industry and as defined in COPAS.

1.4 "Dollars" or the symbol "$" - means legal tender of the United States of
America.

1.5 "Effective Date" - means the effective date of this Agreement, being 12:00
p.m. Central Standard Time on January 15, 2004.

1.6 "Funds" - means the monies provided by SEC to Derek pursuant to the SEC
Agreement which Derek agreed to spend on operating and development expenses on
the

                                       2
<PAGE>

LAK Ranch Area and which upon its complete expenditure, SEC will earn an
undivided 5% working interest in the LAK Ranch Area.

1.7 "Gross Negligence or Willful Misconduct" - means any act or failure to act
(whether sole, joint or concurrent) by any person or entity which was intended
to cause, or which was in reckless disregard of or wanton indifference to,
harmful consequences such person or entity knew, or should have known, such act
or failure would have on the safety or property of another person or entity.

1.8 "Joint Account" - means the account established and maintained by Operator
to record all expenditures, receipts, materials and other assets acquired or
used in the conduct of Joint Operations.

1.9 "Joint Operating Agreement" or "JOA" - means the Joint Operating Agreement
referred to in Article VIII, a form of which is attached hereto and made a part
hereof as Exhibit "C".

1.10 "Joint Operations" - mean operations, whether for the Pilot Phase, Phase 1
or subsequently, conducted by Operator for the benefit and account of the
Parties pursuant to any or all this Agreement, the Joint Operating Agreement,
the LAK Ranch Lease and any New Lease.

1.11 "LAK Ranch Area" - refers to the area outlined on the plat attached hereto
and made a part hereof as Exhibit "B."

1.12 "LAK Ranch Leases" - means the Leases listed on Exhibit "A" attached hereto
and made a part hereof and covering lands located within the confines of the LAK
Ranch Area.

                                       3
<PAGE>

1.13 "LAK Ranch Program" - means the program summarized on Exhibit "E" to this
Agreement summarizing the work to be done during the Pilot Phase and Phase 1.

1.14 "New Lease" - has the meaning ascribed to it in Section 3.2.

1.15 "Non-Operator" - means a Party other than the Operator. Derek is initially
the Non-Operator, but should SEC be assigned a Working Interest by Derek, SEC
shall also be a Non-Operator.

1.16 "Operator" - means at any time the Party appointed to conduct Joint
Operations on behalf of the Parties, and initially shall mean Ivanhoe.

1.17 "Other Costs" - mean costs other than Capital Expenditures, for which the
Parties will be liable and pay in accordance with their Working Interests, as
provided in Section 4.4.

1.18 "Lease" - means an oil and gas lease and any oil, gas, and mineral lease,
mineral interest, or any other instrument granting the right to explore for,
drill, and take oil, gas, and other minerals.

1.19 "Party" and "Parties" - means initially Ivanhoe and Derek, individually or
collectively, as the case may be, and/or their successors and assigns. If Derek
spends the Funds, and assigns a 5% Working Interest to SEC, then SEC shall be a
Party or one of the Parties, and assume its Working Interest share of all
obligations and liabilities as a Party to and under this Agreement, including
with respect to representations and warranties and under the Joint Operating
Agreement and the LAK Ranch Lease.

1.20 "Phase 1" - means the work and activities described as Phase 1 in the LAK
Ranch Program Summary attached as Exhibit "E".

                                       4
<PAGE>

1.21 "Pilot Phase" - means the work described as the Pilot Phase in the LAK
Ranch Program Summary attached as Exhibit "E".

1.22 "SEC" - means SEC Oil and Gas Partnership.

1.23 "SEC Agreement" - means the document entitled "LAK Ranch Oil Project -
Amended Heads of Agreement", dated October 30, 2003, between Derek and SEC and
any and all agreements that may be substituted therefore.

1.24 "Substances" - means all severed crude oil, natural gas, casinghead gas,
gasoline, natural gasoline, petroleum, natural gas liquids, condensate,
products, liquids and other hydrocarbons and other minerals of every kind and
description produced to be produced under the LAK Ranch Leases from the LAK
Ranch Area.

1.25 "Working Interest" - means the undivided participating interest of a Party
in the benefits and obligations under this Agreement, the Joint Operating
Agreement, the LAK Ranch Lease and any other Lease that may be taken by the
Parties in the LAK Ranch Area. Expression of working interests as a percentage
means the indicated percentage of 100%.

                                   ARTICLE II

                             ATTACHMENT AND EXHIBITS

2.1 Exhibits - The following Exhibits, attached hereto, are incorporated herein
and made a part hereof for all purposes:

                  Exhibit "A"             LAK Ranch Leases and Lands
                  Exhibit "B              LAK Ranch Area/ AMI
                  Exhibit "C"             Joint Operating Agreement
                  Exhibit "D"             Environmental Compliance
                  Exhibit "E"             LAK Ranch Program Summary

                                       5
<PAGE>

                                   ARTICLE III

                             AREA OF MUTUAL INTEREST

3.1 Area of Mutual Interest - The Parties hereby establish an Area of Mutual
Interest" or "AMI", covering the lands located within the area outlined on the
plat attached hereto and made a part hereof as Exhibit "B" and within two (2)
miles of that area. The AMI shall continue in effect as long as the Parties
jointly own Leases within the AMI and shall continue in effect under the JOA and
until one year after the JOA terminates.

3.2 Acquisition/Option - Should any Party directly or indirectly, acquire a
Lease ("New Lease"), in addition to or in substitution for all or any part of
the LAK Ranch Lease, affecting any lands located, fully or partially within the
AMI, such Party (the "Acquiring Party") shall immediately give written notice
thereof to each other Party (a "Non-Acquiring Party"), together with all
pertinent details and information, including copies of all instruments of
conveyance (including but not limited to, copies of the New Lease, assignments,
subleases, farmouts, and other contracts affecting the LAK Ranch Lease and or
the LAK Ranch Area), copies of paid drafts or checks and itemized invoices of
the actual costs expended incurred and to be incurred by the Acquiring Party,
including any bonus, administrative fees, brokerage, legal and recordation
costs, and any other direct costs (said actual costs are referred to as
"Acquisition Costs"). A Non-Acquiring Party shall have 30 days (or 48 hours if a
rig capable of performing a drilling operation is on location in preparation for
drilling), from receipt of such notice to elect in writing to acquire its
proportionate interest in the New Lease by paying its proportionate share of the
cost and assuming its proportionate share of the obligations. Failure to respond
by the deadlines stated herein shall be deemed an election not to participate in
the acquisition described in said notice. Failure to pay said proportionate
share of costs within 30 days

                                       6
<PAGE>

following an election to participate shall result in a forfeiture of a
Non-Acquiring Party's interest with the same effect as if said Party had
initially elected not to participate. If less than all Parties elect to
participate in said acquisition, the lands and/or depths covered by any New
Lease shall be excluded from the AMI and the New Lease acquired shall not be
subject to this Agreement, but shall belong entirely to the Parties
participating in the acquisition.

3.3 Payment/Assignment - If a Non-Acquiring Party elects to participate in such
acquisition it shall pay to the Acquiring Party its proportionate share of the
Acquisition Costs for such interest within 30 days after receipt of an invoice
for said costs. Upon receipt of said payment, the Acquiring Party shall execute
and deliver to the Non-Acquiring Party an assignment of the interest due the
Non-Acquiring Party, pursuant to which the Non-Acquiring Party shall bear and
assume its proportionate share of all obligations, covenants, conditions,
requirements, and terms associated with the acquisition.

3.4 Encumbrances - Any assignment made pursuant to this Article III shall be
free and clear of any encumbrances placed on the assigned New Lease in favor of
or by the Acquiring Party, but otherwise shall be made without warranty of
title, either express or implied, except by, through, and under the Acquiring
Party. The assignment shall be made and accepted subject to, and assignee shall
expressly assume its proportionate share of, all obligations of the assignor
pertaining to the New Lease.

3.5 Merger - The provisions of this Article III shall not apply to Lease
acquisitions resulting from mergers, consolidations or reorganizations involving
all or substantially all of the properties or assets of the Acquiring Party.

                                       7
<PAGE>

                                   ARTICLE IV

               IVANHOE CASH PAYMENT AND PARTIES' WORKING INTERESTS

4.1 Ivanhoe Cash Payment. Contemporaneously with the signing of this Agreement,
Ivanhoe will make a one-time cash payment to Derek of $100,000, in consideration
of which Derek will assign to Ivanhoe a 30% Working Interest and Ivanhoe shall
undertake to complete the Pilot Phase as described in Section 4.5.

4.2 Ivanhoe Earning. Ivanhoe is entitled to earn up to an additional 30% Working
Interest for a total Working Interest of 60%, by participating in the Pilot
Phase and Phase 1, and paying Capital Expenditures and Other Costs, as provided
in Sections 4.3 through 4.6 below. The following are the initial Working
Interests of the Parties:

<TABLE>
<S>                                                 <C>
               Derek.................................70%
               Ivanhoe...............................30%
</TABLE>

4.3 Capital Expenditures. If Ivanhoe participates in the Pilot Phase and Phase
1, Ivanhoe shall make Capital Expenditures in accordance with work programs and
budgets prepared by Ivanhoe in consultation with the Parties. Ivanhoe's initial
30% Working Interest shall be increased by a proportional 6% for every
$1,000,000, or part thereof, it incurs on a 100% basis for Capital Expenditures
(that is without contribution by the other Parties) for the LAK Ranch Program
during the Pilot Phase and Phase 1, up to a maximum of 60% Working Interest. For
further clarity, at the time of determination and adjustment of Ivanhoe's
interest for incurred Capital Expenditures, for any portion of the Capital
Expenditures less than a full multiple of one million ($1,000,000) dollars (the
"Portion"), the increase in interest shall be determined based upon the
following formula:

                                 [Portion] X 6%
                                 --------------
                                    1,000,000

                                       8
<PAGE>

Ivanhoe's Working Interest will be determined and adjusted at the end of each
quarter based on cumulative Capital Expenditures it has incurred on a 100% basis
through the quarter. If Ivanhoe participates in Phase I and, upon completion of
the work program for Phase I, Ivanhoe has incurred less than $5,000,000 on
Capital Expenditures on a 100% basis, additional Capital Expenditures for work
on the LAK Ranch Lease agreed by the Parties to be performed, shall be paid 100%
by Ivanhoe until it has incurred an aggregate of $5,000,000 between the Pilot
Phase and Phase I. When Ivanhoe has incurred a total of $5,000,000 on Capital
Expenditures on a 100% basis during the Pilot Phase and Phase 1 and
subsequently, as appropriate, additional LAK Ranch Program costs, including
Capital Expenditures, will be paid by the Parties in proportion to their
respective Working Interests at the time, which will be as follows:

<TABLE>
<S>                                                       <C>
                  Ivanhoe..................................60%
                  Derek....................................40%
</TABLE>

4.4 OTHER COSTS. Ivanhoe's commitments to make Capital Expenditures on a 100%
basis shall apply only to Capital Expenditures of the LAK Ranch Program. Lease
operating costs, Operator's overhead costs agreed in the JOA and all such
similar costs during the Pilot Phase and Phase 1 ("Other Costs") will be paid
and shared by the Parties in proportion to their respective Working Interests
from time to time during the Pilot Phase, Phase 1 and subsequently. Ivanhoe
shall have no liability for Other Costs incurred prior to the Effective Date.
Other Costs from and after the Effective Date will be paid by the Parties
pursuant to cash calls or advance provisions of the JOA. If one or more of the
Parties fails to pay their share of Other Costs for the Pilot Phase and/or Phase
1, and Ivanhoe pays Other Costs to continue operations, then such delinquent
amounts shall bear interest at the rate provided in the JOA and shall be subject
to the remedies for collection provided in the JOA.

                                       9
<PAGE>

4.5 Pilot Phase. Ivanhoe undertakes the work program for the Pilot Phase, which
consists of the work program described in the LAK Ranch Program details attached
as Exhibit "E" to this Agreement. Ivanhoe will pay 100% of the Capital
Expenditures of the Pilot Phase. The Capital Expenditures budgeted to be spent
in performing such work does not constitute an obligation to spend that amount.

Operations being conducted on the LAK Ranch Lease by Derek were ordered stopped
by the Wyoming Oil and Gas Commission . Before Ivanhoe can commence work on the
Pilot Phase, it must obtain approval of the Commission and possibly other
Wyoming and Federal agencies in order to resume operations. Promptly after the
Effective Date, Ivanhoe, with the other Parties' cooperation and assistance,
will undertake the necessary studies and work in order to obtain all the
approvals to resume operations. Such work will be pursued diligently in order to
obtain the approval as quickly as possible, but in the event that
notwithstanding such diligent efforts such approvals are not obtained within one
year after the Effective Date, Ivanhoe will have the option to terminate this
Agreement and will have no further obligation to the other Parties. The costs of
obtaining the above approvals to resume operations shall be Other Costs to be
shared by the Parties in proportion to their respective Working Interests, i.e.,
Ivanhoe 30% and Derek 70%.

4.6 Phase 1. Phase 1 consists of the work program described in the LAK Ranch
Program details attached as Exhibit "E" to this Agreement. Ivanhoe shall have
the option to elect to participate in Phase 1, within 30 days after completion
and evaluation of the results of the Pilot Phase. If Ivanhoe does not elect to
participate in Phase 1, Ivanhoe shall retain a 15% Working Interest and shall
reassign to the Parties the remaining 15% of its initial Working Interest.

4.7 SEC Interest. If the Funds have been spent by Derek and a Working Interest
has been assigned to SEC, then Derek's Working Interest shall be reduced by 5%
and SEC

                                       10
<PAGE>

shall have a 5% Working Interest. Ivanhoe's Working Interest shall not be
reduced or affected by the assignment of a Working Interest to SEC.

4.8 Delivery of Assignments - Unless otherwise provided herein, any assignment
due any Party, shall be delivered in a form suitable for recording and within 15
days of the date on which it was executed.

4.9 Assignment of Real and Personal Property - Any assignment of a Working
Interest hereunder shall include an assignment of an equal undivided interest in
all real and personal property and which is owned by the assigning party,
located on or off the LAK Ranch Leases and used in connection with the
operations of the Leases, including without limitation, wells, well equipment,
casing, tubing, tanks, gathering lines, separators, buildings, pumps,
compressors, gas plants, motors, fixtures, machinery, power lines, telegraph and
telephone lines, roads, field processing plants, and other improvements used in
the operation thereof.

                                    ARTICLE V

                            JOINT OPERATING AGREEMENT

5.1 Operations - Except as otherwise provided herein, or in the Joint Operating
Agreement, the costs, risk, and expenses shall be based on each Party's Working
Interest. All operations hereunder shall be conducted and governed in accordance
with the terms and conditions of the Joint Operating Agreement. The Parties
shall execute the Joint Operating Agreement signed simultaneously with the
execution of this Agreement. Ivanhoe shall be designated Operator under the
Joint Operating Agreement, and Derek or Derek and SEC, as the case may be, shall
be Non-Operators. In the event of a conflict between the terms and conditions of
this Agreement and the Joint Operating Agreement, the terms and conditions of
this Agreement shall prevail.

                                       11
<PAGE>

                                   ARTICLE VI

                         INFORMATION, TESTS, AND NOTICES

6.1 Access to Operations and Furnishing of Data - The Non-Operators shall, at
all times, and at their sole cost and risk, have full and free access to the LAK
Ranch Area. Ivanhoe shall obtain and furnish to Non-Operators the following data
reports as they are currently produced or compiled so far as they relate to
Joint Operations:

(a)   copies of all logs or surveys, including in digitally recorded format if
      exists;

(b)   daily drilling reports;

(c)   copies of all tests and core data and analysis reports;

(d)   final well recap report;

(e)   copies of plugging reports;

(f)   copies of final geological and geophysical maps, seismic sections and shot
      point location maps;

(g)   engineering studies, development schedules and quarterly progress reports
      relating to the LAK Ranch Area;

(h)   field and well performance reports, including reservoir studies and
      reserve estimates;

(i)   production data;

(j)   as requested by Non-Operators (i) copies of all material reports relating
      to the LAK Ranch Area furnished to Ivanhoe by any governmental or
      regulatory body or authority; and (ii) other material studies and reports
      relating to LAK Ranch Area; and

(k)   such other information as Non-Operators may reasonably request, provided
      that the requesting Party or Parties pay the costs of preparation of such
      information and that the preparation of such information will not unduly
      burden Operator's administrative and technical personnel.

                                       12
<PAGE>

6.2 Ivanhoe shall test any wells encountered which Ivanhoe wishes to test in
accordance with good and prudent petroleum industry practices and field
conservation principles as are generally followed by the United States petroleum
industry, and shall further test all formations indicated by such testing to be
productive and considered to have the potential for commercial production in the
LAK Ranch Area, provided that they are subject to the LAK Ranch Lease or other
Leases granting the Parties the right to do so. Ivanhoe shall keep an accurate
and detailed log of each well drilled hereunder.

                                   ARTICLE VII

                        CONDUCT OF OPERATIONS/ABANDONMENT

7.1 Diligent Operations and Abandonment - Ivanhoe as Operator shall conduct all
operations for the Pilot Phase, Phase 1 and thereafter, in a diligent, safe and
efficient manner in accordance with good and prudent petroleum industry
practices and field conservation principles as are generally followed by the
United States petroleum industry under similar circumstances and at all times in
compliance with all applicable laws, ordinances, rules and regulations. When any
programmed well drilled hereunder, reaches the contract depth and has been
tested as agreed, Ivanhoe shall either complete the same as a producer, or plug
and abandon the same in accordance with all applicable laws and regulations;
provided however, that if Ivanhoe desires to abandon the well as a dry hole,
Ivanhoe shall so notify Non-Operators who shall then have 48 hours to elect to
take over such well and attempt to complete it at their sole cost, risk, and
expense. Should any Non-Operator take over the well ("Takeover Parties"),
Ivanhoe shall relinquish all rights thereto, including the materials and
equipment used in connection therewith free and clear of all liens and
encumbrances not existing as of the date of this Agreement, other than ordinary
and usual liens and encumbrances arising from the drilling of the well. The
Takeover Parties shall pay to Ivanhoe the fair market value of such material and
of the salvageable in-hole equipment, less the estimated cost of salvage, and
the Takeover Parties shall become responsible for the rig time costs. Upon any
such takeover, all rights of

                                       13
<PAGE>

Ivanhoe pertaining to the well shall automatically terminate and the Takeover
Parties shall be solely responsible for the completion and/or abandonment of the
well, and shall indemnify and hold Ivanhoe harmless from any cost or loss
relating thereto.

                                  ARTICLE VIII

                                    OPERATOR

8.1 Status of Ivanhoe as Operator. - Notwithstanding the provisions of the JOA,
in the absence of Gross Negligence or Willful Misconduct on the part of
management level or supervisory personnel of Ivanhoe directly and causally
connected with the subject action, Ivanhoe shall not be liable as Operator for
damages or losses or otherwise to any other Party for anything done or omitted
to be done as Operator in carrying out any Joint Operations, which shall be for
the Joint Account, subject however to Ivanhoe's obligation to pay Capital
Expenditures on a 100% basis. Each Party, including Ivanhoe as a Party, shall
bear any losses or liabilities in proportion to their Working Interests;
provided, however, that Ivanhoe as a Party or as Operator shall not be liable
for losses or liabilities resulting from operations on or related to the LAK
Ranch Lease or LAK Ranch Area prior the Effective Date, the liability for which
shall be for the account of the other Parties.

8.2 No liability for Losses. In no case shall the Operator be liable to any
Party, or to any third party, for any loss or spillage of oil or gas or other
hydrocarbon substances or for any consequential loss, including loss of profit,
arising out of its conduct of Joint Operations, or for any damages or losses
resulting therefrom. Each Party shall bear any such losses or liability in
proportion to their Working Interests.

8.3 Government Approvals. In the conduct of the Pilot Phase, Phase 1 and Joint
Operations, the Operator shall:

      (a)   Pay to the government of the State of Wyoming or the Federal
            Government, as applicable, (collectively, the "Government") for the
            Joint Account, within

                                       14
<PAGE>

            the periods and in the manner prescribed by all applicable laws,
            ordinances, rules, and regulations, all periodic payments,
            royalties, taxes, fees and other payments pertaining to the Joint
            Operations (such amounts to be treated under this Agreement as
            Capital Expenditures or Other Costs, as the case may be, in
            accordance with generally accepted accounting principles) but
            excluding any taxes measured by the incomes of any of the Parties;
            and

      (b)   Have the exclusive right and obligation to represent the Parties in
            all dealings with the Government with respect to matters arising
            under the Joint Operations. The Operator shall notify the
            Non-Operators as soon as possible of such meetings. Subject to any
            necessary Government approvals, Non-Operators shall have the right
            to attend any meetings with the Government with respect to such
            matters, but only in the capacity of observers. Nothing contained in
            this Agreement shall restrict any Party from holding discussions
            with the Government with respect to any issue peculiar to its
            particular business interests arising under the LAK Ranch Leases or
            this Agreement, but in such event, such Party shall promptly advise
            the other Parties, if possible, before and in any event promptly
            after such discussions, provided that such Party shall not be
            required to divulge to the other Parties any matters discussed to
            the extent the same involve proprietary information or matters not
            affecting the other Parties.

                                   ARTICLE IX

                 TITLE AND OTHER REPRESENTATIONS AND WARRANTIES

9.1 Title and Curative Work. Except for those encumbrances and royalties created
by, through or under Derek or SEC including but not limited to those set out in
Exhibit "A", Derek does not warrant title, express or implied, to the LAK Ranch
Leases. Derek shall not be obligated to perform any curative work or to furnish
any materials with respect thereto, other than copies of such title opinions and
other relevant documents as they may have in their possession. Nevertheless,
during the term of this Agreement or the JOA, any

                                       15
<PAGE>

curative work by Derek shall enure to the benefit of Ivanhoe and Ivanhoe shall
be promptly furnished with copies of all opinions and curative instruments
pertaining to the LAK Ranch Leases and the LAK Ranch Area. Derek shall make
available to Ivanhoe, all records and lease files pertaining to the LAK Ranch
Leases. To the extent that title to one or more of the Leases included in the
drilling unit for any programmed well in the LAK Ranch Program is such that a
reasonable and prudent Operator would require in Ivanhoe's opinion curative
action to be taken, except as set out above, Ivanhoe may undertake such curative
action, in which case, the time in which operations are to be started, shall be
extended by the period of time necessary for Ivanhoe to complete such curative
work.

9.2 Other Representations and Warranties of Derek. Derek, on its own behalf and
for SEC to the extent that SEC will earn a Working Interest in the LAK Ranch
Area, represents and warrants to Ivanhoe as follows:

9.2.1 Encumbrances on the LAK Ranch Area. Exhibit "A" sets forth a description
      of (a) all overriding royalties, production payments or preferential
      rights of any nature of third parties with respect to the LAK Ranch Leases
      and the Substances, (b) all rights-of-way and other agreements and other
      rights relating to the use or ownership of the surface or surface
      properties that are used or held for use in connection with the production
      of Substances from the LAK Ranch Area, (c) all contracts, licenses,
      permits, approvals, consents, certificates and other rights granted by
      governmental authorities and all certificates of convenience or necessity,
      immunities, privileges, grants and other rights that relate to the LAK
      Ranch Area or the ownership or operation of the LAK Ranch Area and the LAK
      Ranch Leases. Ivanhoe and the interests of Ivanhoe in the LAK Ranch Leases
      and the LAK Ranch Area shall at all times be free and clear of any
      obligation under the SEC Agreement. Derek and SEC agree that Derek and its
      interests in the LAK Ranch Leases and the LAK Ranch Area, alone shall be
      responsible for performance of all obligations to

                                       16
<PAGE>

      SEC under the SEC Agreement and/or any other agreement or arrangement
      between Derek and SEC.

9.2.2 Litigation and Claims. There are no claims, demands, filings,
      investigations, administrative proceedings, actions, suits or other legal
      proceedings pending or, to the best of their knowledge, threatened, with
      respect the LAK Ranch Leases or LAK Ranch Area or the ownership or
      operation thereof, other than proceedings relating to the oil and gas
      industry generally and as to which neither Derek and or SEC is a named
      party; and no written notice from any governmental authority or any other
      person has been received by either Derek or SEC claiming any violation of
      any law, rule, regulation, ordinance, order, decision or decree of any
      governmental authority (including, without limitation, any such law, rule,
      regulation, ordinance, order, decision or decree concerning the
      conservation of natural resources) except for funds owed to Bateman
      Engineering Inc. ("Bateman") in the approximate amount of $285,000, which
      funds shall be paid by Derek to Bateman within ten (10) days of the
      Effective Date.

9.2.3 Approval and Preferential Rights. There are no approvals or consents
      required to be obtained by Derek for consummation of the transactions
      contemplated by this Agreement and no preferential purchase rights that
      affect the transactions contemplated by this Agreement.

9.2.4 Compliance with Laws and Permits. The operations conducted by Derek on the
      LAK Ranch Area and LAK Ranch Leases have been and currently are, in
      compliance with the provisions and requirements of all laws, rules,
      regulations, ordinances, orders, decisions and decrees of all governmental
      authorities having jurisdiction with respect thereto, except where
      noncompliance would not reasonably be expected to have a material adverse
      effect on the operation thereof. All necessary government permits,
      licenses and other authorizations would not reasonably be

                                       17
<PAGE>

      expected to have a material adverse effect on the ownership or operation
      of the LAK Ranch Leases. Neither has Derek received a demand from a
      governmental authority to plug and abandon any well on the LAK Ranch
      Leases that has not been plugged and abandoned.

9.2.5 Environmental Compliance. No pollutant, waste, contaminant, or hazardous,
      extremely hazardous, or toxic material, substance, chemical or waste
      identified, defined or regulated as such under any law relating to health,
      safety or environmental matters is present, or has been handled, managed,
      stored, transported, processed, treated, disposed of, released, migrated
      or has escaped on, in, from, under or in connection with the LAK Ranch
      Lease or LAK Ranch Area or the ownership or operation thereof such as to
      cause a condition or circumstance that would reasonably be expected to
      result in a violation of any law relating to health and safety or
      environmental matters or in a remediation, removal, response, restoration,
      abatement, investigative or monitoring obligation, other than violations
      or obligations that would not reasonably be expected to have a material
      adverse effect on the ownership or operation of the LAK Ranch Leases or
      LAK Ranch Area.

9.2.6 Production Burdens, Taxes and Expenses. All payments due under or with
      respect to the LAK Ranch Leases have been properly and timely paid. All ad
      valorem, property, production, severance and other taxes based on or
      measured by the ownership of the LAK Ranch Leases and the LAK Ranch Area
      based on or measured by the ownership of such properties or the production
      of Substances therefrom have been properly and timely paid.

                                    ARTICLE X

                              RELATIONSHIP/TAXATION

10.1 Relationship of the Parties - This Agreement does not create, and shall not
be construed to create, a partnership, association, joint venture or fiduciary
relationship of

                                       18
<PAGE>

any kind or character between the Parties, and shall not be construed to impose
any duty, obligation or liability arising from such a relationship by or with
respect to any Party. Notwithstanding any provisions herein that the rights and
liabilities hereunder are several and not joint or collective or that this
Agreement and the operations hereunder shall not constitute a partnership, each
Party elects to be excluded from the application of all or any part of the
provisions of Subchapter "K", Chapter 1, Subtitle "A", U.S. Internal Revenue
Code of 1986, as amended, or similar provisions of applicable State laws.

                                   ARTICLE XI

                                  FORCE MAJEURE

11.1 Force Majeure - If a Party is rendered unable, wholly or in part, by Force
Majeure, to carry out its obligations under this Agreement, other than the
obligations to pay money, that Party shall give the other Parties prompt written
notice of the Force Majeure with reasonably full particulars concerning it;
thereupon the obligations of the Party giving the notice, so far as they are
affected by the Force Majeure, shall be suspended during the continuance of the
Force Majeure, and such reasonable time thereafter as the affected Party
reasonably requires under the circumstances to carry out its obligations. The
affected Party shall use all reasonable diligence to remove the Force Majeure
situation and resume the performance of its obligations as quickly as
practicable. The requirement that any Force Majeure shall be remedied with all
reasonable dispatch, shall not require the settlement of strikes, lockouts, or
other labor difficulty by the Parties involved, contrary to its wishes; how all
such difficulties shall be handled shall be entirely within the discretion of
the Party concerned.

11.2 Claims. The term "Force Majeure" shall mean any circumstances not within
the reasonable control, directly or indirectly, of the Party affected including
but not limited to an act of God, strike, lockout or other industrial
disturbance, terrorist act, act of the public enemy, war, blockade, public riot,
lightning, fire, storm, flood, explosion, governmental

                                       19
<PAGE>

delay, restraint or inaction, unavailability of equipment, but only if and to
the extent that any act to which Force Majeure is claimed:

(a)   Such circumstances, despite the exercise of reasonable diligence, cannot
      be or be caused to be prevented, avoided or removed by such Party; and

(b)   In the case of claims by such Party, such event materially adversely
      affects (in case and/or time) the ability of the Party to perform its
      obligations under this Agreement, the Joint Operating Agreement or any
      Lease, and the Party has taken all reasonable precautions, exercised due
      care and has taken all reasonable alternative measures in order to avoid
      the effect of such event on the Party's ability to perform its obligations
      under this Agreement and to mitigate the consequences thereof.

                                   ARTICLE XII

                                   ASSIGNMENTS
                          OPTION TO PURCHASE INTERESTS

12.1 Right of First Refusal - Other than as required and allowed as between one
Party to this Agreement to another Party or third party elsewhere in this
Agreement and subject to this Section, a Party shall not dispose of any of its
Working Interest, whether by assignment, sale, trade, lease, sublease or
farmout, without first complying with the following provisions:

(a)   The Party wishing to make the disposition (in this Section called the
      "Disposing Party") shall give notice to each other Party (in this Section
      called an "Offeree") of its intention to make the disposition, including
      in such notice a description of the Working Interest proposed to be
      disposed of, the identity of the proposed assignee, the price or other
      consideration for which the Disposing Party is prepared to make such
      disposition, the

                                       20
<PAGE>

      proposed effective date and closing date of the transaction and any other
      information respecting the transaction which would be material to the
      exercise of the Offerees' rights hereunder (such notice in this Article
      called the "Disposition Notice").

(b)   In the event the consideration described in the Disposition Notice cannot
      be matched in kind and the Disposition Notice does not include the
      Disposing Party's bona fide estimate of the value, in cash, of such
      consideration, an Offeree may, within seven (7) days of the receipt by the
      Offerees of the Disposition Notice, request the Disposing Party to provide
      such estimate to the Offerees, whereupon the Disposing Party shall provide
      such estimate in a timely manner, and in no event in excess of 15 business
      days, and the election period provided herein to the Offerees shall be
      suspended until such estimate is received by the Offerees. Failure to
      provide such cash equivalent estimate shall be grounds for refusal by any
      or all of the Offerees of consent to the disposition.

(c)   In the event of a dispute as to the reasonableness of an estimate of the
      cash value of the consideration described in the Disposition Notice or
      provided pursuant to paragraph (b) herein, as the case may be, the matter
      shall be referred to arbitration as provided in Section 16.8.

(d)   Within the later of: i) thirty (30) days from the receipt of the
      Disposition Notice, as modified by any suspension pursuant to paragraph
      (b) herein; or ii) if applicable, fifteen (15) days from receipt of notice
      of the arbitrated value determined pursuant to Section 16.8, an Offeree
      may give notice to the Disposing Party that it elects to purchase the
      Working Interest described in the Disposition Notice for the applicable
      price (in this Section called a "Notice of Acceptance"). A Notice of
      Acceptance shall create a binding contractual obligation upon the
      Disposing Party to sell, and upon an Offeree giving a Notice of Acceptance
      to purchase, for the applicable price, all of the Working Interest
      included in such Disposition Notice on the terms and conditions set forth
      in the Disposition Notice. However, if more than one Offeree gives a
      Notice of Acceptance,

                                       21
<PAGE>

      each such Offeree shall purchase the Working Interest to which such Notice
      of Acceptance pertains in the proportion its Working Interest bears to the
      total Working Interests of such Offerees.

(e)   In the event that the Working Interest described in the Disposition Notice
      is not disposed of to one or more of the Offerees pursuant to the
      preceding paragraph, the disposition to the proposed assignee shall be
      subject to the consent of the Offerees. Such consent shall not be
      unreasonably withheld, and it shall be reasonable for an Offeree to
      withhold its consent to the disposition if it reasonably believes that the
      disposition would be likely to have a material adverse effect on it, its
      Working Interest or operations to be conducted hereunder, including,
      without limiting the generality of all or any part of the foregoing, a
      reasonable belief that the proposed assignee does not have the financial
      capability to meet prospective obligations arising out of this Agreement.
      However, an Offeree shall be deemed to have consented to the disposition
      to the proposed assignee, unless, within the time period prescribed in
      paragraph (d) herein, the Offeree advises the other parties, by notice,
      that it is not prepared to consent to such disposition.

(f)   If the Working Interest described in the Disposition Notice is not
      disposed of to one or more the Offerees pursuant to paragraph (d) herein,
      the Disposing party may, subject to the obtaining the consents prescribed
      by the preceding paragraph, dispose of such Working Interest at any time
      within one hundred and fifty (150) days from the issuance of such
      Disposition Notice, provided that such disposition is not on terms that
      are more favorable to such purchaser than those offered in the Disposition
      Notice.

(g)   Following a disposition herein or one hundred fifty (150) days following
      the issuance of a Disposition Notice from which a disposition did not
      result, as the case may be, the provisions of this Section shall once
      again apply to the Working Interest described in the Disposition Notice.

                                       22
<PAGE>

12.2  Section 12.1 shall not apply in the following instances, namely:

(a)   An assignment made by way of security for the assignor's present or future
      indebtedness, or liabilities (whether contingent, direct or indirect and
      whether financial or otherwise), the issuance of the bonds or debentures
      of a corporation, or the performance of the obligations of the assignor as
      a guarantor under a guarantee, provided that in the event the security is
      enforced by sale or foreclosure, Section 12.1 shall apply.

(b)   A disposition to an Affiliate of the assignor, or in consequence of a
      merger or amalgamation of the assignor with another corporation or
      pursuant to an assignment, sale or disposition made by a Party of its
      entire Working Interest to a corporation in return for shares in that
      corporation or to a registered partnership in return for an interest in
      that partnership.

(c)   A disposition made by the assignor of all, or substantially all, or of an
      undivided interest in all or substantially all, of its petroleum and
      natural gas rights; provided, however, if the LAK Ranch Leases and any
      other Lease interests of Derek and/or SEC are all or substantially all of
      the net assets held by them, then Section 12.1 shall apply.

(d)   A disposition by Derek to SEC pursuant to the terms of the SEC Agreement.

However, a Party making such a disposition pursuant to paragraph (b), (c) or (d)
of this Clause shall advise the other Parties of such disposition in a timely
manner.

12.3 If any assignment of Working Interest is made to multiple assignees so as
to increase the expense or duties of the Operator, the Operator may require the
assignees (and the assignor if it retains a Working Interest) to appoint one of
their number as representing all

                                       23
<PAGE>

of them for the purposes of this Agreement, unless arrangements satisfactory to
the Operator are made to compensate the Operator for the increased expenses or
duties.

                                  ARTICLE XIII

                                    INSURANCE

13.1 Insurance Requirements - Before commencing operations within the LAK Ranch
Area, pursuant to this Agreement, Ivanhoe shall procure and shall thereafter
maintain in force during the term of this Agreement, the insurance hereinafter
described, covering the operations to be performed hereunder by Ivanhoe as
Operator. The costs of all insurance carried by the Operator for the benefit of
the Parties and the Joint Operations shall be for the Joint Account of the
Parties.

(a)   Workers' Compensation and Occupational Disease Insurance, satisfying the
      legal requirements of the State of Wyoming and Employers Liability
      Insurance with a minimum of $1,000,000.00 per occurrence.

(b)   Comprehensive general liability insurance, including personal injury
      blanket contractual liability and property damage, with coverage of at
      least $1,000,000 combined single limit or the equivalent; owned and
      non-owned automobile liability, including personal injury and property
      damage, with coverage of at least $1,000,000, combined single limit or the
      equivalent; products liability and completed operations coverage of at
      least $1,000,000, combined single limit or the equivalent

(c)   Umbrella liability insurance, with at least $4,000,000 combined single
      limit per occurrence and at least $10,000,000 in the aggregate;

                                       24
<PAGE>

(d)   Control of well seepage and pollution, and well Restoration/Redrill
      Insurance with a combined single limit of at least $3,000,000 per
      occurrence.

(e)   Each and every policy required hereinabove in (b), (c) and (d) shall name
      Non-Operators as additional insured.

(f)   With the exception of Paragraph 13.1 (a), the Parties agree to mutually
      waive subrogation in favor of each other on all insurances carried by each
      Party and/or obtain such waiver from the insurance carrier if so required
      by the insurance contract. If such waiver is not obtained, the Party
      failing to do so shall indemnify the other Parties for any claim by an
      insurance carrier arising out of subrogation.

13.2 Certificates of Insurance. Before commencing any work hereunder, Ivanhoe
shall furnish to Non-Operators Certificates of Insurance evidencing the issuance
to Ivanhoe of the policies of insurance providing the types of coverage and
limits of liability prescribed above, and certifying that Non-Operators shall be
given not less than 30 days written notice prior to any material change,
substitution or cancellation prior to the normal expiration dates. Cancellation
or expiration of any of said policies of insurance shall not preclude Ivanhoe
from recovery thereunder for any liability arising under this Agreement.

                                  ARTICLE XIV

                                FAILURE TO DRILL

14.1 Failure to Comply - Under no circumstances shall Ivanhoe be liable for its
failure to drill or complete any programmed well in the LAK Ranch Program, or
the manner in which it is drilled, tested or completed.

                                       25
<PAGE>

                                   ARTICLE XV

                                     NOTICES

15.1 Notices - All notices between the Parties authorized or required by any of
the provisions of this Agreement, unless otherwise specifically provided, shall
be given in writing and delivered in person by mail, courier service, facsimile,
or e-mail, postage or charges prepaid or by telex or telecopier and addressed to
the Party to whom the notice is given as follows.

Derek:             Derek Resources (U.S.A.) Inc.
-----
Street Address:    Suite 1550, 355 Burrard Street
                   Vancouver B. C., Canada V6C 2G8
Attention:         Barry C. J. Ehrl, President & CEO
Telephone:         604-331-1757
Facsimile:         604-669-5193
E- mail:           info@derekresources.com

Ivanhoe:           Ivanhoe Energy (USA) Inc.
-------
Street Address:    5060 California Avenue, Suite 400
                   Bakersfield, California 93309
Mailing Address:   P.O. Box 9279
                   Bakersfield, CA  93389-9279
Attention:         Robert Coffey, Vice-President, Operations
Telephone:         661-869-8332
Facsimile:         661-869-2820
E-mail             rcoffey@ivanhoeenergy.com

Copy to;           Oscar Blake, General Counsel
-------
                                       26
<PAGE>

The originating notice given under any provision hereof shall be deemed given
only when received by the Party to whom such notice is directed, and the time
for such Party to give any notice in response thereto shall run from the date
the originating notice is received. The second or any responsive notice shall be
deemed given when deposited in the mail or with the courier service, with
postage or charges prepaid, or upon transmission by facsimile or telecopier.
Each Party shall have the right to change its address, or the person to receive
such notice, at any time, and from time to time by giving written notice thereof
to the other Party.

                                   ARTICLE XVI

                   ADDITIONAL TERMS, PROVISIONS, AND COVENANTS

16.1 Time and Specific Performance of Essence - Time and specific performance
are of the essence of this Agreement.

16.2 Laws and Regulations; Applicable Law - Ivanhoe as Operator shall comply
with and conduct its operations hereunder in accordance with all applicable
laws, ordinances, rules, and regulations. This Agreement shall be construed and
interpreted under and in accordance with the laws of the State of Wyoming.

16.3 Headings and Interpretation - The section and other headings used
throughout this Agreement are for administrative convenience only and shall be
disregarded for purposes of construing this Agreement. Words importing the
singular shall include the plural and vice versa, and the use of one gender
includes any other gender, except where the context otherwise requires.

                                       27
<PAGE>

16.4 Waiver - Any of the terms, provisions, covenants, representations or
conditions hereof may be waived only by a written instrument executed by the
Party waiving compliance. The failure of any Party at any time or times to
require performance of any provisions hereof shall in no manner affect the right
to enforce the same. No waiver by any Party of any condition or of the breach of
any term, provision, covenant, representation or warranty contained in this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be or construed as a further or continuing waiver of any such
condition or breach, or a waiver of any other condition or of the breach of any
other term, provision, covenant, representation or warranty.

16.5 Press Releases - No Party shall distribute any information or photographs
concerning operations hereunder to the press or other media without the approval
of the other Parties. In the event of a requirement by a regulatory agency
[including the Securities Exchange Commission or the U.S. or securities
regulatory authorities of Canada, or any stock exchange on which the securities
of a Party or its Affiliate (to the extent the Affiliate either owns a majority
interest in a Party, or a Party owns a majority interest in the Affiliate) are
listed], or of an emergency involving extensive property damage, operations
failure, loss of human life or other clear emergency, the Parties are deemed
authorized to furnish such minimum, strictly factual information as is necessary
to satisfy requirements of appropriate regulatory authorities, or the legitimate
public interest on the part of the press, other media, and duly constituted
authorities if time does not permit the obtaining of prior approval by the other
Party, but the Party furnishing such information shall promptly advise the other
Party of the information so furnished.

16.6 Amendments - This Agreement may be amended, modified, changed, altered or
supplemented only by written instrument duly executed by the Parties
specifically for such purpose and which specifically refers to this Agreement.

                                       28
<PAGE>

16.7 Conflicts - In the event of a conflict between provisions of this Agreement
and those contained in any of the agreements attached hereto, the provisions of
this Agreement shall prevail.

16.8 Arbitration - Unless otherwise expressly agreed in writing by all of the
Parties to any claim, dispute or controversy (the "Dispute"), the following
procedures shall be implemented for resolving any Dispute:

(a) Any Party may invoke these dispute resolution procedures (the "Procedures")
by providing written notice of any Dispute to the other Parties. Within thirty
(30) days after such notice is given, all the Parties shall attempt to resolve
the Dispute through negotiations at a meeting, which shall be attended by
representatives of each of the Parties having decision-making authority as well
as by management-level personnel of each of the Parties who have not previously
been directly engaged in directing or responding to the Dispute;

(b) If a Dispute is not resolved after negotiations in a meeting as set out
above, the Dispute shall be submitted to mandatory and binding arbitration at
the election of any Party by sending a notice of arbitration to the other
Parties;

(c) The Arbitration proceedings shall administered and conducted in accordance
with the Commercial Rules of Arbitration of the American Arbitration
Association.

(d) The Dispute shall be decided by three independent arbitrators
("Arbitrators") (that is having no substantial economic or other material
relationship with any or all of the Parties). The Parties shall attempt to agree
on two of the independent arbitrators (the "Agreed Arbitrators") with the third
being appointed by the Agreed Arbitrators. Should any Party refuse or neglect to
join in the timely appointment of the Agreed Arbitrators, the Agreed Arbitrators
shall be appointed by the American Arbitration Association, and the

                                       29
<PAGE>

Arbitration shall proceed notwithstanding the non-appointment and non-attendance
of such Party in the appointment process.

(e) The Arbitrators shall have 30 days after their appointment within which to
allow discovery, hear evidence, and issue its decision or award and shall in
good faith attempt to comply with such time limits; provided, however, if the
Arbitrators, at their sole and reasonable discretion, believe additional time is
necessary to reach a decision, they may notify the Parties and extend the time
to reach a decision in 30 day increments, but in no event to exceed an
additional 60 days.

(f) The decision or award of the Arbitrators shall be by majority vote. shall be
in writing and shall state its detailed reasoning for the award. Discovery of
evidence shall be conducted expeditiously by the Parties, bearing in mind the
Parties desire to limit discovery and to expedite the decision or award of the
Arbitrators at the most reasonable cost and expense of the Parties. Judgment
upon an award rendered pursuant to such arbitration may be entered in any court
having jurisdiction or application may be made to such court for a judicial
acceptance of the award, and an order of enforcement, as the case may be. The
place of Arbitration shall be Denver, Colorado. All questions arising out of
this Agreement and their rights and obligations created herein, or its validity,
existence, interpretation, performance or breach shall be governed by the laws
of the State of Wyoming, without regard to conflict of laws principles. The
Arbitrators shall not award consequential or punitive damages to any Party. The
costs and expenses of the arbitration proceeding, including the fees of the
arbitrators and all costs and expenses, including legal fees and witness fees,
incurred by the prevailing Party, shall be borne by the losing Party, such award
of costs to be decided and specified by the Arbitrators.

16.9 Entire Agreement - When executed by the duly authorized representatives of
the Parties, this Agreement shall constitute the entire agreement between the
Parties regarding the LAK Ranch Leases, and the LAK Ranch Area and Area of
Mutual Interest and shall

                                       30
<PAGE>

supersede and replace any and all other writings, understandings or memoranda of
understanding entered into or discussed prior to the Effective Date.

16.10 Savings Clause - If any part or portion of this Agreement is held to be
invalid, such invalidity of any such part or portion shall not affect any
remaining part or portion hereof.

16.11 Corporate Authority - The Parties represent that, as of the date of the
execution hereof, they are duly authorized, validly existing, and in good
standing under the laws of the jurisdictions of organization and are qualified
and authorized to do business in the State of Wyoming and that all requisite
corporate power and authority to execute, deliver, and effectuate this Agreement
have been duly obtained.

16.12 Further Assurances - Each Party shall promptly execute, acknowledge, and
deliver to the other Party such other instruments and take such other action as
may be necessary or convenient in order to effect the transactions contemplated
in this Agreement.

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement to be
effective as of the Effective Date.

IVANHOE ENERGY (USA) INC.

BY:  _______________________________
         E. L. DANIEL, President

DEREK RESOURCES (U.S.A.) INC.

BY:  ________________________________
     BARRY C. J. EHRL, President & CEO

                                       31
<PAGE>
                                   EXHIBIT "A"

Attached to and made a part of that certain Farmin Agreement dated January 15,
2004, by and between Ivanhoe Energy (USA Inc., and Derek Resources (USA) Inc.

All lands are in Weston County, Wyoming

Description of Lands
--------------------

      Tract A

      Township 44 North, Range 60 West, 6th P.M.
      ------------------------------------------

      Section 6:     Southwest Quarter, Northeast Quarter, East Half of the
                     Northwest Quarter, and West Half of the Southeast Quarter
                     (SW/4, NE/4, E/2 NW/4, W/2 SE/4).

      Section 7:     West Half, and West Half of the East Half (W/2, W/2 E/2).

      Section 18:    South Half of the Southwest Quarter, and the Northwest
                     Quarter (S/2 SW/4, NW/4).

      Section 19:    West Half of West Half, Northeast Quarter of the Northwest
                     Quarter (W/2 W/2, NE/4 NW/4).

      Township 44 North, Range 61 West, 6th P.M.
      ------------------------------------------

      Section 1:     Southeast Quarter (SE/4).

      Section 11:    Southeast Quarter, East Half of the Northeast Quarter, and
                     South Half of the Southwest Quarter (SE/4, E/2 NE/4, S/2
                     SW/4).

      Section 12:    All.

      Section 13:    West Half, and South Half of the Southeast Quarter (W/2,
                     S/2 SE/4).

      Section 14:    All.

      Section 22:    Northeast Quarter (NE/4).

      Section 23:    North Half, Southeast Quarter, East Half of the Southwest
                     Quarter (N/2, SE, E/2 SW/4).

      Section 24:    North Half, Southeast Quarter, and East Half of the
                     Southwest Quarter (N/2, SE/4, E/2 SW/4).

      Section 25:    Northwest Quarter of the Northeast Quarter, North Half of
                     the Northwest Quarter, Southwest Quarter of the Northwest
                     Quarter, and Northwest Quarter of the Southwest Quarter
                     (NW/4 NE/4, N/2 NW/4, SW/4 NW/4, NW/4 SW/4.

      Section 26:    East Half of the Northeast Quarter, and Northeast Quarter
                     of the Southeast Quarter (E/2 NE/4, NE/4 SE/4).

      Section 30:    West Half of the Northwest Quarter (W/4 NW/4).

      Tract B

      Township 44 North, Range 61 West, 6th P.M.
      ------------------------------------------

      Section 24:    Southeast Quarter of the Southeast Quarter (SE/4 SE/4).

      Section 24:    Northeast Quarter of the Southeast Quarter (NE/4 SE/4).

      Section 25:    South Half of the Southwest Quarter, the Northeast Quarter
                     of the Southwest Quarter, Northwest Quarter of the
                     Southeast Quarter, East Half of the Northeast Quarter,
                     Southwest Quarter of the Northeast Quarter, and Southeast
                     Quarter of the Northwest Quarter (S/2 SW/4, NE/4 SW/4, NW/4
                     SE/4, E/4 NE/4, SW/4 NE/4, SE/4 NW/4).

      Tract C

      Township 44 North, Range 60 West, 6th P.M.
      ------------------------------------------

      Section 18:    North Half of the Southwest Quarter (N/2 SW/4).

      Township 44 North, Range 61 West, 6th P.M.
      ------------------------------------------

      Section 13:    Northeast Quarter, and North Half of the Southeast Quarter
                     (NE/4, N/2 SE/4).

      Tract D

      Township 44 North, Range 61 West, 6th P.M.
      ------------------------------------------

      Section 22:    Southeast Quarter (SE/4).

      Section 27:    West Half of the East Half (W/2 E/2).

      Tract E

      Township 44 North, Range 60 West, 6th P.M.
      ------------------------------------------

      Section 24:    Southeast Quarter of the Southeast Quarter (SE/4,SE/4).

                                     Page 1
<PAGE>

            Additional Property Leased from the Federal Government
            ------------------------------------------------------

      Township 44 North, Range 61 West, 6th P.M.
      ------------------------------------------

      Section 1:     South Half of the Southwest Quarter (S/2 SW/4).

      Section 10:    Southwest Quarter of the Northeast Quarter (SW/4 NE/4).

      Section 10:    West Half of the Southeast Quarter, Southeast Quarter of
                     the Southeast Quarter (W/2 SE/4, SE/4 SE/4), excluding
                     13.77 acres in railroad right-of-way WyW0119068.

      Section 15:    West Half of the East Half, East Half of the West Half,
                     Northwest Quarter of the Northwest Quarter, Southwest
                     Quarter of the Southwest Quarter (W/2 E/2, E/2 W/2, NW/4
                     NW/4, SW/4 SW/4).

      Section 15:    East Half of the East Half (E/2 E/2), excluding 23.78 acres
                     in railroad right-of-way WyW0119068.

      Section 25:    Northeast Quarter of the Southeast Quarter, South half of
                     the Southeast Quarter (NE/4 SE/4, S/2 SE/4).

      Section 26:    Northwest Quarter of the Northeast Quarter, East Half of
                     the Southwest Quarter (NW/4 NE/4, E/2 SW/4).

      Section 26:    East Half of the Northwest Quarter, Southeast Quarter of
                     the Southeast Quarter (E/2 NW/4, SE/4 SE/4), excluding
                     14.23 acres in railroad right-of-way WyW0119068.

Oil and Gas Leases subject to this Agreement
--------------------------------------------

      A.    Oil and Gas Lease, dated January 10, 1981, by and between Donald B.
            Roberts, B.M. Stewart, and Sheri Vineyard, as Lessors, and Exoil
            Services, Inc., as Lessee, recorded in Book 87, Page 189, Official
            Records of Weston County, Wyoming.

      B.    Oil and Gas Lease, dated effective August 31, 1958, by and between
            the U.S. Department of Interior, Bureau of Land Management, as
            Lessor, and Edel P. Smith, as Lessee, being identified as Lease
            Serial Number W-022180-A.

      C.    Oil and Gas Lease, dated effective December 1, 1999, by and between
            the U.S. Department of Interior, Bureau of Land Management, as
            Lessor, and Cove Energy, as Lessee, being identified as Lease Serial
            Number W-149512.

Burdens on Production
---------------------

     Tract A      19.9501%
     Tract B      19.9501%
     Tract C      11.7875% (Based on 50% leased)
     Tract D      11.7875% (Based on 50% leased)
     Tract E      19.9501%

                                     Page 2

<PAGE>

                        EXHIBIT "B" TO FARMIN AGREEMENT
                               LAK RANCH AREA/AMI

[GRAPHIC - FULL PAGE MAP OF DEREK RESOURCES CORPORATION LAK RANCH PROPERTY
           WESTON COUNTY WYOMING]

<PAGE>
Original LAK Property and Adjoining Property
--------------------------------------------

DESCRIPTION OF PROPERTY

TRACT A
Township 44 North, Range 60 West, 6th P.M., Weston County, Wyoming
Section 6:     SW1/4, NE1/4, E1/2NW1/4, W1/2SE1/4
Section 7:     W1/2, W1/2E1/2
Section 18:    S1/2S W1/4, NW1/4
Section 19:    W1/2 W1/2, NE1/4NW1/4
Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
Section 1:     SE1/4
Section 11:    SE1/4, E1/2NE1/4, S1/2SW1/4
Section 12:    All
Section 13:    W1/2, S1/2SE1/4
Section 14:    All
Section 22     NE1/4
Section 23     N1/2, SE, E1/2SW1/4
Section 24     N1/2, SE1/4, E1/2SW1/4
Section 25     NW1/4NE1/4, N1/2NW1/4, SW1/4NW1/4, NW1/4SW1/4
Section 26     E1/2NE1/4, NE1/4SE1/4
Section 30     W1/2NW1/4

TRACT B
Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
Section 24:    SE1/4SE1/4
Section 24:    NE1/4SE1/4
Section 25:    S1/2SW1/4, NE1/4SW1/4, NW1/4SE1/4, E1/2NE1/4, SW1/4NE1/4,
               SE1/4NW1/4

TRACT C
Township 44 North, Range 60 West, 6th P.M., Weston County, Wyoming
Section 18:    N1/2SW1/4
Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
Section 13:    NE1/4, N1/2SE1/4

TRACT D
Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
Section 22:    SE1/4
Section 27:    W1/2E1/2

Additional Property Leased from the Federal Government
------------------------------------------------------

DESCRIPTION OF PROPERTY

Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
Section 10:    SW1/4NE1/4
Section 10:    W1/2SE1/4, SE1/4SE1/4, (Excluding 13.77 acres in railroad
               right-of-way WyW0119068)
Section 15:    W1/2E1/2, E1/2W1/2, NW1/4NW1/4, SW1/4SW1/4
Section 15:    E1/2E1/2(Excluding 23.87 acres in railroad right-of-way
               WyW0119068)
Section 25     NE1/4SE1/4, S1/2S1/4
Section 26:    NW1/4NE1/4, E1/2SW1/4
Section 26:    E1/2NW1/4, SE1/4SE1/4(Excluding 14.23 acres in railroad
               right-of-way WyW0119068)

<PAGE>

Additional Property Leased from Edel P. Smith and Accidental Oil Company
------------------------------------------------------------------------

DESCRIPTION OF PROPERTY

Township 44 North, Range 61 West, 6th P.M., Weston County, Wyoming
Section 1:     SW1/2 SW1/4

<PAGE>
                                 EXHIBIT "D" TO
                           LAK RANCH FARMIN AGREEMENT
                            LAK RANCH PROGRAM SUMMARY

                            ENVIRONMENTAL COMPLIANCE

1.    Oil spill occurred on December 20, 2001 as a result of high winds breaking
      the wire that held the bypass loop on the Jacuzzi pump. Approximately 9 to
      10 barrels was displaced on the surface. Chuck Brothers were retained to
      handle the oil waste disposal which was completed on or about December 26,
      2001.

2.    On December 31, 2001, Mr. Jack Eslinger, a landowner with property near
      the LAK Ranch Project called the Derek LAK Ranch site office regarding
      water surfacing on his property. Dr. Paul Trost was consulted regarding
      the water seepage and informed Derek site staff that the water was ground
      water being pressured to the surface and that the water was not
      contaminated so that there need not be any concern in this regard. Derek
      did not shut down its LAK Ranch Project operation due to the water seepage
      as Derek had previously decided to shut down operations for financial
      reasons. In addition, Derek was in the process of applying for a surface
      water discharge permit, which was subsequently granted. There was no
      further contact with Mr. Eslinger with regard to this matter beyond his
      original call to the LAK Ranch site office until mid-January of 2004, when
      Mr. Eslinger spoke with the Derek site manager, Mr. Art Huckins. At this
      time, Mr. Eslinger expressed further concerns about the water damage to
      his property. Derek acknowledges that it is Derek's responsibility to
      resolve this matter with Mr. Eslinger and Derek intends to do so without
      admitting any liability for the water damage.
<PAGE>
                                       3
                                   EXHIBIT "E"

ATTACHED TO AND MADE A PART OF THAT CERTAIN FARMIN AGREEMENT DATED JANUARY 15,
2004, BY AND BETWEEN IVANHOE ENERGY (USA) INC. AND DEREK RESOURCES (U.S.A.) INC.

                            LAK RANCH PROGRAM DETAILS

                                   PILOT PHASE

PROGRAM SUMMARY

      o   Cycle steam existing horizontal producer
      o   Drill approx. 5 vertical slim hole steam injection wells
      o   Test response from continuous steam injection
      o   Acquire and process high resolution 3-D seismic survey

          Estimated Pilot Cost - 1.1 MM$ (US$)
          Timeframe - 1.5 years starting in 1/1/2004

DISCUSSION

The intent of this phase is to test the technical feasibility of using thermal
recovery methods to enhance the production of the horizontal producing well
completed in the Newcastle Sand on the LAK Ranch.

The existing horizontal producing well will be tested in a cyclic steam mode
using a conventional beam pump to produce the well. This portion of the program
is estimated to take approximately six months. After evaluating the cyclic
results, a continuous steam injection program will be evaluated using five
vertical steam injection wells completed up dip of the horizontal well. After
one year of continuous injection there should be enough data to support the
go-forward decision.

During this phase, and depending on performance of the above injection program,
a 3-D seismic program will be conducted over prospective acreage on the LAK
Ranch in order to more accurately map the geologic features and support the
exploitation of oil reserves on this project. In order to resolve the
stratigraphic variability, and successfully identify the productive zones, an
ultra-high resolution survey will be obtained. We estimate that a project of 4-5
square miles of 3-D seismic data may be acquired and processed for $500,000 US.
At a minimum, Ivanhoe will spend 250 M$US acquiring and processing seismic data
during the Pilot Phase. It is estimated that the geophysical program will take a
minimum of 6 months and is scheduled for the later half of 2004.

<PAGE>

                                    PHASE I

PROGRAM SUMMARY

      o   Drill three horizontal producers
      o   Drill approx. 15 vertical slim hole steam injection wells
      o   Drill six temperature observation wells
      o   Drill six delineation wells
      o   Expand existing facility infrastructure (well testing, water treatment
          and steam generation).
      o   Drill approximately six delineation wells to test 3-D geological model

          Estimated Phase I Cost - 5.8 MM$ (US$)
          Estimated Cumulative (Pilot +Phase I) Cost = 6.9MM$ (US$)
          Timeframe - 2 years starting on 7/1/2005

DISCUSSION

During Phase I three additional horizontal producers will be drilled along with
15 vertical steam injection wells and one water disposal well. The total
drilling cost is estimated at 3.65 MM$ and will occur during 2005 (2.4 MM$) and
2006 (1.25 MM$). A detailed reservoir simulation model will be constructed and
used to plan the Phase I reservoir development.

The existing facility infrastructure should be maximized with a total of four
horizontal producers with some modifications. The modifications that are
anticipated are purchasing a 50 MMBTU/hr steam generator, building a water plant
to process produced water for generator feed water, adding well test equipment,
modifying the heater treater with fire tubes, adding a free water knockout and
installing a LACT. Facility costs are anticipated to total 1.6 MM$ and occur
mainly during 2005 (1.5 MM$).
<PAGE>
                                  EXHIBIT "C"

ATTACHED TO AND MADE A PART OF THAT CERTAIN FARMIN AGREEMENT DATED JANUARY 15,
2004, BY AND BETWEEN IVANHOE ENERGY (USA) INC. (IVAN), AS OPERATOR AND DEREK
RESOURCES (U.S.A.) INC., AS NON-OPERATOR.

                            A.A.P.L. FORM 610 - 1989

                         MODEL FORM OPERATING AGREEMENT

                               OPERATING AGREEMENT

                                      DATED

                                JANUARY 15, 2004,
                                ----------- -----
                                            year

OPERATOR            IVANHOE ENERGY (USA) INC.
                    ------------------------------------------------------------

CONTRACT AREA       PURSUANT TO THE FARMIN AGREEMENT REFERENCED ABOVE

                    ------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

COUNTY OR PARISH OF  WESTON , STATE OF  WYOMING
                     -------            -------

                                      COPYRIGHT 1989 - ALL RIGHTS RESERVED
                                      AMERICAN ASSOCIATION OF PETROLEUM
                                      LANDMEN, 4100 FOSSIL CREEK BLVD.
                                      FORT WORTH, TEXAS, 76137, APPROVED FORM.

                                                 A.A.P.L. NO. 610 - 1989

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                TABLE OF CONTENTS

Article                                 Title                               Page
-------                                 -----                               ----
    I.  DEFINITIONS............................................................1
   II.  EXHIBITS...............................................................1
  III.  INTERESTS OF PARTIES...................................................2
        B.  INTERESTS OF PARTIES IN COSTS AND PRODUCTION:......................2
        C.  SUBSEQUENTLY CREATED INTERESTS: ...................................2
   IV.  TITLES.................................................................2
        A.  TITLE EXAMINATION:.................................................2
        B.  LOSS OR FAILURE OF TITLE:..........................................3
              3.  Losses.......................................................3
    V.  OPERATOR...............................................................4
        A.  DESIGNATION AND RESPONSIBILITIES OF OPERATOR:......................4
        B.  RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR: ....4
              1.  Resignation or Removal of Operator...........................4
              2.  Selection of Successor Operator..............................4
              3.  Effect of Bankruptcy.........................................4
        C.  EMPLOYEES AND CONTRACTORS: ........................................4
        D.  RIGHTS AND DUTIES OF OPERATOR: ....................................4
              1.  Competitive Rates and Use of Affiliates......................4
              2.  Discharge of Joint Account Obligations.......................4
              3.  Protection from Liens........................................4
              4.  Custody of Funds.............................................5
              5.  Access to Contract Area and Records..........................5
              6.  Filing and Furnishing Governmental Reports...................5
              7.  Drilling and Testing Operations..............................5
              8.  Cost Estimates...............................................5
              9.  Insurance....................................................5
   VI.  DRILLING AND DEVELOPMENT...............................................5
              1.  Proposed Operations..........................................5
              2.  Operations by Less Than All Parties..........................6
              3.  Stand-By Costs...............................................7
              4.  Deepening....................................................8
              5.  Sidetracking.................................................8
              6.  Order of Preference of Operations............................8
              7.  Paying Wells.................................................9
        C.  COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:..................9
              1.  Completion...................................................9
              2.  Rework, Recomplete or Plug Back..............................9
        D.  OTHER OPERATIONS:..................................................9
        E.  ABANDONMENT OF WELLS:..............................................9
              1.  Abandonment of Dry Holes.....................................9
              2.  Abandonment of Wells That Have Produced.....................10
              3.  Abandonment of Non-Consent Operations.......................10
        F.  TERMINATION OF OPERATIONS:........................................10
        G.  TAKING PRODUCTION IN KIND:........................................10
              (Option 1) Gas Balancing Agreement Attached.....................10
  VII.  EXPENDITURES AND LIABILITY OF PARTIES.................................11
        A.  LIABILITY OF PARTIES: ............................................11
        B.  LIENS AND SECURITY INTERESTS:.....................................12
        C.  ADVANCES:.........................................................12
        D.  DEFAULTS AND REMEDIES:............................................12
              1.  Suspension of Rights........................................13
              2.  Suit for Damages............................................13
              3.  Deemed Non-Consent..........................................13
              4.  Advance Payment.............................................13
              5.  Costs and Attorneys' Fees...................................13
        E.  RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:.............13
        F.  TAXES:............................................................13
 VIII.  ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST......................14
        A.  SURRENDER OF LEASES:..............................................14
        B.  RENEWAL OR EXTENSION OF LEASES:...................................14
        C.  ACREAGE OR CASH CONTRIBUTIONS:....................................14

                                       i
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                TABLE OF CONTENTS

        D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: ......................15
        E. WAIVER OF RIGHTS TO PARTITION:.....................................15
        F. PREFERENTIAL RIGHT TO PURCHASE:....................................15
   IX.  INTERNAL REVENUE CODE ELECTION........................................15
    X.  CLAIMS AND LAWSUITS...................................................15
   XI.  FORCE MAJEURE.........................................................16
  XII.  NOTICES...............................................................16
 XIII.  TERM OF AGREEMENT.....................................................16
  XIV.  COMPLIANCE WITH LAWS AND REGULATIONS..................................16
        A. LAWS, REGULATIONS AND ORDERS:......................................16
        B. GOVERNING LAW:.....................................................16
        C. REGULATORY AGENCIES: ..............................................16
   XV.  MISCELLANEOUS.........................................................17
        A. EXECUTION:.........................................................17
        B. SUCCESSORS AND ASSIGNS:............................................17
        C. COUNTERPARTS:......................................................17
        D. SEVERABILITY.......................................................17
  XVI.  OTHER PROVISIONS......................................................17
        A. ADDITIONAL PARTIES:................................................17
        B. BILLING ADDITIONAL INTERESTS:......................................17
        C. WORKOVER OPERATIONS:...............................................17
        D. SEQUENCE OF FURTHER OPERATIONS:....................................17
        E. MEMORANDUM OF OPERATING AGREEMENT:.................................18
        F. HEADINGS:..........................................................18
        G. CONFIDENTIALITY OF INFORMATION:....................................18
        H. NEWS RELEASES:.....................................................18
        I. LANDS EXCLUDED FROM THIS AGREEMENT:................................18
        J. CONFLICT OF TERMS:.................................................18
        K. METERING OF PRODUCTION:............................................18
        L. COVENANT RUNNING WITH THE LAND/EXTENT OF OBLIGATIONS:..............18
        M. AUTHORITY FOR EXPENDITURE REQUIREMENTS:............................18

                                       ii
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                               OPERATING AGREEMENT

         THIS AGREEMENT, entered into by and between IVANHOE ENERGY (USA) INC.
____________________________, hereinafter designated and referred to as
"Operator," and the signatory party or parties other than Operator, sometimes
hereinafter referred to individually as "Non-Operator," and collectively as
"Non-Operators."

                                   WITNESSETH:

         WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A," and the
parties hereto have reached an agreement to explore and develop these Leases
and/or Oil and Gas Interests for the production of Oil and Gas to the extent and
as hereinafter provided,

         NOW, THEREFORE, it is agreed as follows:

                                   ARTICLE I.
                                   DEFINITIONS

         As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:

         A. The term "AFE" shall mean an Authority for Expenditure prepared by a
party to this agreement for the purpose of estimating the costs to be incurred
in conducting an operation hereunder.

         B. The term "Completion" or "Complete" shall mean a single operation
intended to complete a well as a producer of Oil and Gas in one or more Zones,
including, but not limited to, the setting of production casing, perforating,
well stimulation and production testing conducted in such operation.

         C. The term "Contract Area" shall mean all of the lands, Oil and Gas
Leases and/or Oil and Gas Interests intended to be developed and operated for
Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and
Oil and Gas Interests are described in Exhibit "A."

         D. The term "Deepen" shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated AFE,
whichever is the lesser.

         E. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this agreement.

         F. The term "Drilling Unit" shall mean the area fixed for the drilling
of one well by order or rule of any state or federal body having authority. If a
Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
unless fixed by express agreement of the Drilling Parties.

         G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.

         H. The term "Initial Well" shall mean the well required to be drilled
by the parties hereto as provided in Article VI.A.

         I. The term "Non-Consent Well" shall mean a well in which less than all
parties have conducted an operation as provided in Article VI.B.2.

         J. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean
a party who elects not to participate in a proposed operation.

         K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas
condensate, and/or all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.

         L. The term "Oil and Gas Interests" or "Interests" shall mean unleased
fee and mineral interests in Oil and Gas in tracts of land lying within the
Contract Area which are owned by parties to this agreement.

         M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean
the oil and gas leases or interests therein covering tracts of land lying within
the Contract Area which are owned by the parties to this agreement.

         N. The term "Plug Back" shall mean a single operation whereby a deeper
Zone is abandoned in order to attempt a Completion in a shallower Zone.

         O. The term "Recompletion" or "Recomplete" shall mean an operation
whereby a Completion in one Zone is abandoned in order to attempt a Completion
in a different Zone within the existing wellbore.

         P. The term "Rework" shall mean an operation conducted in the wellbore
of a well after it is Completed to secure, restore, or improve production in a
Zone which is currently open to production in the wellbore. Such operations
include, but are not limited to, well stimulation operations but exclude any
routine repair or maintenance work or drilling, Sidetracking, Deepening,
Completing, Recompleting, or Plugging Back of a well.

         Q. The term "Sidetrack" shall mean the directional control and
intentional deviation of a well from vertical so as to change the bottom hole
location unless done to straighten the hole or drill around junk in the hole to
overcome other mechanical difficulties.

         R. The term "Zone" shall mean a stratum of earth containing or thought
to contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.

         Unless the context otherwise clearly indicates, words used in the
singular include the plural, the word "person" includes natural and artificial
persons, the plural includes the singular, and any gender includes the
masculine, feminine, and neuter.

                                   ARTICLE II.
                                    EXHIBITS

         The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:

X        A. Exhibit "A," shall include the following information:

            (1)   Description of lands subject to this agreement,

            (2)   Restrictions, if any, as to depths, formations, or substances,

            (3)   Parties to agreement with addresses and telephone numbers for
                  notice purposes,

            (4)   Percentages or fractional interests of parties to this
                  agreement,

            (5)   Oil and Gas Leases and/or Oil and Gas Interests subject to
                  this agreement,

            (6)   Burdens on production.

X        C. Exhibit "C," Accounting Procedure.

X        D. Exhibit "D," Insurance.

X        E. Exhibit "E," Gas Balancing Agreement.

X        F. Exhibit "F," Non-Discrimination and Certification of Non-Segregated
            Facilities.

X        H. Other: MEMORANDUM OF OPERATING AGREEMENT

                                     - 1 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.

                                  ARTICLE III.
                              INTERESTS OF PARTIES

B.  INTERESTS OF PARTIES IN COSTS AND PRODUCTION:

         Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A." In the same manner, the
parties shall also own all production of Oil and Gas from the Contract Area
subject, however, to the payment of royalties and other burdens on production as
described hereafter.

         Regardless of which party has contributed any Oil and Gas Lease or Oil
and Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each party shall pay or deliver,
or cause to be paid or delivered, all burdens on its share of the production
from the Contract Area up to, but not in excess of, 20% and shall indemnify,
defend and hold the other parties free from any liability therefor. Except as
otherwise expressly provided in this agreement, if any party has contributed
hereto any Lease or Interest which is burdened with any royalty, overriding
royalty, production payment or other burden on production in excess of the
amounts stipulated above, such party so burdened shall assume and alone bear all
such excess obligations and shall indemnify, defend and hold the other parties
hereto harmless from any and all claims attributable to such excess burden.
However, so long as the Drilling Unit for the productive Zone(s) is identical
with the Contract Area, each party shall pay or deliver, or cause to be paid or
delivered, all burdens on production from the Contract Area due under the terms
of the Oil and Gas Lease(s) which such party has contributed to this agreement,
and shall indemnify, defend and hold the other parties free from any liability
therefor.

         No party shall ever be responsible, on a price basis higher than the
price received by such party, to any other party's lessor or royalty owner, and
if such other party's lessor or royalty owner should demand and receive
settlement on a higher price basis, the party contributing the affected Lease
shall bear the additional royalty burden attributable to such higher price.

         Nothing contained in this Article III.B. shall be deemed an assignment
or cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.

C.  SUBSEQUENTLY CREATED INTERESTS:

         If any party has contributed hereto a Lease or Interest that is
burdened with an assignment of production given as security for the payment of
money, or if, after the date of this agreement, any party creates an overriding
royalty, production payment, net profits interest, assignment of production or
other burden payable out of production attributable to its working interest
hereunder, such burden shall be deemed a "Subsequently Created Interest."
Further, if any party has contributed hereto a Lease or Interest burdened with
an overriding royalty, production payment, net profits interests, or other
burden payable out of production created prior to the date of this agreement,
and such burden is not shown on Exhibit "A," such burden also shall be deemed a
Subsequently Created Interest to the extent such burden causes the burdens on
such party's Lease or Interest to exceed the amount stipulated in Article III.B.
above.

         The party whose interest is burdened with the Subsequently Created
Interest (the "Burdened Party") shall assume and alone bear, pay and discharge
the Subsequently Created Interest and shall indemnify, defend and hold harmless
the other parties from and against any liability therefor. Further, if the
Burdened Party fails to pay, when due, its share of expenses chargeable
hereunder, all provisions of Article VII.B. shall be enforceable against the
Subsequently Created Interest in the same manner as they are enforceable against
the working interest of the Burdened Party. If the Burdened Party is required
under this agreement to assign or relinquish to any other party, or parties, all
or a portion of its working interest and/or the production attributable thereto,
said other party, or parties, shall receive said assignment and/or production
free and clear of said Subsequently Created Interest, and the Burdened Party
shall indemnify, defend and hold harmless said other party, or parties, from any
and all claims and demands for payment asserted by owners of the Subsequently
Created Interest.

                                   ARTICLE IV.
                                     TITLES

A.  TITLE EXAMINATION:

         Title examination shall be made on the Drillsite of any proposed well
prior to commencement of drilling operations and, if a majority in interest of
the Drilling Parties so request or Operator so elects, title examination shall
be made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of
the well. The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable Leases. Each party contributing Leases and/or Oil and Gas Interests
to be included in the Drillsite or Drilling Unit, if appropriate, shall furnish
to Operator all abstracts (including federal lease status reports), title
opinions, title papers and curative material in its possession free of charge.
All such information not in the possession of or made available to Operator by
the parties, but necessary for the examination of the title, shall be obtained
by Operator. Operator shall cause title to be examined by attorneys on its staff
or by outside attorneys. Copies of all title opinions shall be furnished to each
Drilling Party. Costs incurred by Operator in procuring abstracts, fees paid
outside attorneys for title examination (including preliminary, supplemental,
shut-in royalty opinions and division order title opinions) and other direct
charges as provided in Exhibit "C" shall be borne by the Drilling Parties in the
proportion that the interest of each Drilling Party bears to the total interest
of all Drilling Parties as such interests appear in Exhibit "A." Operator shall
make no charge for services rendered by its staff attorneys or other personnel
in the performance of the above functions.

         Each party shall be responsible for securing curative matter and
pooling amendments or agreements required in connection with Leases or Oil and
Gas Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communitization agreements as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders or any other
orders necessary or appropriate to the conduct of operations hereunder. This
shall not prevent any party from appearing on its own behalf at such hearings.
Costs incurred by Operator, including fees paid to outside attorneys, which are
associated with hearings before governmental agencies, and which costs are
necessary and proper for the activities contemplated under this agreement, shall
be direct charges to the joint account and shall not be covered by the
administrative overhead charges as provided in Exhibit "C."

                                     - 2 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

Operator shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.

         No well shall be drilled on the Contract Area until after (1) the title
to the Drillsite or Drilling Unit, if appropriate, has been examined as above
provided, and (2) the title has been approved by the examining attorney or title
has been accepted by all of the Drilling Parties in such well.

B. LOSS OR FAILURE OF TITLE:

         3. Losses: All losses of Leases or Interests committed to this
agreement, shall be joint losses and shall be borne by all parties in proportion
to their interests shown on Exhibit "A." This shall include but not be limited
to the loss of any Lease or Interest through failure to develop or because
express or implied covenants have not been performed (other than performance
which requires only the payment of money), and the loss of any Lease by
expiration at the end of its primary term if it is not renewed or extended.
There shall be no readjustment of interests in the remaining portion of the
Contract Area on account of any joint loss.

                                     - 3 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                   ARTICLE V.
                                    OPERATOR

A.  DESIGNATION AND RESPONSIBILITIES OF OPERATOR:

         IVANHOE ENERGY (USA) INC. shall be the Operator of the Contract Area,
and shall conduct and direct and have full control of all operations on the
Contract Area as permitted and required by, and within the limits of this
agreement. In its performance of services hereunder for the Non-Operators,
Operator shall be an independent contractor not subject to the control or
direction of the Non-Operators except as to the type of operation to be
undertaken in accordance with the election procedures contained in this
agreement. Operator shall not be deemed, or hold itself out as, the agent of the
Non-Operators with authority to bind them to any obligation or liability assumed
or incurred by Operator as to any third party. Operator shall conduct its
activities under this agreement as a reasonable prudent operator, in a good and
workmanlike manner, with due diligence and dispatch, in accordance with good
oilfield practice, and in compliance with applicable law and regulation, but in
no event shall it have any liability as Operator to the other parties for losses
sustained or liabilities incurred except such as may result from gross
negligence or willful misconduct.

B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:

         1. Resignation or Removal of Operator: Operator may resign at any time
by giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, no longer owns an interest hereunder in the Contract Area, or
is no longer capable of serving as Operator, Operator shall be deemed to have
resigned without any action by Non-Operators, except the selection of a
successor. Operator may be removed only for good cause by the affirmative vote
of Non-Operators owning a majority interest based on ownership as shown on
Exhibit "A" remaining after excluding the voting interest of Operator; such vote
shall not be deemed effective until a written notice has been delivered to the
Operator by a Non-Operator detailing the alleged default and Operator has failed
to cure the default within thirty (30) days from its receipt of the notice or,
if the default concerns an operation then being conducted, within forty-eight
(48) hours of its receipt of the notice. For purposes hereof, "good cause" shall
mean not only gross negligence or willful misconduct but also the material
breach of or inability to meet the standards of operation contained in Article
V.A. or material failure or inability to perform its obligations under this
agreement.

         Subject to Article VII.D.1., such resignation or removal shall not
become effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator. A change of a corporate
name or structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator.

         2. Selection of Successor Operator: Upon the resignation or removal of
Operator under any provision of this agreement, a successor Operator shall be
selected by the parties. The successor Operator shall be selected from the
parties owning an interest in the Contract Area at the time such successor
Operator is selected. The successor Operator shall be selected by the
affirmative vote of two (2) or more parties owning a majority interest based on
ownership as shown on Exhibit "A"; provided, however, if an Operator which has
been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative vote
of the party or parties owning a majority interest based on ownership as shown
on Exhibit "A" remaining after excluding the voting interest of the Operator
that was removed or resigned. The former Operator shall promptly deliver to the
successor Operator all records and data relating to the operations conducted by
the former Operator to the extent such records and data are not already in the
possession of the successor operator. Any cost of obtaining or copying the
former Operator's records and data shall be charged to the joint account.

         3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any action
by Non-Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit "A."
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit "A."

C.  EMPLOYEES AND CONTRACTORS:

         The number of employees or contractors used by Operator in conducting
operations hereunder, their selection, and the hours of labor and the
compensation for services performed shall be determined Operator, and all such
employees or contractors shall be the employees or contractors of Operator.

D.  RIGHTS AND DUTIES OF OPERATOR:

         1. Competitive Rates and Use of Affiliates: All wells drilled on the
Contract Area shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall not
exceed the prevailing rates in the area and the rate of such charges shall be
agreed upon by the parties in writing before drilling operations are commenced,
and such work shall be performed by Operator under the same terms and conditions
as are customary and usual in the area in contracts of independent contractors
who are doing work of a similar nature. All work performed or materials supplied
by affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with customs
and standards prevailing in the industry.

         2. Discharge of Joint Account Obligations: Except as herein otherwise
specifically provided, Operator shall promptly pay and discharge expenses
incurred in the development and operation of the Contract Area pursuant to this
agreement and shall charge each of the parties hereto with their respective
proportionate shares upon the expense basis provided in Exhibit "C." Operator
shall keep an accurate record of the joint account hereunder, showing expenses
incurred and charges and credits made and received.

         3. Protection from Liens: Operator shall pay, or cause to be paid, as
and when they become due and payable, all accounts of contractors and suppliers
and wages and salaries for services rendered or performed, and for materials
supplied on, to or in respect of the Contract Area or any operations for the
joint account thereof, and shall keep the Contract Area free from

                                     - 4 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

liens and encumbrances resulting therefrom except for those resulting from a
bona fide dispute as to services rendered or materials supplied.

         4. Custody of Funds: Operator shall hold for the account of the
Non-Operators any funds of the Non-Operators advanced or paid to the Operator,
either for the conduct of operations hereunder or as a result of the sale of
production from the Contract Area, and such funds shall remain the funds of the
Non-Operators on whose account they are advanced or paid until used for their
intended purpose or otherwise delivered to the Non-Operators or applied toward
the payment of debts as provided in Article VII.B. Nothing in this paragraph
shall be construed to establish a fiduciary relationship between Operator and
Non-Operators for any purpose other than to account for Non-Operator funds as
herein specifically provided. Nothing in this paragraph shall require the
maintenance by Operator of separate accounts for the funds of Non-Operators
unless the parties otherwise specifically agree.

         5. Access to Contract Area and Records: Operator shall, except as
otherwise provided herein, permit each Non-Operator or its duly authorized
representative, at the Non-Operator's sole risk and cost, full and free access
at all reasonable times to all operations of every kind and character being
conducted for the joint account on the Contract Area and to the records of
operations conducted thereon or production therefrom, including Operator's books
and records relating thereto. Such access rights shall not be exercised in a
manner interfering with Operator's conduct of an operation hereunder and shall
not obligate Operator to furnish any geologic or geophysical data of an
interpretive nature unless the cost of preparation of such interpretive data was
charged to the joint account. Operator will furnish to each Non-Operator upon
request copies of any and all reports and information obtained by Operator in
connection with production and related items, including, without limitation,
meter and chart reports, production purchaser statements, run tickets and
monthly gauge reports, but excluding purchase contracts and pricing information
to the extent not applicable to the production of the Non-Operator seeking the
information. Any audit of Operator's records relating to amounts expended and
the appropriateness of such expenditures shall be conducted in accordance with
the audit protocol specified in Exhibit "C."

         6. Filing and Furnishing Governmental Reports: Operator will file, and
upon written request promptly furnish copies to each requesting Non-Operator not
in default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies or
authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.

         7. Drilling and Testing Operations: The following provisions shall
apply to each well drilled hereunder, including but not limited to the Initial
Well:

         (a) Operator will promptly advise Non-Operators of the date on which
the well is spudded, or the date on which drilling operations are commenced.

         (b) Operator will send to Non-Operators such reports, test results and
notices regarding the progress of operations on the well as the Non-Operators
shall reasonably request, including, but not limited to, daily drilling reports,
completion reports, and well logs.

         (c) Operator shall adequately test all Zones encountered which may
reasonably be expected to be capable of producing Oil and Gas in paying
quantities as a result of examination of the electric log or any other logs or
cores or tests conducted hereunder.

         8. Cost Estimates: Upon request of any Consenting Party, Operator shall
furnish estimates of current and cumulative costs incurred for the joint account
at reasonable intervals during the conduct of any operation pursuant to this
agreement. Operator shall not be held liable for errors in such estimates so
long as the estimates are made in good faith.

         9. Insurance: At all times while operations are conducted hereunder,
Operator shall comply with the workers compensation law of the state where the
operations are being conducted; provided, however, that Operator may be a self-
insurer for liability under said compensation laws in which event the only
charge that shall be made to the joint account shall be as provided in Exhibit
"C." Operator shall also carry or provide insurance for the benefit of the joint
account of the parties as outlined in Exhibit "D" attached hereto and made a
part hereof. Operator shall require all contractors engaged in work on or for
the Contract Area to comply with the workers compensation law of the state where
the operations are being conducted and to maintain such other insurance as
Operator may require.

         In the event automobile liability insurance is specified in said
Exhibit "D," or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automotive equipment.

                                   ARTICLE VI.
                            DRILLING AND DEVELOPMENT

         Pursuant to the Farmin Agreement to which this Operating Agreement is
attached.

         1. Proposed Operations: If any party hereto should desire to drill any
well on the Contract Area other than the Initial Well, or if any party should
desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a
well no longer capable of producing in paying quantities in which such party has
not otherwise relinquished its interest in the proposed objective Zone under
this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Recomplete or Plug Back such a well shall give written notice of the proposed
operation to the parties who have not otherwise relinquished their interest in
such objective Zone

                                     - 5 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective Zone and the estimated cost of the operation. The
parties to whom such a notice is delivered shall have thirty (30) days after
receipt of the notice within which to notify the party proposing to do the work
whether they elect to participate in the cost of the proposed operation. If a
drilling rig is on location, notice of a proposal to Rework, Sidetrack,
Recomplete, Plug Back or Deepen may be given by telephone and the response
period shall be limited to forty-eight (48) hours, exclusive of Saturday,
Sunday and legal holidays. Failure of a party to whom such notice is delivered
to reply within the period above fixed shall constitute an election by that
party not to participate in the cost of the proposed operation. Any proposal by
a party to conduct an operation conflicting with the operation initially
proposed shall be delivered to all parties within the time and in the manner
provided in Article VI.B.6.

         If all parties to whom such notice is delivered elect to participate in
such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced within the time
period hereafter set forth, and Operator shall, no later than ninety (90) days
after expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the forty-eight (48) hour period when a
drilling rig is on location, as the case may be), actually commence the proposed
operation and thereafter complete it with due diligence at the risk and expense
of the parties participating therein; provided, however, said commencement date
may be extended upon written notice of same by Operator to the other parties,
for a period of up to thirty (30) additional days if, in the sole opinion of
Operator, such additional time is reasonably necessary to obtain permits from
governmental authorities, surface rights (including rights-of-way) or
appropriate drilling equipment, or to complete title examination or curative
matter required for title approval or acceptance. If the actual operation has
not been commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior proposal had been made. Those parties that did not participate in
the drilling of a well for which a proposal to Deepen or Sidetrack is made
hereunder shall, if such parties desire to participate in the proposed Deepening
or Sidetracking operation, reimburse the Drilling Parties in accordance with
Article VI.B.4. in the event of a Deepening operation and in accordance with
Article VI.B.5. in the event of a Sidetracking operation.

         2. Operations by Less Than All Parties:

         (a) Determination of Participation. If any party to whom such notice is
delivered as provided in Article VI.B.1. or VI.C.1. (Option No. 2) elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as practicable after the expiration of the forty-eight (48) hour
period when a drilling rig is on location, as the case may be) actually commence
the proposed operation and complete it with due diligence. Operator shall
perform all work for the account of the Consenting Parties; provided, however,
if no drilling rig or other equipment is on location, and if Operator is a
Non-Consenting Party, the Consenting Parties shall either: (i) request Operator
to perform the work required by such proposed operation for the account of the
Consenting Parties, or (ii) designate one of the Consenting Parties as Operator
to perform such work. The rights and duties granted to and imposed upon the
Operator under this agreement are granted to and imposed upon the party
designated as Operator for an operation in which the original Operator is a
Non-Consenting Party. Consenting Parties, when conducting operations on the
Contract Area pursuant to this Article VI.B.2., shall comply with all terms and
conditions of this agreement.

         If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise all Parties of the total interest of the parties approving such operation
and its recommendation as to whether the Consenting Parties should proceed with
the operation as proposed. Each Consenting Party, within forty-eight (48) hours
(exclusive of Saturday, Sunday and legal holidays) after receipt of such notice,
shall advise the proposing party of its desire to (i) limit participation to
such party's interest as shown on Exhibit "A" or (ii) carry only its
proportionate part (determined by dividing such party's interest in the Contract
Area by the interests of all Consenting Parties in the Contract Area) of
Non-Consenting Parties' interests, or (iii) carry its proportionate part
(determined as provided in (ii)) of Non-Consenting Parties' interests together
with all or a portion of its proportionate part of any Non-Consenting Parties'
interests that any Consenting Party did not elect to take. Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall be deemed
to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election, may
withdraw such proposal if there is less than 100% participation and shall notify
all parties of such decision within ten (10) days, or within twenty-four (24)
hours if a drilling rig is on location, following expiration of the applicable
response period. If 100% subscription to the proposed operation is obtained, the
proposing party shall promptly notify the Consenting Parties of their
proportionate interests in the operation and the party serving as Operator shall
commence such operation within the period provided in Article VI.B.1., subject
to the same extension right as provided therein.

         (b) Relinquishment of Interest for Non-Participation. The entire cost
and risk of conducting such operations shall be borne by the Consenting Parties
in the proportions they have elected to bear same under the terms of the
preceding paragraph. Consenting Parties shall keep the leasehold estates
involved in such operations free and clear of all liens and encumbrances of
every kind created by or arising from the operations of the Consenting Parties.
If such an operation results in a dry hole, then subject to Articles VI.B.6. and
VI.E.3., the Consenting Parties shall plug and abandon the well and restore the
surface location at their sole cost, risk and expense; provided, however, that
those Non-Consenting Parties that participated in the drilling, Deepening or
Sidetracking of the well shall remain liable for, and shall pay, their
proportionate shares of the cost of plugging and abandoning the well and
restoring the surface location insofar only as those costs were not increased by
the subsequent operations of the Consenting Parties. If any well drilled,
Reworked, Sidetracked, Deepened, Recompleted or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or Gas
in paying quantities, the Consenting Parties shall Complete and equip the well
to produce at their sole cost and risk, and the well shall then be turned over
to Operator (if the Operator did not conduct the operation) and shall be
operated by it at the expense and for the account of the Consenting Parties.
Upon commencement of operations for the drilling, Reworking, Sidetracking,
Recompleting, Deepening or Plugging Back of any such well by Consenting Parties
in accordance with the provisions of this Article, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties, and the Consenting
Parties shall own and be entitled to receive, in proportion to their respective
interests, all of such Non-Consenting Party's interest in the well and share of
production therefrom or, in the case of a Reworking, Sidetracking,

                                     - 6 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
VI.C.1. Option No. 2, all of such Non-Consenting Party's interest in the
production obtained from the operation in which the Non-Consenting Party did not
elect to participate. Such relinquishment shall be effective until the proceeds
of the sale of such share, calculated at the well, or market value thereof if
such share is not sold (after deducting applicable ad valorem, production,
severance, and excise taxes, royalty, overriding royalty and other interests not
excepted by Article III.C. payable out of or measured by the production from
such well accruing with respect to such interest until it reverts), shall equal
the total of the following:

         (i) 100% of each such Non-Consenting Party's share of the cost of any
newly acquired surface equipment beyond the wellhead connections (including but
not limited to stock tanks, separators, treaters, pumping equipment and piping),
plus 100% of each such Non-Consenting Party's share of the cost of operation of
the well commencing with first production and continuing until each such
Non-Consenting Party's relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non-Consenting Party's
share of such costs and equipment will be that interest which would have been
chargeable to such Non-Consenting Party had it participated in the well from the
beginning of the operations; and

         (ii) 300% of (a) that portion of the costs and expenses of drilling,
Reworking, Sidetracking, Deepening, Plugging Back, testing, Completing, and
Recompleting, after deducting any cash contributions received under Article
VIII.C., and of (b) that portion of the cost of newly acquired equipment in the
well (to and including the wellhead connections), which would have been
chargeable to such Non-Consenting Party if it had participated therein.

         Notwithstanding anything to the contrary in this Article VI.B., if the
well does not reach the deepest objective Zone described in the notice proposing
the well for reasons other than the encountering of granite or practically
impenetrable substance or other condition in the hole rendering further
operations impracticable, Operator shall give notice thereof to each
Non-Consenting Party who submitted or voted for an alternative proposal under
Article VI.B.6. to drill the well to a shallower Zone than the deepest objective
Zone proposed in the notice under which the well was drilled, and each such Non-
Consenting Party shall have the option to participate in the initial proposed
Completion of the well by paying its share of the cost of drilling the well to
its actual depth, calculated in the manner provided in Article VI.B.4. (a). If
any such Non-Consenting Party does not elect to participate in the first
Completion proposed for such well, the relinquishment provisions of this Article
VI.B.2. (b) shall apply to such party's interest.

         (c) Reworking, Recompleting or Plugging Back. An election not to
participate in the drilling, Sidetracking or Deepening of a well shall be deemed
an election not to participate in any Reworking, Recompletion or Plugging Back
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
amount. Similarly, an election not to participate in the Completing or
Recompleting of a well shall be deemed an election not to participate in any
Reworking operation proposed in such a well, or portion thereof, to which the
initial non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
amount. Any such Reworking, Recompleting or Plugging Back operation conducted
during the recoupment period shall be deemed part of the cost of operation of
said well and there shall be added to the sums to be recouped by the Consenting
Parties 200% of that portion of the costs of the Reworking, Recompleting or
Plugging Back operation which would have been chargeable to such Non-Consenting
Party had it participated therein. If such a Reworking, Recompleting or Plugging
Back operation is proposed during such recoupment period, the provisions of this
Article VI.B. shall be applicable as between said Consenting Parties in said
well.

         (d) Recoupment Matters. During the period of time Consenting Parties
are entitled to receive Non-Consenting Party's share of production, or the
proceeds therefrom, Consenting Parties shall be responsible for the payment of
all ad valorem, production, severance, excise, gathering and other taxes, and
all royalty, overriding royalty and other burdens applicable to Non-Consenting
Party's share of production not excepted by Article III.C.

         In the case of any Reworking, Sidetracking, Plugging Back, Recompleting
or Deepening operation, the Consenting Parties shall be permitted to use, free
of cost, all casing, tubing and other equipment in the well, but the ownership
of all such equipment shall remain unchanged; and upon abandonment of a well
after such Reworking, Sidetracking, Plugging Back, Recompleting or Deepening,
the Consenting Parties shall account for all such equipment to the owners
thereof, with each party receiving its proportionate part in kind or in value,
less cost of salvage.

         Within ninety (90) days after the completion of any operation under
this Article, the party conducting the operations for the Consenting Parties
shall furnish each Non-Consenting Party with an inventory of the equipment in
and connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
the operations for the Consenting Parties shall furnish the Non-Consenting
Parties with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the well's
working interest production during the preceding month. In determining the
quantity of Oil and Gas produced during any month, Consenting Parties shall use
industry accepted methods such as but not limited to metering or periodic well
tests. Any amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned by a
Non-Consenting Party had it participated therein shall be credited against the
total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.

         If and when the Consenting Parties recover from a Non-Consenting
Party's relinquished interest the amounts provided for above, the relinquished
interests of such Non-Consenting Party shall automatically revert to it as of
7:00 a.m. on the day following the day on which such recoupment occurs, and,
from and after such reversion, such Non-Consenting Party shall own the same
interest in such well, the material and equipment in or pertaining thereto, and
the production therefrom as such Non-Consenting Party would have been entitled
to had it participated in the drilling, Sidetracking, Reworking, Deepening,
Recompleting or Plugging Back of said well. Thereafter, such Non-Consenting
Party shall be charged with and shall pay its proportionate part of the further
costs of the operation of said well in accordance with the terms of this
agreement and Exhibit "C" attached hereto.

         3. Stand-By Costs: When a well which has been drilled or Deepened has
reached its authorized depth and all tests have been completed and the results
thereof furnished to the parties, or when operations on the well have been
otherwise terminated pursuant to Article VI.F., stand-by costs incurred pending
response to a party's notice proposing a Reworking,

                                     - 7 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation in
such a well (including the period required under Article VI.B.6. to resolve
competing proposals) shall be charged and borne as part of the drilling or
Deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2. (a), shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest as shown on Exhibit
"A" bears to the total interest as shown on Exhibit "A" of all Consenting
Parties.

         In the event that notice for a Sidetracking operation is given while
the drilling rig to be utilized is on location, any party may request and
receive up to five (5) additional days after expiration of the forty-eight hour
response period specified in Article VI.B.1. within which to respond by paying
for all stand-by costs and other costs incurred during such extended response
period; Operator may require such party to pay the estimated stand-by time in
advance as a condition to extending the response period. If more than one party
elects to take such additional time to respond to the notice, standby costs
shall be allocated between the parties taking additional time to respond on a
day-to-day basis in the proportion each electing party's interest as shown on
Exhibit "A" bears to the total interest as shown on Exhibit "A" of all the
electing parties.

         4. Deepening: If less than all parties elect to participate in a
drilling, Sidetracking, or Deepening operation proposed pursuant to Article
VI.B.1., the interest relinquished by the Non-Consenting Parties to the
Consenting Parties under Article VI.B.2. shall relate only and be limited to the
lesser of (i) the total depth actually drilled or (ii) the objective depth or
Zone of which the parties were given notice under Article VI.B.1. ("Initial
Objective"). Such well shall not be Deepened beyond the Initial Objective
without first complying with this Article to afford the Non-Consenting Parties
the opportunity to participate in the Deepening operation.

         In the event any Consenting Party desires to drill or Deepen a
Non-Consent Well to a depth below the Initial Objective, such party shall give
notice thereof, complying with the requirements of Article VI.B.1., to all
parties (including Non-Consenting Parties). Thereupon, Articles VI.B.1. and 2.
shall apply and all parties receiving such notice shall have the right to
participate or not participate in the Deepening of such well pursuant to said
Articles VI.B.1. and 2. If a Deepening operation is approved pursuant to such
provisions, and if any Non-Consenting Party elects to participate in the
Deepening operation, such Non-Consenting party shall pay or make reimbursement
(as the case may be) of the following costs and expenses.

         (a) If the proposal to Deepen is made prior to the Completion of such
well as a well capable of producing in paying quantities, such Non-Consenting
Party shall pay (or reimburse Consenting Parties for, as the case may be) that
share of costs and expenses incurred in connection with the drilling of said
well from the surface to the Initial Objective which Non-Consenting Party would
have paid had such Non-Consenting Party agreed to participate therein, plus the
Non-Consenting Party's share of the cost of Deepening and of participating in
any further operations on the well in accordance with the other provisions of
this Agreement; provided, however, all costs for testing and Completion or
attempted Completion of the well incurred by Consenting Parties prior to the
point of actual operations to Deepen beyond the Initial Objective shall be for
the sole account of Consenting Parties.

         (b) If the proposal is made for a Non-Consent Well that has been
previously Completed as a well capable of producing in paying quantities, but is
no longer capable of producing in paying quantities, such Non-Consenting Party
shall pay (or reimburse Consenting Parties for, as the case may be) its
proportionate share of all costs of drilling, Completing, and equipping said
well from the surface to the Initial Objective, calculated in the manner
provided in paragraph (a) above, less those costs recouped by the Consenting
Parties from the sale of production from the well. The Non-Consenting Party
shall also pay its proportionate share of all costs of re-entering said well.
The Non-Consenting Parties' proportionate part (based on the percentage of such
well Non-Consenting Party would have owned had it previously participated in
such Non-Consent Well) of the costs of salvable materials and equipment
remaining in the hole and salvable surface equipment used in connection with
such well shall be determined in accordance with Exhibit "C." If the Consenting
Parties have recouped the cost of drilling, Completing, and equipping the well
at the time such Deepening operation is conducted, then a Non-Consenting Party
may participate in the Deepening of the well with no payment for costs incurred
prior to re-entering the well for Deepening

         The foregoing shall not imply a right of any Consenting Party to
propose any Deepening for a Non-Consent Well prior to the drilling of such well
to its Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.

         5. Sidetracking: Any party having the right to participate in a
proposed Sidetracking operation that does not own an interest in the affected
wellbore at the time of the notice shall, upon electing to participate, tender
to the wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore to
be utilized as follows:

         (a) If the proposal is for Sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the initial
drilling of the well down to the depth at which the Sidetracking operation is
initiated.

         (b) If the proposal is for Sidetracking a well which has previously
produced, reimbursement shall be on the basis of such party's proportionate
share of drilling and equipping costs incurred in the initial drilling of the
well down to the depth at which the Sidetracking operation is conducted,
calculated in the manner described in Article VI.B.4(b) above. Such party's
proportionate share of the cost of the well's salvable materials and equipment
down to the depth at which the Sidetracking operation is initiated shall be
determined in accordance with the provisions of Exhibit "C."

         6. Order of Preference of Operations. Except as otherwise specifically
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
hours, (exclusive of Saturday, Sunday and legal holidays), from delivery of the
initial proposal, if a drilling rig is on location for the well on which such
operation is to be conducted, to deliver to all parties entitled to participate
in the proposed operation such party's alternative proposal, such alternate
proposal to contain the same information required to be included in the initial
proposal. Each party receiving such proposals shall elect by delivery of notice
to Operator within five (5) days after expiration of the proposal period, or
within twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays)
if a drilling rig is on location for the well that is the subject of the
proposals, to participate in one of the competing proposals. Any party not
electing within the time required shall be deemed not to have voted. The
proposal receiving the vote of parties owning the largest aggregate percentage
interest of the parties voting shall have priority over all other competing
proposals; in the case of a tie vote, the

                                     - 8 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

initial proposal shall prevail. Operator shall deliver notice of such result to
all parties entitled to participate in the operation within five (5) days after
expiration of the election period (or within twenty-four (24) hours, exclusive
of Saturday, Sunday and legal holidays, if a drilling rig is on location). Each
party shall then have two (2) days (or twenty-four (24) hours if a rig is on
location) from receipt of such notice to elect by delivery of notice to Operator
to participate in such operation or to relinquish interest in the affected well
pursuant to the provisions of Article VI.B.2.; failure by a party to deliver
notice within such period shall be deemed an election not to participate in the
prevailing proposal.

         7. Paying Wells. No party shall conduct any Reworking, Deepening,
Plugging Back, Completion, Recompletion, or Sidetracking operation under this
agreement with respect to any well then capable of producing in paying
quantities except with the consent of parties with majority interest in
percentage of that have not relinquished interests in the well at the time of
such operation.

C.  COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:

         1. Completion: Without the consent of all parties, no well shall be
drilled, Deepened or Sidetracked, except any well drilled, Deepened or
Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.
Consent to the drilling, Deepening or Sidetracking shall include:

    [X]  Option No. 2: All necessary expenditures for the drilling, Deepening or
         Sidetracking and testing of the well. When such well has reached its
         authorized depth, and all logs, cores and other tests have been
         completed, and the results thereof furnished to the parties, Operator
         shall give immediate notice to the Non-Operators having the right to
         participate in a Completion attempt whether or not Operator recommends
         attempting to Complete the well, together with Operator's AFE for
         Completion costs if not previously provided. The parties receiving such
         notice shall have forty-eight (48) hours (exclusive of Saturday, Sunday
         and legal holidays) in which to elect by delivery of notice to Operator
         to participate in a recommended Completion attempt or to make a
         Completion proposal with an accompanying AFE. Operator shall deliver
         any such Completion proposal, or any Completion proposal conflicting
         with Operator's proposal, to the other parties entitled to participate
         in such Completion in accordance with the procedures specified in
         Article VI.B.6. Election to participate in a Completion attempt shall
         include consent to all necessary expenditures for the Completing and
         equipping of such well, including necessary tankage and/or surface
         facilities but excluding any stimulation operation not contained on the
         Completion AFE. Failure of any party receiving such notice to reply
         within the period above fixed shall constitute an election by that
         party not to participate in the cost of the Completion attempt;
         provided, that Article VI.B.6. shall control in the case of conflicting
         Completion proposals. If one or more, but less than all of the parties,
         elect to attempt a Completion, the provision of Article VI.B.2. hereof
         (the phrase "Reworking, Sidetracking, Deepening, Recompleting or
         Plugging Back" as contained in Article VI.B.2. shall be deemed to
         include "Completing") shall apply to the operations thereafter
         conducted by less than all parties; provided, however, that Article
         VI.B.2. shall apply separately to each separate Completion or
         Recompletion attempt undertaken hereunder, and an election to become a
         Non-Consenting Party as to one Completion or Recompletion attempt shall
         not prevent a party from becoming a Consenting Party in subsequent
         Completion or Recompletion attempts regardless whether the Consenting
         Parties as to earlier Completions or Recompletion have recouped their
         costs pursuant to Article VI.B.2.; provided further, that any
         recoupment of costs by a Consenting Party shall be made solely from the
         production attributable to the Zone in which the Completion attempt is
         made. Election by a previous Non-Consenting party to participate in a
         subsequent Completion or Recompletion attempt shall require such party
         to pay its proportionate share of the cost of salvable materials and
         equipment installed in the well pursuant to the previous Completion or
         Recompletion attempt, insofar and only insofar as such materials and
         equipment benefit the Zone in which such party participates in a
         Completion attempt.

         2. Rework, Recomplete or Plug Back: No well shall be Reworked,
Recompleted or Plugged Back except a well Reworked, Recompleted, or Plugged Back
pursuant to the provisions of Article VI.B.2. of this agreement. Consent to the
Reworking, Recompleting or Plugging Back of a well shall include all necessary
expenditures in conducting such operations and Completing and equipping of said
well, including necessary tankage and/or surface facilities.

D.  OTHER OPERATIONS:

         Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of TWENTY-FIVE THOUSAND Dollars ($25,000.00 )
except in connection with the drilling, Sidetracking, Reworking, Deepening,
Completing, Recompleting or Plugging Back of a well that has been previously
authorized by or pursuant to this agreement; provided, however, that, in case of
explosion, fire, flood or other sudden emergency, whether of the same or
different nature, Operator may take such steps and incur such expenses as in its
opinion are required to deal with the emergency to safeguard life and property
but Operator, as promptly as possible, shall report the emergency to the other
parties. If Operator prepares an AFE for its own use, Operator shall furnish any
Non-Operator so requesting an information copy thereof for any single project
costing in excess of TWENTY-FIVE THOUSAND Dollars ($25,000.00). Any party who
has not relinquished its interest in a well shall have the right to propose that
Operator perform repair work or undertake the installation of artificial lift
equipment or ancillary production facilities such as salt water disposal wells
or to conduct additional work with respect to a well drilled hereunder or other
similar project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed
exclusively be those Articles). Operator shall deliver such proposal to all
parties entitled to participate therein. If within thirty (30) days thereof
Operator secures the written consent of any party or parties owning at least 51%
of the interests of the parties entitled to participate in such operation, each
party having the right to participate in such project shall be bound by the
terms of such proposal and shall be obligated to pay its proportionate share of
the costs of the proposed project as if it had consented to such project
pursuant to the terms of the proposal.

E.  ABANDONMENT OF WELLS:

         1. Abandonment of Dry Holes: Except for any well drilled or Deepened
pursuant to Article VI.B.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be

                                     - 9 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

plugged and abandoned without the consent of all parties. Should Operator, after
diligent effort, be unable to contact any party, or should any party fail to
reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after delivery of notice of the proposal to plug and abandon such
well, such party shall be deemed to have consented to the proposed abandonment.
All such wells shall be plugged and abandoned in accordance with applicable
regulations and at the cost, risk and expense of the parties who participated in
the cost of drilling or Deepening such well. Any party who objects to plugging
and abandoning such well by notice delivered to Operator within forty-eight (48)
hours (exclusive of Saturday, Sunday and legal holidays) after delivery of
notice of the proposed plugging shall take over the well as of the end of such
forty-eight (48) hour notice period and conduct further operations in search of
Oil and/or Gas subject to the provisions of Article VI.B.; failure of such party
to provide proof reasonably satisfactory to Operator of its financial capability
to conduct such operations or to take over the well within such period or
thereafter to conduct operations on such well or plug and abandon such well
shall entitle Operator to retain or take possession of the well and plug and
abandon the well. The party taking over the well shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations conducted on such well except for the costs
of plugging and abandoning the well and restoring the surface, for which the
abandoning parties shall remain proportionately liable.

         2. Abandonment of Wells That Have Produced: Except for any well in
which a Non-Consent operation has been conducted hereunder for which the
Consenting Parties have not been fully reimbursed as herein provided, any well
which has been completed as capable of production, whether or not such well has
produced, shall not be plugged and abandoned without the consent of all parties.
If all parties consent to such abandonment, the well shall be plugged and
abandoned in accordance with applicable regulations and at the cost, risk and
expense of all the parties hereto. Failure of a party to reply within sixty (60)
days of delivery of notice of proposed abandonment shall be deemed an election
to consent to the proposal. If, within sixty (60) days after delivery of notice
of the proposed abandonment of any well, all parties do not agree to the
abandonment of such well, those wishing to continue its operation from the Zone
then open to production shall be obligated to take over the well as of the
expiration of the applicable notice period and shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations on the well conducted by such parties.
Failure of such party or parties to provide proof reasonably satisfactory to
Operator of their financial capability to conduct such operations or to take
over the well within the required period or thereafter to conduct operations on
such well shall entitle operator to retain or take possession of such well and
plug and abandon the well.

         Parties taking over a well as provided herein shall tender to each of
the other parties its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of Exhibit
"C," less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface; provided, however, that in the event the
estimated plugging and abandoning and surface restoration costs and the
estimated cost of salvaging are higher than the value of the well's salvable
material and equipment, each of the abandoning parties shall tender to the
parties continuing operations their proportionate shares of the estimated excess
cost. Each abandoning party shall assign to the non-abandoning parties, without
warranty, express or implied, as to title or as to quantity, or fitness for use
of the equipment and material, all of its interest in the wellbore of the well
and related equipment, together with its interest in the Leasehold insofar and
only insofar as such Leasehold covers the right to obtain production from that
wellbore in the Zone then open to production. If the interest of the abandoning
party is or includes and Oil and Gas Interest, such party shall execute and
deliver to the non-abandoning party or parties an oil and gas lease, limited to
the wellbore and the Zone then open to production, for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced from the Zone covered
thereby, such lease to be on the form attached as Exhibit "B." The assignments
or leases so limited shall encompass the Drilling Unit upon which the well is
located. The payments by, and the assignments or leases to, the assignees shall
be in a ratio based upon the relationship of their respective percentage of
participation in the Contract Area to the aggregate of the percentages of
participation in the Contract Area of all assignees. There shall be no
readjustment of interests in the remaining portions of the Contract Area.

         Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
Zone then open other than the royalties retained in any lease made under the
terms of this Article. Upon request, Operator shall continue to operate the
assigned well for the account of the non-abandoning parties at the rates and
charges contemplated by this agreement, plus any additional cost and charges
which may arise as the result of the separate ownership of the assigned well.
Upon proposed abandonment of the producing Zone assigned or leased, the assignor
or lessor shall then have the option to repurchase its prior interest in the
well (using the same valuation formula) and participate in further operations
therein subject to the provisions hereof.

         3. Abandonment of Non-Consent Operations: The provisions of Article
VI.E.1. or VI.E.2. above shall be applicable as between Consenting Parties in
the event of the proposed abandonment of any well excepted from said Articles;
provided, however, no well shall be permanently plugged and abandoned unless and
until all parties having the right to conduct further operations therein have
been notified of the proposed abandonment and afforded the opportunity to elect
to take over the well in accordance with the provisions of this Article VI.E.;
and provided further, that Non-Consenting Parties who own an interest in a
portion of the well shall pay their proportionate shares of abandonment and
surface restoration cost for such well as provided in Article VI.B.2.(b).

F.  TERMINATION OF OPERATIONS:

         Upon the commencement of an operation for the drilling, Reworking,
Sidetracking, Plugging Back, Deepening, testing, Completion or plugging of a
well, including but not limited to the Initial Well, such operation shall not be
terminated without consent of parties bearing 75% of the costs of such
operation; provided, however, that in the event granite or other practically
impenetrable substance or condition in the hole is encountered which renders
further operations impractical, Operator may discontinue operations and give
notice of such condition in the manner provided in Article VI.B.1, and the
provisions of Article VI.B. or VI.E. shall thereafter apply to such operation,
as appropriate.

G.  TAKING PRODUCTION IN KIND:

    [X]  OPTION NO. 1: GAS BALANCING AGREEMENT ATTACHED

            Each party shall have the right to take in kind or separately
         dispose of its proportionate share of all Oil and Gas produced from the
         Contract Area, exclusive of production which may be used in development
         and producing operations and in preparing and treating Oil and Gas for
         marketing purposes and production unavoidably lost. Any extra
         expenditure incurred in the taking in kind or separate disposition by
         any party of its proportionate share of the production shall be borne
         by such party. Any party taking its share of production in kind shall
         be required to pay for only its proportionate share of such part of
         Operator's surface facilities which it uses.

            Each party shall execute such division orders and contracts as may
         be necessary for the sale of its interest in

                                     - 10 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         production from the Contract Area, and, except as provided in Article
         VII.B., shall be entitled to receive payment directly from the
         purchaser thereof for its share of all production.

            If any party fails to make the arrangements necessary to take in
         kind or separately dispose of its proportionate share of the Oil
         produced from the Contract Area, Operator shall have the right, subject
         to the revocation at will by the party owning it, but not the
         obligation, to purchase such Oil and/or Gas or sell it to others at any
         time and from time to time, for the account of the non-taking party.
         Any such purchase or sale by Operator may be terminated by Operator
         upon at least ten (10) days written notice to the owner of said
         production and shall be subject always to the right of the owner of the
         production upon at least ten (10) days written notice to Operator to
         exercise at any time its right to take in kind, or separately dispose
         of, its share of all Oil and/or Gas not previously delivered to a
         purchaser. Any purchase or sale by Operator of any other party's share
         of Oil and/or Gas shall be only for such reasonable periods of time as
         are consistent with the minimum needs of the industry under the
         particular circumstances, but in no event for a period in excess of one
         (1) year.

            Any such sale by Operator shall be in a manner commercially
         reasonable under the circumstances but Operator shall have no duty to
         share any existing market or to obtain a price equal to that received
         under any existing market. The sale or delivery by Operator of a
         non-taking party's share of Oil under the terms of any existing
         contract of Operator shall not give the non-taking party any interest
         in or make the non-taking party a party to said contract. No purchase
         shall be made by Operator without first giving the non-taking party at
         least ten (10) days written notice of such intended purchase and the
         price to be paid or the pricing basis to be used.

            All parties shall give timely written notice to Operator of their
         Gas marketing arrangements for the following month, excluding price,
         and shall notify Operator immediately in the event of a change in such
         arrangements. Operator shall maintain records of all marketing
         arrangements, and of volumes actually sold or transported, which
         records shall be made available to Non-Operators upon reasonable
         request.

            In the event one or more parties' separate disposition of its share
         of the Gas causes split-stream deliveries to separate pipelines and/or
         deliveries which on a day-to-day basis for any reason are not exactly
         equal to a party's respective proportion- ate share of total Gas sales
         to be allocated to it, the balancing or accounting between the parties
         shall be in accordance with any Gas balancing agreement between the
         parties hereto, whether such an agreement is attached as Exhibit "E" or
         is a separate agreement. Operator shall give notice to all parties of
         the first sales of Gas from any well under this agreement.

                                  ARTICLE VII.

                      EXPENDITURES AND LIABILITY OF PARTIES

A.  LIABILITY OF PARTIES:

         The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally, and no party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership, joint venture, agency relationship or
association, or to render the parties liable as partners, co-venturers, or
principals. In their relations with each other under this agreement, the parties
shall not be considered fiduciaries or to have established a confidential
relationship but rather shall be free to act on an arm's-length basis in
accordance with their own respective self-interest, subject, however, to the
obligation of the parties to act in good faith in their dealings with each other
with respect to activities hereunder.

                                     - 11 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

B.  LIENS AND SECURITY INTERESTS:

         Each party grants to the other parties hereto a lien upon any interest
it now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas
Interests in the Contract Area, and a security interest and/or purchase money
security interest in any interest it now owns or hereafter acquires in the
personal property and fixtures on or used or obtained for use in connection
therewith, to secure performance of all of its obligations under this agreement
including but not limited to payment of expense, interest and fees, the proper
disbursement of all monies paid hereunder, the assignment or relinquishment of
interest in Oil and Gas Leases as required hereunder, and the proper performance
of operations hereunder. Such lien and security interest granted by each party
hereto shall include such party's leasehold interests, working interests,
operating rights, and royalty and overriding royalty interests in the Contract
Area now owned or hereafter acquired and in lands pooled or unitized therewith
or otherwise becoming subject to this agreement, the Oil and Gas when extracted
therefrom and equipment situated thereon or used or obtained for use in
connection therewith (including, without limitation, all wells, tools, and
tubular goods), and accounts (including, without limitation, accounts arising
from gas imbalances or from the sale of Oil and/or Gas at the wellhead),
contract rights, inventory and general intangibles relating thereto or arising
therefrom, and all proceeds and products of the foregoing.

         To perfect the lien and security agreement provided herein, each party
hereto shall execute and acknowledge the recording supplement and/or any
financing statement prepared and submitted by any party hereto in conjunction
herewith or at any time following execution hereof, and Operator is authorized
to file this agreement or the recording supplement executed herewith as a lien
or mortgage in the applicable real estate records and as a financing statement
with the proper officer under the Uniform Commercial Code in the state in which
the Contract Area is situated and such other states as Operator shall deem
appropriate to perfect the security interest granted hereunder. Any party may
file this agreement, the recording supplement executed herewith, or such other
documents as it deems necessary as a lien or mortgage in the applicable real
estate records and/or a financing statement with the proper officer under the
Uniform Commercial Code.

         Each party represents and warrants to the other parties hereto that the
lien and security interest granted by such party to the other parties shall be a
first and prior lien, and each party hereby agrees to maintain the priority of
said lien and security interest against all persons acquiring an interest in Oil
and Gas Leases and Interests covered by this agreement by, through or under such
party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by this Article VII.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or after such interest is acquired.

         To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they shall
be entitled to exercise the rights and remedies of a secured party under the
Code. The bringing of a suit and the obtaining of judgment by a party for the
secured indebtedness shall not be deemed an election of remedies or otherwise
affect the lien rights or security interest as security for the payment thereof.
In addition, upon default by any party in the payment of its share of expenses,
interests or fees, or upon the improper use of funds by the Operator, the other
parties shall have the right, without prejudice to other rights or remedies, to
collect from the purchaser the proceeds from the sale of such defaulting party's
share of Oil and Gas until the amount owed by such party, plus interest as
provided in "Exhibit C," has been received, and shall have the right to offset
the amount owed against the proceeds from the sale of such defaulting party's
share of Oil and Gas. All purchasers of production may rely on a notification of
default from the non-defaulting party or parties stating the amount due as a
result of the default, and all parties waive any recourse available against
purchasers for releasing production proceeds as provided in this paragraph.

         If any party fails to pay its share of cost within one hundred twenty
(120) days after rendition of a statement therefor by Operator, the
non-defaulting parties, including Operator, shall upon request by Operator, pay
the unpaid amount in the proportion that the interest of each such party bears
to the interest of all such parties. The amount paid by each party so paying its
share of the unpaid amount shall be secured by the liens and security rights
described in Article VII.B., and each paying party may independently pursue any
remedy available hereunder or otherwise.

         If any party does not perform all of its obligations hereunder, and the
failure to perform subjects such party to foreclosure or execution proceedings
pursuant to the provisions of this agreement, to the extent allowed by governing
law, the defaulting party waives any available right of redemption from and
after the date of judgment, any required valuation or appraisement of the
mortgaged or secured property prior to sale, any available right to stay
execution or to require a marshaling of assets and any required bond in the
event a receiver is appointed. In addition, to the extent permitted by
applicable law, each party hereby grants to the other parties a power of sale as
to any property that is subject to the lien and security rights granted
hereunder, such power to be exercised in the manner provided by applicable law
or otherwise in a commercially reasonable manner and upon reasonable notice.

         Each party agrees that the other parties shall be entitled to utilize
the provisions of Oil and Gas lien law or other lien law of any state in which
the Contract Area is situated to enforce the obligations of each party
hereunder. Without limiting the generality of the foregoing, to the extent
permitted by applicable law, Non-Operators agree that Operator may invoke or
utilize the mechanics' or materialmen's lien law of the state in which the
Contract Area is situated in order to secure the payment to Operator of any sum
due hereunder for services performed or materials supplied by Operator.

C.  ADVANCES:

         Operator, at its election, shall have the right from time to time to
demand and receive from one or more of the other parties payment in advance of
their respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of such
estimated expense, together with an invoice for its share thereof. Each such
statement and invoice for the payment in advance of estimated expense shall be
submitted on or before the 20th day of the next preceding month. Each party
shall pay to Operator its proportionate share of such estimate within fifteen
(15) days after such estimate and invoice is received. If any party fails to pay
its share of said estimate within said time, the amount due shall bear interest
as provided in Exhibit "C" until paid. Proper adjustment shall be made monthly
between advances and actual expense to the end that each party shall bear and
pay its proportionate share of actual expenses incurred, and no more.

D.  DEFAULTS AND REMEDIES:

         If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C. or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the remedies
provided in Article VII.B. or elsewhere in this agreement, the remedies
specified below shall be applicable. For purposes of this Article VII.D., all
notices and elections shall be delivered

                                     - 12 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

only by Operator, except that Operator shall deliver any such notice and
election requested by a non-defaulting Non-Operator, and when Operator is the
party in default, the applicable notices and elections can be delivered by any
Non-Operator. Election of any one or more of the following remedies shall not
preclude the subsequent use of any other remedy specified below or otherwise
available to a non-defaulting party.

         1. Suspension of Rights: Any party may deliver to the party in default
a Notice of Default, which shall specify the default, specify the action to be
taken to cure the default, and specify that failure to take such action will
result in the exercise of one or more of the remedies provided in this Article.
If the default is not cured within thirty (30) days of the delivery of such
Notice of Default, all of the rights of the defaulting party granted by this
agreement may upon notice be suspended until the default is cured, without
prejudice to the right of the non-defaulting party or parties to continue to
enforce the obligations of the defaulting party previously accrued or thereafter
accruing under this agreement. If Operator is the party in default, the
Non-Operators shall have in addition the right, by vote of Non-Operators owning
a majority in interest in the Contract Area after excluding the voting interest
of Operator, to appoint a new Operator effective immediately. The rights of a
defaulting party that may be suspended hereunder at the election of the
non-defaulting parties shall include, without limitation, the right to receive
information as to any operation conducted hereunder during the period of such
default, the right to elect to participate in an operation proposed under
Article VI.B. of this agreement, the right to participate in an operation being
conducted under this agreement even if the party has previously elected to
participate in such operation, and the right to receive proceeds of production
from any well subject to this agreement.

         2. Suit for Damages: Non-defaulting parties or Operator for the benefit
of non-defaulting parties may sue (at joint account expense) to collect the
amounts in default, plus interest accruing on the amounts recovered from the
date of default until the date of collection at the rate specified in Exhibit
"C" attached hereto. Nothing herein shall prevent any party from suing any
defaulting party to collect consequential damages accruing to such party as a
result of the default.

         3. Deemed Non-Consent: The non-defaulting party may deliver a written
Notice of Non-Consent Election to the defaulting party at any time after the
expiration of the thirty-day cure period following delivery of the Notice of
Default, in which event if the billing is for the drilling a new well or the
Plugging Back, Sidetracking, Reworking or Deepening of a well which is to be or
has been plugged as a dry hole, or for the Completion or Recompletion of any
well, the defaulting party will be conclusively deemed to have elected not to
participate in the operation and to be a Non-Consenting Party with respect
thereto under Article VI.B. or VI.C., as the case may be, to the extent of the
costs unpaid by such party, notwithstanding any election to participate
theretofore made.

         Until the delivery of such Notice of Non-Consent Election to the
defaulting party, such party shall have the right to cure its default by paying
its unpaid share of costs plus interest at the rate set forth in Exhibit "C,"
provided, however, such payment shall not prejudice the rights of the
non-defaulting parties to pursue remedies for damages incurred by the
non-defaulting parties as a result of the default. Any interest relinquished
pursuant to this Article VII.D.3. shall be offered to the non-defaulting parties
in proportion to their interests, and the non-defaulting parties electing to
participate in the ownership of such interest shall be required to contribute
their shares of the defaulted amount upon their election to participate therein.

         4. Advance Payment: If a default is not cured within thirty (30) days
of the delivery of a Notice of Default, Operator, or Non-Operators if Operator
is the defaulting party, may thereafter require advance payment from the
defaulting party of such defaulting party's anticipated share of any item of
expense for which Operator, or Non-Operators, as the case may be, would be
entitled to reimbursement under any provision of this agreement, whether or not
such expense was the subject of the previous default. Such right includes, but
is not limited to, the right to require advance payment for the estimated costs
of drilling a well or Completion of a well as to which an election to
participate in drilling or Completion has been made. If the defaulting party
fails to pay the required advance payment, the non-defaulting parties may pursue
any of the remedies provided in the Article VII.D. or any other default remedy
provided elsewhere in this agreement. Any excess of funds advanced remaining
when the operation is completed and all costs have been paid shall be promptly
returned to the advancing party.

         5. Costs and Attorneys' Fees: In the event any party is required to
bring legal proceedings to enforce any financial obligation of a party
hereunder, the prevailing party in such action shall be entitled to recover all
court costs, costs of collection, and a reasonable attorney's fee, which the
lien provided for herein shall also secure.

E.  RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:

         Rentals, shut-in well payments and minimum royalties which may be
required under the terms of any lease shall be paid by the party or parties who
subjected such lease to this agreement at its or their expense. In the event two
or more parties own and have contributed interests in the same lease to this
agreement, such parties may designate one of such parties to make said payments
for and on behalf of all such parties. Any party may request, and shall be
entitled to receive, proper evidence of all such payments. In the event of
failure to make proper payment of any rental, shut-in well payment or minimum
royalty through mistake or oversight where such payment is required to continue
the lease in force, any loss which results from such non-payment shall be borne
in accordance with the provisions of Article IV.B.2.

         Operator shall notify Non-Operators of the anticipated completion of a
shut-in well, or the shutting in or return to production of a producing well, at
least five (5) days (excluding Saturday, Sunday, and legal holidays) prior to
taking such action, or at the earliest opportunity permitted by circumstances,
but assumes no liability for failure to do so. In the event of failure by
Operator to so notify Non-Operators, the loss of any lease contributed hereto by
Non-Operators for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article
IV.B.3.

F.  TAXES:

         Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on Leases and Oil and Gas Interests contributed by such
Non-Operator. If the assessed valuation of any Lease is reduced by reason of its
being subject to outstanding excess royalties, overriding royalties or
production payments, the reduction in ad valorem taxes resulting therefrom shall
inure to the benefit of the owner or owners of such Lease, and Operator shall
adjust the charge to such owner or owners so as to reflect the benefit of such
reduction. If the ad valorem taxes are based in whole or in part upon separate
valuations of each party's working interest, then notwithstanding anything to
the contrary herein, charges to the joint account shall be made and paid by the
parties hereto in accordance with the tax value generated by each party's
working interest. Operator shall bill the other parties for their proportionate
shares of all tax payments in the manner provided in Exhibit "C."

                                     - 13 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C."

         Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes imposed upon or with respect to the production
or handling of such party's share of Oil and Gas produced under the terms of
this agreement.

                                  ARTICLE VIII.
                ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

A.  SURRENDER OF LEASES:

         The Leases covered by this agreement, insofar as they embrace acreage
in the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.

         However, should any party desire to surrender its interest in any Lease
or in any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute a consent to the surrender of the Leases described in the
notice. If all parties do not agree or consent thereto, the party desiring to
surrender shall assign, without express or implied warranty of title, all of its
interest in such Lease, or portion thereof, and any well, material and equipment
which may be located thereon and any rights in production thereafter secured, to
the parties not consenting to such surrender. If the interest of the assigning
party is or includes an Oil and Gas Interest, the assigning party shall execute
and deliver to the party or parties not consenting to such surrender an oil and
gas lease covering such Oil and Gas Interest for a term of one (1) year and so
long thereafter as Oil and/or Gas is produced from the land covered thereby.
Upon such assignment or lease, the assigning party shall be relieved from all
obligations thereafter accruing, but not theretofore accrued, with respect to
the interest assigned or leased and the operation of any well attributable
thereto, and the assigning party shall have no further interest in the assigned
or leased premises and its equipment and production other than the royalties
retained in any lease made under the terms of this Article. The party assignee
or lessee shall pay to the party assignor or lessor the reasonable salvage value
of the latter's interest in any well's salvable materials and equipment
attributable to the assigned or leased acreage. The value of all salvable
materials and equipment shall be determined in accordance with the provisions of
Exhibit "C," less the estimated cost of salvaging and the estimated cost of
plugging and abandoning and restoring the surface. If such value is less than
such costs, then the party assignor or lessor shall pay to the party assignee or
lessee the amount of such deficit. If the assignment or lease is in favor of
more than one party, the interest shall be shared by such parties in the
proportions that the interest of each bears to the total interest of all such
parties. If the interest of the parties to whom the assignment is to be made
varies according to depth, then the interest assigned shall similarly reflect
such variances.

         Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as it
was immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed subject to an Operating Agreement in the
form of this agreement.

B. RENEWAL OR EXTENSION OF LEASES:

         If any party secures a renewal or replacement of an Oil and Gas Lease
or Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interest
held at that time by the parties in the Contract Area. Each party who
participates in the purchase of a renewal or replacement Lease shall be given an
assignment of its proportionate interest therein by the acquiring party.

         If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties who
elect to participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate of
the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated in
Exhibit "A," but any renewal or replacement Lease in which less than all parties
elect to participate shall not be subject to this agreement but shall be deemed
subject to a separate Operating Agreement in the form of this agreement.

         If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or replacement
Leases and their right to receive an assignment of interest shall also reflect
such depth variances.

         The provisions of this Article shall apply to renewal or replacement
Leases whether they are for the entire interest covered by the expiring Lease or
cover only a portion of its area or an interest therein. Any renewal or
replacement Lease taken before the expiration of its predecessor Lease, or taken
or contracted for or becoming effective within six (6) months after the
expiration of the existing Lease, shall be subject to this provision so long as
this agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.

         The provisions in this Article shall also be applicable to extensions
of Oil and Gas Leases.

C.  ACREAGE OR CASH CONTRIBUTIONS:

         While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost of
such drilling or other operation. If the contribution be in the form of acreage,
the party to whom the contribution is made shall promptly tender an assignment
of the acreage, without warranty of title, to the Drilling Parties in the
proportions said Drilling Parties shared the cost of drilling the well. Such
acreage shall become a separate Contract Area and, to the extent possible, be
governed by provisions identical to this agreement. Each party shall promptly
notify all other parties of any acreage or cash contributions it may obtain in
support of any well or any other operation on the Contract Area. The above
provisions shall also be applicable to optional rights to earn acreage outside
the Contract Area which are in support of well drilled inside Contract Area.

                                     - 14 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.

D.  ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:

         For the purpose of maintaining uniformity of ownership in the Contract
Area in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production covered by this agreement no party shall sell, encumber, transfer or
make other disposition of its interest in the Oil and Gas Leases and Oil and Gas
Interests embraced within the Contract Area or in wells, equipment and
production unless such disposition covers either:

         1. the entire interest of the party in all Oil and Gas Leases, Oil and
Gas Interests, wells, equipment and production; or

         2. an equal undivided percent of the party's present interest in all
Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production in
the Contract Area.

         Every sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties, and any transferee of an
ownership interest in any Oil and Gas Lease or Interest shall be deemed a party
to this agreement as to the interest conveyed from and after the effective date
of the transfer of ownership; provided, however, that the other parties shall
not be required to recognize any such sale, encumbrance, transfer or other
disposition for any purpose hereunder until thirty (30) days after they have
received a copy of the instrument of transfer or other satisfactory evidence
thereof in writing from the transferor or transferee. No assignment or other
disposition of interest by a party shall relieve such party of obligations
previously incurred by such party hereunder with respect to the interest
transferred, including without limitation the obligation of a party to pay all
costs attributable to an operation conducted hereunder in which such party has
agreed to participate prior to making such assignment, and the lien and security
interest granted by Article VII.B. shall continue to burden the interest
transferred to secure payment of any such obligations.

         If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such co-owners
to appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the Oil and Gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.

E. WAIVER OF RIGHTS TO PARTITION:

         If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.

F.  PREFERENTIAL RIGHT TO PURCHASE:

    [ ]  (Optional; Check if applicable.)

         Should any party desire to sell all or any part of its interests under
this agreement, or its rights and interests in the Contract Area, it shall
promptly give written notice to the other parties, with full information
concerning its proposed disposition, which shall include the name and address of
the prospective transferee (who must be ready, willing and able to purchase),
the purchase price, a legal description sufficient to identify the property, and
all other terms of the offer. The other parties shall then have an optional
prior right, for a period of ten (10) days after the notice is delivered, to
purchase for the stated consideration on the same terms and conditions the
interest which the other party proposes to sell; and, if this optional right is
exercised, the purchasing parties shall share the purchased interest in the
proportions that the interest of each bears to the total interest of all
purchasing parties. However, there shall be no preferential right to purchase in
those cases where any party wishes to mortgage its interests, or to transfer
title to its interests to its mortgagee in lieu of or pursuant to foreclosure of
a mortgage of its interests, or to dispose of its interests by merger,
reorganization, consolidation, or by sale of all or substantially all of its Oil
and Gas assets to any party, or by transfer of its interests to a subsidiary or
parent company or to a subsidiary of a parent company, or to any company in
which such party owns a majority of the stock.

                                   ARTICLE IX.
                         INTERNAL REVENUE CODE ELECTION

         If, for federal income tax purposes, this agreement and the operations
hereunder are regarded as a partnership, and if the parties have not otherwise
agreed to form a tax partnership pursuant to Exhibit "G" or other agreement
between them, each party thereby affected elects to be excluded from the
application of all of the provisions of Subchapter "K," Chapter 1, Subtitle "A,"
of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and
authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to execute on behalf of each
party hereby affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States or the Federal Internal Revenue
Service, including specifically, but not by way of limitation, all of the
returns, statements, and the data required by Treasury Regulation ss.1.761.
Should there be any requirement that each party hereby affected give further
evidence of this election, each such party shall execute such documents and
furnish such other evidence as may be required by the Federal Internal Revenue
Service or as may be necessary to evidence this election. No such party shall
give any notices or take any other action inconsistent with the election made
hereby. If any present or future income tax laws of the state or states in which
the Contract Area is located or any future income tax laws of the United States
contain provisions similar to those in Subchapter "K," Chapter 1, Subtitle "A,"
of the Code, under which an election similar to that provided by Section 761 of
the Code is permitted, each party hereby affected shall make such election as
may be permitted or required by such laws. In making the foregoing election,
each such party states that the income derived by such party from operations
hereunder can be adequately determined without the computation of partnership
taxable income.

                                   ARTICLE X.
                               CLAIMS AND LAWSUITS

         Operator may settle any single uninsured third party damage claim or
suit arising from operations hereunder if the expenditure does not exceed
TWENTY-FIVE THOUSAND Dollars ($25,000.00) and if the payment is in complete
settlement of such claim or suit. If the amount required for settlement exceeds
the above amount, the parties hereto shall assume and take over the further
handling of the claim or suit, unless such authority is delegated to Operator.
All costs and expenses of handling settling, or otherwise discharging such claim
or suit shall be at the joint expense of the parties participating in the
operation from which the claim or suit arises. If a claim is made against any
party or if any party is sued on account of any matter arising from operations
hereunder over which such individual has no control because of the rights given
Operator by this agreement, such party shall immediately notify all other
parties, and the claim or suit shall be treated as any other claim or suit
involving operations hereunder.

                                     - 15 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                   ARTICLE XI.
                                  FORCE MAJEURE

         If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
indemnify or make money payments or furnish security, that party shall give to
all other parties prompt written notice of the force majeure with reasonably
full particulars concerning it; thereupon, the obligations of the party giving
the notice, so far as they are affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure. The term
"force majeure," as here employed, shall mean an act of God, strike, lockout, or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightening, fire, storm, flood or other act of nature, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the control of the party
claiming suspension.

         The affected party shall use all reasonable diligence to remove the
force majeure situation as quickly as practicable. The requirement that any
force majeure shall be remedied with all reasonable dispatch shall not require
the settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.

                                  ARTICLE XII.
                                     NOTICES

         All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall be
in writing and delivered in person or by United States mail, courier service,
telegram, telex, telecopier or any other form of facsimile, postage or charges
prepaid, and addressed to such parties at the addresses listed on Exhibit "A."
All telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice. The originating notice given under any
provision hereof shall be deemed delivered only when received by the party to
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date the originating notice is received.
"Receipt" for purposes of this agreement with respect to written notice
delivered hereunder shall be actual delivery of the notice to the address of the
party to be notified specified in accordance with this agreement, or to the
telecopy, facsimile or telex machine of such party. The second or any responsive
notice shall be deemed delivered when deposited in the United States mail or at
the office of the courier or telegraph service, or upon transmittal by telex,
telecopy or facsimile, or when personally delivered to the party to be notified,
provided, that when response is required within 24 or 48 hours, such response
shall be given orally or by telephone, telex, telecopy or other facsimile within
such period. Each party shall have the right to change its address at any time,
and from time to time, by giving written notice thereof to all other parties. If
a party is not available to receive notice orally or by telephone when a party
attempts to deliver a notice required to be delivered within 24 or 48 hours, the
notice may be delivered in writing by any other method specified herein and
shall be deemed delivered in the same manner provided above for any responsive
notice.

                                  ARTICLE XIII.
                                TERM OF AGREEMENT

         This agreement shall remain in full force and effect as to the Oil and
Gas Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.

    [X]  Option No. 1: So long as any of the Oil and Gas Leases subject to this
         agreement remain or are continued in force as to any part of the
         Contract Area, whether by production, extension, renewal or otherwise.

         The termination of this agreement shall not relieve any party hereto
from any expense, liability or other obligation or any remedy therefor which has
accrued or attached prior to the date of such termination.

         Upon termination of this agreement and the satisfaction of all
obligations hereunder, in the event a memorandum of this Operating Agreement has
been filed of record, Operator is authorized to file of record in all necessary
recording offices a notice of termination, and each party hereto agrees to
execute such a notice of termination as to Operator's interest, upon request of
Operator, if Operator has satisfied all its financial obligations.

                                  ARTICLE XIV.
                      COMPLIANCE WITH LAWS AND REGULATIONS

A.  LAWS, REGULATIONS AND ORDERS:

         This agreement shall be subject to the applicable laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations and
orders.

B.  GOVERNING LAW:

         THIS AGREEMENT AND ALL MATTERS PERTAINING HERETO, INCLUDING BUT NOT
LIMITED TO MATTERS OF PERFORMANCE, NON-PERFORMANCE, BREACH, REMEDIES,
PROCEDURES, RIGHTS, DUTIES, AND INTERPRETATION OR CONSTRUCTION, SHALL BE
GOVERNED AND DETERMINED BY THE LAW OF THE STATE IN WHICH THE CONTRACT AREA IS
LOCATED. IF THE CONTRACT AREA IS IN TWO OR MORE STATES, THE LAW OF THE STATE OF
WYOMING SHALL GOVERN.

C.  REGULATORY AGENCIES:

         Nothing herein contained shall grant, or be construed to grant,
Operator the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or

                                     - 16 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on tracts
offsetting or adjacent to the Contract Area.

         With respect to the operations hereunder, Non-Operators agree to
release Operator from any and all losses, damages, injuries, claims and causes
of action arising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or Federal Energy Regulatory Commission or
predecessor or successor agencies to the extent such interpretation or
application was made in good faith and does not constitute gross negligence.
Each Non-Operator further agrees to reimburse Operator for such Non-Operator's
share of production or any refund, fine, levy or other governmental sanction
that Operator may be required to pay as a result of such an incorrect
interpretation or application, together with interest and penalties thereon
owing by Operator as a result of such incorrect interpretation or application.

                                   ARTICLE XV.
                                  MISCELLANEOUS

A.  EXECUTION:

         This agreement shall be binding upon each Non-Operator when this
agreement or a counterpart thereof has been executed by such Non-Operator and
Operator notwithstanding that this agreement is not then or thereafter executed
by all of the parties to which it is tendered or which are listed on Exhibit "A"
as owning an interest in the Contract Area or which own, in fact, an interest in
the Contract Area. Operator may, however, by written notice to all Non-Operators
who have become bound by this agreement as aforesaid, given at any time prior to
the actual spud date of the Initial Well but in no event later than five days
prior to the date specified in Article VI.A. for commencement of the Initial
Well, terminate this agreement if Operator in its sole discretion determines
that there is insufficient participation to justify commencement of drilling
operations. In the event of such a termination by Operator, all further
obligations of the parties hereunder shall cease as of such termination. In the
event any Non-Operator has advanced or prepaid any share of drilling or other
costs hereunder, all sums so advanced shall be returned to such Non-Operator
without interest. In the event Operator proceeds with drilling operations for
the Initial Well without the execution hereof by all persons listed on Exhibit
"A" as having a current working interest in such well, Operator shall indemnify
Non-Operators with respect to all costs incurred for the Initial Well which
would have been charged to such person under this agreement if such person had
executed the same and Operator shall receive all revenues which would have been
received by such person under this agreement if such person had executed the
same.

B.  SUCCESSORS AND ASSIGNS:

         This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, devisees, legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the Contract Area.

C.  COUNTERPARTS:

         This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.

D.  SEVERABILITY:

         For the purposes of assuming or rejecting this agreement as an
executory contract pursuant to federal bankruptcy laws, this agreement shall not
be severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.

                                  ARTICLE XVI.
                                OTHER PROVISIONS

Notwithstanding any other provision contained in Articles I through XV to the
contrary,

A.  ADDITIONAL PARTIES:

         There shall be no obligation on the Operator hereof to perform to a
multiplicity of parties succeeding to the interest of the parties hereto.
Therefore, in exercising any option, election, consent, notice, acceptance,
declination or other right of performance, the respective successors in interest
shall act as a unit and shall, moreover, designate one of their number to whom
all notices and performance may be tendered and from whom all notices and
performance may be obtained and exacted, respectively.

B.  BILLING ADDITIONAL INTERESTS:

         The parties further agree that in no event during the term of this
agreement shall Operator be required to make more than one (1) billing for the
entire interest credited to each Party hereunder. It is further agreed that if
any Party to this Agreement, hereinafter referred to as "Selling Party",
disposes of part of the interest credited to it hereunder, the Selling Party
will be solely responsible for billing its assignee(s), and shall remain
primarily liable to the other party for the interest(s) assigned and shall make
prompt payment to Operator for the entire amount of statements and billings
rendered to it. It is further understood and agreed that if Selling Party
disposes of all its interest as set out hereunder, whether to one or several
assignees, Operator shall continue to issue statements and billings to the
Selling Party for the interest conveyed until such time as Selling Party has
designated and qualified one assignee to receive the billing for the entire
interest. In order to qualify one assignee to receive the billing for the entire
interest credited to the Selling Party hereunder, Selling Party shall furnish to
Operator the following:

         1. Written notice of the conveyance and photostatic or certified copies
            of the recorded assignments by which the transfer was made.

         2. The name of the assignee to be billed and a written statement signed
            by the assigned to be billed in which it consents to receive
            statements and billings for the entire interest credited to Selling
            Party on Exhibit "A" hereunder.

         3. Written consent from all assignees evidencing their consent to have
            the designee act on their behalf as hereinabove provided.

C.  WORKOVER OPERATIONS:

         It is agreed that without the mutual consent of all parties, no
workover or other operations will be conducted under the provisions of Article
VI so long as any completion in the well proposed to be worked over is producing
in paying quantities.

D.  SEQUENCE OF FURTHER OPERATIONS:

         It is agreed that where a well, which has been authorized under the
terms of this agreement, by all parties, or by one or more, but less than all
parties under Paragraph VI.B. (1) or (2), shall have been drilled to the
objective depth or the objective formation, and the parties participating in the
well cannot mutually agree upon the sequence and timing of further operations
regarding said well, the following elections shall control in the order
enumerated hereafter, to wit:

         1. An election to do additional logging, coring or testing;

         2. An election to attempt to complete the well at either the objective
            depth or objective formation;

         3. An election to plug back and attempt to complete said well;

         4. An election to sidetrack the well;

                                     - 17 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         5. An election to deepen said well; and

         6. An election to plug and abandon said well.

         If at the time said participating parties are considering any of the
above elections, the hole is in such a condition that a reasonably prudent
Operator would not conduct the operations contemplated by the particular
election involved for fear of placing the hole in jeopardy or losing the same
prior to completing the well in the objective depth or objective formation, such
election shall not be given the priority hereinabove set forth.

E.  MEMORANDUM OF OPERATING AGREEMENT:

         Parties agree to execute a memorandum of this Agreement simultaneously
with the execution of this Agreement, which shall be recorded by Operator in
each County in which lands comprising all or any part of the Contract Area
hereunder are situated. Operator will prepare the memorandum of this Agreement
and circulate same to the Non-Operator for execution. Upon recording, Operator
will provide recordation information to Non-Operator for its records. A form of
said Memorandum, which is attached as Exhibit "H" hereto, shall include a
reference to the pertinent substantive provisions of this Agreement, including
the Gas Balancing Agreement.

F.  HEADINGS:

         All headings in this agreement are for reference purposes only and have
no binding effect on the terms, conditions or provisions of this Agreement.

G.  CONFIDENTIALITY OF INFORMATION:

         All geophysical, geological or engineering data acquired by the parties
under this Agreement, as a result of joint operations conducted hereunder, shall
be kept CONFIDENTIAL by the parties unless the release of such information to a
third party is agreed upon by the parties or is required by law; however, it is
agreed that such data may be released to a third party if such third party is a
consultant of any party or provided such third party is a prospective partner of
such party or is a prospective purchaser of all or any portion of such parties
interest. The term during which information is to be kept SECRET AND
CONFIDENTIAL shall coincide with the term of this Agreement or for a period of
one (1) years from the date of this Agreement, whichever is later. Unless
otherwise provided above, any release of information to a third party must have
the prior written consent of all parties hereto, but in any event, said third
party must agree in writing to be bound by the provisions of this paragraph.

         Nothing herein shall prohibit any party from disclosing necessary
information to its affiliate company or whatever information in such manner as
may be required by statute, rule or regulation, including the rules and
regulations of any stock exchange on which any securities of such party or any
affiliate are traded; nor shall any party be prohibited by the terms hereof form
disclosing information acquired under this agreement to any financial
institution providing or proposing to provide financing to the disclosing party.

H.  NEWS RELEASES:

         Any party hereto or any related party desiring to issue a news release
concerning operations conducted within the Contract Area, shall provide the
other party(ies) hereto with copies of the proposed release and no such news
release shall be issued without first obtaining the written consent of all
parties hereto, which consent shall not be unreasonably withheld.
Notwithstanding the immediately preceding sentence, no prior consent shall be
required for any news release required by law and/or the Securities and Exchange
Commission. The only exception to the foregoing shall be that in the event of an
emergency involving extensive property damage, operations failure, loss of human
life or other clear emergency, the Operator is authorized to furnish such
minimum, strictly factual information as shall be necessary to satisfy the
legitimate public interest on the part of the press and duly constituted
authorities if time does not permit the obtaining of prior approval by the other
parties hereto. The Operator shall thereupon promptly advise the other parties
hereto of the information so furnished.

I.  LANDS EXCLUDED FROM THIS AGREEMENT:

         In the event that lands covered by a lease or a portion thereof which
were initially subject to this Agreement, but in accordance with the terms
hereof are no longer subject to this Agreement, and such lands are acquired by
one or more parties to this Agreement (provided that at such time two (2) or
more parties are signatories to this Agreement), such leasehold or contractual
rights and the leasehold covered thereby shall be governed by an operating
agreement identical to this Agreement, except that such operating agreement
shall be revised to reflect the parties thereto and their percentage ownership,
the Contract Area and the Operator, if different.

J.  CONFLICT OF TERMS:

         This Agreement is made expressly subject to the Farmin agreement dated
January   , 2004, by and between Ivanhoe Energy (USA) Inc., Derek Resources
(U.S.A.) ,Inc., and the parties hereto shall be bound by the terms and
conditions contained in said Agreement. In the event that any of the terms of
this Operating Agreement conflict with the terms of the Farmin Agreement, the
parties hereto agree that the terms of the Farmin Agreement shall prevail.

K.  METERING OF PRODUCTION:

         If a diversity of the working interest ownership in production from a
lease subject to this Agreement occurs as a result of operations by less than
all parties pursuant to the provisions of this Agreement, it is agreed that the
oil, gas or other hydrocarbons produced from the well or wells completed by the
consenting party or parties shall be separately measured either by well test or
by standard metering equipment (to be properly tested periodically for
accuracy), at the option of the Operator, and that the setting of a separate
tank battery will not be required unless the purchaser of the production or a
governmental regulatory body having jurisdiction will not approve metering for
separately measuring the production.

L.  COVENANT RUNNING WITH THE LAND/EXTENT OF OBLIGATIONS:

         Should any party hereto sell or transfer any or all of its leasehold
estate committed to this Agreement, the obligations, terms and covenants hereof
shall be considered covenants running with the land and shall inure to and be
binding upon the parties hereto, their respective heirs, devisees, legal
representatives, successors and assigns. The transferring party shall remain
bound to and liable for the performance of obligations and covenants of this
Agreement until the transferee executes and agrees to become a party to this
Agreement. Should any such transferee fail to assume all of the obligations and
covenants of this Agreement, then the transferring party remains bound to the
other parties to this agreement for the performance of all obligations,
covenants and indemnifications hereof.

M.  AUTHORITY FOR EXPENDITURE REQUIREMENTS:

         Notwithstanding anything herein to the contrary, the proposing party
will furnish both a detailed Authority For Expenditure and a detailed program
for each proposed operation that is estimated to exceed Twenty-Five Thousand
Dollars ($25,000.00) For purposes of this provision, "detailed" shall mean
information understood by the proposing party to be reasonably necessary for the
receiving party to make an informed decision, but in no event shall the
proposing party be required to furnish information beyond what is deemed
reasonable and prudent in the industry.

                                     - 18 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         IN WITNESS WHEREOF, this agreement shall be effective as of the 15th
day of January, 2004.

__________________________________________________ , who has prepared and
circulated this form for execution, represents and warrants that the form was
printed from and, with the exception(s) listed below, is identical to the AAPL
Form 610-1989 Model Form Operating Agreement, as published in computerized form
by Forms On-A-Disk, Inc. No changes, alterations, or modifications, other than
those made by strikethrough and/or insertion and that are clearly recognizable
as changes in Articles ____________________________________________ , have been
made to the form.

ATTEST OR WITNESS:                           OPERATOR

                                             IVANHOE ENERGY (USA) INC.

                                        By
------------------------------------         -----------------------------------

------------------------------------         -----------------------------------
                                             Type or print name

                                             Title
                                                   -----------------------------
                                             Date
                                                   -----------------------------

                                             Tax ID or S.S. No.   77-0492835
                                                                ----------------

                                  NON-OPERATORS

                                             DEREK RESOURCES (U.S.A.) INC.

                                        By
------------------------------------         -----------------------------------

------------------------------------         -----------------------------------
                                             Type or print name

                                             Title
                                                   -----------------------------
                                             Date
                                                   -----------------------------

                                             Tax ID or S.S. No.
                                                                ----------------

                                     - 19 -
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                 ACKNOWLEDGMENTS

         Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the
statutes of that state.

Individual acknowledgment:

State of                   )
         -----------------
                           ) ss.
County of                  )
          ----------------

         This instrument was acknowledged before me on

                                        by
---------------------------------------    ------------------------------------

(Seal, if any)
                                     -------------------------------------------

                                     Title (and Rank)
                                                      --------------------------

                                     My commission expires:
                                                            --------------------

Acknowledgment in representative capacity:

State of                   )
         -----------------
                           ) ss.
County of                  )
          ----------------

     This instrument was acknowledged before me on

                                       by                                     as
-------------------------------------      -------------------------------------
                  of                                                           .
-----------------    ----------------------------------------------------------

(Seal, if any)
                                     -------------------------------------------

                                     Title (and Rank)
                                                      --------------------------

                                     My commission expires:
                                                            --------------------

                                     - 20 -
<PAGE>
                                   EXHIBIT "A"

Attached to and made a part of that certain Operating Agreement dated January
15, 2004, by and between Ivanhoe Energy (USA Inc., as Operator, and Derek
Resources (USA) Inc. as Non-Operators.

All lands are in Weston County, Wyoming

1.   Description of Lands
     --------------------

     Tract A
     Township 44 North, Range 60 West, 6th P.M.
     ------------------------------------------
     Section 6:   Southwest Quarter, Northeast Quarter, East Half of the
                  Northwest Quarter, and West Half of the Southeast Quarter
                  (SW/4, NE/4, E/2 NW/4, W/2 SE/4).
     Section 7:   West Half, and West Half of the East Half (W/2, W/2 E/2).
     Section 18:  South Half of the Southwest Quarter, and the Northwest Quarter
                  (S/2 SW/4, NW/4).
     Section 19:  West Half of West Half, Northeast Quarter of the Northwest
                  Quarter (W/2 W/2, NE/4 NW/4).

     Township 44 North, Range 61 West, 6th P.M.
     ------------------------------------------
     Section 1:   Southeast Quarter (SE/4).
     Section 11:  Southeast Quarter, East Half of the Northeast Quarter, and
                  South Half of the Southwest Quarter (SE/4, E/2 NE/4, S/2
                  SW/4).
     Section 12:  All.
     Section 13:  West Half, and South Half of the Southeast Quarter (W/2, S/2
                  SE/4).
     Section 14:  All.
     Section 22:  Northeast Quarter (NE/4).
     Section 23:  North Half, Southeast Quarter, East Half of the Southwest
                  Quarter (N/2, SE, E/2 SW/4).
     Section 24:  North Half, Southeast Quarter, and East Half of the Southwest
                  Quarter (N/2, SE/4, E/2 SW/4).
     Section 25:  Northwest Quarter of the Northeast Quarter, North Half of the
                  Northwest Quarter, Southwest Quarter of the Northwest Quarter,
                  and Northwest Quarter of the Southwest Quarter (NW/4 NE/4, N/2
                  NW/4, SW/4 NW/4, NW/4 SW/4.
     Section 26:  East Half of the Northeast Quarter, and Northeast Quarter of
                  the Southeast Quarter (E/2 NE/4, NE/4 SE/4).
     Section 30:  West Half of the Northwest Quarter (W/4 NW/4).

     Tract B
     Township 44 North, Range 61 West, 6th P.M.
     ------------------------------------------
     Section 24:  Northeast Quarter of the Southeast Quarter (NE/4 SE/4).
     Section 25:  South Half of the Southwest Quarter, the Northeast Quarter of
                  the Southwest Quarter, Northwest Quarter of the Southeast
                  Quarter, East Half of the Northeast Quarter, Southwest Quarter
                  of the Northeast Quarter, and Southeast Quarter of the
                  Northwest Quarter (S/2 SW/4, NE/4 SW/4, NW/4 SE/4, E/4 NE/4,
                  SW/4 NE/4, SE/4 NW/4).

     Tract C
     Township 44 North, Range 60 West, 6th P.M.
     ------------------------------------------
     Section 18:  North Half of the Southwest Quarter (N/2 SW/4).

     Township 44 North, Range 61 West, 6th P.M.
     ------------------------------------------
     Section 13:  Northeast Quarter, and North Half of the Southeast Quarter
                  (NE/4, N/2 SE/4).

     Tract D
     Township 44 North, Range 61 West, 6th P.M.
     ------------------------------------------
     Section 22:  Southeast Quarter (SE/4).
     Section 27:  West Half of the East Half (W/2 E/2).

     Tract E
     Township 44 North, Range 61 West, 6th P.M.
     ------------------------------------------
     Section 24:  Southeast Quarter of the Southeast Quarter (SE/4 SE/4).

                                     Page 1
<PAGE>

     Additional Property Leased from the Federal Government
     ------------------------------------------------------

     Township 44 North, Range 61 West, 6th P.M.
     ------------------------------------------
     Section 1:   South Half of the Southwest Quarter (S/2 SW/4).
     Section 10:  Southwest Quarter of the Northeast Quarter (SW/4 NE/4).
     Section 10:  West Half of the Southeast Quarter, Southeast Quarter of the
                  Southeast Quarter (W/2 SE/4, SE/4 SE/4), excluding 13.77 acres
                  in railroad right-of-way WyW0119068.
     Section 15:  West Half of the East Half, East Half of the West Half,
                  Northwest Quarter of the Northwest Quarter, Southwest Quarter
                  of the Southwest Quarter (W/2 E/2, E/2 W/2, NW/4 NW/4, SW/4
                  SW/4).
     Section 15:  East Half of the East Half (E/2 E/2), excluding 23.78 acres in
                  railroad right-of-way WyW0119068.
     Section 25:  Northeast Quarter of the Southeast Quarter, South half of the
                  Southeast Quarter (NE/4 SE/4, S/2 SE/4).
     Section 26:  Northwest Quarter of the Northeast Quarter, East Half of the
                  Southwest Quarter (NW/4 NE/4, E/2 SW/4).
     Section 26:  East Half of the Northwest Quarter, Southeast Quarter of the
                  Southeast Quarter (E/2 NW/4, SE/4 SE/4), excluding 14.23 acres
                  in railroad right-of-way WyW0119068.

2.   Restriction as to depths
     ------------------------
     None

3.   Parties To This Agreement With Addresses And Telephone Numbers For
     Notice Purposes:
     ------------------------------------------------------------------
         Ivanhoe:                   Ivanhoe Energy (USA) Inc.
         --------
         Mailing Address:           P.O. Box 9279
                                    Bakersfield, California 93389

         Street Address:            5060 California Avenue
                                    Suite 400
                                    Bakersfield, California 93309

         Attention:                 Robert Coffey

         Telephone:                 661-869-8332

         Facsimile:                 661-869-2820

         e-mail:                    rcoffey@ivanhoeenergy.com

         Copy to:                   Oscar Blake, General Counsel

         Derek:                     Derek Oil & Gas Corporation
         ------
         Street Address:            Suite 1550, 355 Burrard Street
                                    Vancouver, B.C., Canada V6C 2GB

         Attention:                 Barry C.J. Ehrl

         Telephone:                 604-331-1757

         Facsimile:                 604-669-5193

         e-mail:                    info@derekresources.com

4.   Percentages or fractional interest of parties to this Agreement
     ---------------------------------------------------------------
     Pursuant to the LAK Ranch Farmin Agreement to which this Operating
     Agreement is attached.

5.   Oil and Gas Leases subject to this Agreement
     --------------------------------------------
     A.   Oil and Gas Lease, dated January 10, 1981, by and between Donald B.
          Roberts, B.M. Stewart, and Sheri Vineyard, as Lessors, and Exoil
          Services, Inc., as Lessee, recorded in Book 87, Page 189, Official
          Records of Weston County, Wyoming.

     B.   Oil and Gas Lease, dated effective August 31, 1958, by and between the
          U.S. Department of Interior, Bureau of Land Management, as Lessor, and
          Edel P. Smith, as Lessee, being identified as Lease Serial Number
          W-022180-A.

     C.   Oil and Gas Lease, dated effective December 1, 1999, by and between
          the U.S. Department of Interior, Bureau of Land Management, as Lessor,
          and Cove Energy, as Lessee, being identified as Lease Serial Number
          W-149512.

                                     Page 2
<PAGE>

6.   Burdens on Production
     ---------------------
     Tract A      19.9501%
     Tract B      19.9501%
     Tract C      11.7875% (Based on 50% leased)
     Tract D      11.7875% (Based on 50% leased)
     Tract E      19.9501%

                                     Page 3
<PAGE>
                                                      COPAS   1984   ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                                      COPAS

                                  EXHIBIT " C "

Attached to and made a part of that certain Operating Agreement,dated January
15, 2004, by and between IVANHOE ENERGY (USA) INC., as Operator and DEREK
RESOURCES (U.S.A.) INC. as Non-Operator ______________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

                              ACCOUNTING PROCEDURE

                                JOINT OPERATIONS

                              I. GENERAL PROVISIONS

1.       DEFINITIONS

         "Joint Property" shall mean the real and personal property subject to
         the agreement to which this Accounting Procedure is attached.

         "Joint Operations" shall mean all operations necessary or proper for
         the development, operation, protection and maintenance of the Joint
         Property.

         "Joint Account" shall mean the account showing the charges paid and
         credits received in the conduct of the Joint Operations and which are
         to be shared by the Parties.

         "Operator" shall mean the party designated to conduct the Joint
         Operations.

         "Non-Operators" shall mean the Parties to this agreement other than the
         Operator.

         "Parties" shall mean Operator and Non-Operators.

         "First Level Supervisors" shall mean those employees whose primary
         function in Joint Operations is the direct supervision of other
         employees and/or contract labor directly employed on the Joint Property
         in a field operating capacity.

         "Technical Employees" shall mean those employees having special and
         specific engineering, geological or other professional skills, and
         whose primary function in Joint Operations is the handling of specific
         operating conditions and problems for the benefit of the Joint
         Property.

         "Personal Expenses" shall mean travel and other reasonable reimbursable
         expenses of Operator's employees.

         "Material" shall mean personal property, equipment or supplies acquired
         or held for use on the Joint Property.

         "Controllable Material" shall mean Material which at the time is so
         classified in the Material Classification Manual as most recently
         recommended by the Council or Petroleum Accountants Societies.

2.       STATEMENT AND BILLINGS

         Operator shall bill Non-Operators on or before the last day of each
         month for their proportionate share of the Joint Account for the
         preceding month. Such bills will be accompanied by statements which
         identify the authority for expenditure, lease or facility, and all
         charges and credits summarized by appropriate classifications of
         investment and expense except that items of Controllable Material and
         unusual charges and credits shall be separately identified and fully
         described in detail.

3.       ADVANCES AND PAYMENTS BY NON-OPERATORS

         A.    Unless otherwise provided for in the agreement, the Operator may
               require the Non-Operators to advance their share of estimated
               cash outlay for the succeeding month's operation within fifteen
               (15) days after receipt of the billing or by the first day of the
               month for which the advance is required, whichever is later.
               Operator shall adjust each monthly billing to reflect advances
               received from the Non-Operators.

         B.    Each Non-Operator shall pay its proportion of all bills within
               fifteen (15) days after receipt. If payment is not made within
               such time, the unpaid balance shall bear interest monthly at the
               prime rate in effect at BANK OF AMERICA on the first day of the
               month in which delinquency occurs plus 1% or the maximum contract
               rate permitted by the applicable usury laws in the state in which
               the Joint Property is located, whichever is the lesser, plus
               attorney's fees, court costs, and other costs in connection with
               the collection of unpaid amounts.

4.       ADJUSTMENTS

         Payment of any such bills shall not prejudice the right of any
         Non-Operator to protest or question the correctness thereof; provided,
         however, all bills and statements rendered to Non-Operators by Operator
         during any calendar year shall conclusively be presumed to be true and
         correct after twenty-four (24) months following the end of any such
         calendar year, unless within the said twenty-four (24) month period a
         Non-Operator takes written exception thereto and makes claim on
         Operator for adjustment. No adjustment favorable to Operator shall be
         made unless it is made within the same prescribed period. The
         provisions of this paragraph shall not prevent adjustments resulting
         from a physical inventory of Controllable Material as provided for in
         Section V.

     COPYRIGHT (C) 1985 BY THE COUNCIL OF PETROLEUM ACCOUNTANTS SOCIETIES.

                                     - 1 -
<PAGE>
                                                      COPAS   1984   ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                                      COPAS

5.       AUDITS

         A.    A Non-Operator, upon notice in writing to Operator and all other
               Non-Operators, shall have the right to audit Operator's accounts
               and records relating to the Joint Account for any calendar year
               within the twenty-four (24) month period following the end of
               such calendar year; provided, however, the making of an audit
               shall not extend the time for the taking of written exception to
               and the adjustments of accounts as provided for in Paragraph 4 of
               this Section I. Where there are two or more Non-Operators, the
               Non-Operators shall make every reasonable effort to conduct a
               joint audit in a manner which will result in a minimum of
               inconvenience to the Operator. Operator shall bear no portion of
               the Non-Operators' audit cost incurred under this paragraph
               unless agreed to by the Operator. The audits shall not be
               conducted more than once each year without prior approval of
               Operator, except upon the resignation or removal of the Operator,
               and shall be made at the expense of those Non-Operators approving
               such audit.

         B.    The Operator shall reply in writing to an audit report within 180
               days after receipt of such report.

6.       APPROVAL BY NON-OPERATORS

         Where an approval or other agreement of the Parties or Non-Operators is
         expressly required under other sections of this Accounting Procedure
         and if the agreement to which this Accounting Procedure is attached
         contains no contrary provisions in regard thereto, Operator shall
         notify all Non-Operators of the Operator's proposal, and the agreement
         or approval of a majority in interest of the Non-Operators shall be
         controlling on all Non-Operators.

                               II. DIRECT CHARGES

Operator shall charge the Joint Account with the following items:

1.       ECOLOGICAL AND ENVIRONMENTAL

         Costs incurred for the benefit of the Joint Property as a result of
         governmental or regulatory requirements to satisfy environmental
         considerations applicable to the Joint Operations. Such costs may
         include surveys of an ecological or archaeological nature and pollution
         control procedures as required by applicable laws and regulations.

2.       RENTALS AND ROYALTIES

         Lease rentals and royalties paid by Operator for the Joint Operations.

3.       LABOR

         A.    (1)   Salaries and wages of Operator's field employees directly
                     employed on the Joint Property in the conduct of Joint
                     Operations.

               (2)   Salaries of First level Supervisors in the field.

               (3)   Salaries and wages of Technical Employees directly employed
                     on the Joint Property if such charges are excluded from the
                     overhead rates.

               (4)   Salaries and wages of Technical Employees either
                     temporarily or permanently assigned to and directly
                     employed in the operation or the Joint Property if such
                     charges are excluded from the overhead rates.

         B.    Operator's cost of holiday, vacation, sickness and disability
               benefits and other customary allowances paid to employees whose
               salaries and wages are chargeable to the Joint Account under
               Paragraph 3A of this Section II. Such costs under this Paragraph
               3B may be charged on a "when and as paid basis" or by "percentage
               assessment" on the amount of salaries and wages chargeable to the
               Joint Account under Paragraph 3A of this Section II. If
               percentage assessment is used, the rate shall be based on the
               Operator's cost experience.

         C.    Expenditures or contributions made pursuant to assessments
               imposed by governmental authority which are applicable to
               Operator's costs chargeable to the Joint Account under Paragraphs
               3A and 3B of this Section II.

         D.    Personal Expenses of those employees whose salaries and wages are
               chargeable to the Joint Account under Paragraphs 3A and 3B of
               this Section II.

4.       EMPLOYEE BENEFITS

         Operator's current costs or established plans for employees' group life
         insurance, hospitalization, pension, retirement, stock purchase,
         thrift, bonus,and other benefit plans of a like nature applicable to
         Operator's labor cost chargeable to the Joint Account under Paragraphs
         3A and 3B of this Section II shall be Operator's actual cost not to
         exceed the percent most recently recommended by the Council of
         Petroleum Accountants Societies.

                                     - 2 -
<PAGE>
                                                      COPAS   1984   ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                                      COPAS

5.       MATERIAL

         Material purchased or furnished by Operator for use on the Joint
         Property as provided under Section IV. Only such Material shall be
         purchased for or transferred to the Joint Property as may be required
         for immediate use and is reasonably practical and consistent with
         efficient and economical operations. The accumulation of surplus stocks
         shall be avoided.

6.       TRANSPORTATION

         Transportation of employees and Material necessary for the Joint
         Operations but subject to the following limitations:

         A.    If Material is moved to the Joint Property from the Operator's
               warehouse or other properties, no charge shall be made to the
               Joint Account for a distance greater than the distance from the
               nearest reliable supply store where like material is normally
               available or railway receiving point nearest the Joint Property
               unless agreed to by the Parties.

         B.    If surplus Material is moved to Operator's warehouse or other
               storage point, no charge shall be made to the Joint Account for a
               distance greater than the distance to the nearest reliable supply
               store where like material is normally available, or railway
               receiving point nearest the Joint Property unless agreed to by
               the Parties. No charge shall be made to the Joint Account for
               moving Material to other properties belonging to Operator, unless
               agreed to by the Parties.

         C.    In the application of subparagraphs A and B above, the option to
               equalize or charge actual trucking cost is available when the
               actual charge is $400 or less excluding accessorial charges. The
               $400 will be adjusted to the amount most recently recommended by
               the Council of Petroleum Accountants Societies.

7.       SERVICES

         The cost of contract services, equipment and utilities provided by
         outside sources, except services excluded by Paragraph 10 of Section II
         and Paragraph i, ii, and iii, of Section III. The cost of professional
         consultant services and contract services of technical personnel
         directly engaged on the Joint Property if such charges are excluded
         from the overhead rates. The cost of professional consultant services
         or contract services of technical personnel not directly engaged on the
         Joint Property shall not be charged to the Joint Account unless
         previously agreed to by the Parties.

8.       EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR

         A.    Operator shall charge the Joint Account for use of Operator owned
               equipment and facilities at rates commensurate with costs of
               ownership and operation. Such rates shall include costs of
               maintenance, repairs, other operating expense, insurance, taxes,
               depreciation, and interest on gross investment less accumulated
               depreciation not to exceed TEN percent (10%) per annum. Such
               rates shall not exceed average commercial rates currently
               prevailing in the immediate area of the Joint Property.

         B.    In lieu of charges in Paragraph 8A above, Operator may elect to
               use average commercial rates prevailing in the immediate area of
               the Joint Property less 20%. For automotive equipment, Operator
               may elect to use rates published by the Petroleum Motor Transport
               Association.

9.       DAMAGES AND LOSSES TO JOINT PROPERTY

         All costs or expenses necessary for the repair or replacement of Joint
         Property made necessary because of damages or losses incurred by fire,
         flood, storm, theft, accident, or other cause, except those resulting
         from Operator's gross negligence or willful misconduct. Operator shall
         furnish Non-Operator written notice of damages or losses incurred as
         soon as practicable after a report thereof has been received by
         Operator.

10.      LEGAL EXPENSE

         Expense of handling, investigating and settling litigation or claims,
         discharging of liens, payment of judgments and amounts paid for
         settlement of claims incurred in or resulting from operations under the
         agreement or necessary to protect or recover the Joint Property, except
         that no charge for services of Operator's legal staff or fees or
         expense of outside attorneys shall be made unless previously agreed to
         by the Parties. All other legal expense is considered to be covered by
         the overhead provisions of Section III unless otherwise agreed to by
         the Parties, except as provided in Section I, Paragraph 3.

11.      TAXES

         All taxes of every kind and nature assessed or levied upon or in
         connection with the Joint Property, the operation thereof, or the
         production therefrom, and which taxes have been paid by the Operator
         for the benefit of the Parties. If the ad valorem taxes are based in
         whole or in part upon separate valuations of each party's working
         interest, then notwithstanding anything to the contrary herein, charges
         to the Joint Account shall be made and paid by the Parties hereto in
         accordance with the tax value generated by each party's working
         interest.

                                     - 3 -
<PAGE>
                                                      COPAS   1984   ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                                      COPAS

12.      INSURANCE

         Net premiums paid for insurance required to be carried for the Joint
         Operations for the protection of the Parties. In the event Joint
         Operations are conducted in a state in which Operator may act as
         self-insurer for Worker's Compensation and/or Employers Liability under
         the respective state's laws, Operator may, at its election, include the
         risk under its self-insurance program and in that event, Operator shall
         include a charge at Operator's cost not to exceed manual rates.

13.      ABANDONMENT AND RECLAMATION

         Costs incurred for abandonment of the Joint Property, including costs
         required by governmental or other regulatory authority.

14.      COMMUNICATIONS

         Cost of acquiring, leasing, installing, operating, repairing and
         maintaining communication systems, including radio and microwave
         facilities directly serving the Joint Property. In the event
         communication facilities/systems serving the Joint Property are
         Operator owned, charges to the Joint Account shall be made as provided
         in Paragraph 8 of this Section II.

15.      OTHER EXPENDITURES

         Any other expenditure not covered or dealt with in the foregoing
         provisions of this Section II, or in Section III and which is of direct
         benefit to the Joint Property and is incurred by the Operator in the
         necessary and proper conduct of the Joint Operations.

                                  III. OVERHEAD

1.       OVERHEAD - DRILLING AND PRODUCING OPERATIONS

         i.    As compensation for administrative, supervision, office services
               and warehousing costs, Operator shall charge drilling and
               producing operations on either:

               (X)   Fixed Rate Basis, Paragraph lA, or

               ( )   Percentage Basis, Paragraph lB

               Unless otherwise agreed to by the Parties, such charge shall be
               in lieu of costs and expenses of all offices and salaries or
               wages plus applicable burdens and expenses of all personnel,
               except those directly chargeable under Paragraph 3A, Section II.
               The cost and expense of services from outside sources in
               connection with matters of taxation, traffic, accounting or
               matters before or involving governmental agencies shall be
               considered as included in the overhead rates provided for in the
               above selected Paragraph of this Section III unless such cost and
               expense are agreed to by the Parties as a direct charge to the
               Joint Account.

         ii.   The salaries, wages and Personal Expenses of Technical Employees
               and/or the cost of professional consultant services and contract
               services of technical personnel directly employed on the Joint
               Property:

               ( )   shall be covered by the overhead rates, or

               (X)   shall not be covered by the overhead rates.

         iii.  The salaries, wages and Personal Expenses of Technical Employees
               and/or costs of professional consultant services and contract
               services of technical personnel either temporarily or permanently
               assigned to and directly employed in the operation of the Joint
               Property, irrespective of where such employee is located.

               ( )   shall be covered by the overhead rates, or

               (X)   shall not be covered by the overhead rates.

         A.    Overhead - Fixed Rate Basis

               (1)   Operator shall charge the Joint Account at the following
                     rates per well per month:

                     Drilling Well Rate $10,000 - HORIZONTAL WELL; $6,000 -
                     VERTICAL WELL
                     (Prorated for less than a full month)

                     Producing Well Rate $1,000 - HORIZONTAL WELL; $700 -
                     VERTICAL INJECTOR OR PRODUCER.

               (2)   Application of Overhead - Fixed Rate Basis shall be as
                     follows:

                     (a)   Drilling Well Rate

                           (1)   Charges for drilling wells shall begin on the
                                 date the well is spudded and terminate on the
                                 date the drilling rig, completion rig, or other
                                 units used in completion of the well is
                                 released, whichever

                                     - 4 -
<PAGE>
                                                      COPAS   1984   ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                                      COPAS

                                 is later, except that no charge shall be made
                                 during suspension of drilling or completion
                                 operations for fifteen (15) or more consecutive
                                 calendar days.

                           (2)   Charges for wells undergoing any type of
                                 workover or recompletion for a period of five
                                 (5) consecutive work days or more shall be made
                                 at the drilling well rate. Such charges shall
                                 be applied for the period from date workover
                                 operations, with rig or other units used in
                                 workover, commence through date of rig or other
                                 unit release, except that no charge shall be
                                 made during suspension of operations for
                                 fifteen (15) or more consecutive calendar days.

                     (b)   Producing Well Rates

                           (1)   An active well either produced or injected into
                                 for any portion of the month shall be
                                 considered as a one-well charge for the entire
                                 month.

                           (2)   Each active completion in a multi-completed
                                 well in which production is not commingled down
                                 hole shall be considered as a one-well charge
                                 providing each completion is considered a
                                 separate well by the governing regulatory
                                 authority.

                           (3)   An inactive gas well shut in because of
                                 overproduction or failure of purchaser to take
                                 the production shall be considered as a
                                 one-well charge providing the gas well is
                                 directly connected to a permanent sales outlet.

                           (4)   A one-well charge shall be made for the month
                                 in which plugging and abandonment operations
                                 are completed on any well. This one-well charge
                                 shall be made whether or not the well has
                                 produced except when drilling well rate
                                 applies.

                           (5)   All other inactive wells (including but not
                                 limited to inactive wells covered by unit
                                 allowable, lease allowable, transferred
                                 allowable, etc.) shall not qualify for an
                                 overhead charge.

               (3)   The well rates shall be adjusted as of the first day of
                     April each year following the effective date of the
                     agreement to which this Accounting Procedure is attached.
                     The adjustment shall be computed by multiplying the rate
                     currently in use by the percentage increase or decrease in
                     the average weekly earnings of Crude Petroleum and Gas
                     Production Workers for the last calendar year compared to
                     the calendar year preceding as shown by the index of
                     average weekly earnings of Crude Petroleum and Gas
                     Production Workers as published by the United States
                     Department of Labor, Bureau of Labor Statistics, or the
                     equivalent Canadian index as published by Statistics
                     Canada, as applicable. The adjusted rates shall be the
                     rates currently in use, plus or minus the computed
                     adjustment.

2.       OVERHEAD - MAJOR CONSTRUCTION

         To compensate Operator for overhead costs incurred in the construction
         and installation of fixed assets, the expansion of fixed assets, and
         any other project clearly discernible as a fixed asset required for the
         development and operation of the Joint Property, Operator shall either
         negotiate a rate prior to the beginning of construction, or shall
         charge the Joint

                                     - 5 -
<PAGE>
                                                      COPAS   1984   ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                                      COPAS

         Account for overhead based on the following rates for any Major
         Construction project in excess of $_______________________:

         A.    5% of first $100,000 or total cost if less, plus

         B.    3% of costs in excess of $100,000 but less than $1,000,000, plus

         C.    2% of costs in excess of $1,000,000.

         Total cost shall mean the gross cost of any one project. For the
         purpose of this paragraph, the component parts of a single project
         shall not be treated separately and the cost of drilling and workover
         wells and artificial lift equipment shall be excluded.

3.       CATASTROPHE OVERHEAD

         To compensate Operator for overhead costs incurred in the event of
         expenditures resulting from a single occurrence due to oil spill,
         blowout, explosion, fire, storm, hurricane, or other catastrophes as
         agreed to by the Parties, which are necessary to restore the Joint
         Property to the equivalent condition that existed prior to the event
         causing the expenditures, Operator shall either negotiate a rate prior
         to charging the Joint Account or shall charge the Joint Account for
         overhead based on the following rates:

         A.    5% of total costs through $100,000; plus

         B.    3% of total costs in excess of $100,000 but less than $1,000,000;
               plus

         C.    2% of total costs in excess of $1,000,000.

         Expenditures subject to the overheads above will not be reduced by
         insurance recoveries, and no other overhead provisions of this Section
         III shall apply.

4.       AMENDMENT OF RATES

         The overhead rates provided for in this Section III may be amended from
         time to time only by mutual agreement between the Parties hereto if, in
         practice, the rates are found to be insufficient or excessive.

   IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS

Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator's option, such Material may be supplied by the
Non-Operator. Operator shall make timely disposition of idle and/or surplus
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase, interest of Non-Operators in surplus
condition A or B Material. The disposal of surplus Controllable Material not
purchased by the Operator shall be agreed to by the Parties.

1.       PURCHASES

         Material purchased shall be charged at the price paid by Operator after
         deduction of all discounts received. In case of Material found to be
         defective or returned to vendor for any other reasons, credit shall be
         passed to the Joint Account when adjustment has been received by the
         Operator.

2.       TRANSFERS AND DISPOSITIONS

         Material furnished to the Joint Property and Material transferred from
         the Joint Property or disposed of by the Operator, unless otherwise
         agreed to by the Parties, shall be priced on the following basis
         exclusive of cash discounts:

         A.   New Material (Condition A)

               (1)   Tubular Goods Other than Line Pipe

                     (a)   Tubular goods, sized 2 3/8 inches OD and larger,
                           except line pipe, shall be priced at Eastern mill
                           published carload base prices effective as of date of
                           movement plus transportation cost using the 80,000
                           pound carload weight basis to the railway receiving
                           point nearest the Joint Property for which published
                           rail rates for tubular goods exist. If the 80,000
                           pound rail rate is not offered, the 70,000 pound or
                           90,000 pound rail rate may be used. Freight charges
                           for tubing will be calculated from Lorain, Ohio and
                           casing from Youngstown, Ohio.

                     (b)   For grades which are special to one mill only, prices
                           shall be computed at the mill base of that mill plus
                           transportation cost from that mill to the railway
                           receiving point nearest the Joint Property as
                           provided above in Paragraph 2.A.(1)(a). For
                           transportation cost from points other than Eastern
                           mills, the 30,000

                                     - 6 -
<PAGE>
                                                      COPAS   1984   ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                                      COPAS

                           pound Oil Field Haulers Association interstate truck
                           rate shall be used.

                     (c)   Special end finish tubular goods shall be priced at
                           the lowest published out-of-stock price, f.o.b.
                           Houston, Texas, plus transportation cost, using Oil
                           Field Haulers Association interstate 30,000 pound
                           truck rate, to the railway receiving point nearest
                           the Joint Property.

                     (d)   Macaroni tubing (size less than 2 3/8 inch OD) shall
                           be priced at the lowest published out-of-stock prices
                           f.o.b. the supplier plus transportation costs, using
                           the Oil Field Haulers Association interstate truck
                           rate per weight of tubing transferred, to the railway
                           receiving point nearest the Joint Property.

               (2)   Line Pipe

                     (a)   Line pipe movements (except size 24 inch OD and
                           larger with walls 3/4 inch and over) 30,000 pounds or
                           more shall be priced under provisions of tubular
                           goods pricing in Paragraph A.(l)(a) as provided
                           above. Freight charges shall be calculated from
                           Lorain, Ohio.

                     (b)   Line Pipe movements (except size 24 inch OD) and
                           larger with walls 3/4 inch and over) less than 30,000
                           pounds shall be priced at Eastern mill published
                           carload base prices effective as of date of shipment,
                           plus 20 percent, plus transportation costs based on
                           freight rates as set forth under provisions of
                           tubular goods pricing in Paragraph A.(1)(a) as
                           provided above. Freight charges shall be calculated
                           from Lorain, Ohio.

                     (c)   Line pipe 24 inch OD and over and 3/4 inch wall and
                           larger shall be priced f.o.b. the point of
                           manufacture at current new published prices plus
                           transportation cost to the railway receiving point
                           nearest the Joint Property.

                     (d)   Line pipe, including fabricated line pipe, drive pipe
                           and conduit not listed on published price lists shall
                           be priced at quoted prices plus freight to the
                           railway receiving point nearest the Joint Property or
                           at prices agreed to by the Parties.

               (3)   Other Material shall be priced at the current new price, in
                     effect at date of movement, as listed by a reliable supply
                     store nearest the Joint Property, or point of manufacture,
                     plus transportation costs, if applicable, to the railway
                     receiving point nearest the Joint Property.

               (4)   Unused new Material, except tubular goods, moved from the
                     Joint Property shall be priced at the current new price, in
                     effect on date of movement, as listed by a reliable supply
                     store nearest the Joint Property, or point of manufacture,
                     plus transportation costs, if applicable, to the railway
                     receiving point nearest the Joint Property. Unused new
                     tubulars will be priced as provided above in Paragraph
                     2.A.(l) and (2).

         B.    Good Used Material (Condition B)

               Material in sound and serviceable condition and suitable for
               reuse without reconditioning:

               (1)   Material moved to the Joint Property

                     At seventy-five percent (75%) of current new price, as
                     determined by Paragraph A.

               (2)   Material used on and moved from the Joint Property

                     (a)   At seventy-five percent (75%) of current new price,
                           as determined by Paragraph A, if Material was
                           originally charged to the Joint Account as new
                           Material or

                     (b)   At sixty-five percent (65%) of current new price, as
                           determined by Paragraph A, if Material was originally
                           charged to the Joint Account as used Material

               (3)   Material not used on and moved from the Joint Property

                     At seventy-five percent (75%) of current new price as
                     determined by Paragraph A.

               The cost of reconditioning, if any, shall be absorbed by the
               transferring property.

         C.    Other Used Material

               (1)   Condition C

                     Material which is not in sound and serviceable condition
                     and not suitable for its original function until after
                     reconditioning shall be priced at fifty percent (50%) of
                     current new price as determined by Paragraph A. The cost of
                     reconditioning shall be charged to the receiving property,
                     provided Condition C value plus cost of reconditioning does
                     not exceed Condition B value.

                                     - 7 -
<PAGE>
                                                      COPAS   1984   ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                                      COPAS

               (2)   Condition D

                     Material, excluding junk, no longer suitable for its
                     original purpose, but usable for some other purpose shall
                     be priced on a basis commensurate with its use. Operator
                     may dispose of Condition D Material under procedures
                     normally used by Operator without prior approval of
                     Non-Operators.

                     (a)   Casing, tubing, or drill pipe used as line pipe shall
                           be priced as Grade A and B seamless line pipe of
                           comparable size and weight. Used casing, tubing or
                           drill pipe utilized as line pipe shall be priced at
                           used line pipe prices.

                     (b)   Casing, tubing or drill pipe used as higher pressure
                           service lines than standard line pipe, e.g. power oil
                           lines, shall be priced under normal pricing
                           procedures for casing, tubing, or drill pipe. Upset
                           tubular goods shall be priced on a non upset basis.

               (3)   Condition E

                     Junk shall be priced at prevailing prices. Operator may
                     dispose of Condition E Material under procedures normally
                     utilized by Operator without prior approval of
                     Non-Operators.

         D.    Obsolete Material

               Material which is serviceable and usable for its original
               function but condition and/or value of such Material is not
               equivalent to that which would justify a price as provided above
               may be specially priced as agreed to by the Parties. Such price
               should result in the Joint Account being charged with the value
               of the service rendered by such Material.

         E.    Pricing Conditions

               (1)   Loading or unloading costs may be charged to the Joint
                     Account at the rate of twenty-five cents (25(cent)) per
                     hundred weight on all tubular goods movements, in lieu of
                     actual loading or unloading costs sustained at the stocking
                     point. The above rate shall be adjusted as of the first day
                     of April each year following January 1, 1985 by the same
                     percentage increase or decrease used to adjust overhead
                     rates in Section III, Paragraph 1.A.(3). Each year, the
                     rate calculated shall be rounded to the nearest cent and
                     shall be the rate in effect until the first day of April
                     next year. Such rate shall be published each year by the
                     Council of Petroleum Accountants Societies.

               (2)   Material involving erection costs shall be charged at
                     applicable percentage of the current knocked-down price of
                     new Material.

3.       PREMIUM PRICES

         Whenever Material is not readily obtainable at published or listed
         prices because of national emergencies. strikes or other unusual causes
         over which the Operator has no control, the Operator may charge the
         Joint Account for the required Material at the Operator's actual cost
         incurred in providing such Material, in making it suitable for use, and
         in moving it to the Joint Property; provided notice in writing is
         furnished to Non-Operators of the proposed charge prior to billing
         Non-Operators for such Material. Each Non-Operator shall have the
         right, by so electing and notifying Operator within ten days after
         receiving notice from Operator, to furnish in kind all or part of his
         share of such Material suitable for use and acceptable to Operator.

4.       WARRANTY OF MATERIAL FURNISHED BY OPERATOR

         Operator does not warrant the Material furnished. In case of defective
         Material, credit shall not be passed to the Joint Account until
         adjustment has been received by Operator from the manufacturers or
         their agents.

                                 V. INVENTORIES

The Operator shall maintain detailed records of Controllable Material.

1.       PERIODIC INVENTORIES, NOTICE AND REPRESENTATION

         At reasonable intervals, inventories shall be taken by Operator of the
         Joint Account Controllable Material. Written notice of intention to
         take inventory shall be given by Operator at least thirty (30) days
         before any inventory is to begin so that Non-Operators may be
         represented when any inventory is taken. Failure of Non-Operators to be
         represented at an inventory shall bind Non-Operators to accept the
         inventory taken by Operator.

2.       RECONCILIATION AND ADJUSTMENT OF INVENTORIES

         Adjustments to the Joint Account resulting from the reconciliation of a
         physical inventory shall be made within six months following the taking
         of the inventory. Inventory adjustments shall be made by Operator to
         the Joint Account for

                                     - 8 -
<PAGE>
                                                      COPAS   1984   ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                                      COPAS

         overages and shortages, but, Operator shall be held accountable only
         for shortages due to lack of reasonable diligence.

3.       SPECIAL INVENTORIES

         Special inventories may be taken whenever there is any sale, change of
         interest, or change of Operator in the Joint Property. It shall be the
         duty of the party selling to notify all other Parties as quickly as
         possible after the transfer of interest takes place. In such cases,
         both the seller and the purchaser shall be governed by such inventory.
         In cases involving a change of Operator, all Parties shall be governed
         by such inventory.

4.       EXPENSE OF CONDUCTING INVENTORIES

         A.    The expense of conducting periodic inventories shall not be
               charged to the Joint Account unless agreed to by the Parties.

         B.    The expense of conducting special inventories shall be charged to
               the Parties requesting such inventories, except inventories
               required due to change of Operator shall be charged to the Joint
               Account.

                                     - 9 -
<PAGE>
                                   EXHIBIT "D"

Attached to and made a part of that certain Operating Agreement dated January
15, 2004, by and between Ivanhoe Energy (USA) Inc., as Operator and Derek
Resources (U.S.A.) Inc. as Non-Operator.

                                    INSURANCE

1.    At all times during the conduct of operations hereunder, Operator shall
      maintain in force the following minimum limits of insurance at the expense
      of, and for the benefit of the Joint Account:

      Pursuant to Insurance Requirements, as provided under Article XIII of the
      Farmin Agreement, of which this Operating Agreement is attached to and
      made a part thereof.

<PAGE>
                                   EXHIBIT "E"

Attached to and made a part of that certain Operating Agreement dated January
15, 2004, by and between Ivanhoe Energy (USA) Inc., as Operator and Derek
Resources (U.S.A.) Inc., as Non-Operator.

                             Gas Balancing Agreement
                                     Onshore

I.    Definitions

      A.    "Agreement" shall mean this Gas Balancing Agreement.

      B.    "Balanced" is that condition which occurs when a party hereto has
            taken the same percentage of the cumulative volume of Gas production
            it is entitled to take pursuant to the terms of the Operating
            Agreement.

      C.    "Contract Area" is the area affected by the Operating Agreement.

      D.    "Gas" includes natural gas produced from a Well that produces Gas
            Well Gas, including all constituent parts of such natural gas,
            except liquid hydrocarbons and condensate recovered by primary
            separation equipment.

      E.    "Gas Well Gas" is gas produced from a Well classified as a gas well
            by the regulatory body having jurisdiction.

      F.    "Oil Well Gas" is gas produced from a Well classified as an oil well
            by the regulatory body having jurisdiction.

      G.    "Overproduced" is the status of a party when the percentage of the
            cumulative volume of Gas taken by that party exceeds that party's
            percentage interest of the volume of cumulative Gas production of
            all parties to the Operating Agreement under and pursuant to the
            terms of said Operating Agreement.

      H.    "Underproduced" is the status of a party when the percentage of
            cumulative volume of Gas taken by that party is less than that
            party's percentage interest of the volume of cumulative Gas
            production of all parties to the Operating Agreement under and
            pursuant to the terms of said Operating Agreement.

      I.    "Well" is defined as each well subject to the Operating Agreement
            that produces Gas. If a single Well is completed in two or more
            reservoirs, such Well shall be considered a separate Well with
            respect to, but only with respect to, each reservoir from which the
            Gas produced is not commingled in the wellbore.

II.   Application of this Agreement

      The parties to the Operating Agreement to which this Gas Balancing
      Agreement is attached, own the working or operating interests in the Gas
      underlying the Contract Area covered by such Agreement and are entitled to
      share in the percentages therein as stated in the Operating Agreement.

      In accordance with the terms of the Operating Agreement, each party shall
      take its share of Gas produced from the Contract Area and market or
      otherwise dispose of same. In the event a party hereto does not take in
      kind or market its share of gas or has contracted to sell its share of Gas
      produced from the Contract Area to a purchaser which, at any time while
      this Agreement is in effect, fails to take the share of Gas attributable
      to the interest of such party, the terms of this Gas Balancing Agreement
      shall automatically become effective.

      The Operator has the duty to control Gas Production and the responsibility
      of administering the provisions of this Gas Balancing Agreement. The
      Operator shall cause deliveries to be made to the Gas purchasers at such
      rates as may be required to give effect to the intent that the Gas
      Production accounts of all parties are, to the extent practicable, to be
      or become Balanced.

III.  Storing and Making Up Gas Production

      A.    Right to Take and Market Gas

            During any period or periods when any party hereto does not take,
            has no market for, or the market of a party is not sufficient to
            take that party's full share of the Gas produced from a Well located
            on the Contract Area, or such party's purchaser otherwise fails to
            take such party's share of Gas produced from any such Well in the
            contract Area, resulting in such party becoming Underproduced

                                     Page 1
<PAGE>

            (such party being herein referred to as an "Underproduced party")
            the other party or parties shall be entitled, but not required, to
            produce from said Well in the Contract Area and take or deliver to
            their respective purchaser(s), each month, all or a part of that
            portion of the allowable Gas production assigned to such Well by the
            regulatory body having jurisdiction. Any party so taking or
            delivering Gas which results in such party becoming Overproduced is
            herein referred to as an "Overproduced party".

            Those parties which are capable of taking and/or marketing
            quantities of Gas allocable to an Underproduced party, in the
            absence of any other agreement between them, shall each take a share
            of the Gas attributed to the Underproduced party or parties in the
            direct proportion that their respective interests bear to the total
            interest of all parties taking Gas who are also considered
            Overproduced.

            All parties hereto shall share in and own the liquid hydrocarbons
            recovered from such Gas by primary separation equipment, in
            accordance with their respective interests and subject to the terms
            of the above-described Operating Agreement, whether or not such
            parties are actually taking and/or marketing Gas at such time.

      B.    Making Up Underproduction

            Each party failing to market its share of the total volume of Gas
            produced or failing to take its full share of the total volume of
            Gas produced shall be considered Underproduced and shall be credited
            with Gas in storage equal to its percentage share of the total
            volume of Gas produced under this Agreement, less that portion of
            the Gas actually marketed or taken by such party, gas used in
            operations, vented, or lost. Any Underproduced party shall endeavor
            to bring its taking of Gas into a Balanced condition. Upon at least
            30 days written notice to the Operator, any Underproduced party may
            thereafter begin taking or delivering to its purchaser its full
            share of the Gas produced from a Well (less any used in operations,
            vented or lost). To allow an Underproduced party to balance, upon 30
            days written notice, an Underproduced party shall be entitled to
            take or deliver to a purchaser its full share of Gas produced from
            such Well (less any used in operations, vented, or lost) plus, (i)
            for the months of March, April, May, June, July, August, September
            and October only of any calendar year or years during which this
            agreement may be in place, an amount up to an additional fifty
            percent (50%) of the monthly quantity of gas attributable to the
            Overproduced party or parties, or (ii) for the months of November,
            December, January and February only of any calendar year or years
            during which this agreement may be in place, an amount up to an
            additional fifteen percent (15%) of the monthly quantity of Gas
            attributable to the Overproduced party or parties, beginning the
            first of the month immediately following the twenty (20) day written
            notice.

            If more than one Underproduced party is entitled to take additional
            Gas, they shall divide the additional Gas in proportion to their
            respective Underproduced accounts. The first Gas made up shall be
            assumed to be the first Gas Underproduced.

      C.    Gas Balance Reporting

            Each party taking Gas shall furnish or cause to be furnished to the
            Operator a monthly written statement of Gas volumes taken and the
            identity of its Gas purchaser, if any, no later than twenty (20)
            days after the production month. Operator shall not be required to
            adjust its Gas accounting statements reflecting a different Gas
            purchaser until the first day of the month following the month in
            which such notice is received by the Operator. The Operator will
            maintain appropriate accounting on a monthly and cumulative basis of
            the quantities of Gas each party is entitled to take and/or market
            and the quantities of Gas taken and/or marketed by each of the
            parties to their respective Gas purchasers. With respect to Gas
            purchased from or transported for more than one party by or through
            one pipeline connected to the Well, each party selling to or
            transporting through such one pipeline shall furnish to Operator or
            cause the pipeline owner to furnish to Operator monthly volume
            statements showing the split of ownership through such pipeline's
            sales or pipeline inlet meter during the preceding calendar month.
            Within ninety (90) days after the end of each producing calendar
            month, the Operator shall furnish each party a statement showing the
            status of the Overproduced and Underproduced accounts of all
            parties.

            To determine respective volume of Gas taken by separate gas pipeline
            connected to the Well, measurement of Gas for overproduction and
            underproduction shall be accomplished by use of sales meters and
            well measurement equipment, which shall be in accordance with AGA
            requirements.

            Each party to this agreement agrees that it will not utilize any
            information obtained hereunder for any purpose other than
            implementing or administering the terms of this Gas Balancing
            Agreement.

      D.    Royalty and Production Tax

            At all times while Gas is produced from the Contract Area, unless
            otherwise required by any State or Federal law or regulations, each
            party shall pay or cause to be paid all royalty due and payable on
            its share of Gas production as if each party were taking or
            delivering to a Gas purchaser its share of Gas production. Each
            party agrees to hold each other party harmless from any and all
            claims for royalty payments asserted by its royalty owners. The term
            "royalty owner" shall include owners of royalty, overriding
            royalties, production payments, and similar interests payable out of
            production.

                                     Page 2
<PAGE>

            Each party producing and taking or delivering Gas to its Gas
            purchaser shall pay, or cause to be paid, all production and
            severance taxes due on all volumes of Gas actually taken or sold by
            such party.

IV.   Cash Settlement

      A.    Final Cash Balancing

            Should production of gas from the Contract Area be permanently
            discontinued before the gas accounts are balanced, the Operator
            shall make a final determination of the volume of the last accrued
            over- and underproduction, if any, as of the date of such permanent
            discontinuance and the identity of the party(s) who are over- or
            underproduced. A cash settlement will then be made between the
            Underproduced and Overproduced parties. In making such settlement,
            the Underproduced parties shall be paid a sum of money by the
            Overproduced parties equal to the value, computed as hereinafter set
            forth, of the unrecouped cumulative balance of overproduction,
            adjusted for applicable taxes and royalties theretofore paid.

            In determining the value of the unrecouped cumulative balance of
            overproduction, beginning with the most recent month in which the
            Overproduced parties took a volume of gas in excess of the quantity
            to which such parties were entitled (hereafter called "overage") the
            volume of overage during such month shall be multiplied times the
            actual prices received for such overage during such month. The same
            calculation shall be made for the next preceding month in which an
            overage occurred and for each preceding month (progressing backward
            in time) in which an overage occurred until the total volume of the
            overages for these months equals the total volume of the unrecouped
            cumulative balance of overproduction for purposes of the cash
            settlement herein contemplated. Within ninety (90) days of permanent
            discontinuance, the Operator will supply to the Non-Operator final
            volume gas balancing statements. Within one hundred twenty (120)
            days of permanent discontinuance, the Overproduced parties will pay
            or cause to be paid to the Underproduced parties their share of
            overage. Operator assumes no liability with respect to any such
            third party payments due any Underproduced party. If refunds are
            later required by any governmental authority, each party shall be
            accountable for its respective share of such refunds as finally
            balanced hereunder.

      B.    Collection and Distribution

            Operator shall provide within thirty (30) days of permanent
            termination of Gas production a final accounting of the Gas balance
            to all parties hereto. Overproduced parties, within thirty (30) days
            of receipt of the final accounting of the Gas balance, shall provide
            Operator with a monthly statement of volume for each month during
            which overproduction occurred that has not been made-up. Within
            thirty (30) days after the receipt of such monthly statements for
            Overproduced parties, Operator shall calculate and invoice each
            Overproduced party for its share of the cash settlement, based on
            said volume statements, and the Cash Out Value due each
            Underproduced party. Overproduced parties shall make settlement,
            based on the invoiced amount, to the Operator within thirty (30)
            days after receipt of said invoice. Such payment shall relieve an
            Overproduced party of liability to any other party for the sums
            paid. Operator shall promptly distribute the funds it receives to
            the Underproduced parties in that production that each Underproduced
            party's volume of gas in storage bears to the total of all
            Underproduced parties volumes for Gas in storage.

      C.    Responsibility and Liability for Collection

            Operator shall not be liable to any Underproduced party for the
            failure of any Overproduced party to any amounts owned pursuant to
            the terms hereof. In the event that any party fails to pay any sum
            due under the terms hereof after demand therefore by the Operator,
            the Operator may turn responsibility for the collection of such sum
            to the party or parties to whom it is owned, and Operator shall have
            no further responsibility in the event that such sums are not paid.
            Any party shall have the right after expiration of thirty (30) days
            after the Operator shall have provided a final accounting of the Gas
            balance to all parties hereto to demand on thirty (30) days advance
            written notice to both Operator and all Overproduced parties that
            any payments due to such party for such party's Underproduced
            volumes shall be paid directly to such party by the Overproduced
            party(s), rather than being paid through Operator. In the event that
            any Overproduced party pays to Operator any sums due to an
            Underproduced party at any time after thirty (30) days following the
            receipt of such written notification of a demand that such
            Underproduced party receive such payment directly, the Overproduced
            party(s) shall continue to be liable to such Underproduced party for
            any sums so paid, until such payment is actually received by such
            Underproduced party. In no event shall Operator be liable or
            responsible for any amount of cash settlement based on a value
            asserted by an Underproduced party different than the value
            calculated based on the volume statements and Cash Out Value
            provided by the Overproduced party or parties.

                                     Page 3
<PAGE>

      D.    Ownership changes

            In the event an Overproduced party intends to sell, assign, exchange
            or otherwise transfer any of its interest in a Well located on the
            Contract Area, such Overproduced party shall notify in writing the
            other working interest owners who are parties hereto in such Well of
            such fact within forty-five (45) days prior to closing the
            transaction. Any Underproduced party may demand of such Overproduced
            party in writing within twenty (20) days after receipt of the
            Overproduced party's notice of intent to sell, assign, exchange or
            otherwise transfer its interest in a Well, a cash settlement of its
            underproduction attributed to such Overproduced party's
            Overproduction in the Well. Any Underproduced party electing to cash
            settle with the Overproduced party shall thereby indemnify and hold
            the Overproduced party harmless against any causes of action,
            claims, losses or other actions which may be claimed by any third
            party, including, but not limited to, any purchaser of the Gas of
            the Underproduced party, as a result of the cash settlement. The
            Operator shall be notified of any such demand and of any cash
            settlement pursuant to this Paragraph IV.D., and the Gas balance
            accounts of the parties shall be adjusted accordingly. Any cash
            settlement pursuant to this Paragraph IV.D. shall be on the same
            basis as otherwise set forth in Paragraphs IV.A. through IV.C.
            hereof.

V.    Miscellaneous

      A.    Term

            This agreement shall remain in force and effect as long as the
            Operating Agreement to which it is attached remains in force and
            effect and thereafter until the Gas balance accounts between the
            parties are settled in full, and shall inure to the benefit of and
            be binding upon the parties hereto, their heirs, successors, legal
            representatives and assigns.

      B.    Expenses

            Nothing herein shall change or affect each party's obligations to
            pay its proportionate share of all costs and liabilities incurred in
            operations on the Contract Area as its share thereof is set forth in
            the Operating Agreement to which this Agreement is attached.

      C.    Well Tests

            Nothing herein shall be construed to deny any party the right, from
            time to time, to produce and take or deliver to its Gas purchaser up
            to one hundred percent (100%) of the entire well stream to meet the
            deliverability test required by its Gas purchaser, provided that
            such tests are reasonable in light of overall industry standards.

      D.    Monitoring of Takes of Production

            Each party shall, at all times, use its best efforts to regulate its
            takes and deliveries from each well on said Contract Area so that no
            well will be shut-in for overproducing the allowable assigned
            thereto by the regulatory body having jurisdiction. Additionally,
            each party shall communicate, as necessary, the contents of this
            agreement to its respective Gas purchaser(s) or transporter(s) and
            shall monitor its deliveries to its respective Gas Purchaser(s) or
            transporter(s) so as to ensure to the greatest extent practicable
            that its Gas purchaser(s) or transporter(s) does not take Gas in
            excess of the quantities provided for herein.

      E.    Method of Tax Accounting

            In the event Internal Revenue Service regulations require a uniform
            method of computing taxable income by all parties, each party agrees
            to compute and report income to the Internal Revenue Service based
            on the quantity of Gas taken for its account (the cumulative method)
            in accordance with such regulations.

                                     Page 4
<PAGE>
                                   EXHIBIT "F"

Attached to and made a part of that certain Operating Agreement dated January
15, 2004, by and between Ivanhoe Energy (USA) Inc., as Operator and Derek
Resources (U.S.A.) Inc., as Non-Operator.

                Equal Opportunity & Non-Segregation Of Facilities
                          Certifications and Agreements

This contract shall be performed by Operator in compliance with all applicable
laws, proclaimed, order, rules and regulations, including, without limitation,
the following:

1.    Equal Employment Opportunity

      A.    Equal Opportunity Clause (41 CFR 60-1.4). (Applicable to all
            contracts for more than $10,000, individually; or if Operator has
            such contracts or subcontracts with the Government in any 12-month
            period which have an aggregate total value (or can reasonable be
            expected to have an aggregate total value) exceeding $10,000, the
            $10,000 or under exemption does not apply, and the contracts are
            subject to the order and the regulations issued pursuant thereto
            regardless of whether any single contract exceeds $10,000.)

The equal opportunity clause required by Executive Order 11246 of September 24,
1965, and prescribed in section 60-1.4 of Title 41 of the Code of Federal
Regulations is incorporated by reference (as permitted by section 60-1.4(d) of
said Regulations) as if set out in full at this point.

      B.    Certification of Nonsegregated Facilities (41 CFR 60-1.8).
            (Applicable only to contracts which are not exempt from the
            provisions of the Equal Opportunity Clause set out above.) Operator
            certifies that it does not, and will not, maintain or provide for
            its employees any segregated facilities at any of its
            establishments, and that it does not and will not permit its
            employees to perform their services at any location, under its
            control, where segregated facilities are maintained. Operator agrees
            that a breach of this certification is a violation of the Equal
            Opportunity Clause required by Executive Order 11246 of September
            24, 1965.

            As used in this certification, the term "segregated facilities"
            means any waiting rooms, work areas, rest rooms and wash room,
            restaurants and other eating areas, time clocks, locker rooms and
            other storage or dressing areas, parking lots, drinking fountains,
            recreation or entertainment areas, transportation, and housing
            facilities provided for employees which are segregated by explicit
            directive or are in fact segregated on the basis of race, color,
            religion, or national origin, because of habit, local custom, or
            otherwise.

            Operator further agrees that (except where it has obtained identical
            certifications from proposed subcontractors for specific time
            periods), it will obtain identical certifications from proposed
            subcontractors prior to the award of subcontractors exceeding
            $10,000 which are not exempt from the provisions of the Equal
            Opportunity Clause; that will forward that following notice to such
            proposed subcontractors (except where the proposed subcontractors
            have submitted identical certifications for specific time periods):

NOTICE TO PROSPECTIVE SUBCONTRACTORS OR REQUIREMENT FOR CERTIFICATIONS OF
NONSEGREGATED FACILITIES

            A certificate of Nonsegregated Facilities must be submitted prior to
            the award of a subcontract exceeding $10,000 which is not exempt
            from the provisions of the Equal Opportunity Clause. The
            certification may be submitted either for each subcontract or for
            all subcontracts during a period (i.e., quarterly, semiannually, or
            annually).

      C.    Affirmative Action Compliance Program (41 CFR 60-1.4). (Applicable
            only if Operator (a) has 50 or more employees, and (b) has a
            contract for $50,000 or more). If required under Section 60-1.4 of
            Title 41 of Code of Federal Regulations, Operator certifies that it
            has developed, or agrees to develop, a written affirmative action
            program for each of its establishments within 120 days from the
            effectiveness of this contract or the first of the contracts of
            sale. Operator shall maintain such program until such time as it is
            no longer required by law or regulation. Operator shall maintain a
            copy of separate program for each establishment, including
            evaluation of utilization of minority group personnel and the job
            classifications tables, at each local office responsible for the
            personnel matters of such establishment.

      D.    Employer Information Report (41 CFR 60-1.7). (Applicable only if
            Operator (a) had 50 or more employees, (b) is non exempt pursuant to
            41 CFR 60-1.5 from the requirement for filing Employer Information
            Report EEO-0, and (c) has a contract or subcontract amounting to
            $50,000 or more.)

                                     Page 1
<PAGE>

      If required under Section 60-1.7 of Title 41 of the Code of Federal
      Regulations to file, the Employer Information Report, Standard Form 100
      (EEO-0), or such forms as may hereinafter be promulgated in its place, in
      accordance with the applicable instructions and will continue to file such
      report unless and until Operator is not required to so file by law or
      regulation.

2.    AFFIRMATIVE ACTION FOR DISABLED VETERANS AND VETERANS OF THE VIETNAM ERA

      A.    Affirmative Action Clause (41 CFR 60-250.4). (Applicable only to
            contracts for $10,000 or more.)

            The affirmative action clause prescribed in Section 60-250.4 of the
            Code of Federal Regulations is incorporated by reference (as
            permitted by Section 60-250.22 of said Regulations) as if set out in
            full at this point.

      B.    Affirmative Action Program (41 CFR 60-250.5). (Applicable to
            contracts for $10,000 or more only if Operator (a) has 50 or more
            employees and (b) holds a contract of $50,000 or more.)

            The affirmation action program prescribed in sections 60-250.22 of
            said Regulations) as if set out in full at this point.

3.    AFFIRMATIVE ACTION FOR HANDICAPPED WORKERS

      A.    Affirmative Action Clause (41 CFR 60-741.4). (Applicable to
            contracts for $2,500 or more.)

            The affirmative action clause prescribed in Section 60-741.4 of
            Title 41 of the Code of Federal Regulations is incorporated herein
            by reference (as permitted by Section 60-741.22 of said Regulations)
            as if set out in full at this point.

      B.    Affirmative Action Program (41 CFR 60-741.5). (Applicable to
            contracts for $2,500 or more only if Operator (a) has 50 or more
            employees and (b) holds a contract of $50,000 or more.)

            The affirmative action program prescribed in Sections 60-741.5 and
            60-741.6 of Title 41 of the Code of Federal Regulations is
            incorporated by reference (as permitted by Section 60-741.22 of said
            Regulations) as if set out in full at this point.

4.    MINORITY BUSINESS ENTERPRISES 41 CFR 1-1.13, FEDERAL PROCUREMENT
      REGULATIONS)

      A.    Utilization of Minority Business Enterprises (41 CFR 1-131310-2
            (a)). (Applicable only to contracts which may exceed $10,000 except
            those, and all subcontracts thereunder, to be performed entirely
            outside the United States, its possessions, and Puerto Rico, and
            those of services of a personal nature.)

            (1)   It is the policy of the Government that minority business
                  enterprises shall have the maximum practicable opportunity to
                  participate in the performance of Government contracts.

            (2)   Operator agrees to use its best efforts to carry out this
                  policy in the award of its subcontracts to the fullest extent
                  consistent with the efficient performance of this contract. As
                  used in this contract, the term "minority business
                  enterprises" means a business, at least 50% of which is owned
                  by minority group members or, in case of publicly owned
                  businesses, at least 51 percent of the stock of which is owned
                  by minority group members. For the purposes of this
                  definition, minority group members are Negroes, Spanish
                  speaking American persons, American-Oriental,
                  American-Indians, American-Eskimos, and American-Aleut.
                  Operator may rely on written representation by subcontractors
                  regarding their status as minority business enterprises in
                  lieu of an independent investigation.

      B.    Minority Business Enterprises Subcontracting Program (41 CFR
            1-131310-2(b)). (Applicable to all contracts which may exceed
            $500,000 which contain the clause required by 41 CFR 1-1.1310-2(a)
            and which offer substantial subcontracting possibilities.)

            (1)   Operator agrees to establish and conduct a program which will
                  enable minority business enterprises (as defined in the above
                  clause entitled "Utilization of Minority business
                  enterprises') to be considered fairly as subcontractors and
                  suppliers under this contract. In this connection, Operator
                  shall:

                  (a)   Designate a liaison officer who will administer
                        Operator's minority business enterprises program.

                  (b)   Provide adequate and timely consideration of the
                        potentialities of known minority business enterprises in
                        all "make-or buy" decisions.

                                     Page 2
<PAGE>

                  (c)   Assure that known minority business enterprises will
                        have an equitable opportunity to compete for
                        subcontracts, particularly by arranging solicitations,
                        time for the preparation of bids, quantities,
                        specification, and delivery schedules so as to
                        facilitate the participation of minority business
                        enterprises.

                  (d)   Maintain records showing (i) procedures which have been
                        adopted to comply with the policies set forth in this
                        clause, including the establishment of a source list of
                        minority business enterprises, (ii) awards to minority
                        business enterprises on the source list, and (iii)
                        specific efforts to identify and award contracts to
                        minority business enterprises.

                  (e)   Include the Utilization of Minority Business Enterprises
                        clause in subcontracts which offer substantial minority
                        business enterprises subcontracting opportunities.

                  (f)   Cooperate with the Contracting Officer in any studies
                        and surveys of Operator's minority business enterprises
                        procedures and practices that the Contracting Officer
                        may from time to time conduct.

                  (g)   Submit periodic reports of subcontracting to known
                        minority business enterprises with respect to the
                        records referred to in subparagraph (d), above, in such
                        form and manner and at such time (not more often than
                        quarterly) as the Contracting Officer may prescribe.

            (2)   Operator further agrees to insert, in any subcontract
                  hereunder which may exceed $500,000, provisions which shall
                  conform substantially to the language of this clause,
                  including this Paragraph (2), and to notify the Contracting
                  Officer of the names of such subcontractors.

                                     Page 3
<PAGE>
                                   EXHIBIT "H"

Attached to and made a part of that certain Operating Agreement dated January
15, 2004, by and between Ivanhoe Energy (USA) Inc., as Operator and Derek
Resources (U.S.A.) Inc., as Non-Operator.

                       Model Form Recording Supplement to
                   Operating Agreement and Financing Statement

      THIS AGREEMENT, entered into by and between Ivanhoe Energy (USA) Inc. dba
USA Ivanhoe Energy, Inc., in California (hereinafter referred to as "Operator")
and the signatory party or parties other than Operator (hereinafter referred to
individually as "Non-Operator", and collectively as "Non-Operators").

      WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A" (said land,
Leases and Interests being hereinafter called the "Contract Area"), and in any
instance in which the Leases or Interests of a party are not of record, the
record owner and the party hereto that owns the Interest or rights therein are
reflected on Exhibit "A";

      WHEREAS, the parties hereto have executed an Operating Agreement dated
January 15 ,2004 (herein the "Operating Agreement"), covering the Contract Area
for the purpose of exploring and developing such lands, Leases and Interests for
Oil and Gas; and

      WHEREAS, the parties hereto have executed this agreement for the purpose
of imparting notice to all persons of the rights and obligations of the parties
under the Operating Agreement and for the further purpose of perfecting those
rights capable of perfection.

      NOW, THEREFORE, in consideration of the mutual rights and obligations of
the parties hereto, it is agreed as follows:

      1.    This agreement supplements the Operating Agreement, which Agreement
            in its entirety is incorporated herein by reference, and all terms
            used herein shall have the meaning ascribed to them in the Operating
            Agreement.

      2.    The parties do hereby agree that:

            A.    The Oil and Gas Leases and/or Oil and Gas Interests of the
                  parties comprising the Contract Area shall be subject to and
                  burdened with the terms and provisions of this agreement and
                  the Operating Agreement, and the parties do hereby commit such
                  Leases and Interests to the performance thereof.

            B.    The exploration and development of the Contract Area for Oil
                  and Gas shall be governed by the terms and provisions of the
                  Operating Agreement, as supplemented by this agreement.

            C.    All costs and liabilities incurred in operations under this
                  agreement and the Operating Agreement shall be borne and paid,
                  and all equipment and materials acquired in operations on the
                  Contract Area shall be owned, by the parties hereto, as
                  provided in the Operating Agreement.

            D.    Regardless of the record title ownership to the Oil and Gas
                  Leases and/Oil and Gas Interests identified on Exhibit "A",
                  all production of Oil and Gas from the Contract Area shall be
                  owned by the parties as provided in the Operating Agreement;
                  provided nothing contained in this agreement shall be deemed
                  an assignment or cross-assignment of interests covered hereby.

            E.    Each party shall pay or deliver, or cause to be paid or
                  delivered, all burdens on its share of the production from the
                  Contract Area as provided in the Operating Agreement.

            F.    An overriding royalty, production payment, net profits
                  interest or other burden payable out of production hereafter
                  created, assignments of production given as security for the
                  payment of money and those overriding royalties, production
                  payments and other burdens payable out of production
                  heretofore created and defined as Subsequently Created
                  Interests in the Operating Agreement shall be (i) borne solely
                  by the party whose interest is burdened therewith, (ii)
                  subject to suspension if a party is required to assign or
                  relinquish to another party an interest which is subject to
                  such burden, and (iii) subject to the lien and security
                  interest hereafter provided if the party subject to such
                  burden fails to pay its share of expenses chargeable hereunder
                  and under the Operating Agreement, all upon the terms and
                  provisions and in the times and manner provided by the
                  Operating Agreement.

                                     Page 1
<PAGE>

            G.    The Oil and Gas Leases and/or Oil and Gas Interests which are
                  subject hereto may not be assigned or transferred except in
                  accordance with those terms, provisions and restrictions in
                  the Operating Agreement regulating such transfers. This
                  agreement and the Operating Agreement shall be binding upon
                  and shall inure to the benefit of the parties hereto, and
                  their respective heirs, devisees, legal representatives, and
                  assigns, and the terms hereof shall be deemed to run with the
                  leases or interests included within the lease Contract Area.

            H.    The parties shall have the right to acquire an interest in
                  renewal, extension and replacement leases, leases proposed to
                  be surrendered, wells proposed to be abandoned, and interests
                  to be relinquished as a result of non-participation in
                  subsequent operations, all in accordance with the terms and
                  provisions of the Operating Agreement.

            I.    The rights and obligations of the parties and the adjustment
                  of interests among them in the event of a failure or loss of
                  title, each party's right to propose operations, obligations
                  with respect to participation in operations on the Contract
                  Area and the consequences of a failure to participate in
                  operations, the rights and obligations of the parties
                  regarding the marketing of production, and the rights and
                  remedies of the parties for failure to comply with financial
                  obligations shall be as provided in the Operating Agreement.

            J.    Each party's interest under this agreement and under the
                  Operating Agreement shall be subject to relinquishment for its
                  failure to participate in subsequent operations and each
                  party's share of production and costs shall be reallocated on
                  the basis of such relinquishment, all upon the terms and
                  provisions provided in the Operating Agreement.

            K.    All other matters with respect to exploration and development
                  of the Contract Area and the ownership and transfer of the Oil
                  and Gas Leases and/or Oil and Gas Interest therein shall be
                  governed by the terms and provisions of the Operating
                  Agreement.

      3.    The parties hereby grant reciprocal liens and security interests as
            follows:

            A.    Each party grants to the other parties hereto a lien upon any
                  interest it now owns or hereafter acquires in Oil and Gas
                  Leases and Oil and Gas Interests in the Contract Area, and a
                  security interest and/or purchase money security interest in
                  any interest it now owns or hereafter acquires in the personal
                  property and fixtures on or used or obtained for use in
                  connection therewith, to secure performance of all of its
                  obligations under this agreement and the Operating Agreement
                  including but not limited to payment of expense, interest and
                  fees, the proper disbursement of all monies paid under this
                  agreement and the Operating Agreement, the assignment or
                  relinquishment of interest in Oil and Gas Leases as required
                  under this agreement and the Operating Agreement, and the
                  proper performance of operations under this agreement and the
                  Operating Agreement. Such lien and security interest granted
                  by each party hereto shall include such party's leasehold
                  interests, working interests, operating rights, and royalty
                  and overriding royalty interests in the Contract Area now
                  owned or hereafter acquired and in lands pooled or unitized
                  therewith or otherwise becoming subject to this agreement and
                  the Operating Agreement, the Oil and Gas when extracted
                  therefrom and equipment situated thereon or used or obtained
                  for use in connection therewith (including, without
                  limitation, all wells, tools, and tubular goods), and accounts
                  (including, without limitation, accounts arising from the sale
                  of production at the wellhead), contract rights, inventory and
                  general intangibles relating thereto or arising therefrom, and
                  all proceeds and products of the foregoing.

            B.    Each party represents and warrants to the other parties hereto
                  that the lien and security interest granted by such party to
                  the other parties shall be a first and prior lien, and each
                  party hereby agrees to maintain the priority of said lien and
                  security interest against all persons acquiring an interest in
                  Oil and Gas Leases and Interests covered by this agreement and
                  Operating Agreement by, through or under such party. All
                  parties acquiring an interest in Oil and Gas Leases and Oil
                  and Gas Interests covered by this agreement and the Operating
                  Agreement, whether by assignment, merger, mortgage, operation
                  of law, or otherwise, shall be deemed to have taken subject to
                  the lien and security interest granted by the Operating
                  Agreement and this instrument as to all obligations
                  attributable to such interest under this agreement and the
                  Operating Agreement whether or not such obligations arise
                  before or after such interest is acquired.

            C.    To the extent that the parties have a security interest under
                  the Uniform Commercial Code of the state in which the Contract
                  Area is situated, they shall be entitled to exercise the
                  rights and remedies of a secured party under the Code. The
                  bringing of a suit and the obtaining of judgment by a party
                  for the secured indebtedness shall not be deemed an election
                  of remedies or otherwise affect the lien rights or security
                  interest as security for the payment thereof. In addition,
                  upon default by any party in the payment of its share of
                  expenses, interest or fees, or upon the improper use of funds
                  by the Operator, the other parties shall have the right,
                  without prejudice to other rights or remedies, to collect from
                  the purchaser the proceeds from the sale of such defaulting
                  party's share of Oil and Gas until the amount

                                     Page 2
<PAGE>

                  owned by such party, plus interest, has been received, and
                  shall have the right to offset the amount owned against the
                  proceeds from the sale of such defaulting party or parties
                  stating the amount due as a result of the default, and all
                  parties waive any from the non-defaulting party or parties
                  stating the amount due as a result of the default, and all
                  parties waive any recourse available against purchasers for
                  releasing production proceeds as provided in this paragraph.

            D.    If any party fails to pay its share of expenses within one
                  hundred-twenty (120) days after rendition of a statement
                  therefore by Operator the non-defaulting parties, including
                  Operator, shall, upon request by Operator, pay the unpaid
                  amount in the proportion that the interest of each such party
                  bears to the interest of all such parties. The amount paid by
                  each party so paying its share of the unpaid amount shall be
                  secured by the liens and security rights described in this
                  Paragraph 3 and in the Operating Agreement, and each paying
                  party may independently pursue any remedy available under the
                  Operating Agreement or otherwise.

            E.    If any party does not perform all of its obligations under
                  this agreement of the Operating Agreement, and the failure to
                  perform subjects such party to foreclosure or execution
                  proceedings pursuant to the provisions of this agreement or
                  the Operating Agreement, to the extent allowed by governing
                  law, the defaulting party waives any available right of
                  redemption from and after the date of judgment, any required
                  valuation or appraisement of the mortgaged or secured property
                  prior to sale, any available right to stay execution or to
                  require a marshalling of assets and any required bond in the
                  event a receiver is appointed. In addition, to the extent
                  permitted by applicable law, each party hereby grants to the
                  other parties a power of sale as to any property that is
                  subject to the lien and security rights granted hereunder or
                  under the Operating Agreement, such power to be exercised in
                  the manner provided by applicable law or otherwise in a
                  commercially reasonable manner and upon reasonable notice.

            F.    The lien and security interest granted in this Paragraph 3.
                  supplements identical rights granted under the Operating
                  Agreement.

            G.    To the extent permitted by applicable law, Non-Operators agree
                  that Operator may invoke or utilize the mechanics' or
                  materialmen's lien law of the state in which the Contract Area
                  is situated in order to secure the payment to Operator of any
                  sum due under this agreement and the Operating Agreement for
                  services performed or materials supplied by Operator.

            H.    The above described security will be financed at the wellhead
                  of the well or wells located on the Contract Area and this
                  Recording Supplement may be filed in the land records in the
                  County or Parish in which the Contract Area is located, and as
                  a financing statement in all recording offices required under
                  the Uniform Commercial Code or other applicable state statutes
                  to perfect the above-described security interest, and any
                  party hereto may file a continuation statement as necessary
                  under the Uniform Commercial Code, or other state laws.

      4.    This agreement shall be effective as of the date of the Operating
            Agreement as above recited. Upon termination of this agreement and
            the Operating Agreement and the satisfaction of all obligations
            thereunder, Operator is authorized to file of record in all
            necessary recording offices a notice of termination, and each party
            hereto agrees to execute such a notice of termination as to
            Operator's interest, upon the request of Operator, if Operator has
            complied with all of its financial obligations.

      5.    This agreement and the Operating Agreement shall be binding upon and
            shall inure to the benefit of the parties hereto and their
            respective heirs, devisees, legal representatives, successors and
            assigns. No sale, encumbrance, transfer or other disposition shall
            be made by any party of any interest in the Leases or Interests
            subject hereto except as expressly permitted under the Operating
            Agreement and, if permitted, shall be made expressly subject to this
            agreement and the Operating Agreement and without prejudice to the
            rights of the other parties. If the transfer is permitted, the
            assignee of an ownership interest in any Oil and Gas Lease shall be
            deemed a party to this agreement and the Operating Agreement as to
            the interest assigned from and after the effective date of the
            transfer of ownership; provided, however, that the other parties
            shall not be required to recognize any such sale, encumbrance,
            transfer or other disposition for any purpose hereunder until thirty
            (30) days after they have received a copy of the instrument of
            transfer or other satisfactory evidence thereof in writing from the
            transferor or transferee. No assignment or other disposition of
            interest by a party shall relieve such party of obligations
            previously incurred by such party under this agreement or the
            Operating Agreement with respect to the interest transferred,
            including without limitation the obligation of a party to pay all
            costs attributable to an operation conducted under this agreement
            and the Operating Agreement in which such party has agreed to
            participate prior to making such assignment, and the lien and
            security interest granted by Article VII.B. of the Operating
            Agreement and hereby shall continue to burden the interest
            transferred to secure payment of any such obligations.

                                     Page 3
<PAGE>

      6.    In the event of a conflict between the terms and provisions of this
            agreement and the terms and provisions of the Operating Agreement,
            then, as between the parties, the terms and provisions of the
            Operating Agreement shall control.

      7.    This agreement shall be binding upon each Non-Operator when this
            agreement or a counterpart thereof has been executed by such
            Non-Operator and Operator notwithstanding that this agreement is not
            then or thereafter executed by all of the parties to which it is
            tendered or which are listed on Exhibit "A" as owning an interest in
            the Contract Area or which own, in fact, an interest in the Contract
            Area. In the event that any provision herein is illegal or
            unenforceable, the remaining provisions shall not be affected, and
            shall be enforced as if the illegal or unenforceable provision did
            not appear herein. ______________________________________ who has
            prepared and circulated this form for execution, represents and
            warrants that the form was printed from and, with the exception(s)
            listed below, is identical to the AAPL Form 610RS-1989 Model Form
            Recording Supplement to Operating Agreement and Financing Statement,
            as published in computerized form by Forms On-A-Disk, Inc. No
            changes, alterations, or modifications, other than those made by
            strikethrough and/or insertion and that are clearly recognizable as
            changes in Articles __________________, have been made to the form.

         IN WITNESS WHEREOF, this agreement shall be effective as of the 15th
day of January 2004.

ATTEST OR WITNESS:                          OPERATOR
                                            --------

                                            IVANHOE ENERGY (USA) INC.

_________________________________           By:________________________________

                                            Title:_____________________________

_________________________________           Date:______________________________

                                            NON-OPERATORS
                                            --------------

                                            DEREK RESOURCES (U.S.A.) INC.

_________________________________           By:________________________________

                                            Title:_____________________________

_________________________________           Date:______________________________

                                     Page 4<PAGE>
                                                                   Exhibit 10.22

                                FARMOUT AGREEMENT

                                     BETWEEN

                           RICHFIRST HOLDINGS LIMITED

                                    ("CITIC")

                                       AND

                            PAN-CHINA RESOURCES LTD.

                                  ("PAN-CHINA")

                                       AND

                               SUNWING ENERGY LTD.

                                   ("SUNWING")

                                       AND

                               IVANHOE ENERGY INC.

                                   ("IVANHOE")

                             DATED 18TH JANUARY 2004

                                                                          Page 1
<PAGE>

                                FARMOUT AGREEMENT

THIS AGREEMENT is entered into as of the 18th day of January 2004

BETWEEN:

         RICHFIRST HOLDINGS LIMITED, a company incorporated under the laws of
         the British Virgin Islands and having an office at Room 2118 Hutchinson
         House, Harcourt Road, Hong Kong, a wholly-owned subsidiary of CITIC
         Group

         ("CITIC")

AND:

         PAN-CHINA RESOURCES LTD., a company incorporated under the laws of the
         British Virgin Islands and having an office at 19th Floor, 101-6th
         Avenue S.W., Calgary, Alberta, Canada T2P 3T4

         ("PAN-CHINA")

AND:

         SUNWING ENERGY LTD., a company incorporated under the laws of Bermuda
         and having an office at 999 Canada Place, Suite 654, Vancouver, BC,
         Canada V6C 3E1

         ("SUNWING")

AND:

         IVANHOE ENERGY INC., a company incorporated under the laws of the
         Territory of the Yukon, Canada and having an office at 999 Canada
         Place, Suite 654, Vancouver, BC, Canada V6C 3E1

         ("IVANHOE")

CITIC and Pan-China and their respective successors and permitted assigns may
sometimes individually be referred to as a "Party" and collectively as the
"Parties". Sunwing and Ivanhoe may sometimes individually be referred to as a
"Company" and be collectively referred to as the "Companies".

WHEREAS:

(A)   Ivanhoe, an Affiliate of Pan-China and China International Trust and
      Investment Corporation, an Affiliate of CITIC on November 18, 2003 signed
      a Heads of Agreement ("HEADS OF AGREEMENT") for Acquisition of Interest in
      Kongnan Contract & Options to Convert, and this Agreement is entered into
      to set out the basis on which CITIC will obtain its Participating
      Interest;

(B)   Capitalised terms used in these recitals without definition have the
      meanings assigned to them in Section 1.1 hereof;

                                                                          Page 2
<PAGE>

(C)   Pan-China is the Contractor and Operator under the Petroleum Contract that
      contemplates Development Operations and Production Operations from the
      Contract Area, located in Hebei Province, PRC (the "KONGNAN PROJECT");

(D)   Pan-China has agreed to assign to CITIC a Participating Interest in the
      Contractor's Rights and Obligations under the Petroleum Contract on the
      terms hereinafter described; and

(E)   Sunwing and Ivanhoe have each agreed to provide an option to CITIC in
      relation to converting CITIC's investment into their respective shares on
      the terms of this Agreement.

NOW THEREFORE THIS AGREEMENT WITNESSES that, in consideration of the mutual
covenants and agreements herein contained, the parties hereto mutually agree as
follows:

                                     PART 1

                                 INTERPRETATION

DEFINITIONS

1.1   In this Agreement the following words and phrases have the indicated
assigned meanings:

      "AFFILIATE" means any person, partnership, joint venture, corporation or
      other form of enterprise which directly or indirectly controls, is
      controlled by, or is under common control with, a specified person. For
      purposes of the preceding sentence, "control" means possession, directly
      or indirectly of the power to direct or cause direction of management and
      policies through ownership of voting securities, contract, voting trust or
      otherwise;

      "BUSINESS DAY" means a day, other than a Saturday or Sunday, on which the
      banks in Hong Kong are open to the public for the transaction of business;

      "CITIC INTEREST" has the meaning assigned to it in Section 4.1;

      "CLOSING" shall occur at the offices of CITIC or such a place as the
      Parties agree within seven (7) Business Days of all Conditions Precedent
      having been either satisfied or waived;

      "CNPC" means China National Petroleum Corporation, a company organised
      under the laws of the PRC, and its successors and permitted assigns under
      the Petroleum Contract, and/or the laws and regulations of the PRC;

      "CNPC/PRC APPROVAL" means, individually or collectively, as the context
      requires, any approval of CNPC and/or a Governmental Authority in the PRC,
      which is a prerequisite to a particular act or omission under the terms of
      the Petroleum Contract;

      "CONDITIONS PRECEDENT" means the conditions precedent specified in Section
      4.2;

                                                                          Page 3
<PAGE>

      "CONTRACT AREA" has the meaning assigned to it in the Petroleum Contract;

      "CONTRACTOR" has the meaning assigned to it in the Petroleum Contract;

      "CONTRACTOR'S EXPENSES" means all items of outlay and expense whatsoever,
      wheresoever or howsoever incurred pursuant to the fulfilment, from time to
      time, of the Contractor's Obligations or otherwise incurred by the
      Operator in accordance with the terms of this Agreement;

      "CONTRACTOR'S OBLIGATIONS" means those covenants, liabilities and
      obligations required to be performed by the Contractor under the Petroleum
      Contract;

      "CONTRACTOR'S RIGHTS AND INTERESTS" means all of the Contractor's rights
      and interests in and to the Kongnan Project including the Contractor's
      rights and interests in the Petroleum Contract, the Contract Area, any
      Petroleum produced from the Contract Area and any assets comprising the
      Kongnan Project in which the Contractor has rights or holds an interest
      pursuant to the terms of the Petroleum Contract;

      "CONTRACTOR'S RIGHTS AND OBLIGATIONS" means, individually or collectively,
      as the context requires, the Contractor's Rights and Interests and the
      Contractor's Obligations;

      "DAGANG OILFIELD" has the meaning implied in the Petroleum Contract;

      "DEVELOPMENT COSTS" has the meaning assigned to it in the Petroleum
      Contract;

      "DEVELOPMENT OPERATIONS" has the meaning assigned to it in the Petroleum
      Contract;

      "DOLLARS" or the symbol "$" means lawful money of the United States of
      America;

      "EFFECTIVE DATE" means the date upon which CITIC gives written notice to
      Pan-China that all Conditions Precedent have either been satisfied or
      waived;

      "ENCUMBRANCE" means any mortgage, charge, pledge, hypothecation, security
      interest, lien, easement, right-of-way, encroachment, covenant, condition,
      right of re-entry, lease, license, assignment, option or claim or any
      other encumbrance, charge or any title defect of whatever kind or nature,
      regardless of form, whether or not registered or registrable and whether
      or not consensual or arising by law;

      "GOVERNMENTAL AUTHORITY" means any national, central, federal, provincial,
      state, municipal, county or regional government or quasi-governmental
      authority, domestic or foreign, and includes any ministry, department,
      commission, bureau, board, administrative or other agency or regulatory
      body or instrumentality thereof;

      "HEADS OF AGREEMENT" has the meaning assigned in Recital (A);

      "JMC" means the joint management committee created pursuant the Petroleum
      Contract to oversee Petroleum Operations;

      "JOINT OPERATING AGREEMENT" means the joint operating agreement in the
      form attached hereto as Appendix "A";

                                                                          Page 4
<PAGE>

      "KONGNAN PROJECT" has the meaning assigned to it in Recital (C);

      "OPERATOR" has the meaning assigned to it under the Joint Operating
      Agreement;

      "OVERALL DEVELOPMENT PROGRAM" has the meaning assigned to it in the
      Petroleum Contract;

      "PARTICIPANT" means a person having a Participating Interest;

      "PARTICIPATING INTEREST" means the undivided percentage interest, from
      time to time, of a Party in the Contractor's Rights and Obligations;

      "PAYMENT" has the meaning assigned to it in Section 4.4;

      "PETROLEUM CONTRACT" or "KONGNAN CONTRACT" means that certain contract
      entered into on the 8th day of September 1997 by and between CNPC and
      Pan-China;

      "PETROLEUM OPERATIONS" has the meaning assigned to it in the Petroleum
      Contract;

      "PRC" means the People's Republic of China; and

      "PRODUCTION OPERATIONS" has the meaning assigned to it in the Petroleum
      Contract.

1.2   For the purposes of this Agreement, except as otherwise expressly
provided:

      (a)   "this Agreement" means this Agreement, including the Appendices
            hereto, and not any particular part, section or other portion
            hereof, and includes any agreement, document or instrument entered
            into, made or delivered pursuant to the terms hereof, as the same
            may, from time to time, be supplemented or amended and in effect;

      (b)   all references in this Agreement to a designated "part", "section",
            "subsection" or other subdivision or to a schedule are references to
            the designated part, section, subsection or other subdivision of, or
            schedule to, this Agreement;

      (c)   the words "hereof", "herein", "hereto" and "hereunder" and other
            words of similar import refer to this Agreement as a whole and not
            to any particular part, section, subsection or other subdivision or
            schedule unless the context or subject matter otherwise requires;

      (d)   the division of this Agreement into parts, sections and other
            portions and the insertion of headings are for convenience of
            reference only and are not intended to interpret, define or limit
            the scope, extent or intent of this Agreement or any provision
            hereof;

      (e)   a reference to a statute in this Agreement includes all regulations
            made thereunder, all amendments to the statute or regulations in
            force from time to time, and any statute or regulation that
            supplements or supersedes such statute or regulations;

      (f)   the singular of any term includes the plural, and vice versa, and
            the use of any term is generally applicable to any gender and, where
            applicable, a body corporate, firm or other entity, and the word
            "or" is not exclusive and the word

                                                                          Page 5
<PAGE>

            "including" is not limiting whether or not not-limiting language
            (such as "without limitation" or "but not limited to" or words of
            similar import) is used with reference thereto;

      (g)   in the event that any date on which any action is required to be
            taken hereunder by any of the parties hereto is not a Business Day,
            such action shall be required to be taken on the next succeeding day
            which is a Business Day;

      (h)   unless otherwise provided herein, all references to currency in this
            Agreement are to lawful money of the United States of America; and

      (i)   all references to "approval", "authorisation", "consent" or
            "direction" in this Agreement means written approval, authorisation,
            consent or direction.

APPENDICES

1.3   Attached to and forming part of this Agreement is the following Appendix:

      Appendix "A" - Joint Operating Agreement

                                     PART 2

                         REPRESENTATIONS AND WARRANTIES

REPRESENTATIONS AND WARRANTIES OF EACH PARTY

2.1   Each Party represents and warrants to the other Party and to each Company
and each Company represents and warrants to the other Company and to each Party
that:

      (a)   is a body corporate duly incorporated, organised and validly
            subsisting under the laws of its jurisdiction of incorporation;

      (b)   it has full power and authority to carry on its business and to
            enter into this Agreement and any agreement or instrument referred
            to or contemplated in this Agreement;

      (c)   neither the execution and delivery of this Agreement nor any of the
            agreements referred to herein or contemplated hereby, nor the
            consummation of the transactions hereby contemplated conflicts with,
            results in a breach of or accelerates the performance required by
            any agreement to which it is a party;

      (d)   the execution and delivery of this Agreement and the agreements
            contemplated hereby will not violate or result in a breach of its
            constituent documents or the laws of any jurisdiction applicable or
            pertaining to the subject matter of this Agreement; and

      (e)   this Agreement constitutes a legal, valid and binding agreement
            enforceable against the warranting party in accordance with its
            terms.

                                                                          Page 6
<PAGE>

REPRESENTATIONS AND WARRANTIES OF PAN-CHINA

2.2   Pan-China represents and warrants to CITIC that:

      (a)   the Petroleum Contract is a legal, valid and binding agreement
            between Pan-China and CNPC made in accordance with the laws of the
            PRC and, to the best knowledge of Pan-China, remains in full force
            and effect as of the date of this Agreement;

      (b)   save and except for (i) CNPC/PRC Approval of the assignment of a
            Participating Interest to CITIC, and (ii) applicable stock exchange
            approvals related to CITIC's option to convert its Participating
            Interest pursuant to Section 4.6, no exemption, consent, approval,
            order or authorisation of, or registration or filing with, any
            court, Governmental Authority or any third party is required by
            Pan-China in connection with the execution and delivery of this
            Agreement or the consummation of the transactions contemplated
            hereby;

      (c)   to the best of Pan-China's knowledge, all of the Contractor's
            Obligations requiring performance on or before the date of this
            Agreement have been performed;

      (d)   to the best of Pan-China's knowledge, there is no existing or
            threatened litigation, arbitration or administrative proceedings
            relating to the Petroleum Contract or to the conduct of Petroleum
            Operations under the Petroleum Contract which might result in
            impairment or loss of the Contractor's Rights and Interests and
            there is no unsatisfied judgment, order, arbitral award or decision
            of any court, tribunal or arbitrator against Pan-China affecting the
            Kongnan Project or relating to the Petroleum Contract or relating to
            the conduct of Petroleum Operations under the Petroleum Contract;

      (e)   Pan-China is not in violation of any existing laws, rules or
            regulations of the PRC or of any provincial or local Governmental
            Authority in the PRC having jurisdiction over the Contract Area
            which materially affect or could materially affect the Kongnan
            Project;

      (f)   Pan-China is the legal and beneficial owner of one hundred percent
            (100%) of the Contractor's Rights and Obligations free and clear of
            Encumbrances;

      (g)   Pan-China is not insolvent and no receiver has been appointed over
            any part of its assets and no such appointment has been threatened;

      (h)   Pan-China is not in liquidation or official management and no
            proceedings have been brought or threatened for the purpose of
            winding up Pan-China or placing it under official management;

      (i)   Pan-China has received no notice of any material breach in relation
            to any of its obligations (in its capacity as Contractor or in its
            capacity as Operator) under the Petroleum Contract;

      (j)   there are no material defaults by any parties under the Petroleum
            Contract or in respect of the Contract Area;

                                                                          Page 7
<PAGE>

      (k)   all of Pan-China's obligations as Operator under the Petroleum
            Contract requiring performance on or before the date of this
            Agreement have been performed;

      (l)   Pan-China has not entered into, or agreed to enter into, any
            agreement, arrangement or understanding with any third party
            relating to the Contractor's Rights and Obligations which may
            preclude CITIC from earning the CITIC Interest or may otherwise
            prejudice CITIC's rights under this Agreement; and

      (m)   there are no environmental or other liabilities, claims or
            circumstances relating to the conduct of Petroleum Operations under
            the Petroleum Contract which may materially affect the Contractor's
            Rights and Obligations or CITIC's rights under this Agreement.

RELIANCE ON REPRESENTATIONS AND WARRANTIES

2.3   The Parties and Companies have relied upon the representations and
warranties set forth in Sections 2.1 and 2.2 in entering into this Agreement.

TIME AT WHICH REPRESENTATIONS AND WARRANTIES ARE MADE

2.4   The representations and warranties of each Party and each Company under
Sections 2.1 and 2.2 are made and given on the date of this Agreement and each
of them is taken to be repeated on the Effective Date and at Closing (references
to "date of this Agreement" in Section 2.2 are to be read as references to
"Effective Date" and "Closing" on those dates).

                                     PART 3

                          UNDERTAKINGS AND INDEMNITIES

PAN-CHINA'S OBLIGATIONS PRIOR TO CLOSING

3.1   Between the date of this Agreement and the Closing, Pan-China shall:

      (a)   inform and consult with CITIC on all material matters relating to
            the Petroleum Operations and, in particular, will not take any
            action in respect of the Petroleum Operations or the Petroleum
            Contract which would require a unanimous decision of the Operating
            Committee under Section 4.9 of the Joint Operating Agreement;

      (b)   continue to fulfil all obligations of the Contractor and Operator
            under the Petroleum Contract; and

      (c)   not create any Encumbrance over the Contractor's Rights and
            Obligations.

INDEMNITY GIVEN BY PAN-CHINA

3.2   Pan-China must indemnify, and keep indemnified, CITIC against all claims,
liabilities, costs, damages, losses or expenses suffered or incurred by CITIC
arising out of or in connection with:

                                                                          Page 8
<PAGE>

      (a)   the Petroleum Contract or the conduct of Petroleum Operations under
            the Petroleum Contract which accrue or relate to any period before
            the Effective Date; and

      (b)   any breach of this Agreement by Pan-China.

PAN-CHINA'S ADDITIONAL UNDERTAKINGS

3.3   Pan-China undertakes to CITIC that between the date of this Agreement and
Closing, except to the extent CITIC otherwise consents:

      (a)   (CORPORATE EXISTENCE) it will do all things necessary to maintain
            its corporate existence in good standing and will not transfer its
            jurisdiction of incorporation or enter any merger or consolidation;

      (b)   (COMPLIANCE WITH LAW) it will duly and punctually comply with all
            laws binding on it;

      (c)   (INFORMATION) it will furnish to CITIC promptly after their issue
            all documents issued by it as required by applicable law to its
            shareholders including, without limitation, its audited
            (consolidated and unconsolidated) balance sheet and profit and loss
            account and annual report;

      (d)   (CONSTITUTION) unless required by applicable law, it will not
            convene a meeting of its shareholders at which a resolution is to be
            put to alter its constitution;

      (e)   (LITIGATION) it will give notice to CITIC as soon as it becomes
            aware of all litigation, arbitration or similar proceedings to which
            it is a party involving a claim in excess of $5 million or its
            equivalent other than a claim which is fully insured against, unless
            the insurer has indicated it intends to deny liability;

      (f)   (DISPOSAL OF ASSETS) it will not, and will ensure that each of its
            subsidiaries will not, sell or otherwise dispose of all or a
            substantial part of its assets or agree or attempt to do so (whether
            in one or more related or unrelated transactions) except:

            (i)   disposals of assets in exchange for assets comparable in
                  value; and

            (ii)  disposals in the ordinary course of day to day trading;

      (g)   (NEGATIVE PLEDGE) it will not, and will ensure that each of its
            subsidiaries will not, create, permit, or suffer to exist any
            Encumbrance over all or any of its assets except for liens arising
            by operation of law in the ordinary course of day to day trading
            where it duly and punctually pays any indebtedness secured by such
            lien other than indebtedness contested in good faith; and

      (h)   (ALLOTMENT OF SECURITIES) it has not and will not, nor will it agree
            to nor grant any option to, allot or issue any capital or securities
            convertible into capital of Pan-China.

                                                                          Page 9
<PAGE>

                                     PART 4

                              ACQUISITION OF CITIC

                   PARTICIPATING INTEREST; OPTIONS TO CONVERT

ACQUISITION OF CITIC INTEREST

4.1   Subject to satisfaction of the Conditions Precedent and CITIC fulfilling
its obligations under Section 4.4, Pan-China will assign to CITIC at the Closing
a forty percent (40%) interest in the Contractor's Rights and Obligations (the
"CITIC INTEREST").

CONDITIONS PRECEDENT

4.2   Closing is subject to the satisfaction of the following conditions
precedent:

      (a)   CNPC giving its written consent to CITIC becoming a party to the
            Petroleum Contract;

      (b)   CNPC, Pan-China and CITIC executing an amending agreement to the
            Petroleum Contract to give effect to the amendments which CITIC
            considers necessary as a result of this Agreement and the Joint
            Operating Agreement;

      (c)   CNPC waiving its `right of first refusal' pursuant to Sections 23.2
            of the Petroleum Contract in relation to the acquisition by CITIC of
            the Participating Interest;

      (d)   All relevant PRC Governmental Authority approvals to this Agreement
            and the transactions contemplated in it being obtained;

      (e)   Completion of due diligence in respect of the Contract Area and the
            Contractor's Rights and Interests to the satisfaction of CITIC;

      (f)   CITIC and Pan-China entering into the Joint Operating Agreement and
            an agreement concerning any financial or other assistance to be
            provided by CITIC to Pan-China; and

      (g)   CITIC being satisfied that on the basis of such approvals or
            agreements as it may request including in relation to the Ivanhoe
            Shares an approval from Toronto Stock Exchange and on currently
            applicable rules, an exercise of the options under Section 4.6 will
            be possible without undue delay or expense to CITIC.

SATISFACTION OF CONDITIONS PRECEDENT

4.3   Each Party will:

      (a)   use all reasonable endeavours to achieve early satisfaction of the
            Conditions Precedent;

      (b)   do all things and execute all documents as are reasonably necessary
            to achieve the satisfaction of the Conditions Precedent as soon as
            practicable; and

                                                                         Page 10
<PAGE>

      (c)   keep each other informed regarding progress and their reasonable
            endeavours to satisfy the Conditions Precedent on a regular basis
            and will notify one another in writing when any Condition Precedent
            has been satisfied.

Either Party may terminate this Agreement by giving notice to the other Party
and the Companies if the Conditions Precedent have not been satisfied or waived
by March 15, 2004, or such later date as the Parties may agree in writing. If
this Agreement is terminated pursuant to this Section 4.3, the Parties and the
Companies shall be freed and discharged from all further obligations and
liabilities under this Agreement but without prejudice to any rights, remedies,
powers, obligations and liabilities in respect of this Agreement accrued at or
prior to the receipt of the notice of termination given pursuant to this Section
or to any continuing obligations under Section 6.

CONSIDERATION FOR CITIC INTEREST

4.4   In consideration for the CITIC Interest and following satisfaction of the
Conditions Precedent, CITIC will pay to Pan-China at Closing the sum of Twenty
Million Dollars ($20,000,000) without any deduction, withholding or setoff
whatsoever (the "PAYMENT"). The Payment will be used exclusively by Pan-China
for Development Costs for the initial development phase of the Overall
Development Program under the Kongnan Contract, including but not limited to
drilling, completing and producing new wells, producing existing wells,
installation of surface facilities and development of the water injection scheme
for the Kongnan Project.

PAYMENT IS A DEVELOPMENT COST

For the avoidance of doubt, the Payment constitutes a Development Cost for the
purposes of the Petroleum Contract and CITIC is entitled to its Participating
Interest share of investment recovery oil in respect of the Payment.

OPTIONS TO CONVERT PARTICIPATING INTEREST

4.6   CITIC may, subject to all applicable stock exchange approvals, elect by
notice to Sunwing and Pan-China to convert its Participating Interest into
Sunwing common shares at any time ("SUNWING OPTION PERIOD") prior to the first
anniversary of the date that Sunwing completes an initial public offering
("IPO"). The number of Sunwing common shares ("SUNWING SHARES") issuable to
CITIC upon conversion of its Participating Interest will be determined by
dividing the Payment (less any net cash flow received by CITIC on account of its
Participating Interest prior to conversion) by the "SUNWING CONVERSION PRICE".
If CITIC elects to convert at least 10 days prior to the completion date of
Sunwing's IPO, the Sunwing Conversion Price will be the IPO price per common
share, less a 10% discount. If CITIC elects to convert thereafter and within one
year after Sunwing's IPO, the Sunwing Conversion Price will be a price per share
equal to the volume weighted average trading price of Sunwing's common shares on
the principal stock exchange on which such shares are traded, for the 30 trading
days immediately preceding CITIC's conversion election, less an 8% discount. If
CITIC elects to convert its Participating Interest, Sunwing must allot and issue
the Sunwing Shares to CITIC within fourteen (14) days after CITIC has given
notice to Pan-China and Sunwing pursuant to this section and promptly deliver to
CITIC certificates issued by Sunwing in respect of the Sunwing Shares.

Instead of electing to convert into Sunwing Shares, CITIC may, subject to all
applicable stock exchange approvals, elect by notice to Pan-China and Ivanhoe to
convert its Participating

                                                                         Page 11
<PAGE>

Interest into Ivanhoe common shares at any time prior to eighteen months after
the Closing ("IVANHOE OPTION PERIOD") of CITIC's acquisition of its
Participating Interest. The number of Ivanhoe common shares ("IVANHOE SHARES")
issuable upon conversion of its Participating Interest will be determined by
dividing the Payment (less any net cash flow received by CITIC on account of its
Participating Interest prior to conversion) by the "IVANHOE CONVERSION PRICE".
The Ivanhoe Conversion Price will be a price per common share equal to the
volume weighted average trading price of Ivanhoe's common shares on the Toronto
Stock Exchange, for the 30 trading days preceding CITIC's conversion election,
less an 8% discount. If CITIC elects to convert its Participating Interest,
Ivanhoe must allot and issue the required number of Ivanhoe common shares to
CITIC within fourteen (14) days after CITIC has given notice to Pan-China and
Ivanhoe pursuant to this section and promptly deliver to CITIC certificates
issued by Ivanhoe in respect of the Ivanhoe Shares.

If the Sunwing Conversion Price or Ivanhoe Conversion Price when calculated in
the manner described above is not an amount in Dollars then it shall be
converted into Dollars by reference to the average (mean) exchange rate (middle
price) quoted by the Bank of China for the currency in which the Sunwing
Conversion Price or Ivanhoe Conversion Price (as the case may be) is calculated
and Dollars for the 30 day period preceeding CITIC's conversion election. Any
partial number of relevant common shares shall be rounded up to the next whole
number.

REASSIGNMENT OF CITIC'S INTEREST

4.7   On conversion of its interest pursuant to Section 4.6, the CITIC Interest
automatically is assigned to Pan-China and CITIC agrees to provide all
reasonable assistance to Pan-China to give effect to this reassignment. The
provisions of Part 10 and Part 11 of the Joint Operating Agreement do not apply
to a reassignment of CITIC's Interest pursuant to this Section 4.7.

NO LIABILITY AFTER REASSIGNMENT

4.8   On reassignment of CITIC's Participating Interest to Pan-China pursuant to
Section 4.7 ("REASSIGNMENT DATE"), CITIC has no further obligation and has no
liability in respect of the Participating Interest other than in respect of
obligations or liabilities that accrued or were incurred prior to the
Reassignment Date.

UNDERTAKINGS BY SUNWING AND IVANHOE

4.9   Each of Sunwing and Ivanhoe respectively undertakes to CITIC that from the
date of this Agreement to the end of the Sunwing Option Period or the Ivanhoe
Option Period (as applicable), except to the extent CITIC otherwise consents:

      (a)   (CORPORATE EXISTENCE) it will do all things necessary to maintain
            its corporate existence in good standing and will not transfer its
            jurisdiction of incorporation or enter any merger or consolidation;

      (b)   (COMPLIANCE WITH LAW) it will duly and punctually comply with all
            laws binding on it;

      (c)   (INFORMATION) it will furnish to CITIC promptly after their issue
            all documents issued by it as required by applicable law to its
            shareholders including, without limitation, its audited
            (consolidated and unconsolidated) balance sheet and profit and loss
            account and annual report; and

                                                                         Page 12
<PAGE>

      (d)   (LITIGATION) it will give notice to CITIC as soon as it becomes
            aware of all litigation, arbitration or similar proceedings to which
            it is a party involving a claim in excess of $5 million or its
            equivalent other than a claim which is fully insured against, unless
            the insurer has indicated it intends to deny liability.

WARRANTIES BY SUNWING AND IVANHOE

4.10   Each of Sunwing and Ivanhoe respectively warrants to CITIC that:

      (a)   (SECURITY INTERESTS) there will be, at the time CITIC exercises its
            option pursuant to Section 4.6, no Encumbrance on or over or
            affecting the Sunwing Shares or the Ivanhoe Shares (as applicable)
            and there is no agreement or arrangement to give or create any such
            Encumbrance;

      (b)   (CONSENT) it will be, at the time CITIC exercises its option
            pursuant to Section 4.6, entitled to allot the Sunwing Shares or the
            Ivanhoe Shares (as applicable) without the consent of any third
            parties; and

      (c)   (TITLE) on allotment and issue of the shares CITIC shall receive
            valid and marketable title to the Sunwing Shares or the Ivanhoe
            Shares (as applicable).

                                     PART 5

                          KONGNAN PROJECT PARTICIPATION

JOINT OPERATING AGREEMENT

5.1   The Parties agree that the Joint Operating Agreement will from the date on
which Closing occurs thereafter govern their ongoing joint participation in the
Kongnan Project. In the event of any conflict between the terms of the Joint
Operating Agreement and the terms of this Agreement, the terms of this Agreement
will prevail.

OPERATORSHIP

5.2   Pan-China is currently designated as the Operator under the Petroleum
Contract and, CNPC may in the circumstances described in the Petroleum Contract,
elect to become the Operator there under. Pan-China and CITIC agree that, unless
and until CNPC exercises its right to become the Operator under the Petroleum
Contract, Pan-China will act as Operator throughout the term of the Joint
Operating Agreement.

JMC REPRESENTATION

5.3   Under the terms of Petroleum Contract, the Contractor is entitled to
appoint three (3) representatives to the JMC, one of whom is to be designated
the Contractor's chief representative. Pan-China and CITIC hereby agree that the
Contractor's representatives on the JMC will, from time to time, consist of one
(1) individual selected by CITIC and two (2) individuals selected by Pan-China
and one of the individuals selected by Pan-China will be designated as the
Contractor's chief representative.

                                                                         Page 13
<PAGE>

                                     PART 6

                            CONFIDENTIAL INFORMATION

CONFIDENTIALITY INFORMATION

6.1   Pan-China and CITIC agree that this Agreement and all information and data
acquired or obtained by CITIC in respect of the Kongnan Project shall be
considered confidential and shall be kept confidential and shall not be
disclosed for a period ending two (2) years after the time when Pan-China and
CITIC are no longer joint Participants in the Kongnan Project, to any person or
entity, except:

      (a)   to an Affiliate, provided such Affiliate maintains confidentiality
            as provided in this Part;

      (b)   to the extent such data and information is required to be furnished
            in compliance with any applicable laws or regulations, or pursuant
            to any legal proceedings or because of any order of any court
            binding upon a Party;

      (c)   subject to this Section 5.1, to potential contractors, contractors,
            consultants (including financing consultants and advisors) and
            professional advisors employed by any Party where disclosure of such
            data or information is essential to such contractor's, consultant's
            or advisor's work;

      (d)   subject to this Section 5.1, to a bank or other financial
            institution to the extent appropriate to a Party arranging funding
            for its obligations under this Agreement;

      (e)   to the extent such data and information must be disclosed by a Party
            pursuant to any rules or requirements of any government or stock
            exchange having jurisdiction over such Party, or its Affiliates;
            provided that if any Party desires to disclose information in an
            annual or periodic report to its or its Affiliates' shareholders and
            to the public and such disclosure is not required pursuant to any
            rules or requirements of any government or stock exchange, then such
            party shall comply with Section 5.2; or

      (f)   where any data or information which, through no fault of a Party,
            becomes a part of the public domain.

Disclosure pursuant to Sections 5.1(c) or (d) shall not be made unless prior to
such disclosure the disclosing Party has obtained a written undertaking from the
recipient to keep the data and information strictly confidential and not to use
or disclose the data and information except for the express purpose for which
disclosure is to be made.

PUBLIC ANNOUNCEMENTS; EXCLUSIVITY

6.2   Except as required under applicable law or stock exchange requirements, or
under the Kongnan Contract, or in order to obtain a required approval from any
PRC Governmental Authority ("PUBLIC DISCLOSURE"), without the mutual consent of
the parties hereto, neither Party will disclose the existence of this Agreement
to any third party other than its professional advisors and only on the basis
that those advisors agree to maintain confidentiality in accordance with the
terms of this agreement. All necessary press releases and other Public

                                                                         Page 14
<PAGE>

Disclosure in required form shall be submitted by the disclosing party to the
other party for approval prior to the dissemination thereof unless such
requirement would prevent the disclosing party from complying with its timely
disclosure obligations under applicable law or stock exchange requirements.
Pan-China will not attempt to deal on its interest in the Kongnan Contract or
the Dagang Oilfield with any third party before Closing unless this Agreement
has been terminated by agreement in writing between the parties or by written
notice under Section 4.3.

CONTINUING OBLIGATIONS

6.3   As of the Effective Date, the confidentiality provisions of this Agreement
will be superseded and replaced by the confidentiality provisions contained in
the Joint Operating Agreement.

                                     PART 7

                               GENERAL PROVISIONS

NOTICES

7.1   Notices, demands or other communications ("COMMUNICATION") required or
permitted to be given or made hereunder:

      (a)   shall be in writing and delivered personally or sent by prepaid
            first class post with recorded delivery, e-mail, or by legible
            telefax addressed to the intended recipient as follows:

      in the case of CITIC addressed to:

      Richfirst Holdings Limited
      c/o China International Trust & Investment Corporation
      Rm 611, Capital Mansion
      #6 Xinyuan Nanlu, Chaoyang District
      Beijing, P.R.China 100004
      Fax No.:  +86-10-8486-3105
      Attention: Mr. Hu Yuqing, General Planning Department

      in the case of Pan-China addressed to:

      19th Floor, 101 - 6th Avenue S.W.
      Calgary, Alberta
      T2P 3P4
      Canada
      Fax No.:        +1-403-266-3772
      Attention:      President; and

      (b)   be signed by a person duly authorised by the sender; and

      (c)   will be taken to have been given or made:

            (i)   in the case of delivery in person, when delivered;

                                                                         Page 15
<PAGE>

            (ii)  in the case of facsimile transmission, on receipt by the
                  sender of a transmission control report from the despatching
                  machine showing the relevant number of pages and the correct
                  destination fax number and indicating that the transmission
                  has been made without error; or

            (iii) in the case of deliver by post, 7 Business Days after the date
                  of posting (if posted to an address in another country) or 2
                  Business Days after the date of posting (if posted to an
                  address in the same country),

            but if the result is that the Communication would be taken to be
            given or made on a day which is not a Business Day in the place to
            which the Communication is sent or is later than 4pm (local time),
            it will be taken to have been duly given or made at the commencement
            of business on the next Business Day in that place.

TIME

7.2   Time shall be of the essence as regards the provisions of this Agreement,
both as regards the times and periods mentioned herein and as regards any times
or periods which may, by agreement between the Parties, be substituted for them.

SEVERANCE

7.3   Any provision of this Agreement or part thereof is rendered void, illegal
or unenforceable in any respect under any law, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.

ENTIRE AGREEMENT

7.4   This Agreement supersedes any previous written or oral agreement between
the Parties in relation to the matters dealt with in this Agreement and contains
the whole agreement between the Parties relating to the subject matter of this
Agreement at the date hereof to the exclusion of any terms implied by law which
may be excluded by contract. Each of the Parties acknowledges that it has not
been induced to enter into this Agreement by any representation, warranty or
undertaking not expressly incorporated herein. So far as permitted by law and
except in the case of fraud, each Party agrees and acknowledges that its only
right and remedy in relation to any representation, warranty or undertaking made
or given in connection with this Agreement shall be for breach of the terms of
this Agreement to the exclusion of all other rights and remedies (including
those in tort or arising under statute).

AMENDMENT

7.5   Save as otherwise expressly provided herein, no modification, amendment or
waiver of any of the provisions of this Agreement shall be effective unless made
in writing specifically referring to this Agreement and duly signed by the
Parties.

ASSIGNMENT

7.6   Except for assignment as provided in Section 4.7 of this Agreement, no
Party may assign any of its rights or obligations under this Agreement without
the prior written consent of the other Party.

                                                                         Page 16
<PAGE>

COUNTERPARTS

7.7   This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together shall constitute one
and the same instrument.

GOVERNING LAW

7.8   This Agreement shall be governed by, construed, interpreted and applied in
accordance with the laws of Hong Kong, excluding any choice of law rules, which
would refer the matter to the laws of another jurisdiction.

DISPUTE RESOLUTION

7.9   The Parties shall make their best efforts to settle amicably through
consultation any dispute arising in connection with the performance or
interpretation of any provision hereof. Any dispute that has not been settled
through such consultation within thirty (30) days after a Party has notified the
other Party that it wishes to enter into consultation to resolve a dispute or
claim may be referred to arbitration at the Hong Kong International Arbitration
Centre (HKIAC) at the request of and by any Party. The Parties in dispute shall
each appoint one arbitrator and the two arbitrators so appointed shall designate
a third arbitrator. If one of the disputing Parties does not appoint its
arbitrator within fourteen (14) days after the first appointment, or if the two
arbitrators once appointed fail to appoint the third within fourteen (14) days
after the appointment of the second arbitrator, the HKIAC shall appoint an
independent arbitrator who does not have any financial interests in the dispute,
controversy or claim. All decisions and awards by the arbitration tribunal shall
be made by majority vote, shall be in writing with an explanation of the
reasoning for the decision or award. The place of arbitration shall be Hong
Kong. The arbitration tribunal shall conduct the arbitration in accordance with
the UNCITRAL Arbitration Rules (1976). The English language shall be the
official language used in the arbitral proceedings. All hearing materials,
statements of claim or defence, awards and the reasons supporting them shall be
written in English. Any award of the arbitration tribunal shall be final and
binding upon the parties. The right to arbitrate disputes under this Agreement
shall survive the termination of this Agreement.

The arbitral proceedings shall be confidential and any hearing before the
arbitral tribunal shall be held in camera. All such proceedings, the
documentation and information relevant to the proceedings (to the extent treated
as confidential by any Party), the award and the reasons for the award shall be
kept confidential by the parties and shall not be disclosed except as may be
permitted under Section 6.

Nothing in this Section 7.9 applies to or restricts in any way:

      (a)   disclosure of information to the arbitral tribunal; or

      (b)   disclosure of the arbitral proceedings, the award or the reasons for
            the award in the course of legal proceedings relating to the
            arbitration or the award or in the course of any other judicial,
            arbitral or administrative proceedings between the Parties.

SUCCESSORS AND ASSIGNS

7.10  This Agreement shall inure to the benefit of and be binding upon the
successors and permitted assigns of the Parties.

                                                                         Page 17
<PAGE>

WAIVER

7.11  No waiver by a Party of any one or more defaults by the other Party in the
performance of this Agreement shall operate or be construed as a waiver of any
future default or defaults by the same Party, whether of a like or of a
different character. Except as expressly provided in this Agreement no Party
shall be deemed to have waived, released or modified any of its rights under
this Agreement unless such Party has expressly stated, in writing, that it does
waive, release or modify such right.

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

RICHFIRST HOLDINGS LIMITED                 PAN-CHINA RESOURCES LTD.

Per: /s/ Mei Jing Zhang                    Per: /s/ Patrick Chua
     -----------------------------              -----------------------------
     Authorised Signatory                       Authorised Signatory

SUNWING ENERGY LTD.                        IVANHOE ENERGY INC.

Per: /s/ Patrick Chua                      Per: /s/ Patrick Chua
     -----------------------------              -----------------------------
     Authorised Signatory                       Authorised Signatory

                                                                         Page 18
<PAGE>

                                  APPENDIX "A"

                            JOINT OPERATING AGREEMENT
                                     ("JOA")

                                    COVERING

                                DAGANG OIL FIELD

                                       OF

                         THE PEOPLE'S REPUBLIC OF CHINA

                                     BETWEEN

                            PAN-CHINA RESOURCES LTD.

                                  ("PAN-CHINA")

                                       AND

                           RICHFIRST HOLDINGS LIMITED

                                    ("CITIC")

                               JANUARY 18TH, 2004

                                                                          Page 1
<PAGE>

                                TABLE OF CONTENTS

PART  1

1.1  -  Definitions............................................................7

1.2  -  Interpretation........................................................11

1.3  -  Schedules.............................................................12

PART 2  - JOINT PARTICIPATION

2.1  -  Participating Interests...............................................12

2.2  -  Contractor's Rights and Obligations...................................12

2.3  -  Observance of Petroleum Contract......................................13

2.4  -  Accounting Procedure..................................................13

2.5  -  Participation through Affiliates......................................13

2.6  -  Area of Interest......................................................14

PART 3  -  OPERATOR

3.1  -  Designation of Operator...............................................14

3.2  -  Rights and Duties of Operator.........................................14

3.3  -  Employees of Operator.................................................15

3.4  -  Information Supplied by Operator......................................16

3.5  -  Settlement of Claims and Lawsuits.....................................16

3.6  -  Liability of Operator.................................................17

3.7  -  Insurance Obtained by Operator........................................17

3.8  -  Commingling of Funds..................................................18

3.9  -  Resignation of Operator...............................................18

3.10 -  Default by Operator Under Petroleum Contract..........................18

PART 4  - OPERATING COMMITTEE

4.1  -  JMC Representation....................................................18

4.2  -  Establishment of Operating Committee..................................19

4.3  -  Powers and Duties of Operating Committee..............................19

4.4  -  Authority to Vote.....................................................19

4.5  -  Notice of Meeting.....................................................19

4.6  -  Contents of Meeting Notice............................................20

4.7  -  Location of Meetings..................................................20

4.8  -  Operator's Duties for Meetings........................................20

4.9  -  Voting Procedure......................................................20

4.10 -  Record of Votes.......................................................21

4.11 -  Minutes...............................................................21

                                                                          Page 2
<PAGE>

4.12 -  Voting by Notice......................................................21

4.13 -  Effect of Vote........................................................21

PART 5  -  OPERATIONS BY LESS THAN ALL PARTIES

5.1  -  Limitation on Applicability...........................................23

5.2  -  Procedure to Propose Exclusive Operations.............................23

5.3  -  Responsibility for Exclusive Operations...............................24

5.4  -  Consequences of Exclusive Operations..................................24

5.5  -  Premium to Participate in Exclusive Operations........................27

5.6  -  Order of Preference of Operations.....................................28

5.7  -  Stand-By Costs........................................................28

5.8  -  Miscellaneous.........................................................28

PART 6  -  WORK PROGRAMS

6.1  -  Review and Approval...................................................29

6.2  -  Authorisation for Expenditure ("AFE") Procedure.......................30

6.3  -  Overexpenditures of Work Programs and Budgets.........................31

6.4  -  Development...........................................................31

PART 7  -  DEFAULT

7.1  -  Default and Notice....................................................32

7.2  -  Operating Committee Meetings..........................................32

7.3  -  Allocation of Defaulted Accounts......................................32

7.4  -  Transfer of Interest..................................................33

7.5  -  Continuation of Interest..............................................34

7.6  -  Abandonment...........................................................34

7.7  -  Sale of Petroleum.....................................................34

7.8  -  No Right of Set Off...................................................34

PART 8 -  DISPOSITION OF PRODUCTION

8.1  -  Right and Obligation to Take in Kind..................................35

8.2  -  Offtake Agreement for Crude Oil.......................................35

8.3  -  Separate Agreement for Natural Gas....................................36

PART 9  -  SURRENDER, EXTENSIONS AND RENEWALS

9.1  -  Surrender.............................................................36

9.2  -  Extension of the Term.................................................37

PART 10  -  TRANSFER OF INTEREST OR RIGHTS

10.1  -  Obligations..........................................................37

10.2  -  Rights...............................................................39

                                                                          Page 3
<PAGE>

10.3  -  Reassignment pursuant to Section 4.7 of the Farmout Agreement........39

PART 11  -  WITHDRAWAL FROM AGREEMENT

11.1  -  Right of Withdrawal..................................................39

11.2  -  Partial or Complete Withdrawal.......................................39

11.3  -  Voting...............................................................40

11.4  -  Obligations and Liabilities..........................................40

11.5  -  Emergency............................................................40

11.6  -  Assignment...........................................................40

11.7  -  Approvals............................................................40

11.8  -  Abandonment Security.................................................41

11.9  -  Withdrawal or Abandonment by all Parties.............................41

11.10 -  Reassignment pursuant to Section 4.7 of the Farmout Agreement........41

PART 12 - RELATIONSHIP OF PARTIES AND TAX

12.1  -  Relationship of Parties..............................................41

12.2  -  Tax..................................................................41

PART 13  -  CONFIDENTIAL INFORMATION - PROPRIETARY TECHNOLOGY

13.1  -  Confidential Information.............................................42

13.2  -  Public Announcements.................................................43

13.3  -  Continuing Obligations...............................................43

13.4  -  Proprietary Technology...............................................43

PART 14  -  FORCE MAJEURE

14.1  -  Obligations..........................................................43

14.2  -  Definition of Force Majeure..........................................44

PART 15  -  EFFECTIVE DATE AND TERM

15.1  -  Effective Date.......................................................44

15.2  -  Term.................................................................44

PART 16  -  GENERAL PROVISIONS

16.1  -  Notices..............................................................44

16.2  -  Time is of the Essence...............................................46

16.3  -  Severance............................................................46

16.4  -  Entire Agreement.....................................................46

16.5  -  Amendment............................................................46

16.6  -  Counterparts.........................................................46

16.7  -  Governing Law........................................................46

16.8  -  Dispute Resolution...................................................46

                                                                          Page 4
<PAGE>

16.9  -  Conflicts of Interest................................................47

16.10 -  Successors and Assigns...............................................47

16.11 -  Waiver...............................................................48

SIGNATURES....................................................................48

                                                                          Page 5
<PAGE>

                                  APPENDIX "A"

                            JOINT OPERATING AGREEMENT

THIS AGREEMENT is entered into as of the 18th day of January, 2004

BETWEEN:

         RICHFIRST HOLDINGS LIMITED, a company incorporated under the laws of
         the British Virgin Islands and having an office at Room 2118 Hutchinson
         House, Harcourt Road, Hong Kong a wholly owned subsidiary of CITIC
         Group

         ("CITIC")

AND:

         PAN-CHINA RESOURCES LTD. a company incorporated under the laws of the
         British Virgin Islands and having an office at 19th Floor, 101-6th
         Avenue S.W., Calgary, Alberta, Canada

         ("PAN-CHINA")

WHEREAS:

(A)   Capitalised terms used in these recitals without definition have the
      meanings assigned to them in Section 1.1 hereof;

(B)   Pan-China is the Contractor under the Petroleum Contract which
      contemplates the Kongnan Project;

(C)   Pan-China has agreed to assign a forty percent (40%) Participating
      Interest to CITIC under the terms and conditions of the Farmout Agreement
      and subject to "Closing" as that term is defined in the Farmout Agreement,
      and

(D)   CITIC and Pan-China are entering into this Agreement to provide for their
      ongoing joint participation in the Kongnan Project.

NOW THEREFORE THIS AGREEMENT WITNESSETH that, in consideration of the mutual
covenants and agreements herein contained, the Parties hereby mutually agree as
follows:

                                                                          Page 6
<PAGE>

                                     PART 1

                         DEFINITIONS AND INTERPRETATION

DEFINITIONS

1.1   In this Agreement the following words and phrases have the following
meanings:

      "ACCOUNTING PROCEDURE" means the Accounting Procedure attached hereto as
      Schedule "A", subject to the same being hereafter amended by mutual
      agreement of the Parties;

      "AFE" means an authorisation for expenditure as specified in Section 6.2;

      "AGREED INTEREST RATE" means the rate of interest specified in Section
      7.1;

      "AFFILIATE" means any person, partnership, joint venture, corporation or
      other form of enterprise which directly or indirectly controls, is
      controlled by, or is under common control with, a Party. For purposes of
      the preceding sentence, "control" means possession, directly or indirectly
      of the power to direct or cause direction of management and policies
      through ownership of voting securities, contract, voting trust or
      otherwise;

      "AREA OF INTEREST" or "AMI" means the geographical area situated within a
      distance of two (2) kilometres from the outer perimeter of the Contract
      Area;

      "BUDGET" means estimates of investments and expenditures for a specified
      period of time for an item or the entirety of a Work Program. The term
      "Budget" shall mean, as the context requires, preliminary, proposed or
      finally adopted versions thereof, and revisions or supplements thereto;

      "BUSINESS DAY" means a day, other than a Saturday or Sunday, on which
      banks in Hong Kong, are open to the public for the transaction of
      business;

      "CNPC" means China National Petroleum Corporation, a company organised
      under the laws of the PRC, and its successors and permitted assigns under
      the Petroleum Contract;

      "CNPC/PRC APPROVAL" means, individually or collectively, as the context
      requires, any approval of CNPC and/or a Governmental Authority in the PRC,
      which is a prerequisite to a particular act or omission under the terms of
      the Petroleum Contract;

      "COMPLETION" means an operation intended to complete a well as a producer
      of Petroleum in one or more Zones, including, but not limited to, the
      setting of production casing, perforating, stimulating the well and
      production Testing conducted in such operation. "COMPLETE" and other
      derivatives of such term shall be construed accordingly;

      "CONSENTING PARTY" has the meaning assigned to it in Section 5.2(d);

      "CONTRACT AREA" has the meaning assigned to it in the Petroleum Contract;

                                                                          Page 7
<PAGE>

      "CONTRACTOR" has the meaning assigned to it in the Petroleum Contract;

      "CONTRACTOR'S EXPENSES" means all items of outlay and expense whatsoever,
      wheresoever or howsoever incurred pursuant to the fulfilment, from time to
      time, of the Contractor's Obligations or otherwise incurred by the
      Operator in accordance with the terms of this Agreement;

      "CONTRACTOR'S OBLIGATIONS" means those covenants, liabilities and
      obligations required to be performed by the Contractor under the Petroleum
      Contract;

      "CONTRACTOR'S RIGHTS AND INTERESTS" means all of the Contractor's rights
      and interests in and to the Kongnan Project including the Contractor's
      rights and interests in the Petroleum Contract, the Contract Area, any
      Petroleum produced from the Contract Area and any assets comprising the
      Kongnan Project in which the Contractor has rights or holds an interest
      pursuant to the terms of the Petroleum Contract;

      "CONTRACTOR'S RIGHTS AND OBLIGATIONS" means, individually or collectively,
      as the context requires, the Contractor's Rights and Interests and the
      Contractor's Obligations;

      "CRUDE OIL" has the meaning assigned to it in the Petroleum Contract;

      "DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION" has the meaning assigned
      to it in the Petroleum Contract;

      "DEEPENING" means an operation whereby a well is drilled to an objective
      Zone below the deepest Zone in which the well was previously drilled, or
      below the deepest Zone proposed in the associated Work Program, whichever
      is the deeper and DEEPEN and other derivatives shall be construed
      accordingly;

      "DEFAULTING PARTY" has the meaning assigned to it in Section 7.1;

      "DEVELOPMENT OPERATIONS" has the meaning assigned to it in the Petroleum
      Contract;

      "DISCOVERY" means the discovery of an accumulation of Petroleum whose
      existence until that time was unknown;

      "DOLLARS" or the symbol "$" means lawful money of the United States of
      America;

      "EFFECTIVE DATE" means the date on which "Closing", as that term is
      defined in the Farmout Agreement occurs;

      "ENCUMBRANCE" means any mortgage, charge, pledge, hypothecation, security
      interest, lien, easement, right-of-way, encroachment, covenant, condition,
      right of re-entry, lease, license, assignment, option or claim or any
      other encumbrance, charge or any title defect of whatever kind of nature,
      regardless of form, whether or not registered or registrable and whether
      or not consensual or arising by law;

      "EXCLUSIVE OPERATION" means those operations and activities carried out
      pursuant to Part 5 of this Agreement, the costs of which are chargeable to
      the account of less than all of the Parties;

                                                                          Page 8
<PAGE>

      "EXCLUSIVE WELL" means a well drilled pursuant to an Exclusive Operation;

      "FARMOUT AGREEMENT" means the farmout agreement entered into as of the
      18th day of January, 2004 between Pan-China and CITIC pursuant to which
      CITIC acquired its Participating Interest;

      "FORCE MAJEURE" has the meaning ascribed to it in Section 14.2;

      "G & G DATA" means only geological, geophysical and geochemical data and
      other information that is not obtained through a well bore;

      "GOVERNMENTAL AUTHORITY" means any national, central, federal, provincial,
      state, municipal, county or regional governmental or quasi-governmental
      authority, domestic or foreign, and includes any ministry, department,
      commission, bureau, board, administrative or other agency or regulatory
      body or instrumentality thereof;

      "GROSS NEGLIGENCE" means any act or failure to act (whether sole, joint or
      concurrent) by a Party which was intended to cause, or which was in
      reckless disregard of or wanton indifference to, harmful consequences such
      Party knew, or should have known, such act or failure would have had on
      the safety or property of another person or entity, but shall not include
      any error of judgement or mistake made by such Party in the exercise in
      good faith of any function, authority or discretion conferred on the Party
      under this Agreement;

      "INDEMNITEES" has the meaning assigned to it in Section 3.6;

      "JMC" means the joint management committee created pursuant the Petroleum
      Contract to oversee Petroleum Operations;

      "JOINT ACCOUNT" means the accounts maintained by Operator in accordance
      with the provisions of this Agreement and of the Accounting Procedure for
      Joint Operations;

      "JOINT OPERATIONS" has the meaning assigned to it in Section 5.1;

      "KONGNAN PROJECT" means operations such as the Development Operations and
      Production Operations from the Contract Area, located in the Hebei
      Province, PRC;

      "LIBOR" means the seven-day term London Inter-Bank offered Rate for
      Dollars for similar amounts to the sums in question, quoted by Midland
      Bank in London at 11:00 am on the first business day in London of the
      relevant period;

      "NATURAL GAS" has the meaning assigned to it in the Petroleum Contract;

      "NET OPERATING CASH FLOW" means one hundred per cent (100%) of the revenue
      from the Contractor's allocation of Petroleum from Production Operations
      minus all Contractors' Expenses, calculated on the basis of a calendar
      month;

      "NON-CONSENTING PARTY" has the meaning assigned to it in Section 5.3;

      "NON-OPERATOR" means a Party to this Agreement who is not the Operator;

                                                                          Page 9
<PAGE>

      "OPERATING COMMITTEE" means the committee consisting of representatives of
      the Parties created pursuant to Part 4 to oversee the Operator's exercise,
      from time to time, of the Contractor's Rights and Interests and the
      performance of the Contractor's Obligations;

      "OPERATOR" means the Party designated as Operator under the Petroleum
      Contract if CNPC is not acting as operator under the Petroleum Contract,
      the Party selected under the terms of this Agreement to perform the duties
      assigned to the Operator hereunder;

      "OPPORTUNITY" has the meaning assigned to it in Section 2.6;

      "OVERALL DEVELOPMENT PROGRAM" has the meaning assigned to it in the
      Petroleum Contract;

      "PARTY" means a person or entity having a Participating Interest, and
      initially means Pan-China and CITIC;

      "PARTICIPATING INTEREST" means the undivided percentage interest, from
      time to time, of a Party in the Contractor's Rights and Obligations;

      "PAYMENT" has the meaning given in the Farmout Agreement;

      "PETROLEUM" has the meaning assigned to it in the Petroleum Contract;

      "PETROLEUM OPERATIONS" has the meaning assigned to it in the Petroleum
      Contract;

      "PLUGGING BACK" means a single operation whereby a deeper Zone is
      abandoned in order to attempt a Completion in a shallower Zone and "PLUG
      BACK" and other derivatives shall be construed accordingly;

      "PRC" means the People's Republic of China;

      "PRODUCTION AREA" has the meaning assigned to it in the Petroleum
      Contract;

      "PRODUCTION OPERATIONS" has the meaning assigned to it in the Petroleum
      Contract;

      "PETROLEUM CONTRACT" means that certain contract entered into on the 8th
      day of September 1997 by and between CNPC and Pan-China;

      "RECOMPLETION" means an operation whereby a Completion in a Zone is
      abandoned in order to attempt a Completion in a different Zone within the
      existing wellbore;

      "RECOMPLETE" and other derivatives shall be construed accordingly;

      "REWORKING" means an operation conducted in the wellbore of a well after
      it is Completed to secure, restore, or improve production in a Zone which
      is currently open to production in the wellbore including, but not limited
      to, well stimulation operations, but excluding any routine repair or
      maintenance work, or drilling, Sidetracking, Deepening, Completing,
      Recompleting, or Plugging Back of a well. "REWORK" and other derivatives
      shall be construed accordingly;

                                                                         Page 10
<PAGE>

      "SENIOR SUPERVISORY PERSONNEL" means any supervisory employee of a Party
      who functions as such Party's senior resident manager, or who directs all
      operations and activities of such Party in the country or region in which
      he is resident, but excluding all managers or supervisors who are
      responsible for or in charge of installations or facilities, onsite
      drilling, construction or production and related operations, or any other
      field operations;

      "SIDETRACKING" means the directional control and intentional deviation of
      a well from vertical so as to change the bottom hole location unless done
      to straighten the hole or to drill around junk in the hole or to overcome
      other mechanical difficulties and SIDETRACK and other derivatives shall be
      construed accordingly;

      "TESTING" means an operation intended to evaluate the capacity of a Zone
      to produce Petroleum;

      "TEST" and other derivatives shall be construed accordingly;

      "WORK PROGRAM" has the meaning assigned to it in the Petroleum Contract;
      and

      "ZONE" means a stratum of earth containing or thought to contain a common
      accumulation of Petroleum separately exploitable from any other common
      accumulation of Petroleum.

INTERPRETATION

1.2   For the purposes of this Agreement, except as otherwise expressly
provided:

      (a)   "this Agreement" means this Agreement, including the Schedules
            hereto, and not any particular Part, Section or other portion
            hereof, and includes any agreement, document or instrument entered
            into, made or delivered pursuant to the terms hereof, as the same
            may, from time to time, be supplemented or amended and in effect;

      (b)   all references in this Agreement to a designated "Part", "Section",
            "subsection" or other subdivision or to a Schedule are references to
            the designated part, section, subsection or other subdivision of, or
            schedule to, this Agreement;

      (c)   the words "hereof", "herein", "hereto" and "hereunder" and other
            words of similar import refer to this Agreement as a whole and not
            to any particular part, section, subsection or other subdivision or
            schedule unless the context or subject matter otherwise requires;

      (d)   the division of this Agreement into Parts, Sections and other
            portions and the insertion of headings are for convenience of
            reference only and are not intended to interpret, define or limit
            the scope, extent or intent of this Agreement or any provision
            hereof;

      (e)   a reference to a statute in this Agreement includes all regulations
            made thereunder, all amendments to the statute or regulations in
            force from time to time, and any statute or regulation that
            supplements or supersedes such statute or regulations;

                                                                         Page 11
<PAGE>

      (f)   the singular of any term includes the plural, and vice versa, and
            the use of any term is generally applicable to any gender and, where
            applicable, a body corporate, firm or other entity, and the word
            "or" is not exclusive and the word "including" is not limiting
            whether or not not-limiting language (such as "without limitation"
            or "but not limited to" or words of similar import) is used with
            reference thereto;

      (g)   in the event that any date on which any action is required to be
            taken hereunder by any of the Parties is not a Business Day, such
            action shall be required to be taken on the next succeeding day
            which is a Business Day;

      (h)   unless otherwise provided herein, all references to currency in this
            Agreement are to lawful money of the United States of America; and

      (i)   all references to "approval", "authorisation", "consent" or
            "direction" in this Agreement means written approval, authorisation,
            consent or direction.

SCHEDULES

1.3   Attached to and forming part of this Agreement is the following Schedule:

      Schedule "A" - Accounting Procedure

                                     PART 2

                               JOINT PARTICIPATION

PARTICIPATING INTERESTS

2.1   The Participating Interests of Pan-China and CITIC in the Contractor's
Rights and Obligations will be:

      (a)   in the case of CITIC, a Participating Interest of forty percent
            (40%); and

      (b)   in the case of Pan-China, a Participating Interest of sixty percent
            (60%).

CONTRACTOR'S RIGHTS AND OBLIGATIONS

2.2   Except as otherwise expressly provided in the Farmout Agreement or this
Agreement:

      (a)   all of the Contractor's Rights and Interests including, without
            limitation, all of the Petroleum allocated to the Contractor from
            time to time pursuant to Production Operations, will be owned
            proportionately by the Parties in accordance with their respective
            Participating Interests;

      (b)   all of the Contractor's Obligations and all Contractor's Expenses
            incurred by the Operator in connection with Petroleum Operations
            will be borne by the Parties in accordance with their respective
            Participating Interests; and

                                                                         Page 12
<PAGE>

      (c)   unless otherwise provided in this Agreement, the obligations of the
            Parties under the Petroleum Contract and all liabilities and
            expenses incurred by Operator in connection with Joint Operations
            shall be charged to the Joint Account and all credits to the Joint
            Account shall be shared by the Parties, as among themselves, in
            accordance with their respective Participating Interests.

Each Party will pay, when due in accordance with the Accounting Procedure, its
Participating Interest share of Contractor's Expenses.

For the avoidance of doubt, the Payment is a Development Cost for the purposes
of the Petroleum Contract and CITIC is entitled to its Participating Interest
share of investment recovery oil in respect of the Payment.

OBSERVANCE OF PETROLEUM CONTRACT

2.3   The Parties acknowledge that their respective interests in the Kongnan
Project are derived from the Petroleum Contract and the Parties agree that they
will at all times use their mutual reasonable best efforts to observe the terms
of the Petroleum Contract, perform the Contractor's Obligations and otherwise
preserve the Contractor's Rights and Interests. In the event of any conflict
between the terms of the Petroleum Contract and the terms of this Agreement with
respect to the Contractor's Rights and Obligations, the terms of the Petroleum
Contract will prevail. With respect to the relationships of the Parties
regarding the conduct of Joint Operations, this Agreement and the Farmout
Agreement will prevail. In the event of any conflict between this Agreement and
the Farmout Agreement, the Farmout Agreement will prevail.

ACCOUNTING PROCEDURE

2.4   The Accounting Procedure will apply to:

      (a)   cash calls to the Parties to fund Contractor's Expenses from time to
            time;

      (b)   accounting as between the Parties with respect to the Contractor's
            Rights and Obligations;

      (c)   audit and inventory procedures and accounting reports; and

      (d)   all other accounting matters involving the Parties which would be
            resolved pursuant to an agreed accounting procedure among parties to
            an agreement of similar tenor to this Agreement.

PARTICIPATION THROUGH AFFILIATES

2.5   Notwithstanding anything in this Agreement to the contrary, a Party may,
at any time upon notice to the other Parties, assign its Participating Interest
to an Affiliate provided that the assigning Party will remain liable as
principal for all of its obligations under this Agreement and provided further
that any such assignment will be subject to the terms of the Petroleum Contract.

                                                                         Page 13
<PAGE>

AREA OF INTEREST

2.6   If, at any time during the term of this Agreement, a Party acquires an
interest or the right to acquire an interest of any nature whatsoever within the
Area of Interest which entitles or, if acquired, would entitle, the Party to
explore for, develop or produce Petroleum (an "OPPORTUNITY"), the Party will,
within fifteen (15) days of acquiring the Opportunity, notify the other Parties
with full particulars thereof. Within thirty (30) days of receiving the Party's
notice, each of the other Parties will notify the acquiring Party of its
election to accept or not accept the Opportunity and failure to respond will be
deemed to be an election to not accept the Opportunity. If all the other Parties
elect to accept the Opportunity, the non-acquiring Parties will reimburse the
acquiring Party for its out of pocket costs of acquiring the Opportunity and all
of the Parties will be entitled to participate therein in proportion to their
respective Participating Interests and, subject always to the legal and
contractual terms of the Opportunity, the Parties will, in good faith, negotiate
a definitive participation agreement which will, unless otherwise agreed,
contemplate joint participation in the Opportunity, and the rights and
obligations comprised therein, by the Parties in accordance with their
respective Participating Interests. If all the other Parties elect to not accept
the Opportunity, the acquiring Party will be free to pursue the Opportunity for
its own account. If some, but not all, the other Parties elect to accept the
Opportunity, they shall be entitled to share in the Opportunity with the
acquiring Party in proportion to their respective Participating Interests,
exclusive of the interests of the non-participating Parties.

                                     PART 3

                                    OPERATOR

DESIGNATION OF OPERATOR

3.1   Pan-China is currently designated as the Operator under the Petroleum
Contract and, CNPC may in circumstances described in the Petroleum Contract,
elect to become Operator thereunder. The Parties agree that, unless and until
CNPC exercises its right to become Operator under the Petroleum Contract,
Pan-China will act as Operator throughout the term of this Agreement.

RIGHTS AND DUTIES OF OPERATOR

3.2   The Parties acknowledge that the Operator has all of the rights, functions
and duties assigned to the Operator under the Petroleum Contract and the Parties
agree that the Operator will have exclusive charge of and shall conduct all
Petroleum Operations required to be carried out pursuant to the Contractor's
Obligations. In carrying out the Contractor's Obligations on behalf of the
Parties, the Operator will:

      (a)   perform Petroleum Operations in accordance with the provisions of
            the Petroleum Contract, this Agreement and the instructions of the
            Operating Committee;

      (b)   conduct all Petroleum Operations in a diligent, safe and efficient
            manner in accordance with good and prudent oil field practices
            generally followed by the international petroleum industry under
            similar circumstances;

                                                                         Page 14
<PAGE>

      (c)   subject to Section 3.6, neither gain a profit nor suffer a loss as a
            result of being the Operator in its conduct of Petroleum Operations;

      (d)   perform the duties for the Operating Committee set out in Part 4 and
            prepare and submit to the Operating Committee the proposed Work
            Programs and Budgets and AFE's as provided in Part 6;

      (e)   acquire all permits, consents, approvals, surface or other rights
            that may be required for or in connection with the conduct of
            Petroleum Operations;

      (f)   permit the representatives of any of the Parties to have, at all
            reasonable times and at their own risk and expense, reasonable
            access to the Petroleum Operations with the right to observe all
            such Petroleum Operations;

      (g)   maintain the Petroleum Contract in full force and effect, promptly
            pay and discharge all Contractor's Expenses and use its reasonable
            efforts to keep and maintain the Contractor's Rights and Interests
            free from all Encumbrances arising out of Petroleum Operations
            subject always to receipt by the Operator from the Parties of funds
            therefor;

      (h)   subject always to receipt by the Operator from the Parties of funds
            therefor, pay to the relevant Governmental Authority, within the
            periods and in the manner prescribed by the Petroleum Contract and
            all applicable laws and regulations, all periodic payments,
            royalties, taxes, fees and other payments pertaining to Petroleum
            Operations, but excluding any taxes measured by the incomes of the
            Parties.

      (i)   carry out the obligations of Operator pursuant to the Petroleum
            Contract, including, but not limited to, preparing and furnishing
            such reports, records and information as may be required pursuant to
            the Petroleum Contract;

      (j)   exercise, in accordance with the decisions of the Operating
            Committee, the right and obligation to represent the Parties in all
            dealings with CNPC and the relevant Governmental Authorities in the
            PRC with respect to matters arising under the Petroleum Contract and
            Petroleum Operations; provided that nothing in this subparagraph
            will derogate from CITIC's right to representation on the JMC
            pursuant to the terms of the Farmout Agreement; and

      (k)   take all necessary and proper measures for the protection of life,
            health, the environment and property in the case of an emergency;
            provided, however, that Operator shall immediately notify the
            Parties of the details of such emergency and measures.

EMPLOYEES OF OPERATOR

3.3   Subject always to the Petroleum Contract and this Agreement, the Operator
shall determine the number of employees, the selection of such employees, the
hours of work and the compensation to be paid all such employees in connection
with Petroleum Operations. Operator shall employ only such employees, agents and
contractors as are reasonably necessary to conduct Petroleum Operations. The
Operator, shall if required by CITIC, employ

                                                                         Page 15
<PAGE>

or take on secondment (as agreed by the Operator and CITIC) up to two (2) senior
staff nominated by CITIC and all associated costs shall be for the Joint
Account.

INFORMATION SUPPLIED BY OPERATOR

3.4   Operator shall provide the Parties the following data and reports as they
are currently produced or compiled from the Petroleum Operations:

      (a)   copies of all electrical logs or surveys;

      (b)   daily drilling progress reports;

      (c)   copies of all drill stem tests and core analysis reports;

      (d)   copies of plugging reports;

      (e)   copies of the final geological and geophysical maps and reports;

      (f)   engineering studies, development schedules and annual progress
            reports on development projects;

      (g)   field and well performance reports, including reservoir studies and
            reserve estimates;

      (h)   copies of all reports relating to Petroleum Operations furnished by
            Operator to CNPC or to any Governmental Authority in the PRC, except
            magnetic tapes which shall be stored by Operator and made available
            for inspection and/or copying at the sole expense of the Party
            requesting same;

      (i)   other reports as frequently as is justified by the activities or as
            instructed by the Operating Committee; and

      (j)   subject to Section 13.1, such additional information for the Parties
            as they or any of them may request, provided that the requesting
            Party pay the costs of preparation of such information and that the
            preparation of such information will not unduly burden Operator's
            administrative and technical personnel. Only Parties who pay such
            costs shall receive such additional information.

Operator shall give Parties access at all reasonable times to other data
acquired in the conduct of Petroleum Operations.

SETTLEMENT OF CLAIMS AND LAWSUITS

3.5   Operator shall promptly notify the Parties of any and all material claims
or suits which arise out of Petroleum Operations or relate in any way to
Petroleum Operations. Operator shall represent the Parties and defend or oppose
the claim or suit. Subject to the Petroleum Contract, Operator may in its sole
discretion compromise or settle any such claim or suit or any related series of
claims or suits for an amount not to exceed the equivalent of One Hundred
Thousand Dollars ($100,000.00) exclusive of legal fees. Operator shall obtain
the approval and direction of the Operating Committee on amounts in excess of
the that amount. Each Party shall have the right to be represented by its own
counsel at its own expense in the settlement, compromise or defence of such
claims or suits. Any Party shall promptly notify the other Parties of any

                                                                         Page 16
<PAGE>

claim made against such Party by a third party relating to or which may affect
the Petroleum Operations and insofar as such claim relates to or affects the
Petroleum Operations such Party shall defend or settle the same in accordance
with any directions given by the Operating Committee and such costs, expenses
and damages as are payable pursuant to such defence or settlement shall be paid
by the Parties in proportion to their Participating Interests. Notwithstanding
the foregoing, each Party shall have the right to participate in any such
pursuit, prosecution, defence or settlement conducted in accordance with the
above at its sole cost and expense; provided always that no Party may settle its
Participating Interest share of any claim without first satisfying the Operating
Committee that it can do so without prejudicing the Contractor's Rights and
Interests.

LIABILITY OF OPERATOR

3.6   Except as set out in this Section 3.6, the Party designated as Operator
shall bear no cost, expense or liability resulting from performing the duties
and functions of the Operator. Nothing in this Section 3.6 shall, however, be
deemed to relieve the Party designated as Operator from any cost, expense or
liability as a Party for its Participating Interest share of the Contractor's
Obligations. The Parties shall be liable in proportion to their Participating
Interests and shall defend and indemnify Operator and its consultants, agents,
employees, officers and directors (the "INDEMNITEES") from any and all costs,
expenses (including reasonable attorney's fees) and liabilities incident to
claims, demands or causes of action of every kind and character brought by or on
behalf of any person or entity for damage to or loss of property or the
environment, or for injury to, illness or death of any person or entity, which
damage, loss, injury, illness or death arises out of or is incident to any act
or failure to act by Indemnitees in the conduct of or in connection with
Petroleum Operations regardless of the cause of such damage, loss, injury,
illness or death and even though caused in whole or in part by a pre-existing
defect, the negligence (whether sole, joint or concurrent) Gross Negligence,
strict liability or other legal fault of Operator (or any such affiliate);
provided that if any senior supervisory personnel of Operator, engage in Gross
Negligence or wilful misconduct that proximately causes the Parties to incur
cost, expense or liability for such damage, loss, injury, illness or death, then
only Operator shall bear the actual cost, expense and liability to repair,
replace and/or remove property so damaged or lost, if any. Notwithstanding the
foregoing, under no circumstances shall any Indemnitee (except as a Party to the
extent of its Participating Interest) bear any cost, expense or liability for
environmental, consequential, punitive or any other similar indirect damages or
losses, including but not limited to those arising from business interruption,
reservoir or formation damage, inability to produce petroleum, loss of profits,
pollution control and environmental amelioration or rehabilitation.

INSURANCE OBTAINED BY OPERATOR

3.7   Operator shall procure and maintain or cause to be procured and maintained
all insurance in the types and amounts required by the Petroleum Contract and
applicable laws, rules and regulations. In addition, Operator shall obtain such
further insurance, at competitive rates, as the Operating Committee may from
time to time require. In respect of all insurance obtained pursuant to this
Section 3.7, the Operator shall:

      (a)   promptly inform the Parties when such insurance is obtained and
            supply them with copies of the relevant policies when the same are
            issued;

                                                                         Page 17
<PAGE>

      (b)   subject to the Petroleum Contract, arrange for the Parties,
            according to their respective Participating Interests, to be named
            as co-insureds on the relevant policies with waivers of subrogation
            in favour of all the Parties; and

      (c)   subject to the Petroleum Contract, duly file all claims and take all
            necessary and proper steps to collect any proceeds and credit any
            proceeds to the Parties in proportion to their respective
            Participating Interests.

Operator shall use its reasonable efforts to require all contractors performing
work in respect of Petroleum Operations to obtain and maintain any and all
insurance in the types and amounts required by any applicable laws, rules and
regulations or any decision of the Operating Committee and shall use its
reasonable efforts to require all such contractors to name the Parties as
additional insureds on contractors' insurance policies or to obtain from their
insurers waivers of all rights or recourse against Operator and the Parties.

COMMINGLING OF FUNDS

3.8   Operator may not commingle with its own funds the monies, which it
receives from or for the Joint Account pursuant to this Agreement. Monies
received from or for the Joint Account shall be applied only to their intended
use and shall in no way be deemed to be funds belonging to Operator.

RESIGNATION OF OPERATOR

3.9   The Operator may not resign as Operator except in accordance with the
Petroleum Contract and subject to receiving prior consent from CITIC.

DEFAULT BY OPERATOR UNDER PETROLEUM CONTRACT

3.10  A default by the Operator under the Petroleum contract is deemed to be a
default under this Agreement.

                                     PART 4

                               OPERATING COMMITTEE

JMC REPRESENTATION

4.1   Under the terms of Petroleum Contract, the Contractor is entitled to
appoint three (3) representatives to the JMC, one of whom is to be designated
the Contractor's chief representative. Pan-China and CITIC agree that the
Contractor's representatives on the JMC will, from time to time, consist of one
(1) individual selected by CITIC and two (2) individuals selected by Pan-China
and one of the individuals selected by Pan-China will be designated as the
Contractor's chief representative. Each Party shall cause its appointees to the
JMC to participate in and exercise all voting rights at JMC meetings in
accordance with directions given by the Operating Committee. Pan-China must
provide JMC notices and information in a timely manner to the CITIC
representative on the JMC.

                                                                         Page 18
<PAGE>

ESTABLISHMENT OF OPERATING COMMITTEE

4.2   To provide for the overall supervision and direction of the Contractor's
activities under the Petroleum Contract, the Parties will establish an Operating
Committee composed of representatives of each Party. Each Party shall appoint
one (1) representative and one (1) alternate representative to serve on the
Operating Committee. Each Party shall as soon as possible after the date of this
Agreement give notice in writing to the other Parties of the name and address of
its representative and alternate representative to serve on the Operating
Committee. Each Party shall have the right to change its representative and
alternate at any time by giving proper notice to such effect to the other
Parties.

POWERS AND DUTIES OF OPERATING COMMITTEE

4.3   The Operating Committee shall have power and duty to:

      (a)   authorise and supervise the exercise, from time to time, of the
            Contractor's Rights and Interests;

      (b)   authorise and supervise the fulfilment, from time to time, of the
            Contractor's Obligations;

      (c)   direct, authorise and supervise the participation in and the
            exercise of voting rights by the Contractor's representatives at the
            JMC meetings;

      (d)   approve all proposed Work Programs and related budgets prepared by
            the Operator prior to the submission thereof to JMC; and

      (e)   approve the Overall Development Program prepared by the Operator
            prior to the submission thereof to JMC, CNPC and the relevant
            Governmental Authorities in the PRC.

AUTHORITY TO VOTE

4.4   The representative of a Party or, in his absence, his alternate
representative, shall be authorised to represent and bind such Party with
respect to any matter which is within the powers of the Operating Committee and
is properly brought before the Operating Committee. Each such representative
shall have a vote equal to the Participating Interest of the Party such person
represents. Each alternate representative shall be entitled to attend all
Operating Committee meetings but shall have no vote at such meetings except in
the absence of the representative for whom he is the alternate. In addition to
the representative and alternate representative, each Party may also bring to
any Operating Committee meetings such technical and other advisors as it deems
appropriate.

NOTICE OF MEETING

4.5   Operator may call a meeting of the Operating Committee by giving notice to
the Parties at least seven (7) days in advance of such meeting and shall call a
meeting at least once every three (3) months to be held no more than seven (7)
days in advance of the quarterly JMC meeting. In addition, any Party may request
a meeting of the Operating Committee by giving proper notice to all the other
Parties. Upon receiving such request, Operator shall call such meeting for a
date not less than fifteen (15) days nor more than twenty (20) days after
receipt of

                                                                         Page 19
<PAGE>

the request. The notice periods above may only be waived with the unanimous
consent of all the Parties.

CONTENTS OF MEETING NOTICE

4.6   Each notice of a meeting of the Operating Committee shall contain:

      (a)   the date, time and location of the meeting; and

      (b)   an agenda of the matters and proposals to be considered and/or voted
            upon.

A Party, by notice to the other Parties given not less than three (3) days prior
to a meeting, may add additional matters to the agenda for a meeting. On the
request of a Party, and with the unanimous consent of all Parties, the Operating
Committee may consider at a meeting a proposal not contained in such meeting
agenda.

LOCATION OF MEETINGS

4.7   All meetings of the Operating Committee shall be held in Beijing, PRC, or
elsewhere as may be decided by the Operating Committee.

OPERATOR'S DUTIES FOR MEETINGS

4.8   With respect to meetings of the Operating Committee, Operator's duties
shall include, but not be limited to:

      (a)   timely preparation and distribution of the agenda together with all
            relevant papers and reports pertaining to items on the agenda;

      (b)   organisation and conduct of the meeting; and

      (c)   preparation of a written record or minutes of each meeting.

Operator shall have the right to appoint the chairman of the Operating
Committee.

VOTING PROCEDURE

4.9   Except as otherwise expressly provided in this Agreement, all decisions,
approvals and other actions of the Operating Committee on all proposals coming
before it under this Agreement shall be decided by the affirmative vote of one
or more Parties, then holding, in the aggregate, a simple majority of the
Participating Interests; provided however, a unanimous affirmative vote shall be
required to (a) amend or terminate the Petroleum Contract or (b) relinquish
portions of the Contract Area, subject to Section 9.1 or (c) approve an annual
Work Program and Budget, and AFE for additional work or newly proposed work
which is not included in the approved annual Work Program; provided, however, if
the Parties cannot agree on the Annual Work Program and Budget, the Operator
shall have the right to unilaterally submit an Annual Work Program and Budget to
JMC to satisfy the requirements of the Petroleum Contract, and all Parties will
be bound by the onward commitments outlined in the approved Overall Development
Program agreed with CNPC, as provided for in Article 6 of the Petroleum
Contract, or (d) an Overall Development Plan for an Oil Field (as defined in the
Petroleum Contract), including developing a Discovery for the Joint Operation,
subject in each case to the operation of Part 5, or (e) for either Party to
propose to abandon production from the

                                                                         Page 20
<PAGE>

Oil Field within the Contract Area or to recommence production pursuant to
Section 4.6.2.1 of the Petroleum Contract.

RECORD OF VOTES

4.10  The chairman of the Operating Committee shall appoint a secretary who
shall make a record at the meeting of each proposal voted on and the results of
such voting at each Operating Committee meeting. Each representative shall sign
and be provided a copy of such record at the end of such meeting and it shall be
considered the final record of the decisions of the Operating Committee.

MINUTES

4.11  The secretary shall provide each Party with a copy of the minutes of the
Operating Committee meeting within fifteen (15) days after the end of the
meeting. Each Party shall have fifteen (15) days after receipt of such minutes
to give the secretary notice of its objections to the minutes to the secretary.
A failure to give notice specifying objection to such minutes within such
fifteen (15) day period shall be deemed to be approval of such minutes. In any
event, the votes recorded by the secretary at the meeting under Section 4.10
shall take precedence over the minutes described above.

VOTING BY NOTICE

4.12  In lieu of a meeting, Operator may submit any proposal for a decision of
the Operating Committee by giving each representative notice describing the
proposal so submitted. Each Party shall communicate its vote by notice to
Operator and the other Parties within one of the following appropriate time
periods after receipt of Operator's notice:

      (a)   twenty-four (24) hours in the case of Petroleum Operations which
            involve the use of a drilling rig that is standing by in the
            Contract Area; or

      (b)   twenty (20) days in the case of all other proposals.

Except in the case of subparagraph (a), any Party may, by notice delivered to
all Parties within five (5) days of receipt of Operator's notice, request that
the proposal be decided at a meeting rather than by notice. In such an event,
that proposal shall be decided at an Operating Committee meeting duly called for
that purpose. Any Party failing to communicate its vote in a timely manner shall
be deemed to have voted against such proposal. If a meeting is not requested,
then at the expiration of the appropriate time period, Operator shall give each
Party a confirmation notice stating the tabulation and results of the vote.

EFFECT OF VOTE

4.13  All decisions taken by the Operating Committee pursuant to this Part,
shall be conclusive and binding on all the Parties, except that:

      (a)   if pursuant to this Part, a Joint Operation, other than an operation
            required under the terms of the Petroleum Contract to fulfil the
            Contractor's Obligations, has been properly proposed to the
            Operating Committee and the Operating Committee has not approved
            such proposal in a timely manner, then any Party shall have the
            right for the appropriate period specified below to propose in

                                                                         Page 21
<PAGE>

            accordance with Part 5, an Exclusive Operation involving operations
            essentially the same as those proposed for such Joint Operation as
            follows,

            (i)   for proposals involving the use of a drilling rig that is
                  standing by in the Contract Area, such right shall be
                  exercisable for twenty-four (24) hours after the time
                  specified in Section 4.12(a) has expired;

            (ii)  for proposals to develop a Discovery, such right shall be
                  exercisable for twenty (20) days after the date the Operating
                  Committee considered such proposal pursuant to Section 4.6 or
                  Section 4.12; and

            (iii) for all other proposals, such right shall be exercisable for
                  twenty (20) days after the date the Operating Committee
                  considered such proposal pursuant to Section 4.6 or Section
                  4.12;

      (b)   if a Party voted against any proposal which was approved by the
            Operating Committee and which could be conducted as an Exclusive
            Operation pursuant to Part 5 other than any proposal relating to the
            fulfilment of Contractor's Obligations, then such Party shall have
            the right not to participate in the operation contemplated by such
            approval. Any such Party wishing to exercise its right of
            non-consent must give notice of non-consent to all other Parties
            within ten (10) days (or within twenty-four (24) hours if the
            drilling rig to be used in such operation is standing by in the
            Contract Area) following Operating Committee approval of such
            proposal. The Parties that did not give notice of non-consent shall
            be Consenting Parties as to the operation contemplated by the
            Operating Committee approval, and shall conduct such operation as an
            Exclusive Operation under Part 5. Any Party that gave notice of
            non-consent shall be a Non-Consenting Party as to such Exclusive
            Operation;

      (c)   if the Consenting Parties to an Exclusive Operation under
            subparagraphs (a) or (b) above concur, then the Operating Committee
            may, at any time, pursuant to subparagraph (c), reconsider and
            approve, decide or take action on any proposal that the Operating
            Committee declined to approve earlier, or modify or revoke an
            earlier approval, decision or action; and

      (d)   once a Joint Operation for the drilling, Deepening, Testing,
            Sidetracking, Plugging Back, Completing, Recompleting, Reworking or
            plugging of a well, has been approved and commenced, such operation
            shall not be discontinued without the consent of the Operating
            Committee provided, however, that such operation may be
            discontinued, if,

            (i)   an impenetrable substance or other condition in the hole is
                  encountered which, in the reasonable judgement of Operator,
                  causes the continuation of such operation to be impractical;
                  or

            (ii)  other circumstances occur which, in the reasonable judgement
                  of Operator, causes the continuation of such operation to be
                  unwarranted and, after notice, the Operating Committee, within
                  the period required under Section 4.12(a), approves
                  discontinuing such operation.

                                                                         Page 22
<PAGE>

            On the occurrence of either of the above, Operator shall promptly
            notify the Parties that such operation is being discontinued
            pursuant to the foregoing, and any Party shall have the right to
            propose in accordance with Part 5 an Exclusive Operation to continue
            such operation.

                                     PART 5

                       OPERATIONS BY LESS THAN ALL PARTIES

LIMITATION ON APPLICABILITY

5.1   No operations may be conducted in furtherance of the Petroleum Contract
except as Petroleum Operations in which the Parties participate in the
Contractor's Rights and Obligations to the extent of their respective
Participating Interests ("JOINT OPERATIONS"), or as Exclusive Operations under
this Part. No Exclusive Operation shall be conducted which conflicts with a
Joint Operation. Petroleum Operations which are required to fulfil the
Contractor's Obligations must be proposed and conducted as Joint Operations
under Part 4, and may not be proposed or conducted as Exclusive Operations under
this Part. In addition, no Party may propose or conduct an Exclusive Operation
under this Part unless and until such Party has properly exercised its right to
propose an Exclusive Operation pursuant to Section 4.13. Subject to this Part,
any operation that may be proposed and conducted as a Joint Operation, other
than operations pursuant to an approved Overall Development Program, may be
proposed and conducted as an Exclusive Operation.

PROCEDURE TO PROPOSE EXCLUSIVE OPERATIONS

5.2   Subject to Section 5.1, if any Party proposes to conduct an Exclusive
Operation, such Party shall give notice of the proposed operation to all
Parties. Such notice shall specify that such operation is proposed as an
Exclusive Operation, the work to be performed, the location, the objectives, and
estimated cost of such operation. Any Party entitled to receive such notice
shall have the right to participate in the proposed operation by notifying the
Operator or the Party proposing the Exclusive Operation as follows:

      (a)   for proposals to Deepen, Test, Complete, Sidetrack, Plug Back,
            Recomplete or Rework involving the use of a drilling rig that is
            standing by in the Contract Area, any such Party wishing to exercise
            such right must so notify Operator within twenty-four (24) hours
            after receipt of the notice proposing the Exclusive Operation;

      (b)   for proposals to develop a Discovery, any Party wishing to exercise
            such right must so notify the proposing Party within twenty (20)
            days after receipt of the notice proposing the Exclusive Operation;
            and

      (c)   for all other proposals, any such Party wishing to exercise such
            right must so notify Operator within ten (10) days after receipt of
            the notice proposing the Exclusive Operation.

Failure of a Party to whom a proposal notice is delivered to properly reply
within the period specified above shall constitute an election by that Party not
to participate in the proposed operation. If all Parties properly exercise their
rights to participate, then the proposed

                                                                         Page 23
<PAGE>

operation shall be conducted as a Joint Operation. The Operator shall commence
such Joint Operation as promptly as practicable and conduct it with due
diligence. If less than all Parties entitled to receive such proposal notice
properly exercise their rights to participate, then:

      (d)   the Party proposing the Exclusive Operation, together with any other
            Parties who elect to participate (collectively "CONSENTING PARTIES")
            shall have the right to instruct Operator (subject to Section
            5.8(e)) to conduct the Exclusive Operation;

      (e)   if the Exclusive Operation is conducted, the Consenting Parties
            shall bear the sole liability and expense of such Exclusive
            Operation in a fraction, the numerator of which is such Consenting
            Party's Participating Interest and the denominator of which is the
            aggregate of the Participating Interests of the Consenting Parties
            or in such other proportion totalling one hundred per cent (100%) of
            such liability and expense as the Consenting Parties may agree; and

      (f)   if such Exclusive Operation has not been commenced within one
            hundred and eighty (180) days (excluding any extension specifically
            agreed by all Consenting Parties or allowed by the force majeure
            provisions of Part 14), the right to conduct such Exclusive
            Operation shall terminate. If any Party still desires to conduct
            such Exclusive Operation, written notice proposing such operation
            must be resubmitted to the Parties in accordance with Part 4 as if
            no proposal to conduct an Exclusive Operation had been previously
            made.

      Notwithstanding the foregoing, no Exclusive Operation may be undertaken if
      it would interfere with a previously approved and ongoing Joint Operation.

RESPONSIBILITY FOR EXCLUSIVE OPERATIONS

5.3   The Consenting Parties shall bear in accordance with the Participating
Interests agreed under Section 5.2(e) the entire cost and liability of
conducting an Exclusive Operation to the exclusion of any Party who does not
elect to participate (a "NON-CONSENTING PARTY") and shall indemnify the
Non-Consenting Parties from any and all costs and liabilities incurred incident
to such Exclusive Operation and shall keep the Contract Area free and clear of
all Encumbrances of every kind created by or arising from such Exclusive
Operation.

CONSEQUENCES OF EXCLUSIVE OPERATIONS

5.4   With regard to any Exclusive Operation:

      (a)   for so long as a Non-Consenting Party has the option to reinstate
            the rights it relinquished as established in Section 5.4(b), such
            Non-Consenting Party shall be entitled to have access concurrently
            with the Consenting Parties, to all data and other information
            relating to such Exclusive Operation, other than G & G Data obtained
            in an Exclusive Operation. If a Non-Consenting Party desires to
            receive and acquire the right to use such G & G Data, then such
            Non-Consenting Party shall have the right to do so by paying to the
            Consenting Parties its Participating Interest share of the cost
            incurred in obtaining such G & G Data;

                                                                         Page 24
<PAGE>

      (b)   subject to this Section 5.4, each Non-Consenting Party shall be
            deemed to have relinquished to the Consenting Parties, and the
            Consenting Parties shall be deemed to own, in proportion to their
            respective Participating Interests in the Exclusive Operation:

            (i)   all of each such Non-Consenting Party's right to participate
                  in further operations on any Discovery made in the course of
                  such Exclusive Operation; and

            (ii)  all of each such Non-Consenting Party's right pursuant to the
                  Petroleum Contract to take and dispose of Petroleum produced
                  and saved or to receive its Participating Interest Share of
                  Net Operating Cash Flow:

                  (A)   from the well in which such Exclusive Operation was
                        conducted, and

                  (B)   from any wells drilled to appraise or develop a
                        Discovery;

      (c)   a Non-Consenting Party shall have the following and only the
            following options to reinstate the rights it relinquished pursuant
            to this Section 5.4:

            (i)   if the Consenting Parties decide to appraise a Discovery made
                  in the course of an Exclusive Operation, the Consenting
                  Parties shall submit to each Non-Consenting Party the approved
                  appraisal program. For thirty (30) days (or forty-eight (48)
                  hours if the drilling rig which is to be used in such
                  appraisal program is standing by in the Contract Area) from
                  receipt of such appraisal program, each Non-Consenting Party
                  shall have the option to reinstate the rights it relinquished
                  pursuant to subparagraph (b) above and to participate in such
                  appraisal program. The Non-Consenting Party may exercise such
                  option by notifying Operator within the period specified above
                  that such Non-Consenting Party agrees to bear its
                  Participating Interest share of the expense and liability of
                  such appraisal program, to pay the lump sum amount as set out
                  in Section 5.5(a) and to pay the cash premium as set out in
                  Section 5.5(b);

            (ii)  if the Consenting Parties decide to develop a Discovery made
                  or appraised in the course of an Exclusive Operation, the
                  Consenting Parties shall submit to the Non-Consenting Parties
                  a development plan substantially in the form intended to be
                  submitted to CNPC and the relevant Governmental Authorities in
                  the PRC under the Petroleum Contract. For sixty (60) days from
                  receipt of such development plan or such lesser period of time
                  prescribed by the Petroleum Contract, each Non-Consenting
                  Party shall have the option to reinstate the rights it
                  relinquished pursuant to subparagraph (b) above and to
                  participate in such development plan. The Non-Consenting Party
                  may exercise such option by notifying the Operator within the
                  period specified above that such Non-Consenting Party agrees
                  to bear its Participating Interest share of the liability and
                  expense of such development plan and such future operating and
                  producing costs, to pay the lump sum amount as set out in
                  Section 5.5(a) and to pay the cash premium as set out in
                  Section 5.5(b); and

                                                                         Page 25
<PAGE>

            (iii) if the Consenting Parties decide to Deepen, Test, Complete,
                  Sidetrack, Plug Back, Recomplete or Rework an Exclusive Well
                  and such further operation was not included in the original
                  proposal for such Exclusive Well, the Consenting Parties shall
                  submit to the Non-Consenting Parties an authorisation for
                  expenditure outlining the Consenting Parties' best estimate of
                  the total funds required to carry out such further operation.
                  For thirty (30) days (or forty-eight (48) hours if the
                  drilling rig which is to be used in such operation is standing
                  by in the Contract Area) from receipt of such authorisation
                  for expenditure, each Non-Consenting Party shall have the
                  option to reinstate the rights it relinquished pursuant to
                  subparagraph (b) above and to participate in such operation.
                  The Non-Consenting Party may exercise such option by notifying
                  the Operator within the period specified above that such
                  Non-Consenting Party agrees to bear its Participating Interest
                  share of the liability and expense of such further operation,
                  to pay the lump sum amount as set out in Section 5.5(a) and to
                  pay the cash premium as set out in Section 5.5(b);

      (d)   if a Non-Consenting Party does not properly and in a timely manner
            exercise such option, including paying in a timely manner in
            accordance with Section 5.5, all lump sum amounts and cash premiums,
            if any, due to the Consenting Parties, such Non-Consenting Party
            shall have forfeited the options as set out in subparagraph (c)
            above and the right to participate in the proposed program, unless
            such program, plan or operation is materially modified or expanded;

      (e)   a Non-Consenting Party shall become a Consenting Party with regard
            to an Exclusive Operation at such time as the Non-Consenting Party
            gives proper notice pursuant to subparagraph (c) above provided that
            such Non-Consenting Party shall in no way be deemed to be entitled
            to any lump sum amount or cash premium paid as an incident to such
            Exclusive Operation. The Participating Interest of such
            Non-Consenting Party in such Exclusive Operation shall be its
            Participating Interest in the Contractor's Rights and Obligations.
            The Consenting Parties shall contribute in proportion to their
            respective Participating Interests in such Exclusive Operation, the
            Participating Interest of any Non-Consenting Party. If all Parties
            participate in the proposed operation, then such operation shall be
            conducted as a Joint Operation pursuant to Part 4; and

      (f)   if, after the expiry of the period in which a Non-Consenting Party
            may exercise its option to participate in a development plan, the
            Consenting Parties desire to proceed, each Non-Consenting Party to
            such development plan shall be deemed to have:

            (i)   forfeited all of its economic interest in that part of the
                  Contract Area or any other area covered by such development
                  plan, and

            (ii)  assumed a fiduciary duty to exercise its legal interest in the
                  Petroleum Contract to the extent it relates to any areas
                  covered by the development plan for the benefit of the
                  Consenting Parties.

      In either case such Non-Consenting Party shall be deemed to have withdrawn
      from this Agreement to the extent it relates to such area, even if the
      development plan is modified

                                                                         Page 26
<PAGE>

      or expanded subsequent to the commencement of operations under such
      development plan.

PREMIUM TO PARTICIPATE IN EXCLUSIVE OPERATIONS

5.5   Within thirty (30) days of the exercise of its option under Section
5.4(c):

      (a)   each such Non-Consenting Party shall pay in immediately available
            funds to the Consenting Parties who took the risk of such Exclusive
            Operations in proportion to their respective Participating Interests
            in such Exclusive Operations a lump sum amount payable Dollars .
            Such lump sum amount shall be equal to such Non-Consenting Party's
            Participating Interest share of all liabilities and expenses,
            including overhead, that were incurred in every Exclusive Operations
            relating to the Discovery, or well, as the case may be, in which the
            Non-Consenting Party desires to reinstate the rights it relinquished
            pursuant to Section 5.4(b), and that were not previously paid by
            such Non-Consenting Party; and

      (b)   in addition to Section 5.5(a), each such Non-Consenting Party shall
            pay in immediately available funds, in Dollars to such Consenting
            Parties in proportion to their respective Participating Interests a
            cash premium equal to the total of:

            (i)   five hundred per cent (500%) of such Non-Consenting Party's
                  Participating Interest share of all liabilities and expenses,
                  including overhead, that were incurred in any Exclusive
                  Operations relating to the obtaining of the portion of the G &
                  G Data which pertains to the Discovery, and that were not
                  previously paid by such Non-Consenting Party; plus

            (ii)  five hundred per cent (500%) of such Non-Consenting Party's
                  Participating Interest share of all liabilities and expenses,
                  including overhead, that were incurred in any Exclusive
                  Operations relating to the drilling, Deepening, Testing,
                  Completing, Sidetracking, Plugging Back, Recompleting and
                  Reworking of the exploration well which made the Discovery in
                  which the Non-Consenting Party desires to reinstate the rights
                  it relinquished pursuant to Section 5.4(b), and that were not
                  previously paid by such Non-Consenting Party; plus

            (iii) five hundred per cent (500%) of the Non-Consenting Party's
                  Participating Interest share of all liabilities and expenses,
                  including overhead, that were incurred in any Exclusive
                  Operations relating to the drilling, Deepening, Testing,
                  Completing, Sidetracking, Plugging Back, Recompleting and
                  Reworking of the appraisal well(s) which delineated the
                  Discovery in which the Non-Consenting Party desires to
                  reinstate the rights it relinquished pursuant to Section
                  5.4(b), and that were not previously paid by such
                  Non-Consenting Party.

                                                                         Page 27
<PAGE>

ORDER OF PREFERENCE OF OPERATIONS

5.6   Except as otherwise specifically provided in this Agreement, if any Party
desires to propose the conduct of an operation that will conflict with an
existing proposal for an Exclusive Operation, such Party shall have the right
exercisable for five (5) days, or twenty-four (24) hours if the drilling rig to
be used is standing by in the Contract Area, from receipt of the proposal for
the Exclusive Operation, to deliver to all Parties entitled to participate in
the proposed operation such Party's alternative proposal. Such alternative
proposal shall contain the information required under Section 5.2. Each Party
receiving such proposals shall elect by delivery of notice to Operator within
the appropriate response period set out in Sections 5.2(a) through (c) to
participate in one of the competing proposals. Any Party not notifying Operator
within the response period shall be deemed not to have voted. The proposal
receiving the largest aggregate Participating Interest vote shall have priority
over all other competing proposals. In the case of a tie vote, the Operator
shall choose among the proposals receiving the largest aggregate Participating
Interest vote. Operator shall deliver notice of such result to all Parties
entitled to participate in the operation within five (5) days of the end of the
response period, or twenty-four (24) hours if the drilling rig to be used is
standing by in the Contract Area. Each Party shall then have two (2) days (or
twenty-four (24) hours if the drilling rig to be used is standing by in the
Contract Area) from receipt of such notice to elect by delivery of notice to
Operator whether such Party will participate in such Exclusive Operation, or
will relinquish its interest pursuant to Section 5.4(b). Failure by a Party to
deliver such notice within such period shall be deemed an election not to
participate in the prevailing proposal.

STAND-BY COSTS

5.7   When an operation has been performed, all tests have been conducted and
the results of such tests furnished to the Parties, stand by costs incurred
pending response to any Party's notice proposing an Exclusive Operation for
Deepening, Testing, Sidetracking, Completing, Plugging Back, Recompleting,
Reworking or other further operation in such well (including the period required
under Section 5.6 to resolve competing proposals) shall be charged and borne as
part of the operation just completed. Stand by costs incurred subsequent to all
Parties responding, or expiration of the response time permitted, whichever
first occurs, shall be charged to and borne by the Parties proposing the
Exclusive Operation in proportion to their Participating Interests, regardless
of whether such Exclusive Operation is actually conducted. If a further
operation is proposed while the drilling rig to be utilised is on location, any
Party may request and receive up to five (5) additional days after expiration of
the applicable response period specified in Sections 5.2(a) through (c) within
which to respond by notifying Operator that such Party agrees to bear all stand
by costs and other costs incurred during such extended response period. Operator
may require such Party to pay the estimated stand by time in advance as a
condition to extending the response period. If more than one Party requests such
additional time to respond to the notice, stand by costs shall be allocated
between such Parties on a day-to-day basis in proportion to their Participating
Interests.

MISCELLANEOUS

5.8   Under this Part:

      (a)   each Exclusive Operation shall be carried out by the Consenting
            Parties acting as the Operating Committee, subject to the provisions
            of this Agreement applied

                                                                         Page 28
<PAGE>

            mutatis mutandis to such Exclusive Operation and subject to the
            terms and conditions of the Petroleum Contract;

      (b)   the computation of liabilities and expenses incurred in Exclusive
            Operations, including the liabilities and expenses of Operator for
            conducting such operations, shall be made in accordance with the
            principles set out in the Accounting Procedure;

      (c)   Operator shall maintain separate books, financial records and
            accounts for Exclusive Operations which shall be subject to the same
            rights of audit and examination as provided in the Accounting
            Procedure. Such rights of audit and examination shall extend to each
            of the Consenting Parties and each of the Non-Consenting Parties so
            long as the latter are, or may be, entitled to elect to participate
            in such operations;

      (d)   Operator, if it is a Non-Consenting Party and it is conducting an
            Exclusive Operation for the Consenting Parties, shall be entitled to
            request cash advances and shall not be required to use its own funds
            to pay any cost and expense and shall not be obliged to commence or
            continue Exclusive Operations until cash advances requested have
            been made, and the Accounting Procedure shall apply to Operator in
            respect of any Exclusive Operations conducted by it; and

      (e)   if the Operator is a Non-Consenting Party to an Exclusive Operation
            to develop a Discovery then, subject to obtaining any necessary
            CNPC/PRC Approval, the Operator may resign but, in any event, shall
            resign, on the request of the Consenting Parties, as Operator for
            that portion of the Contract Area comprising such Discovery and,
            subject to the terms of the Petroleum Contract, the Consenting
            Parties shall select another Party to serve as Operator.

                                     PART 6

                                  WORK PROGRAMS

REVIEW AND APPROVAL

6.1   At least sixty (60) days prior to the date upon which the Operator is
obliged, under the Petroleum Contract, to submit to the JMC an annual Work
Program and Budget for the JMC's review and approval, the Operator will furnish
a draft of such Work Program and Budget to the Parties. Within thirty (30) days
of such delivery, the Operating Committee will meet to consider and approve the
draft Work Program and Budget with such modifications as the Operating Committee
determines are warranted and, immediately following such approval, the Operator
will submit the approved Work Program and Budget to the JMC for consideration in
accordance with the terms of the Petroleum Contract. If further modifications to
a Work Program and Budget approved by the Operating Committee are required prior
to approval thereof by the JMC, the Contractor's representatives on the JMC may
approve any such modifications on behalf of the Parties without further
consideration or approval by the Operating Committee.

                                                                         Page 29
<PAGE>

      (a)   During the preparation of the proposed Work Programs and Budgets and
            Development Plans contemplated in this Part 6, Operator shall
            consult with the Operating Committee or the appropriate
            subcommittees regarding the contents of such Work Programs and
            Budgets and Development Plans;

      (b)   Each Work Program and Budget and Overall Development Plan submitted
            by Operator shall contain an itemised estimate of the costs of Joint
            Operations and all other expenditures to be made for the Joint
            Account for the period covered by the Work Program and shall, inter
            alia

            (i)   identify each work category in sufficient detail to afford the
                  ready identification of the nature, scope and duration of the
                  activity in question;

            (ii)  include such reasonable information regarding Operator's
                  allocation procedures and estimated manpower costs as the
                  Operating Committee may determine;

            (iii) comply with the requirements of the Petroleum Contract;

      (c)   The Work Program and Budget shall designate the portion or portions
            of the Contract Area in which Joint Operations itemised in such Work
            Program and Budget are to be conducted and shall specify the kind
            and extent of such operations in such detail as the Operating
            Committee may deem suitable.

AUTHORISATION FOR EXPENDITURE ("AFE") PROCEDURE

6.2   Prior to incurring any commitment or expenditure for the Joint Account,
which is estimated to be in excess of One Hundred Fifty Thousand Dollars
($150,000.00) for any line item in an approved Work Program and Budget, Operator
shall send to each Party an AFE containing Operator's best estimate of the total
funds required to carry out such work, the estimated timing of expenditures and
any other necessary supporting information. The Parties shall sign the AFE
acknowledging their receipt of the AFE.

      (a)   Approval of an operation in the current Work Program and Budget
            shall authorise Operator to conduct the operation subject to Section
            6.3 of this Agreement without further authorisation from the
            Operating Committee.

      (b)   Each AFE proposed by the Operator shall:

            (i)   Identify the operation by specific reference to the applicable
                  line items in the Work Program and Budget;

            (ii)  Describe the work in detail;

            (iii) Contain Operator's best estimate of the total funds required
                  to carry out such work;

            (iv)  Outline the proposed work schedule;

            (v)   Provide a timetable of expenditures, if known; and

                                                                         Page 30
<PAGE>

            (vi)  Be accompanied by such other supporting information as is
                  necessary for an informed decision.

OVEREXPENDITURES OF WORK PROGRAMS AND BUDGETS

6.3   (a)   For expenditures on any line item of an approved Work Program
            and and Budget, Operator shall be entitled to make or incur without
            further approval of the Operating Committee overexpenditures for
            such line item up to ten (10) percent of the authorised amount for
            such line item; provided that the cumulative total of all
            overexpenditures for a Calendar Year shall not exceed five (5)
            percent of the total Budget in question. Operator may also spend
            amounts in excess of an approved Budget in order to safeguard and
            prevent injury or death, or to prevent damage to property or
            pollution, and shall report the amounts spent for that purpose to
            the Parties.

      (b)   At such time that Operator is reasonably certain that the percentage
            overexpenditure limits of Section 6.3(A) will be exceeded, Operator
            shall furnish a supplemental AFE for the estimated overexpenditures
            to the Operating Committee for its approval and shall provide the
            Parties with full details of such overexpenditures. Operator shall
            promptly give notice of the amounts of overexpenditures when
            actually incurred.

DEVELOPMENT

6.4   (a)   If the Operating Committee determines that a Discovery may be
            commercial, the Operator shall, as soon as practicable, deliver to
            the Parties a draft Overall Development Plan together with the first
            annual Work Program and Budget and provisional Work Programs and
            Budgets for the remainder of the development of the Discovery, which
            shall contain, inter alia:

            (i)   Details of the proposed work to be undertaken, personnel
                  required and expenditures to be incurred, including the timing
                  of same, on a Calendar Year basis;

            (ii)  An estimated date for the commencement of production;

            (iii) A delineation of the proposed Development Area; and

            (iv)  Any other information requested by the Operating Committee;

      (b)   After receipt of the draft Overall Development Plan, or earlier if
            necessary to meet any applicable deadline under the Petroleum
            Contract, the Operating Committee shall meet to consider, modify and
            then either approve or reject the draft Overall Development Plan and
            the first annual Work Program and Budget for the Development
            submitted by Operator. If the draft Overall Development Plan is
            approved by the Operating Committee, Operator shall, as soon as
            possible, deliver any notice of Commercial Discovery required under
            the Petroleum Contract and take such other steps as may be required
            under the Petroleum Contract to secure CNPC/PRC Approval. In the
            event CNPC or the Governmental Authority requires changes in the
            draft Overall Development

                                                                         Page 31
<PAGE>

            Plan, the matter shall be resubmitted to the Operating Committee for
            further consideration; and

      (c)   If the draft Overall Development Plan approved by the Operating
            Committee is also approved by CNPC and the applicable Governmental
            Authorities, it shall be incorporated into and form part of annual
            Work Programs and Budgets, and Operator shall, on or before the 1st
            day of August of each Calendar Year, submit a Work Program and
            Budget for the Production Area, for the following Calendar Year.
            Within forty-five (45) Days after such submittal, the Operating
            Committee shall endeavour to agree on such Work Program and budget,
            including any necessary or appropriate revisions to the Work Program
            and Budget for the approved Overall Development Plan.

                                     PART 7

                                     DEFAULT

DEFAULT AND NOTICE

7.1   Any Party that fails to pay when due its Participating Interest share of
Contractor's Expenses including cash advances and interest accrued pursuant to
this Agreement (a "DEFAULTING PARTY") shall be in default under this Agreement.
Operator, or any other Party in the case of the default of Operator, shall
promptly give written notice of such default to the Defaulting Party and each of
the non-defaulting Parties. The amount not paid by the Defaulting Party shall
bear interest from the date due until paid in full. Interest will be calculated
using LIBOR, plus five percent (5%), herein called the "AGREED INTEREST RATE".

OPERATING COMMITTEE MEETINGS

7.2   After any default has continued for ten (10) Business Days from the date
of written notice of default under Section 7.1, and for as long thereafter as
the Defaulting Party remains in default on any payment due under this Agreement,
the Defaulting Party shall not be entitled to attend Operating Committee
meetings or to vote on any matter coming before the Operating Committee during
the period such default continues. Unless agreed otherwise by the non-defaulting
Parties, the voting interest of each non-defaulting Party shall be in the
proportion which its Participating Interest bears to the total of the
Participating Interests of all the non-defaulting Parties. Any matters requiring
unanimous vote of the Parties shall be deemed to exclude the Defaulting Party.
After the said ten (10) Business Days and while the Defaulting Party remains in
default as aforesaid, the Defaulting Party shall not have access to any data or
information relating to Petroleum Operations.

ALLOCATION OF DEFAULTED ACCOUNTS

7.3   Operator shall, either at the time of giving notice of default as provided
in Section 7.1, or by separate notice, notify each non-defaulting Party of the
sum of money it is to pay as its portion (such portion being in the ratio that
each non-defaulting Party's Participating Interest bears to the Participating
Interests of all non-defaulting Parties) of such amount in default. Each
non-defaulting Party shall, if such default continues, pay Operator, within ten
(10) Business Days after receipt of such notice, its share of the amount, which
the Defaulting Party

                                                                         Page 32
<PAGE>

failed to pay. If any non-defaulting Party fails to pay its share of the amount
in default as aforesaid, such non-defaulting Party shall thereupon be in default
and shall be a Defaulting Party subject to the provisions of this Part. The
non-defaulting Parties which pay the amount owed by any Defaulting Party shall
be entitled to receive their respective share of the principal and interest
payable by such Defaulting Party pursuant to Section 7.1. The total of all
amounts paid by the non-defaulting Parties for the Defaulting Party, together
with interest at the Agreed Interest Rate accrued on such amounts shall
constitute a debt due and owing by the Defaulting Party to the non-defaulting
Parties in proportion to such amounts paid. In addition, the non-defaulting
Parties may in the manner contemplated by this Part, satisfy such debt (together
with interest at the Agreed Interest Rate) and may accrue an amount equal to the
Defaulting Party's Participating Interest share of the estimated cost to abandon
the Contractor's Rights and Interests. A Defaulting Party may remedy its default
by paying to Operator the total amount due, together with interest calculated at
the Agreed Interest Rate, at any time prior to transfer of its interest pursuant
to Section 7.4, and upon receipt of such payment Operator shall remit to each
non-defaulting Party its proportionate share of such amount. The rights granted
to each non-defaulting Party pursuant to this Part, shall be in addition to, and
not in substitution for any other rights or remedies which each non-defaulting
Party may have at law, in equity, pursuant to the provisions of the Petroleum
Contract or pursuant to the other provisions of this Agreement.

TRANSFER OF INTEREST

7.4   For a period of thirty (30) days after the failure by the Defaulting Party
to remedy its default by the thirtieth (30th) day following notice of default,
without prejudice to any other rights of the non-defaulting Parties to recover
the amounts paid for the Defaulting Party, together with interest accrued on
such amount, each non-defaulting Party shall have the option to give notice to
the Defaulting Party requiring the Defaulting Party to transfer its interest to
the non-defaulting Parties. To that end, if any of the non-defaulting Parties so
elect, the Defaulting Party shall be deemed to have transferred and to have
empowered the electing non-defaulting Parties to execute on said Defaulting
Party's behalf any documents required to effect a transfer, of all of its right,
title and beneficial interest in and under this Agreement and the Petroleum
Contract to the electing non-defaulting Parties. If requested, each Party shall
execute a power of attorney in the form prescribed by the Operating Committee.
The Defaulting Party shall, without delay following any request from the
non-defaulting Parties, do any and all acts required to be done by applicable
law or regulation in order to render such transfer legally valid, including,
without limitation, the obtaining of CNPC/PRC Approval, and shall execute any
and all documents and take such other actions as may be necessary in order to
effect prompt and valid transfer of the interests described above, free of all
Encumbrances. In the event all such approvals are not timely obtained, the
Defaulting Party shall hold its Participating Interest in trust for such
non-defaulting Parties who elected to assume such Defaulting Party's
Participating Interest. In the absence of an agreement among the non-defaulting
Parties to the contrary, any such transfer to the non-defaulting Parties shall
be in the proportion that the non-defaulting Parties have paid the amounts due
from the Defaulting Party. Subject to Section 10.1(c), on the effective date of
such transfer the Defaulting Party shall forthwith cease to be a Party to the
extent of the Participating Interest so transferred. The acceptance or
non-acceptance by a non-defaulting Party of any portion of a Defaulting Party's
Participating Interest shall be without prejudice to any rights or remedies such
non-defaulting Party have to recover the outstanding debts (including interest)
owed by the Defaulting Party.

                                                                         Page 33
<PAGE>

CONTINUATION OF INTEREST

7.5   If, during the thirty (30) days after the failure by the Defaulting Party
to remedy its default by the thirtieth (30th) day following notice of default,
the non-defaulting Parties elect to not acquire the Defaulting Party's
Participating Interest as provided in Section 7.4 and to continue to bear the
Defaulting Party's Participating Interest share of Contractor's Expenses, then
the non-defaulting Party shall accumulate all such liabilities and expenses as a
debt pursuant to Part 7, but the Defaulting Party shall continue to be a Party
subject to Section 7.2 and Section 7.7. If Operator disposes of any of the
Contractor's Rights and Interests for valuable consideration, or if Operator
sells any of the Defaulting Party's Participating Interest share of the
Contractor's allocation of Petroleum, then, in respect of the Defaulting Party's
Participating Interest share of the proceeds of such disposal, credit or
adjustment or sale, Operator shall be entitled to retain and to set off the same
against all amounts, together with interest accrued on such amount, due and
owing from the Defaulting Party plus an accrued amount equal to the Defaulting
Party's Participating Interest share of the estimated cost to abandon the
Contractor's Rights and Interests. Any surplus remaining after setting off the
same as aforesaid shall be paid promptly to the Defaulting Party.

ABANDONMENT

7.6   If, within the thirty (30) days after the failure by the Defaulting Party
to remedy its default by the thirtieth (30th) day as aforesaid, no
non-defaulting Party elects to acquire the Defaulting Party's Participating
Interest as provided in Section 7.4, or to bear the Defaulting Party's
Participating Interest share of Contractor's Expenses as provided in Section
7.5, then no transfer shall be made and the Contractor's Rights and Interests
shall be abandoned subject to any necessary consents and notices being given,
and each Party, including the Defaulting Party shall pay its Participating
Interest share of all costs of abandoning and relinquishing the Contractor's
Rights and Interests. If abandonment occurs as aforesaid, all monies paid by the
non-defaulting Parties for the Defaulting Party pursuant to Section 7.3,
together with interest accrued on such amount, shall remain a debt due and owing
by the Defaulting Party.

SALE OF PETROLEUM

7.7   If a Party defaults after the Date of Commencement of Commercial
Production and has not remedied the default by the thirtieth (30th) day as
aforesaid, then, during the continuance of such default, the Defaulting Party
shall not be entitled to its Participating Interest share of the Contractor's
allocation of Petroleum from Production Operations which shall vest in and be
the property of the non-defaulting Parties, and Operator shall be authorised to
sell such Petroleum at the best price obtainable under the circumstances and,
after deducting all costs, charges and expenses incurred by Operator in
connection with such sale, pay the proceeds proportionately to the
non-defaulting Parties which proceeds shall be credited against all monies
advanced pursuant to Section 7.3, together with interest accrued thereon. Any
surplus remaining shall be paid to the Defaulting Party, and any deficiency
shall remain a debt due from the Defaulting Party to the non-defaulting Parties.
Notwithstanding any such sales by Operator, the provisions of Section 7.4 shall
continue to apply.

NO RIGHT OF SET OFF

7.8   Each Party acknowledges and accepts that a fundamental principle of this
Agreement is that each Party pays its Participating Interest share of all
amounts including, without limitation, Contractor's Expenses due under this
Agreement as and when required.

                                                                         Page 34
<PAGE>

Accordingly, any Party which becomes a Defaulting Party undertakes that, in
respect of either any exercise by the non-defaulting Parties of any rights under
or the application of any of the provisions of this Part, such Party shall not
raise by way of set off or invoke as a defence, whether in law or equity, any
failure to pay amounts due and owing under this Agreement or any alleged or
unliquidated claim that such Party may have against Operator or any other Party,
whether such claim arises under this Agreement or otherwise. Such Party further
undertakes not to raise by way of defence, whether in law or in equity, that the
nature or the amount of the remedies granted to the non-defaulting Party is
unreasonable or excessive.

                                     PART 8

                            DISPOSITION OF PRODUCTION

RIGHT AND OBLIGATION TO TAKE IN KIND

8.1   Except as otherwise provided in the Petroleum Contract or this Agreement,
each Party shall have the right and obligation to own, take in kind and
separately dispose of its Participating Interest share of the Contractor's
allocation of Petroleum pursuant to the Petroleum Contract from the Production
Area in such quantities and in accordance with such procedures as may be set
forth in the offtake agreement referred to in Section 8.2 or the separate
agreement for Natural Gas referred to in Section 8.3.

OFFTAKE AGREEMENT FOR CRUDE OIL

8.2   The Parties shall in good faith, and not less than three (3) months prior
to first delivery of Crude Oil from the Production Area, negotiate and conclude
the terms of an agreement to cover the offtake of the Contractor's allocation of
Crude Oil under the Petroleum Contract. The terms of the offtake agreement will
be consistent with the provisions of the Petroleum Contract, and shall make
provision for:

      (a)   The delivery point, at which title and risk of loss of Participating
            Interest shares of crude oil shall pass to the Parties (or as the
            Parties may otherwise agree);

      (b)   The Operator's regular periodic advice to the Parties of estimates
            of total available production for succeeding periods, quantities of
            each grade of crude oil and each Party's share for as far ahead as
            is necessary for Operator and the Parties to plan offtake
            arrangements. Such advice shall also cover for each grade of crude
            oil total available production and deliveries for the preceding
            period, inventory and overlifts and underlifts;

      (c)   Nomination by the Parties to Operator of acceptance of their shares
            of total available production for the succeeding period. Such
            nominations shall in any one period be for each Party's entire share
            of available production during that period subject to operational
            tolerances and agreed minimum economic cargo sizes or as the Parties
            may otherwise agree;

      (d)   If offshore loading or a shore terminal for vessel loading is
            involved, risks regarding acceptability of tankers, demurrage and
            (if applicable) availability of berths;

                                                                         Page 35
<PAGE>

      (e)   Elimination of overlifts and underlifts;

      (f)   Distribution to the Parties of available grades, gravities and
            qualities of crude oil to ensure, to the extent Parties take
            delivery of their entitlements as they accrue, that each Party shall
            receive in each period entitlements of grades, gravities and
            qualities of crude oil from each Production Area in which it
            participates similar to the grades, gravities and qualities of crude
            oil received by each other Party from that Production Area in that
            period;

      (g)   To the extent that distribution of entitlements on such basis is
            impracticable due to availability of facilities and minimum cargo
            sizes, a method of making periodic adjustments; and

      (h)   The option and the right of the other Parties to sell an entitlement
            which a Party fails to nominate for acceptance pursuant to (c) above
            or of which a Party fails to take delivery, in accordance with
            applicable agreed procedures, provided that such failure either
            constitutes a breach of Operator's or Parties' obligations under the
            terms of the Petroleum Contract, or is likely to result in the
            curtailment or shut-in of production. Such sales shall be made only
            to the limited extent necessary to avoid disruption of Joint
            Operations. Operator shall give all Parties as much notice as is
            practicable of such unnominated or undelivered entitlement, as the
            case may be, and for reasonable periods of time as are consistent
            with the minimum needs of the industry and in no event to exceed
            three (3) months. The right of sale shall be revocable at will
            subject to any prior contractual commitments. Payment terms for
            production sold under this option shall be established in the
            offtake agreement. If an offtake agreement has not been entered into
            by the date of first delivery of crude oil, the Parties shall be
            bound by the principles set forth in this Section 8.2(h) until an
            offtake agreement has been entered into.

SEPARATE AGREEMENT FOR NATURAL GAS

8.3   The Parties recognise that if Natural Gas is discovered it may be
necessary for the Parties to enter into special arrangements for the disposal of
the Natural Gas, which are consistent with the Overall Development Program and
the terms of the Petroleum Contract.

                                     PART 9

                       SURRENDER, EXTENSIONS AND RENEWALS

SURRENDER

9.1   If the Petroleum Contract requires the Parties to surrender any portion of
the Contract Area, Operator shall advise the Operating Committee of such
requirement at least one hundred and twenty (120) days in advance of the earlier
of the date for filing irrevocable notice of such surrender or the date of such
surrender. Prior to the end of such period, the Operating Committee shall
determine pursuant to Part 4, the size and shape of the surrendered area,
consistent with the requirements of the Petroleum Contract. If a unanimous vote
of the Operating Committee cannot be attained, then the proposal supported by a
simple majority of

                                                                         Page 36
<PAGE>

the Participating Interests shall be adopted. If no proposal attains the support
of a simple majority of the Participating Interests, then the proposal receiving
the largest aggregate Participating Interest vote shall be adopted. In the event
of a tie, the Operator, acting in good faith, shall choose one of the proposals.
The Parties shall execute any and all documents and take such other actions as
may be necessary to effect the surrender. In addition, each Party renounces all
claims and causes of action against Operator and any other Party on account of
any area surrendered in accordance with the foregoing if Petroleum is
subsequently discovered under the surrendered area. A surrender of all or any
part of the Contract Area, which is not required by the Petroleum Contract,
shall require the unanimous consent of the Parties.

EXTENSION OF THE TERM

9.2   A proposal by any Party to seek from CNPC an extension of the term under
the Petroleum Contract for Development Operations, Production Operations or any
phase of the Petroleum Contract, or a proposal to seek from CNPC an extension of
the term of the Petroleum Contract shall be brought before the Operating
Committee pursuant to Part 4.

                                     PART 10

                         TRANSFER OF INTEREST OR RIGHTS

OBLIGATIONS

10.1  Subject to Section 10.3, when a Party transfers any of its Participating
Interest:

      (a)   subject always to the requirements of the Petroleum Contract, the
            transfer of all or part of a Party's Participating Interest shall be
            effective only if it satisfies the terms and conditions of this
            Part;

      (b)   except in the case of a Party transferring all of its Participating
            Interest, no transfer shall be made by any Party which results in
            the transferor or the transferee holding a Participating Interest of
            less than 10 per cent (10%);

      (c)   the transferring Party shall, notwithstanding the transfer, be
            liable to the other Parties for any obligations, financial or
            otherwise, which have vested, matured or accrued under the
            provisions of the Petroleum Contract, the Farmout Agreement or this
            Agreement prior to such transfer. Such obligations shall include,
            without limitation, any proposed expenditure approved by the
            Operating Committee, prior to the transferring Party notifying the
            other Parties of its proposed transfer;

      (d)   the transferee shall have no rights in and under the Petroleum
            Contract, the Contract Area or this Agreement unless and until it
            obtains CNPC/PRC Approval and expressly undertakes in writing to
            perform the obligations of the transferor under the Petroleum
            Contract, the Farmout Agreement and this Agreement in respect of the
            Participating Interest being transferred, to the satisfaction of the
            Parties and furnishes any guarantees required under the Petroleum
            Contract;

                                                                         Page 37
<PAGE>

      (e)   the transferee shall have no rights in and under the Petroleum
            Contract, the Contractor's Rights and Interests or this Agreement
            unless each Party has consented in writing to such transfer, which
            consent shall be denied only if such transferee fails to establish
            to the reasonable satisfaction of each Party its financial or
            technical capability to perform its obligations under the Petroleum
            Contract, the Farmout Agreement and this Agreement;

      (f)   nothing contained in this Part shall prevent a Party from
            Encumbering its Participating Interest for the purpose of security
            relating to finance provided that

            (i)   such Party shall remain liable for all obligations relating to
                  such interest;

            (ii)  the Encumbrance shall be subject to any necessary approval of
                  CNPC, all relevant Governmental Authorities in the PRC and
                  shall be expressly subordinated to the rights of the other
                  Parties under this Agreement; and

            (iii) such Party shall ensure that any such Encumbrance shall be
                  expressed to be without prejudice to the provisions of this
                  Agreement; and

      (g)   any transfer of all or a portion of a Participating Interest, other
            than with or to an Affiliate, shall be subject to the following
            procedure

            (i)   once the transferor Party and a proposed transferee (a third
                  party or a Party) have fully negotiated the final terms and
                  conditions of a transfer, such final terms and conditions
                  shall be disclosed in detail to all other Parties in a written
                  notification from the transferor. Each Party shall have the
                  right to acquire the Participating Interest from the
                  transferor on the same terms and conditions agreed to by the
                  proposed transferee if, within thirty (30) days of
                  transferor's written notification, such Party delivers to all
                  other Parties a counter-notification that it accepts the
                  agreed upon terms and conditions of the transfer without
                  reservations or conditions. If no Party delivers such
                  counter-notification, the transfer to the proposed transferee
                  may be made, subject to the other provisions of this Part 10,
                  under terms and conditions no more favourable to the
                  transferee than those set forth in the notice to the Parties,
                  provided that the transfer shall be concluded within one
                  hundred eighty (180) days from the date of the notice plus
                  such reasonable additional period as may be required to secure
                  any requisite approvals under the Petroleum Contract;

            (ii)  If more than one Party counter-notifies that it intends to
                  acquire the Participating Interest which is the subject of the
                  proposed transfer, then each such Party shall acquire a
                  proportion of the Participating Interest to be transferred
                  equal to the ratio of its own Participating Interest to the
                  total Participating Interests of all the counter-notifying
                  Parties, unless they otherwise agree; and

            (iii) In the event that a Party's proposed transfer of part or all
                  of its Participating Interest involves consideration other
                  than cash then the consideration payable for the Participating
                  Interest shall be allocated a reasonable and justifiable cash
                  value by the transferor in any notification to the other
                  Parties. Such other Parties may satisfy the requirements of

                                                                         Page 38
<PAGE>

                  this Part by agreeing to pay such cash value in lieu of the
                  consideration payable in the third-party offer.

RIGHTS

10.2  Each Party shall have the right, subject to the provisions of Section
10.1, to freely transfer its Participating Interest.

REASSIGNMENT PURSUANT TO SECTION 4.7 OF THE FARMOUT AGREEMENT

10.3  Section 10.1 does not apply to a reassignment of CITIC's Participating
Interest pursuant to Section 4.7 of the Farmout Agreement.

                                     PART 11

                            WITHDRAWAL FROM AGREEMENT

RIGHT OF WITHDRAWAL

11.1  Subject to the provisions of this Part and the provisions of the Petroleum
Contract, any Party may withdraw from this Agreement and the Petroleum Contract
by giving notice to all other Parties stating its decision to withdraw and
specifying a proposed effective date of withdrawal which shall be at least sixty
(60) days but not more than one hundred eighty (180) days after the date of such
notice. Such notice shall be unconditional and irrevocable when given. Subject
to the foregoing and Section 11.5, the effective date of withdrawal for a
withdrawing Party shall be the later of:

      (a)   the date proposed in the notice of withdrawal; or

      (b)   the date that the withdrawing Party has fulfilled its obligations
            under this Part.

PARTIAL OR COMPLETE WITHDRAWAL

11.2  Within thirty (30) days of receipt of a withdrawing Party's notification,
each of the other Parties may also give notice that it desires to withdraw from
this Agreement and the Petroleum Contract. Should all Parties give notice of
withdrawal, the Parties shall proceed to abandon the Contract Area and terminate
the Petroleum Contract and this Agreement. If less than all of the Parties give
such notice of withdrawal, then the withdrawing Party shall take all steps to
withdraw from the Petroleum Contract and this Agreement on the earliest possible
date and execute and deliver all necessary instruments and documents to assign
their Participating Interests to the Parties which are not withdrawing, without
any compensation whatsoever, in accordance with the provisions of Section 11.6.
If any part of the withdrawing Party's Participating Interest remains unclaimed
after sixty (60) days from the date of the first notice of withdrawal, all of
the Parties shall be deemed to have decided to withdraw from the Petroleum
Contract and this Agreement, unless at least one Party agrees to accept the
unclaimed Participating Interest. Any Party withdrawing under this Part shall
withdraw from the entirety of the Contract Area and thus abandon to the other
Parties not joining in its withdrawal all its rights generated by Petroleum
Operations after such withdrawal and all rights in the Contractor's Rights and
Interests.

                                                                         Page 39
<PAGE>

VOTING

11.3  After giving its notification of withdrawal, a Party shall not be entitled
to vote on any matters coming before the Operating Committee, other than matters
for which such Party has financial responsibility.

OBLIGATIONS AND LIABILITIES

11.4  A withdrawing Party, prior to its withdrawal, shall satisfy all
obligations and liabilities it has incurred or which are attributable to it
prior to its withdrawal, including, without limitation, any expenditures
budgeted and/or approved by the Operating Committee prior to its written
notification of withdrawal, and any liability for acts, occurrences or
circumstances taking place or existing prior to its withdrawal. Furthermore, any
Encumbrances which the withdrawing Party placed on such Party's Participating
Interest prior to its withdrawal shall be fully satisfied or released, at the
withdrawing Party's expense, prior to its withdrawal. A Party's withdrawal shall
not relieve it from liability to the non-withdrawing Parties with respect to any
obligations or liabilities attributable to the withdrawing Party which are not
identified or identifiable at the time of withdrawal. Notwithstanding the
foregoing, a Party shall not be liable for any operations or expenditures it
voted against if it sends notification of its withdrawal within ten (10) days
(or within twenty-four (24) hours if the drilling rig to be used in such
operation is standing by on the Contract Area) of the Operating Committee vote
approving such operation or expenditure, nor shall such Party be liable for any
operations or expenditures approved by the Operating Committee, excluding those
approved pursuant to Section 11.5, after notice has been given pursuant to
Section 11.1.

EMERGENCY

11.5  Party's notification of withdrawal shall not become effective if prior to
the proposed date of withdrawal a well goes out of control or a fire, blow out,
sabotage or other emergency occurs. The notification of withdrawal shall become
effective only after the emergency has been contained and the withdrawing Party
has paid, or has provided, security satisfactory to the Parties for its
Participating Interest share of the costs of such emergency.

ASSIGNMENT

11.6  A withdrawing Party shall assign its Participating Interest to each of the
non-withdrawing Party which shall be allocated to them in the proportion which
each of their Participating Interests (prior to the withdrawal) bears to the
total Participating Interests of all the non-withdrawing Parties (prior to the
withdrawal), unless the non-withdrawing Parties agree otherwise. The expenses
associated with the withdrawal and assignments shall be borne by the withdrawing
Party.

APPROVALS

11.7  A withdrawing Party shall promptly join in such actions as may be
necessary or desirable to obtain CNPC/PRC Approval in connection with the
withdrawal and assignments. Any penalties or expenses incurred by the Parties in
connection with such withdrawal shall be borne by the withdrawing Party.

                                                                         Page 40
<PAGE>

ABANDONMENT SECURITY

11.8  A withdrawing Party shall provide security satisfactory to the other
Parties to satisfy any such obligations or liabilities which were approved or
accrued prior to notice of withdrawal, but which become due after its
withdrawal, including, without limitation, security to cover the costs of an
abandonment, if applicable. Failure to provide security shall constitute default
under this Agreement. For the purposes of this Section 11.8, "security" means a
standby letter of credit or bond issued by a first class bank.

WITHDRAWAL OR ABANDONMENT BY ALL PARTIES

11.9  In the event all Parties decide to withdraw or are required to do so
pursuant to this Part, the Parties agree that they shall be bound by the terms
and conditions of this Agreement for so long as may be necessary to wind up the
affairs of the Parties with CNPC and the relevant Governmental Authorities in
the PRC, or to satisfy any requirements of applicable law.

REASSIGNMENT PURSUANT TO SECTION 4.7 OF THE FARMOUT AGREEMENT

11.10 Nothing in this Part 11 applies to a reassignment of CITIC's Participating
Interest pursuant to Section 4.7 of the Farmout Agreement.

                                     PART 12

                         RELATIONSHIP OF PARTIES AND TAX

RELATIONSHIP OF PARTIES

12.1  Except as otherwise provided in the Petroleum Contract, the rights,
duties, obligations and liabilities of the Parties under this Agreement shall be
individual, not joint or collective. It is not the intention of the Parties to
create, nor shall this Agreement be deemed or construed to create a partnership,
association or trust, or as authorising any Party to act as an agent, servant or
employee for any other Party for any purpose whatsoever except as explicitly set
forth in this Agreement. In their relations with each other under this
Agreement, the Parties shall not be considered fiduciaries except as expressly
provided in this Agreement.

TAX

12.2  Each Party shall be responsible for reporting and discharging its own tax
measured by the income of the Party and the satisfaction of such Party's share
of all Contractor's Obligations and other obligations under this Agreement. Each
Party shall protect, defend and indemnify each other Party from any and all
loss, cost or liability arising from a failure or refusal to report and
discharge such taxes or satisfy such obligations.

                                                                         Page 41
<PAGE>

                                 PART 13

                CONFIDENTIAL INFORMATION - PROPRIETARY TECHNOLOGY

CONFIDENTIAL INFORMATION

13.1  Subject to the provisions of the Petroleum Contract, the Parties agree
that all information and data acquired or obtained by any Party in respect of
Petroleum Operations shall be considered confidential and shall be kept
confidential and shall not be disclosed to any person or entity not a Party
under this Agreement during the term of the Petroleum Contract and for a period
of two (2) years after expiration of the Petroleum Contract, except:

      (a)   to an Affiliate, provided such Affiliate maintains confidentiality
            as provided in this Part;

      (b)   to CNPC or a Governmental Authority in the PRC when required by the
            Petroleum Contract;

      (c)   to the extent such data and information is required to be furnished
            in compliance with any applicable laws or regulations, or pursuant
            to any legal proceedings or because of any order of any court
            binding upon a Party;

      (d)   subject to this Section 13.1, to potential contractors, contractors,
            consultants and professional advisors employed by any Party where
            disclosure of such data or information is essential to such
            contractor's, consultant's or advisor's work;

      (e)   subject to this Section 13.1, to a bona fide prospective transferee
            of a Party's Participating Interest (including an entity with whom a
            Party or its Affiliates is conducting bona fide negotiations
            directed toward a merger, consolidation or the sale of a majority of
            its or an Affiliate's shares);

      (f)   subject to this Section 13.1, to a bank or other financial
            institution to the extent appropriate to a Party arranging funding
            for its obligations under this Agreement;

      (g)   to the extent such data and information must be disclosed pursuant
            to any rules or requirements of any government or stock exchange
            having jurisdiction over such Party, or its Affiliates; provided
            that if any Party desires to disclose information in an annual or
            periodic report to its or its Affiliates' shareholders and to the
            public and such disclosure is not required pursuant to any rules or
            requirements of any government or stock exchange, then such Party
            shall comply with Section 13.2;

      (h)   to its respective employees for the purposes of Petroleum
            Operations, subject to each Party taking customary precautions to
            ensure such data and information is kept confidential; or

      (i)   where any data or information which, through no fault of a Party,
            becomes a part of the public domain.

Disclosure pursuant to Sections 13.1(d), (e) or (f) shall not be made unless
prior to such disclosure the disclosing Party has obtained a written undertaking
from the recipient to keep the data and information strictly confidential and
not to use or disclose the data and information except for the express purpose
for which disclosure is to be made.

                                                                         Page 42
<PAGE>

PUBLIC ANNOUNCEMENTS

13.2  Operator shall be responsible for the preparation and release of all
public announcements and statements regarding this Agreement or the Petroleum
Operations; provided that, no public announcement or statement shall be issued
or made by Operator unless prior to its release the Parties have been furnished
with a copy of and have approved such statement or announcement. Where a public
announcement or statement becomes necessary or desirable because of danger to or
loss of life, damage to property or pollution as a result of activities arising
under this Agreement, Operator is authorised to issue and make such announcement
or statement without prior notice to the Parties, Furthermore, public disclosure
of information required under applicable law or stock exchange requirements, or
under the Petroleum Contract, or in order to obtain a required approval CNPC/PRC
Approval ,may be made without being submitted by the disclosing Party to the
other Party prior to the dissemination thereof if prior disclosure would prevent
the disclosing party from complying with its timely disclosure obligations under
applicable law or stock exchange requirements.

CONTINUING OBLIGATIONS

13.3  Any Party ceasing to own a Participating Interest during the term of this
Agreement shall nonetheless remain bound by the obligations of confidentiality
and any disputes shall be resolved in accordance with Section 16.9.

PROPRIETARY TECHNOLOGY

13.4  Nothing in this Agreement shall require a Party to divulge proprietary
technology to the other Parties provided that, where the cost of development of
proprietary technology has been borne by the Parties in proportion to their
Participating Interests, such proprietary technology shall be disclosed to all
Parties bearing a portion of such cost and may be used by such Party or its
Affiliates in other operations.

                                     PART 14

                                  FORCE MAJEURE

OBLIGATIONS

14.1  If, as a result of Force Majeure, any Party is rendered unable, wholly or
in part, to carry out its obligations under this Agreement, other than the
obligation to pay any amounts of money due or to furnish security, then the
obligations of the Party giving such notice, so far as and to the extent that
the obligations are affected by such Force Majeure, shall be suspended during
the continuance of any inability so caused, but for no longer period. The Party
claiming Force Majeure shall notify the other Parties of the Force Majeure
situation within a reasonable time after the occurrence of the facts relied on
and shall keep all Parties informed of all significant developments. Such notice
shall give reasonably full particulars of said Force Majeure, and also estimate
the period of time which the affected said Party will reasonably require to
remedy the Force Majeure. The affected Party shall use all reasonable diligence
to remove or overcome the Force Majeure situation as quickly as possible in an
economic manner,

                                                                         Page 43
<PAGE>

but shall not be obligated to settle any labour dispute except on terms
acceptable to it and all such disputes shall be handled within the sole
discretion of the affected Party.

DEFINITION OF FORCE MAJEURE

14.2  For the purposes of this Agreement, "FORCE MAJEURE" shall mean any
circumstance or event which could not be foreseen and/or which was beyond the
control of the Party concerned and which alone or in combination is the direct
cause of preventing, hindering or delaying that Party's performance of its
obligations under this Agreement.

                                     PART 15

                             EFFECTIVE DATE AND TERM

EFFECTIVE DATE

15.1  This Agreement shall have effect from the Effective Date and shall,
subject to Section 15.2, continue in effect until the Petroleum Contract
terminates or, otherwise until final settlement of all rights and obligations
has been made among the Parties.

TERM

15.2  For the avoidance of doubt, the relevant provisions of this Agreement
described in (a) and (b) below shall remain in effect until:

      (a)   obligations, claims, arbitrations and lawsuits have been settled or
            otherwise disposed of in accordance with Section 3.5 and Section
            16.9; and

      (b)   the time relating to the protection of confidential information and
            proprietary technology has expired in accordance with Part 13.

                                     PART 16

                               GENERAL PROVISIONS

NOTICES

16.1  Notices, demands or other communications ("COMMUNICATIONS") required or
permitted to be given or made hereunder:

      (a)   shall be in writing and delivered personally or sent by prepaid
            first class post with recorded delivery, or by legible telefax
            addressed to the intended recipient as follows:

                                                                         Page 44
<PAGE>

      IN THE CASE OF CITIC ADDRESSED TO:

      Richfirst Holdings Limited
      c/o China International Trust & Investment Corporation
      Room 611, Capital Mansion
      #6 Xinyuan Nanlu, Chaoyang District
      Beijing, P. R. China 100004
      Fax No.:        +86-10-8486-3105
      Attention:      Mr. Hu Yuqing, General Planning Department

      IN THE CASE OF PAN-CHINA ADDRESSED TO:

      19th Floor, 101 - 6th Avenue S.W.
      Calgary, Alberta
      T2P 3P4
      Canada
      Fax No.:        +1-403-266-3772
      Attention:      President;

      (b)   be signed by a person duly authorised by the sender; and

      (c)   will be taken to have been given or made:

            (i)   in the case of delivery in person, when delivered;

            (ii)  in the case of facsimile transmission, on receipt by the
                  sender of a transmission control report from the despatching
                  machine showing the relevant number of pages and the correct
                  destination fax number and indicating that the transmission
                  has been made without error; or

            (iii) in the case of deliver by post, 7 Business Days after the date
                  of posting (if posted to an address in another country) or 2
                  Business Days after the date of posting (if posted to an
                  address in the same country),

            but if the result is that the Communication would be taken to be
            given or made on a day which is not a Business Day in the place to
            which the Communication is sent or is later than 4pm (local time),
            it will be taken to have been duly given or made at the commencement
            of business on the next Business Day in that place.

                                                                         Page 45
<PAGE>

TIME IS OF THE ESSENCE

16.2  Time shall be of the essence as regards the provisions of this Agreement,
both as regards the times and periods mentioned herein and as regards any times
or periods which may, by agreement between the Parties, be substituted for them.

SEVERANCE

16.3  If any provision of this Agreement or part thereof is rendered void,
illegal or unenforceable in any respect under any law, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.

ENTIRE AGREEMENT

16.4  Agreement and the Farmout Agreement supersede any previous written or oral
agreement between the Parties in relation to the matters dealt with herein and
this Agreement and the Farmout Agreement contain the whole agreement between
Pan-China and CITIC relating to the subject matter hereof at the date hereof to
the exclusion of any terms implied by law which may be excluded by contract.
Each of Pan-China and CITIC acknowledges that it has not been induced to enter
into this Agreement or the Farmout Agreement by any representation, warranty or
undertaking not expressly incorporated herein. So far as permitted by law and
except in the case of fraud, each Party agrees and acknowledges that its only
right and remedy in relation to any representation, warranty or undertaking made
or given in connection with this Agreement shall be for breach of the terms of
this Agreement to the exclusion of all other rights and remedies (including
those in tort or arising under statute).

AMENDMENT

16.5  Save as otherwise expressly provided herein, no modification, amendment or
waiver of any of the provisions of this Agreement shall be effective unless made
in writing specifically referring to this Agreement and duly signed by the
Parties.

COUNTERPARTS

16.6  This Agreement may be executed in one or more counterparts, each of which
shall be deemed to an original but all of which together shall constitute one
and the same instrument.

GOVERNING LAW

16.7  This Agreement shall be governed by, construed, interpreted and applied in
accordance with the laws of Hong Kong, excluding any choice of law rules which
would refer the matter to the laws of another jurisdiction.

DISPUTE RESOLUTION

16.8  The Parties shall make their best efforts to settle amicably through
consultation any dispute arising in connection with the performance or
interpretation of any provision hereof. Any dispute that has not been settled
through such consultation within thirty (30) days after a Party has notified the
other Party that it wishes to enter into consultation to resolve a dispute or
claim may be referred to arbitration at the Hong Kong International Arbitration
Centre (HKIAC) at the request of and by any Party. The Parties in dispute shall
each appoint one arbitrator and the two arbitrators so appointed shall designate
a third arbitrator. If one of the

                                                                         Page 46
<PAGE>

disputing Parties does not appoint its arbitrator within fourteen (14) days
after the first appointment, or if the two arbitrators once appointed fail to
appoint the third within fourteen (14) days after the appointment of the second
arbitrator, the appointing authority shall be the American Arbitration
Association HKIAC that shall appoint an independent arbitrator who does not have
any financial interests in the dispute, controversy or claim. All decisions and
awards by the ad hoc arbitration tribunal shall be made by majority vote, shall
be in writing with an explanation of the reasoning for the decision or award.
The place of arbitration shall be Hong Kong. The arbitration tribunal shall
conduct the arbitration in accordance with the arbitration rules of the United
Nations Commission on International Trade Law of 1976 The English language shall
be the official language used in the arbitral proceedings. All hearing
materials, statements of claim or defence, awards and the reasons supporting
them shall be written in English. Any award of the arbitration tribunal shall be
final and binding upon the parties. The right to arbitrate disputes under this
Agreement shall survive the termination of this Agreement.

The arbitral proceedings shall be confidential and any hearing before the
arbitral tribunal shall be held in camera. All such proceedings, the
documentation and information relevant to the proceedings (to the extent treated
as confidential by any Party), the award and the reasons for the award shall be
kept confidential by the parties and shall not be disclosed except as may be
permitted under Section 13.

Nothing in this Section 16.8 applies to or restricts in any way:

      (a)   disclosure of information to the arbitral tribunal; or

      (b)   disclosure of the arbitral proceedings, the award or the reasons for
            the award in the course of legal proceedings relating to the
            arbitration or the award or in the course of any other judicial,
            arbitral or administrative proceedings between the Parties.

CONFLICTS OF INTEREST

16.9  Each Party undertakes that it shall avoid any conflict of interest between
its own interests (including the interests of Affiliates) and the interests of
the other Parties in dealing with suppliers, customers and all other
organisations or individuals doing or seeking to do business with the Parties in
connection with activities contemplated under this Agreement. The provisions of
the foregoing shall not apply to:

      (a)   a Party's performance which is in accordance with the local
            preference laws or policies of the host government; or

      (b)   a Party's acquisition of products or services from an Affiliate, or
            the sale thereof to an Affiliate, made in accordance with rules and
            procedures established by the Operating Committee.

SUCCESSORS AND ASSIGNS

16.10 This Agreement shall inure to the benefit of and be binding upon the
successors and permitted assigns of the Parties.

                                                                         Page 47
<PAGE>

WAIVER

16.11 No waiver by any Party of any one or more defaults by another Party in the
performance of this Agreement shall operate or be construed as a waiver of any
future default or defaults by the same Party, whether of a like or of a
different character. Except as expressly provided in this Agreement no Party
shall be deemed to have waived, released or modified any of its rights under
this Agreement unless such Party has expressly stated, in writing, that it does
waive, release or modify such right.

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

RICHFIRST HOLDINGS LIMITED                  PAN-CHINA RESOURCES LTD.

Per: /s/ Mei Jing Zhang                     Per: /s/ Patrick Chua
     ------------------------------              ------------------------------
     Authorised Signatory                        Authorised Signatory

                                                                         Page 48
<PAGE>

                                  SCHEDULE "A"

                              ACCOUNTING PROCEDURE

                                    Contents

Article     1     General Provisions
Article     2     Definitions
Article     3     Cash Calls
Article     4     Accounting and Management of Material
Article     5     Expense Accounting
Article     6     Recovery of Costs
Article     7     Accounting Reports
Article     8     Audit
Article     9     Transfer Procedure of the Joint Account

<PAGE>
                                  SCHEDULE "A"

                              ACCOUNTING PROCEDURE

                          ARTICLE 1 GENERAL PROVISIONS

      1.1   This Accounting Procedure is an integral part of the Joint
Operating Agreement between Pan-China Resources Ltd. ("Pan-China") and China
International Trust & Investment Corporation ("CITIC") relating to Petroleum
Operations under the Petroleum Contract for the development and production in
Kongnan Block of the Dagang oilfield in the PRC.

      The definitions set forth in Part 1 of the Joint Operating Agreement are
equally applicable to this Accounting Procedure. The definitions and provisions
in this Accounting Procedure have the same force and effect as those in the
Joint Operating Agreement. Certain terms used herein are defined in Article 2.
If the provisions in this Accounting Procedure are in conflict with those in the
Joint Operating Agreement, the provisions in the Joint Operating Agreement shall
prevail.

      1.2   Purpose: The purpose of this Accounting Procedure is to establish
equitable control methods for determining charges and credits applicable to the
Petroleum Operations according to the relevant provisions of the Joint Operating
Agreement, including the guidelines for accounting settlements in respect of
managing funds and materials, financing and Accounting Records, and for
compiling accounting statements, to the end that no Party shall gain or lose in
relation to the other Parties. Any allocations used therein shall be made in
accordance with accepted international petroleum industry accounting practices.

      1.3   Accounting methods: The double-entry method of accounting shall be
used in this Accounting Procedure.

      1.4   Working language: English shall be used as the working language for
the Accounting Records and analyses of financial conditions in respect of the
Joint Account, at the Operator's option.

      1.5   Currency for accounting: Dollars shall be the unit of currency for
accounting in the Joint Account and shall be the currency for the investments
and reimbursements under the Joint Operating Agreement. In case currencies other
than Dollars are used to carry out business activities, the relevant bank
accounts and other current asset and current liability accounts shall be kept
both in Dollars and in the currencies used.

      1.6   Currency translation: For the purpose of accounting, currency
translation entered into the Joint Account shall be made in accordance with
following guidelines:

                                       1
<PAGE>

      The rate of exchange to be used for the conversion into Dollars of cash
calls received in Renminbi shall be the arithmetic average of buying and selling
rates of exchange applicable to any individual or commercial entity quoted by
Bank of China at 11:00 a.m. on the date of receipt of such cash in the
Operator's bank account(s). If the relevant date is a non-business day of the
Bank of China, the rate quoted on the previous business day by the Bank of China
shall apply.

      All other transactions recorded in the Joint Account which are made in
Renminbi shall be translated into and recorded in Dollars at the rate of
exchange as quoted above on the last business day of the previous month, while
those transactions which are made in currencies other than Renminbi and Dollars
shall be recorded in Dollars at the actual cost in Dollars of effecting the
transaction.

      The Operator shall use its best efforts to minimize any exchange loss.

      All gains or losses from currency conversion or translation shall be
recorded in the Joint Account.

      1.7   Foreign exchange business: Foreign exchange business related to the
Petroleum Operations shall be made in accordance with "Regulations for Exchange
Control of the People's Republic of China" and "Rules for the Implementation of
Exchange Control Regulation Relating to Enterprises with Overseas Chinese
Capital, Enterprises with Foreign Capital, and Chinese and Foreign Joint
Ventures."

      1.8   Accounting Records and statements:

      1.8.1  All Accounting Records related to the Petroleum Operations shall be
established and maintained by the Operator within the territory of the PRC.

      1.8.2  All vouchers, accounts, books and statements shall be prepared in
accordance with the Petroleum Operations Accounting System established by CNPC
and the Parties through consultation pursuant to the Accounting Regulations of
the PRC for Enterprises with Foreign Investment.

      1.8.3  Annual accounting statements and important accounting books,
including asset records; cash or bank journals, general and subsidiary ledgers,
balance sheets, and annual gross oil production allocation statements shall be
maintained for the term of the Petroleum Contract as per Article 4.7 thereof, or
for any further period if required by the laws and regulations of the PRC. Other
accounting vouchers and books shall be kept for fifteen (15) years. Quarterly
and monthly statements shall be maintained for five (5) years.

      Upon the expiration of the custody period, a list shall be made of the
accounting files to be disposed of. Disposal of the accounting files shall only
be made after the approval of

                                       2
<PAGE>

CNPC. The list of the accounting files disposed of shall be maintained with the
annual accounting statements.

      1.9   This Accounting Procedure shall apply, mutatis mutandis, to
Exclusive Operations in the same manner that it applies to Joint Operations;
provided, however, that the charges and credits applicable to Consenting Parties
shall be distinguished by an Exclusive Operation Account. For the purpose of
determining and calculating the remuneration of the Consenting Parties,
including the premiums for Exclusive Operations, the costs and expenditures
shall be expressed in Dollars (irrespective of the currency in which the
expenditure was incurred).

      1.10  If it becomes necessary to allocate any costs or expenditures to or
between Joint Operations and any other operations, such allocation shall be made
on an equitable basis. Upon request, Operator shall furnish a description of its
allocation procedures pertaining to these costs and expenditures.

                                       3
<PAGE>

                    ARTICLE 2 DEFINITIONS AND INTERPRETATION

      The terms used in this Accounting Procedure, in addition to terms defined
in the Joint Operating Agreement and used herein, shall have the definitions
ascribed to them as follows:

      2.1   "Accounting Records" means all accounting books, source documents,
original vouchers, approved documents, analytical data, work papers and
accounting statements maintained for the Petroleum Operations.

      2.2   "Accounting System" means the Petroleum Operations Accounting System
prepared by CNPC and the Parties through consultation pursuant to the Accounting
Regulations of the PRC for Enterprises with Foreign investment, specifying the
accounting titles to be used by the Operator and instructions for
implementation, forms and contents of various accounting statements and their
preparation methods, including a material classification section, a definition
of Controllable Material, standards for itemizing assets and the provisions for
fixed asset accounting.

      2.3   "Material" means materials, tools, facilities, equipment and
consumables procured, leased or otherwise acquired and held for the Petroleum
Operations.

      2.4   "Controllable Material" means the Material referred to in the
Accounting System described in Article 2.2 of this Accounting Procedure.

      2.5   "Investing Party" means any party that is contributing the funds for
the Petroleum Operations in accordance with its Participating Interest
determined pursuant to the relevant provisions of the Joint Operating Agreement.

      The interpretation provisions of the Joint Operating Agreement, set forth
in Section 1.2 thereof, shall also be applicable to this Accounting Procedure.
In addition, whenever in this Accounting Procedure reference is made to
"agreement by the Parties" or "agreed by the Parties", it shall refer to an
action by the Operating Committee.

                                       4
<PAGE>

                         ARTICLE 3 PAYMENTS AND ADVANCES

      3.1   Upon approval of any Work Program and Budget and any AFE, if
Operator so requests, each Non-Operator shall advance its share of estimated
cash requirements for the succeeding month's operations. Each such cash call
shall be equal to the Operator's estimate of the money to be spent in the
currencies required to perform its duties under the approved Work Program and
Budget, and the approved AFE, during the month concerned.

      3.2   Each such cash call shall be made in writing and delivered to all
Non-Operators not less than twenty (20) days before the payment due date. The
due date for payment of such advances shall be set by Operator but shall be no
sooner than the first Business Day of the month for which the advances are
required. All advances shall be made without bank charges. Any charges related
to receipt of advances from a Non-Operator shall be borne by that Non-Operator.

      3.3   Each Non-Operator shall wire transfer its share of the full amount
of each such cash call to Operator on or before the due date, in the currencies
requested or any other currencies acceptable to Operator, and at a bank
designated by Operator. If the currency provided by a Non-Operator is other than
the requested currency, then the entire cost of converting to the requested
currency shall be charged to that Non-Operator. All advances shall be made
without bank charges.

      3.4   Notwithstanding the provisions of Article 3.2, should Operator be
required to pay any sums of money for the Joint Operations which were unforeseen
at the time of providing the Non-Operators with said estimates of its
requirements, Operator may make a written request of the Non-Operators for
special advances covering the Non-Operators' share of such payments. Each such
Non-Operator shall make its proportional special advances within fifteen (15)
days after receipt of such notice.

      3.5   Each monthly cash call notice shall clearly indicate the following
information

            3.5.1   All costs and expenses for the cash call to be shared by
                    each Party as shown in the approved Budget and, if required,
                    the approved AFE.

            3.5.2   Detail by major Budget category and relevant AFE
                    identification, if required.

            3.5.3   Funds to be advanced by each Party in the month for which
                    the funds will be used and, for informational purposes, the
                    estimated amount of funds to be advanced by each Party in
                    the following two (2) months.

            3.5.4   The date when funds are to be advanced, currency, and with
                    respect to the account into which the advances are to be
                    made, the name of

                                       5
<PAGE>

                    the bank, its address, account number, name of the account,
                    and particulars required for the advances to be made by wire
                    transfers.

            3.5.5   The Dollar equivalent of the total cash called. The Operator
                    shall also specify the estimated amounts of required
                    Renminbi and Dollars.

      3.6   If a Non-Operator's advances exceed its share of cash expenditures,
the next succeeding cash advance requirements, after such determination, shall
be reduced accordingly. A Non-Operator may request that its excess advances be
refunded. Operator shall make such refund within ten (10) days after receipt of
the Non-Operator's request provided that the amount is in excess of the
requesting Non-Operator's share of the cash advance requirements for the
succeeding month.

      3.7   If Non-Operator's advances are less than its share of cash
expenditures, the deficiency shall, at Operator's option, be added to subsequent
cash advance requirements or be paid by Non-Operator within fifteen (15) days
following the receipt of Operator's billing to Non-Operator for such deficiency.

      3.8   If, under the provisions of the Joint Operating Agreement, Operator
is required to segregate funds received from the Parties, any interest received
on such funds shall be applied against the next succeeding cash call or, if
directed by the Operating Committee, distributed quarterly. The interest thus
received shall be allocated to the Parties on an equitable basis taking into
consideration date of funding by each Party to the accounts in proportion to the
total funding into the account. A monthly statement summarizing receipts,
disbursements, transfers to each joint bank account and beginning and ending
balances thereof shall be provided by Operator to the Parties.

      3.9   If Operator does not request Non-Operators to advance their share of
estimated cash requirements, each Non-Operator shall pay its share of cash
expenditures within twenty (20) Business Days following receipt of Operator's
billing.

      3.10  Payments of advances or billings shall be made on or before the due
date. If these payments are not received by the due date the unpaid balance
shall bear and accrue interest from the due date until the payment is received
by Operator at the Agreed Interest Rate. For the purpose of determining the
unpaid balance and interest owed, Operator shall translate to Dollars all
amounts owed in other currencies using the currency exchange rate readily
available to Operator at the close of the last Business Day prior to the due
date for the unpaid balance as quoted by the applicable authority identified in
Section 1.6 of this Accounting Procedure.

      3.11  Subject to governmental regulation, Operator shall have the right,
at any time and from time to time, to convert the funds advanced or any part
thereof to other currencies to

                                       6
<PAGE>

the extent that such currencies are then required for operations. The cost of
any such conversion shall be charged to the Joint Account.

      3.12  Operator shall endeavor to maintain funds held for the Joint Account
in bank accounts at a level consistent with that required for the prudent
conduct of Joint Operations.

      3.13  If under the Joint Operating Agreement, Operator is required to
segregate funds received from or for the Joint Account, the provisions under
this Article 3 for payments and advances by Non-Operators shall apply also to
Operator.

      3.14  Payments of any advances or billings shall not prejudice the right
of any Non-Operator to protest or question the correctness thereof; provided,
however, all bills and statements rendered to Non-Operators by Operator during
any calendar year shall conclusively be presumed to be true and correct after
twenty-four (24) months following the end of such calendar year, unless within
the said twenty-four (24) month period a Non-Operator takes written exception
thereto and makes claim on Operator for adjustment. Failure on the part of a
Non-Operator to make claim on Operator for adjustment within such period shall
establish the correctness thereof and preclude the filing of exceptions thereto
or making claims for adjustment thereon. No adjustment favorable to Operator
shall be made unless it is made within the same prescribed period. The
provisions of this paragraph shall not prevent adjustments resulting from a
physical inventory of the property as provided for in Article 4.7. Operator
shall be allowed to make adjustments to the Joint Account after such twenty-four
(24) month period if these adjustments result from audit exceptions outside of
this Joint Operating Agreement, third party claims, or Governmental Authority or
CNPC requirements. Any such adjustments shall be subject to audit within the
time period specified in Article 8.

                                       7
<PAGE>

                 ARTICLE 4 ACCOUNTING AND MANAGEMENT OF MATERIAL

      4.1   Procurement of Material:

      The procurement of Material shall be implemented in accordance with the
procedure specified in Articles 15.1 and 7.6 of the Petroleum Contract. In order
to prevent overstocking of Material, the Operator shall use all reasonable best
efforts to ensure that the procurement of Material shall be made in accordance
with the Material procurement plans and that the quality of material conforms to
specifications and prices are fair and reasonable. The Operator does not warrant
the Materials furnished beyond, or back of, the supplier's or manufacturer's
guarantee.

      4.2   Costs of procuring Material

      The costs of Material purchased shall be the invoice prices less discounts
plus related transportation and other expenses, including expenses for freight
to the destination, insurance premiums commensurate with the material covered,
fees of forwarding agents, duties, fees, handling expenses from shipside to and
within any water or land terminal warehouse or yard, and any other reasonable
expenses actually paid and expenses of inland transportation.

      4.3   The provisions and procedures of Article 15.1 and Article 7.6 of the
Petroleum Contract and the following provisions shall be applied for pricing
Material furnished from the stocks of the Parties and/or their Affiliates for
use in the Petroleum Operations:

      (1)   New Material:

      New Material shall be priced on the basis of current market value plus
expenses in moving such Material directly to the job-site where Material is
used.

      (2)   Used Material:

      (A)   Material which is in sound and serviceable condition and is suitable
for reuse without reconditioning shall be priced, as agreed with CNPC, and the
ceiling price shall not exceed seventy-five percent (75%) of the current market
value of new Material.

      (B)   Material which, after being reconditioned, will be further
serviceable for its original function shall be priced, as agreed with CNPC, and
the ceiling price shall not exceed fifty percent (50%) of the current value of
new Material.

      (C)   Used Material which cannot be classified as (A) or (B) above shall
be priced, as agreed with CNPC, through discussions at a value commensurate with
its use.

                                       8
<PAGE>

      (D)   If the Operator wishes to use a method other than the above for
pricing used Material, such other method shall be agreed upon in advance with
Non-Operators and CNPC through consultations.

      4.4   Price determination and leasing expense calculation method for
properties purchased or leased from other contract areas:

      The Operator may lease equipment and facilities and purchase Material and
fuel from other contract areas within the PRC. The Operator shall charge the
leasing expenses or purchase price as agreed upon by the Operator and its
suppliers. Such leasing expenses or purchase prices shall not exceed those
currently prevailing in similar contract areas.

      4.5   For certain Material which is in short supply in the world markets
and difficult to procure at published market prices and the lack of which will
hinder normal operations, the Operator may, after the approval of the Operating
Committee and JMC, purchase such Material urgently needed by the Petroleum
Operations and charge actual purchase costs to the Joint Account.

      4.6   Disposal of Equipment and Material:

      The Operator shall not dispose of or sell Material with book value
exceeding Ten Thousand Dollars ($10,000) without the prior consent of the
Parties. The Operator shall use all reasonable endeavor to minimize losses in
the disposal of or sales of such Material.

      Sales of properties to third parties or Affiliates shall be recorded in
accordance with actual sales income. No guaranty or warranty for Material sold
or disposed of under this Article shall be given by the Operator to any
purchaser.

      4.7   Accounting for Material:

      The costs of Material which is procured by the Operator and is directly
used at the job-site shall be charged to the respective accounts of Development
Costs or Operating Costs at actual purchase prices (as defined in Article 4.2
herein) and on the basis of the use of Material. Should such Material
subsequently be used for other purposes, the relevant charges shall be
transferred from the original cost accounts to the appropriate cost accounts.

      Material for general use which is first stored in warehouses shall be
subject to inventory control procedures. The quantities, unit prices and total
value shall be recorded for Material in inventory using perpetual inventory
methods. Material in stock shall be priced at purchase costs and the Operator,
upon the commencement of or during the term of the Petroleum Contract, has the
freedom to choose one of the following pricing methods such as FIFO, weighted
average method and moving average method, etc. for Material to be

                                       9
<PAGE>

transferred out of the stock. Accounts for inventory Material shall be regarded
as Development Costs or Operating Costs.

      At the request of any Party, the Operator shall furnish to such Party a
detailed statement of Controllable Material at the cost of the requesting Party.

      The Operator shall conduct physical inventory of Material in warehouses
prior to the annual final accounts or whenever depending upon the actual
situation. The Operator shall give a written notice to Non-Operators and the JMC
sixty (60) days before the date of proposed physical inventory in order to allow
time for participation by each Party.

      If any gain or loss is found as a result of the physical inventory, the
Operator shall compile a detailed statement of the gain or loss and attach to it
an explanation for the gain or loss, which shall be submitted to the Operating
Committee and, then the JMC for examination and approval.

      4.8   In accordance with Article 17.1 of the Petroleum Contract, the
Operator shall exercise strict control over the fixed assets of the Petroleum
Operations and set up accounts and record cards, and shall conduct physical
inventory of the fixed assets at the year-end or whenever depending upon the
actual situation to make sure that the book records, card records and physical
fixed assets are in conformity. In case that any damage or loss arises to the
fixed assets, the Operator shall determine the reasons and submit them to the
Operating Committee and, then JMC for examination and approval.

                                       10
<PAGE>

                          ARTICLE 5 EXPENSE ACCOUNTING

      5.1   Rules for accounting

      5.1.1 According to the provisions of Articles 12.1.1, 12.1.2 and 12.1.3 of
the Petroleum Contract, all Development Costs and Operating Costs incurred shall
be recorded in the Joint Account separately.

      The Operator shall establish and maintain two separate accounts, namely:

      5.1.1.1 Development Costs account and

      5.1.1.2 Operating Costs account, in which all charges and costs as
classified pursuant to Articles 5.2 and 5.3 of this Accounting Procedure shall
be reflected.

      5.1.2 If either CNPC or the Parties make the decision to develop excess
associated natural gas for its sole account in accordance with Article 18 of the
Petroleum Contract or to undertake any other operation for its own account, the
relevant costs shall be accounted for separately.

      5.1.3 All items related to the Petroleum Operations such as discounts,
deductions, allowances, interest income, gains from various services,
indemnities from insurance and other miscellaneous income by the Operator, shall
be credited to the relevant expense accounts.

      5.1.4 All direct services or research work (including personnel) provided
by the superior organizations or Affiliates of the Parties and by third parties
for the Petroleum Operations shall be subject to the advance work order
procedures on the basis of the annual Budget or of the approval by the JMC and
shall be charged to the Joint Account after verification of relevant invoices.

      The work order procedure shall be established through consultations at JMC
meetings within three (3) months as of the Date of Commencement of the
Implementation of the Petroleum Contract. The rates charged for direct services
or research work (including personnel cost) provided by the superior
organization or Affiliates of the Parties shall be competitive when compared
with the rates of similar services furnished by the third parties. The Operator
shall, in accordance with Article 15 of the Petroleum Contract, give priority to
use direct services of research work (including personnel) provided by CNPC.

      5.2   Cost items:

      The following items shall be chargeable to the Joint Account by Operator's
net cost.

                                       11
<PAGE>

      5.2.1 Subcontractor charges:

      The charges paid to Subcontractors in accordance with contracts signed
between the Operator and Subcontractors.

      5.2.2 Personnel expenses:

      The contents and control of personnel expenses including but not limited
to reimbursable individual income taxes, provided that the Party will supply
supporting information for such taxes, shall be stipulated in Article 19.3 of
the Petroleum Contract.

      5.2.3 Travel and living expenses:

      Travel and living expenses paid according to Article 19 of the Petroleum
Contract to the personnel involved in the Petroleum Operations.

      5.2.4 Material expenses:

      Expenses paid in accordance with Article 4 of this Accounting Procedure to
purchase Material for use in the Petroleum Operations.

      5.2.5 Relocation and transportation expenses:

      Relocation and transportation expenses for the personnel involved in the
Petroleum Operations to be relocated into or out of the PRC and transferred from
job-sites to job-sites within the PRC.

      5.2.6 Maintenance, repair and leasing expenses:

      Expenses for maintenance, repair or replacement of the properties used in
the Petroleum Operations and the leasing expenses paid for leased properties and
equipment.

      5.2.7 Insurance premiums:

      Necessary net payment made for the insurance of the Petroleum Operations
and related costs and expenses, including deductibles paid in the event of loss
pursuant to Article 21.4 of the Petroleum Contract.

      5.2.8 Legal expenses:

      In order to protect the interests of the Parties, all costs or expenses
paid for attorney's fees, litigation, investigation, including expenses in
securing evidence, mediation and settlements. The expenses for handling legal
matters incurred for the interests of any Party shall be borne solely by such
Party.

                                       12
<PAGE>

      5.2.9 Taxes:

      All taxes paid according to the tax laws of the PRC, except for the income
taxes, Value Added Tax and royalty to be paid by the Parties or CNPC.

      5.2.10 Energy expenses:

      All costs in respect of fuel, electricity, heat, water or other energy
used and consumed for the Petroleum Operations.

      5.2.11 Field office facility charges:

      The costs and expenses of establishing, maintaining and operating any
offices, camps or housing facilities necessary for the performance of job-site
operations, including a share of the costs of any office used by staff directing
such operations (calculated by apportioning office costs and expenses on the
basis of space occupied by such staff).

      5.2.12 Communication charges:

      The costs of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
between the Contract Area and the base facilities.

      5.2.13 Ecological and environmental protection charges:

      The charges for any measures undertaken for the Petroleum Operations
within the Contract Area as required by relevant statutory regulations
formulated by the authorities concerned or pursuant to the programs agreed with
CNPC.

      5.2.14 Service charges:

      5.2.14.1 Technical service:

      The charges paid for services, such as rock specimen analysis, oil quality
tests, geological evaluation, data processing, design and engineering, well site
geology, drilling supervision, special research programs and other technical
services.

      5.2.14.2 General service charges:

      Professional consultant charges incurred for the common interests of the
Parties and charges for other services to obtain original data needed for
Petroleum Operations from outside sources, except legal service.

                                       13
<PAGE>

      5.2.14.3 CNPC's assistance charges:

      (A)   The charges for the assistance provided by CNPC for the Parties to
carry out the Petroleum Operations in accordance with Article 9 of the Petroleum
Contract.

      (B)   For all assistance to be provided by the head office organization of
CNPC to the Parties in the course of the Development Operations, CNPC shall
charge an administrative fee of One Hundred and Seventy-five Thousand Dollars
($175,000) for each calendar year. The aforesaid administrative fee shall be
paid respectively on June 1st and December 1st each calendar year, with
Eighty-seven Thousand Five Hundred Dollars ($87,500) for each time.

      (C)   For all assistance to be provided by the head office organization
of CNPC to the Parties in the course of the Production Operations before CNPC
takes over the said Production Operations, CNPC shall charge an administrative
fee of: Two Hundred and Fifty Thousand Dollars ($250,000) for each calendar year
from the first year (1st) to the third year (3rd) of the Production period; One
Hundred and Seventy five Thousand Dollars ($175,000) for each calendar year from
the fourth year (4th) to the ninth year (9th) of the Production period and One
Hundred Thousand Dollars ($100,000) for each calendar year from the tenth year
(10th) to the twentieth year (20th) of the Production period. The aforesaid
administrative fee will be paid in two equal installments on the first of June
and first of December of each calendar year.

      5.2.15 Damages and losses to the assets:

      All costs and expenses necessary for the repair, replacement or supplement
of the assets resulting from damages or losses incurred by fire, flood, storm,
theft or any other force majeure causes, excluding the losses specified in
Article 8.4 of the Petroleum Contract which shall be born by the Operator alone;
provided that such loss are such that would be the responsibility of Operator
pursuant to Section 3.6 of the Joint Operating Agreement, and otherwise will be
borne by all the Parties in proportion to their Participating Interests.

      5.2.16 Personnel training costs:

      Costs incurred for personnel training pursuant to Article 16 of the
Petroleum Contract and Annex IV -- Training of Chinese Personnel and Transfer of
Technology.

      5.2.17 Miscellaneous expenses:

      Any reasonable miscellaneous expenses needed for the Petroleum Operations
excluded in the above items of expenses, such as bank charges, books, stationery
and conference expenses as well as other reasonable expenses.

                                       14
<PAGE>

         5.2.18   Overhead:

      Overhead refers to the indirect costs for the managerial and operational
services provided by the Operator's superior management organizations for the
Petroleum Operations, including management, administration, accounting,
treasury, inter-company audit, tax, legal matters, procurement, employee
relations, financing, the collection of economic data and costs for general
consultation on such planning, design, research and operational activities, etc.
to the extent that these are not chargeable under Article 5.1.4 of this
Accounting Procedure. The overhead for the Pilot Test Operations shall be
calculated in accordance with the following tiers and based on the sum of the
total actual costs from Article 5.2.1 through Article 5.2.17 and Article 5.2.19
of this Accounting Procedure, but not including CNPC's assistance charges under
Article 5.2.14.3 of this Accounting Procedure.

<TABLE>
<CAPTION>
         Direct Costs                                Percentage Rate
               ($/Year)                                    (%)

<S>                        <C>                             <C>
         First Tier:       0 to 5,000,000                  5%
         Second Tier:      5,000,001 to 15,000,000         3%
         Third Tier:       15,000,001 to 25,000,000        2%
         Fourth Tier:      Over 25,000,001                 1%
</TABLE>

      The overhead rates for the Development Operations shall be unanimously
agreed upon by the Parties, and then with CNPC through discussions at the time
when the Development Budget is being prepared. However, direct costs for
Development shall not include investments on special items of construction which
shall include, but not be limited to, gas processing facilities, terminal
loading and other facilities of which the overhead rates shall be unanimously
agreed upon through discussions between the Parties, and then with CNPC at the
time when the Development Budget is being made.

      When the first Budget is prepared for the calendar year of commencement of
commercial production from an oil field, the overhead rates for the production
period and its related calculation method as well as the utilization method
shall be unanimously agreed upon through discussions between the Parties, and
then with CNPC.

      On the last working day of each month, the Operator shall make provision
into the Joint Account for the overhead fees for the current month, calculated
on the basis of cumulative actual expenditure for the calendar year to that date
and payment shall be made from the Joint Account on the last working day of the
following month. The final adjustment of the overhead shall be made at the end
of the calendar year in respect to any difference between the actual payment by
the Joint Account and the total overhead for that calendar year calculated on
the annual cumulative actual investment expenditure at the end of such year. Any
excess shall be refunded and deficiencies made good.

      The indirect charges provided for in this Section 5.2.18 may be amended
periodically by unanimous agreement between the Parties if, in practice, these
charges are found to be insufficient or excessive.

                                       15
<PAGE>

      5.2.19 General and administrative expenses:

      General and administrative expenses refer to the administrative expenses
incurred for offices established by the Operator within the PRC for the JMC and
its subordinate bodies for the performance of the Petroleum Operations not
otherwise directly chargeable pursuant to Article 5.2 of the Accounting
Procedure in accordance with the provisions of the Petroleum Contract. Such
expenses shall be classified according to minor accounts.

      5.3   Except as otherwise provided in this Accounting Procedure, the
allocation of common costs and expenses for each item of operations shall be
provided by the Parties if they are Development Costs and shall be charged in
proportion to the Operating Costs actually incurred in each month if they are
the Operating Cost.

      5.4   With respect to the expenditures or excess expenditures as mentioned
in Article 10.2.4 (b) of the Petroleum Contract which are determined by JMC to
be unreasonable, to the extent that such expenditures or excess expenditures
were within the limits for by which approved Work Programs and Budgets may be
exceeded as provided for in Section 6.3 of the Joint Operating Agreement, or
were made to safeguard and prevent injury or death, or to prevent damage to
property or pollution, the Parties will bear such expenditures in proportion to
their respective Participating Interests.

                                       16
<PAGE>

                           ARTICLE 6 RECOVERY OF COSTS

      6.1   In accordance with the provisions of Article 12.2 of the Petroleum
Contract, the Operating Costs of the oil field shall be recovered from the
production of the oil field. In accordance with the provisions of Article 12.3
of the Petroleum Contract, the Development Costs incurred by the Parties and the
Pre-development Costs incurred by CNPC shall be recovered from the production of
the oil field.

      6.2   At the date of completing each lifting of crude oil, the Operator
shall make separate records into the Joint Account for the appropriate
reimbursement of the Operating Costs in accordance with Article 12.2 of the
Petroleum Contract. Written notices shall be sent by the Operator to CNPC and
each Investing Party at the same time.

      6.3   In accordance with the provisions of Article 19.1 of the Petroleum
Contract, the Operator shall establish complete books for recording the volume
and value of crude oil and/or natural gas, precisely reflecting the production
and the disposal of the crude oil and/or natural gas within the term of the
Petroleum Contract.

      6.4   Crude oil production in each calendar year for the oil field within
the production period shall be accounted according to the allocation proportions
specified in Article 13 of the Petroleum Contract and at the crude oil price
determined pursuant to Article 14.3 of the Petroleum Contract.

                                       17
<PAGE>

                          ARTICLE 7 ACCOUNTING REPORTS

      7.1   The Operator shall provide relevant accounting reports and
statements based on the Accounting System to CNPC and each Party. Monthly
reports shall be submitted within thirty (30) days after the end of each month,
quarterly reports within forty-five (45) days after the end of each calendar
quarter and annual reports within forty-five (45) days after the end of each
calendar year. Monthly, quarterly and annual reports shall be submitted in
accordance with requirements and formats specified in the Accounting System.

      7.2   Accounting reports and statements as provided in Article 7.1 shall
indicate by appropriate classification the nature thereof, the corresponding
Budget category, and the portion of such costs charged to each of the Parties.
These reports and statements, as a minimum, shall contain the following
information:

      -   advances of funds setting forth the currencies received from each
          Party

      -   the share of each Party in total expenditures

      -   the current account balance of each Party

      -   summary of costs, credits, and expenditures on a current month,
          year-to-date, and inception-to-date basis or other periodic basis, as
          agreed by Parties

      -   details of unusual charges and credits

      7.3   Operator shall, upon request, furnish a description of the
accounting classifications used by it.

      7.4   Amounts included in the reports and statements shall be expressed in
Dollars and reconciled to the currencies advanced.

      7.5   Each Party shall be responsible for preparing its own accounting and
tax reports to meet the requirements of the PRC and of all other countries to
which it may be subject. Operator, to the extent that the information is
reasonably available from the Joint Account records, shall provide Non-Operators
in a timely manner with the necessary statements to facilitate the discharge of
such responsibility.

      7.6   Any Investing Party may require the Operator to allow its staff to
have access to the Joint Account Accounting Records relating to the application
of expenses in the stipulated custody period, upon giving thirty (30) days
notice but such access shall not unduly hinder the Operator's normal operations.

                                       18
<PAGE>
                                 ARTICLE 8 AUDIT

      8.1   A Non-Operator, upon at least thirty (30) days advance notice in
writing to Operator and all other Non-Operators, shall have the right to audit
the Joint Accounts and records of Operator relating to the accounting hereunder
for any calendar year within the twenty-four (24) month period following the end
of such calendar year. The cost of each such audit shall be borne by
Non-Operators conducting the audit. It is provided, however, that Non-Operators
must take written exception to and make claim upon the Operator for all
discrepancies disclosed by said audit within said twenty-four (24) month period.
Where there are two or more Non-Operators, the Non-Operators shall make every
reasonable effort to conduct joint or simultaneous audits in a manner which will
result in a minimum of inconvenience to the Operator. Operator and Non-Operators
shall make every reasonable effort to resolve any claim resulting from an audit
within a reasonable period of time. Operator shall endeavor to produce
information from Affiliates reasonably necessary to support charges from those
Affiliates to the Joint Account.

      8.2   Any information obtained by a Non-Operator under the provisions of
this Article 8 which does not relate directly to the Joint Operations shall be
kept confidential and shall not be disclosed to any party, except as would
otherwise be permitted by Section 13.1(c) and (i) of the Joint Operating
Agreement.

      8.3   In the event that the Operator is required by law to employ a public
accounting firm to audit the Joint Account and records of Operator relating to
the accounting hereunder, the cost thereof shall be a charge against the Joint
Account, and a copy of the audit shall be furnished to each Party.

                                       19
<PAGE>

               ARTICLE 9 TRANSFER PROCEDURE FOR THE JOINT ACCOUNT

      9.1   If, at the expiration of the Pilot Test period, the Parties opt to
enter into Development period, or when the oil field within the Contract Area
goes from Development into Production, or when the Parties terminate the
Petroleum Contract, an inventory and check of all properties and accounts shall
be conducted.

      If the Petroleum Contract has entered into the Development period or the
Production period, the Operator (after taking an inventory of all properties
taken by all Investing Parties) shall make a proposal to the Operating Committee
and JMC for its approval listing the remaining equipment and Materials needed
for the Petroleum Operations for the following period and which shall be carried
forward to the next period in book values in the Joint Account. The Operator
shall be responsible for the disposal of the equipment and materials not needed
for the Petroleum Operations, the gains or losses derived from such disposal
shall be allocated in accordance with the share of each Investing Party in
proportion to the overall investment amount of all Investing Parties and be
adjusted against the original accounts.

      If the Petroleum Contract terminates, the method of an inventory to all of
the remaining equipment and Materials shall be the same as mentioned above, and
the gains and losses derived from such disposal shall be adjusted against the
accounts of the original Investing Parties in accordance with the above
mentioned methods.

      9.2   In accordance with the provisions of Article 8.9 of the Petroleum
Contract, when CNPC becomes the Operator of the oil fields within the Contract
Area, the former Operator shall transfer to CNPC all the Accounting Records
relating to the Joint Account.

      9.3   Upon the termination of the Petroleum Contract, the Operator shall
transfer all the relevant vouchers, books and statements over to CNPC for
custody.

      9.4   In conducting the transfer of the accounting books and inventory and
check of all the properties in accordance with the provisions of this Accounting
Procedure, the implementation procedure for the transfer and verification, the
accounting files to be transferred and accounting matters to be settled as well
as other details shall be agreed upon through consultation in advance between
the Parties and CNPC. The transfer procedure shall be completed within the time
period agreed upon with CNPC.

                                       20

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00062-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00062-of-00352.parquet"}]]