Document:

petro8k02012008ex10-1.htm

    
      

      

    

    

      Farmout
Agreement

      “North
Semitropic Prospect”

      

      This
Farmout Agreement (“FOA”), when accepted and agreed to by the under­signed
parties, shall set forth the terms, conditions and covenants under which Transco
Oil & Gas, Inc., here­inafter referred to as "Farmor" and those entities
listed on the signature page, hereinafter referred to collec­tively as
"Farmee”, shall pursue the exploration and development of the North Semitropic
Prospect Area. In consideration of the mutual terms and covenants provided in
this FOA, Farmor and Farmee agree as follows:

      

      
        
          	
                	
                  1. 

                	
                   Farmor
      is the owner of certain Oil & Gas Leases covering +/-2,390 net acres
      located in Kern County, California and more specifically set out in the
      attached Exhibit “A” and the Lease Schedule. This FOA is a binding
      agreement and is entered into by the parties concurrently with the
      industry model form Joint Operating Agreement (JOA), attached as Exhibit
      “B” and covering the operations to be conducted on the North Semitropic
      Prospect. The specific intent of Farmor in granting this Farmout Agreement
      is to cause the drilling of the first test well to exploit the productive
      potential of two (2) specific target horizons, the fractured Monterey
      Shale at +/- 10,000 ft. estimated vertical depth and the Freeman
      Jewett/Vedder Sand at +/- 14,000 ft. estimated vertical depth. The
      operations for drilling and testing shall be conducted as per the AFE
      & Drilling Program attached to the JOA as Exhibit “H” and are subject
      to change by the Operator.

                

        

      

      

      
        
          	
                	
                  2. 

                	
                   Property
      subject to this FOA is described on Exhibit “A” attached hereto and hereby
      made apart of this FOA, as well as the Lease Schedule. Also described on
      Exhibit “A” is the Area of Mutual Interest (AMI) between Farmor and
      Farmee. The current Net Leasehold Acreage is +/- 2,390. The net leasehold
      is subject to updates as additional leases are acquired within the AMI.
      Subsequent to executing this FOA, Farmee shall be responsible for 100% of
      the costs to acquire new leases within the AMI as initiated by the
      Operator as well as all delay
rentals.

                

        

      

      

      
        
          	
                	
                  3. 

                	
                   Farmor
      and Farmee agree that Farmor and/or its assignees including Farmor’s
      originating geologist will collectively retain the specified 6% Overriding
      Royalty Interests (ORRI) and 15% Back-In
      Working Interests (BIWI) as set out in Exhibit “A”. Said ORRI and BIWI
      shall cover the current Leaseholds, future Leaseholds and all Lands within
      the AMI as set out in the attached Exhibit “A”. The ORRI shall be free and
      clear of any and all costs for lease acquisitions, drilling, completions,
      operating, re-works, etc. and shall receive their specific ORRI percentage
      of gross revenues based on 100% of
      production sales. Farmor’s 15% WI shall
      have the option, on a well by well basis, to participate on a follow up
      well or maintain the 15% BIWI which
      shall be on a per well basis and after payout of all new lease
      acquisitions, hard drilling & completion costs and well operating
      costs.

                

        

      

      

      
        
          	
                	
                  4. 

                	
                   Transco
      Oil & Gas, Inc. or its appointee shall be the initial Operator and
      will deliver to the drilling partners a 77.00% Net
      Revenue Interest (NRI) on the drill site acreage. Farmee collectively will
      earn 100%
      Working Interest in the first test well Before Pay Out (BPO), to become an
      85%
      Working Interest After Pay Out (APO) on a per well basis. Farmee shall be
      responsible for 100% of the
      prospect acquisition, estimated drilling, testing and completion cost for
      the first test well, T.D. +/- 14,000 ft. (Monterey & FJ/Vedder
      test).

                

        

      

      

      
        
          	
                	
                  5. 

                	
                   Originating
      Geologist Fee: $10,000 on follow up wells includes updating all
      geology/geophysical interpretations based on new data acquired from
      previous wells. Also well site geology/geophysics during drilling and
      completion operations.

                

        

      

      

      
        
          	
                	
                  6. 

                	
                   Estimated
      costs for the first test
well.

                

        

      

      

      
        	 
      	
                Prospect
      Acquisition:

              	 	
                $   
      537,750

              	 
      	
                +/-
      $225 / acre for GG&L + OH

              
	 
      	
                Drilling
      14,000’:

              	 	
                1,500,000

              	* 
      	
                Variable
      Costs, as per current AFE.

              
	 
      	
                Completion:

              	 	
                900,000

              	* 
      	
                Completion
      in FJ/Vedder.

              
	 
      	 
      	 	 
      	 
      	
                *See
      attached AFEs, subject to change.

              
	 
      	 
      	 	
                $ 2,937,750

              	 
      	 
      

      

       

      
 

      Transco
Oil & Gas, Inc. <> 7643 McLaughlin Road, # 215 <> (719) 520-3208
/ (719) 635-6181 fax

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

         

      

      
        
          	
                	
                  7. 

                	
                   Should
      the +/- 14,000’ test of the FJ/Vedder result in a dry hole, the well will
      be plugged back and a completion made in the fractured Monterey Shale to
      +/- 10,000’. As per current AFE, the call for completion in the Monterey
      Shale will be about $1,100,000 including a +/- 1,000’ horizontal
      leg.

                

        

      

      

      
        
          	
                	
                  8. 

                	
                   Additional
      Test Wells: An election (drilling commitment) for a test well to evaluate
      the deep Eocene structure (+/-16,500’) must be made within 12 months and
      spud no longer than 18 months from date of the FOA. Failure by Farmee to
      elect and spud will result in deep rights reverting to Farmor and Farmee
      retaining all rights to 100 ft. below deepest vertical drill
      depth.

                

        

      

      

      
        
          	
                	
                  9. 

                	
                   The
      designated Operator will, as soon as practical after full execution of the
      Farmout Agreement covering 100% of the
      working interest, initiate the permitting process and contract for a
      drilling rig for a mutually agreeable move in date. The first test well
      shall be drilled to +/-
14,000’.

                

        

      

      

      
        
          	
                	
                  10. 

                	
                   The
      Prospect Acquisition fee listed above is due and payable to Farmor upon
      signing of this FOA. The “Cash Calls” by Operator for the above listed
      Drilling & Completion funds as per the latest AFE shall be made
      following full execution of this FOA. All Cash Calls for Drilling &
      Completion funds and/or any cost overruns are due within 3 days after
      Operator issues a Cash Call. Failure to meet a Cash Call for funds as
      called for herein shall result in Farmee forfeiting all working interest
      ownership and previously paid in funds to
  Farmor.

                

        

      

      

      This FOA
may be signed in counterparts all constituting a single agreement. Farmee and
Farmor will sign this FOA and accompanying JOA (see attached) concurrently. This
FOA when signed shall become the governing agreement and will prevail over any
conflicts between this FOA and the JOA.

       

      
        
 

        
          	 
      	
                  Farmor:
      Transco Oil & Gas,
      Inc.          
       

                
	 
      	 
      
	 
      	
                  By:
      /s/ Larry J.
      Messmer                        
      

                
	  
      	
                  Larry
      J. Messmer –
      President              
       

                
	      
                  Dated:     1 February
      2008              
      

                	
                   
      7643 McLaughlin Rd.,
      #215                    
      

                  Falcon, CO
      80831                                    
      

                
	
                	
                  (719)
      520-3208 / (719)
      635-6181              
      

                
	 
      	 
      

        

         

        
          	 
      	 	 
      	 	 
      	 	 
      	 	 
      
	
                  Farmee:

                	 	
                  WI BPO

                	 	
                  WI APO

                	 	
                  % of Cost

                	 	
                  Acquisition Cost

                
	 
      	 	 
      	 	 
      	 	 
      	 	 
      
	
                  PetroSouth Energy
      Corp.

                	 	
                  25%

                	 	
                  21.25%

                	 	
                  25%

                	 	$134,437.50 

        

        

        
          	
                  By:
      /s/ Fred B.
      Zaziski                                       
        

                
	 
      
	
                       
      Fred B. Zaziski -
      Chairman                           
      

                
	
                          
      Print Name & Title

                
	 
      
	
                  Address:

                
	 
      
	
                   
      2033 State Highway 249, Ste. 200 -
      113           
      

                
	 
      
	
                        
                     
      Houston, TX
      77070                                
                 
      

                  

                
	 
      
	
                    (281)
      378-1563  /  (281)
      271-8600                      
      

                
	
                                
      Phone & Fax

                

        

      

      Transco
Oil & Gas, Inc. <> 7643 McLaughlin Road, # 215 <> (719) 520-3208
/ (719) 635-6181 fax

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

     

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

      

      EXHIBIT
“B” to the North Semitropic Prospect, Farmout Agreement

      

      OPERATING
AGREEMENT

      THIS
AGREEMENT entered into by and between Transco Oil & Gas,
Inc. hereinafter designated and referred to as "Operator", and the
signatory party or parties other than Operator, sometimes hereinafter referred
to individually herein as "Non-Operator", and collectively as
"Non-Operators".

      

      WITNESSETH:

      WHEREAS, the parties to this agreement
and in accordance with the Farmout Agreement to the North Semitropic Prospect
(hereinafter referred to as “FOA”) to which this Operating Agreement is attached
as Exhibit “B”, shall earn specified Oil and Gas Interests in the land
identified in Exhibit "A" to the FOA. It is agreed that the FOA shall be the
governing agreement and shale prevail in case of any conflicts between this JOA
and FOA , 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 to as
follows:

      

      ARTICLE
I

      DEFINITIONS

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

      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 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 conduced 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 such rule or order, a
Drilling Unit shall be the drilling unit as established by the pattern of
drilling in the Contract Area or as 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 to 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
the 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:

        :

      See
Exhibit “A” attached to the FOA on North Semitropic Prospect

      (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,

      
        
           

        

        
          1

          
            

          

        

        
           

        

      

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

      

      
        	
                ________  B.

              	
                Exhibit
      "B", Form of Lease.

              

      

      
        	
                      X         C.

              	
                Exhibit
      "C", Accounting Procedure.

              

      

      
        	
                      X         D.

              	
                Exhibit
      "D", Insurance.

              

      

      
        	
                ________  E.

              	
                Exhibit
      "E", Gas Balancing Agreement.

              

      

      
        	
                      X         F.

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

              

      

      
        	
                ________  G.

              	
                Exhibit
      "G", Tax Partnership.

              

      

      
        	
                      X         H.

              	
                Other:    Authority for
      Expenditure (AFE) & Drilling
      Program.                             
      

              

      

      

      If any
provision of any exhibit, is inconsistent with any provision contained in the
body of this agreement and/or the FOA, the provisions of the
FOA shall
prevail.

      

      ARTICLE
III

      INTERESTS
OF PARTIES

      
        	
                A.

              	
                Oil
      and Gas Interests:

              

      

      Transco
Oil & Gas, Inc. (Farmor) is the owner of the Oil & Gas Interests under
certain leases of record.

      

      
        	
                B.

              	
                Interests
      of Parties in Costs and Production:

              

      

      In
accordance with and subject to the FOA, 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 paid for and
working interest ownership earned, by the parties as their interests are set
forth in Exhibit "A" to the
FOA.  In the same manner, the parties shall also own a working
interest in 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.

      

      
        	
                C.

              	
                Subsequently
      Created Interests: Shall not apply.

              

      

      

      

      ARTICLE
IV

      TITLES

      
        A.        Title
Examination:

      

      Title
examination shall be made on the Drill site of any proposed well prior to
commencement of drilling operations. No well shall be drilled on the Contract
Area until after (1) the title to the drill site has been examined as above
provided,     and (2) the title has been approved by
the examining attorney on behalf of the Drilling Parties in such
well.

      

      B.  
     Loss or Failure of Title:

      1.  Failure of
Title:  Should any Oil and Gas Interest or Oil and Gas Lease be
lost through failure of title, which loss results in a
reduction  of  interest  from  that  shown  on  Exhibit  "A",  this
agreement, nevertheless, shall continue in force as to all remaining Oil and Gas
Leases and Interests, and, the loss of title shall be jointly born as to working
interest ownership set out on Exhibit “A”.

      

      2.  Loss  by  Non-Payment  or  Erroneous  Payment  of  Amount  Due:  If,
through mistake or oversight, any rental, shut-in well
payment,  minimum  royalty  or  royalty  payment,  or
other payment necessary to maintain all or a portion of an Oil and Gas Lease or
Interest is not paid or is erroneously paid,  and as a result a Lease
or Interest terminates, there shall be no monetary liability against the party
who failed to make such payment.

      3.  Other  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 of its primary terms 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.

      

      ARTICLE
V

      OPERATOR

      A.         Designation
and Responsibilities of Operator:

      ___________________________________________________
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.

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

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

      

      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 two (2) or  more 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 he 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
by 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 therefore 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 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 operations 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 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 no
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”.

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

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

      

      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 shall 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 operations 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 to 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

      A.         Initial Well: Subject to the FOA,
Operator shall commence the drilling (“Commence the drilling” is defined as,
starting the drilling process by obtaining and/or completing one or more of the
following: permits, drill site location, roads, sumps, cellar, rat & mouse
hole and setting conductor pipe) of the Initial Well at the following location:
TBD in T26S, R23E in Kern County, California. Exact coordinates to be
established by survey, and shall thereafter continue the drilling of the well
with due diligence to a depth sufficient to test the Vedder Sand seismic anomaly
at +/- 14,000 feet or to a lesser depth should impenetrable formations, hole
conditions or mechanical problems be encountered that would render further
drilling impractical in keeping with good oilfield practice. The drilling of the
Initial Well and the participation therein by all parties is obligatory, subject
to Article VI.C.1. as to participation in Completion operations and Article
VI.F. as to termination of operations and Article XI as to occurrence of force
majeure.

      

      B.         Subsequent
Operations: Shall be conducted subject to the FOA and only within those earned
depths of operation.

      1.  Proposed  Operations:  If any party hereto should
desire to drill any well on the Contract 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 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 with the time period hereafter set forth, Operator shall, no later
than ninety (90) days after expiration of the notice period of thirty (30) days
(or as promptly as possible 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 of Sidetracking
operations, reimburse the Drilling Parties in accordance with Article VI.B.4 in
the event of a Deepening operation and in accordance with Article VIB.5 in the
event of a Sidetracking operation.

      

      
        
           

        

        
          4

          
            

          

        

        
           

        

      

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

      

      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
possible after the expiration of the forty-eight (48) hours 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 delivery 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 interest together
will 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 the
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 interest in the operation and the
party serving as Operator shall commence such operation within the period
provided in Article VI.B1., 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 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, 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)  300 % 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)  500 % 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
that 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.

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

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

      

      (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 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 operations of said well and there shall be
added to the sums to be recouped by the Consenting Parties 150% 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 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, Sidetracking, Deepening,
Recompleting or 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:

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

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

      

       (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 party (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 savable 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 operations is conducted, then a Non-Consenting Party
may participate in the Deepening of the well with no payments 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

      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 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.  Conformity to Spacing
Pattern.  Notwithstanding the provisions of this Article
VI.B.2., it is agreed that no wells shall be proposed to be drilled to or
Completed in or produced from a Zone from which a well located elsewhere on the
Contract Area is producing, unless such well  conforms to the
then-existing well spacing patter for such Zone.

      8.  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 all parties 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.
      1:  All necessary expenditures for the Drilling,
      Deepening or Sidetracking, testing, Completing and equipping of the well,
      including necessary tankage and/or surface
  facilities.

              

      

      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.

      

      

      
        
           

        

        
          7

          
            

          

        

        
           

        

      

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

      

      D.  Other
Operations:

      Operator shall not undertake any single
project reasonably estimated to require an expenditure in excess of            Thirty
Thousand            
Dollars ($ 30,000.00) 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        Thirty
Thousand         Dollars ( $
30,000.00).  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 liens 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 by 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 abandoned as a dry hole shall not be
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  twenty four (24) hours (exclusive of
Saturday, Sunday and legal holidays) after delivery of notice via either phone,
fax or courier 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  twenty four (24) 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  twenty four (24) 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 a
producer 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 thirty (30) days of delivery of notice via fax, mail or courier
of proposed abandonment shall be deemed an election to consent to the
proposal.  If, within thirty (30) 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
future 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 and 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.

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

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

      

      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 IV.E.; and provided further,
that Non-Consenting Parties who own an interest in a portion of the well shall
pay their proportionate share of abandonment and surface restoration costs for
such well as provided in Article VI.B.2.(b).

      

      F. Termination of
Operations:

      Upon 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         51     %
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 provide in Article
VI.B.1, and the provisions of Article VI.B. or VI.E. shall thereafter apply to
such operation, as appropriate.

      

      ARATICLE
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 ace in good faith in their
dealings with each other with respect to activities hereunder.

      

      
        	
                B.

              	
                Liens
      and Payment Defaults:

              

      

      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 line, 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 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.

      
        
           

        

        
          9

          
            

          

        

        
           

        

      

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

      

      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 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, 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 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
provisions 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.C., all notices and
elections shall be delivered  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 proposed 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 of 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.  If election is made to proceed under this
provision, then the non-defaulting parties may not elect to sue for the unpaid
amount pursuant to Article VII.D.2.

      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 interest, 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.

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

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

      

      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 or 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 this 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 Attorney’s
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 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  Operator who subjected such lease to this agreement at
its or their expense  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 pro-visions of Article IV.B.2.

      Operator shall notify Non-Operator 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-Operator,
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 Lases 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 party 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 share of all tax payments in the manner provided in Exhibit
"C".

      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 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/or 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 deliver 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, such
lease to be on the form attached hereto as Exhibit "B".  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 not 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 to
be subject to an Operating Agreement in the form of this agreement.

      

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

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

      

      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 interests 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 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 of this Article shall
also 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 be come 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 a well drilled inside the Contract Area.

      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 and 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 such 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 an 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.

      

      

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

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

      

      F.  Preferential
Right to Purchase:

      x (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 any one 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 Regulations 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
in 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      Thirty
Thousand       Dollars ($30,000.00) 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.

      

      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
obligation 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 deliver 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
be 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.

      

      
        
           

        

        
          13

          
            

          

        

        
           

        

      

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

      

      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 therefore 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
conservation 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.  .

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

      With respect to 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 owning 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 is its sole discretion determines that there is insufficient
participation to justify commencement of drilling operations.  In the
event of such 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.

      

      
        
           

        

        
          14

          
            

          

        

        
           

        

      

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

      

      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

      
        

         

        A.  ASSIGNMENTS:

      

      
         

        A sale or
assignment of interest by any party will not relieve or release such party of
its obligations hereunder. Further, the assigning party shall be and remain
liable for the obligations incurred by its assignee unless and until said
assignee has been approved in writing by the other parties hereto, which
approval shall not be unreasonably withheld. However, no approval shall be given
unless and until all monies due and accounts payable accruing out of the
development and operation of the lease(s) subject hereto shall have been paid in
foil by the party assigning its interest and the Operator has been furnished
with a certified copy of the recorded instrument evidencing the sale or
assignment.

      

      
         

        B.  REAL
COVENANT:

      

      
         

        The
terms, covenants and conditions of this Agreement shall be covenants running
with the leasehold estates covered therein, and with each transfer or assignment
of said lands or leasehold estates. Each party making an assignment or transfer
of lands or leasehold estates covered hereby shall state in such assignment or
transfer that it is subject to all of the terms, covenants and conditions hereof
and shall promptly give notice to the Operator of any such assignment or
transfer.

      

      
         

        C.  ROYALTIES,
OVERRIDING ROYALTIES AND OTHER PAYMENTS:

      

      
         

        Operator
shall pay or deliver, or cause to be paid or delivered for the account of the
parties on jointly owned leases, and who are not taking their production in
kind, all royalties and other burdens to the extent shown on Exhibit "A". If the
interest of any party in any oil and gas lease covered by this Agreement is
subject to any royalty, production payment, or other charge over and above those
shown on Exhibit "A", such party shall assume and alone bear all such
obligations and shall account for or cause to be accounted for, such interest to
the owners thereof. Operator shall not be liable for failure to pay any
royalties or other burdens, or because of erroneous payments, unless such
failure or error results from gross negligence or willful
misconduct.

      

      
         

        No party
shall ever be responsible, on any 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 would demand and receive settlements on a higher
price basis, the party contributing such lease shall alone bear the royalty
burden insofar as such higher price is concerned.

      

      
         

        The party
taking its production in kind ("taking party") shall pay or cause to be paid or
delivered all royalties and other burdens due on its share of production and
shall hold the other parties free from any liability therefore. However, said
taking party shall not be liable for failure to pay any royalties or other
burdened, or because of erroneous payments, unless such failure or error results
from gross negligence or willful misconduct.

      

      
         

        D.  CASH
CALL

      

      
         

        In
addition to the rights granted Operator under Article VII.C., Operator shall
have the right to issue a Cash Call in any well proposed under the terms of
Article VLB. The Cash Call shall be in the form of an invoice, due and payable
upon receipt by Non-Operator, and shall include a copy of the Cost Estimate from
which said Cash Call is being made. The amount of the Cash Call shall be
determined by the "dry hole" cost set forth in the Cost Estimate and each
Non-Operator shall be invoiced for his proportionate working interest shall of
that cost. All Cash Call monies must be received prior to the commencement of
drilling operations for the well. Failure to pay the Cash Call prior to
commencement of drilling operations may be considered, at the sold discretion of
the Operator, as an election not to participate in the drilling of the well,
notwithstanding any previous consent received pursuant to Article VLB., and the
Non-Operator's interest shall be governed by the terms of Article XV.G and
Article VI.B.2.

      

      
         

        E.  AREA
OF MUTUAL INTEREST

      

      
         

        An Area
of Mutual Interest (AMI) is hereby established covering the lands as set out on
Exhibit "A", Article I to this Agreement. The AMI shall remain in full force and
effect for and during the term of this Agreement in accordance with the
provisions of Article XIII hereof.   Each of the parties hereto
represents that, as of the effective date hereof, it is not a party to another
agreement creating an area of mutual interest conflicting with the one hereby
established.

      

      
        

      

      
        (i) A
party's AMI interest shall be that party's interest as defined in Article IV of
Exhibit "A", in the Contract Area at the time of acquisition of the Acquired
Interest. AS to each Acquired Interest each Non-Acquiring Party shall have the
option, but not the obligation, to elect to participate in such acquisition hi
an amount equal to such party s AMI Interest divided by the AMI Interest of all
parties so electing to participate or may elect to limit participation in such
acquisition to its applicable percentage set forth in Article IV of Exhibit "A"
hereto by paying a like percentage of the acquisition costs of such Acquired
Interest.

      

      
         

        (ii) All
parties electing to participate in an Acquired Interest shall notify the
Acquiring Party of such election within fifteen (15) days (forty-eight hours,
excluding Saturdays, Sundays and holidays if a drilling rig, completion rig or
workover rig is the operating within the AMI which effects the Acquired
Interest) after receipt of notice from the Acquiring Party. Failure of a party
having the right to participate to timely elect shall be deemed an election by
such party not to participate in such Acquired Interest. All parties electing to
participate hi an Acquired Interest shall promptly remit such party's share of
the costs of acquisition to the Acquiring Party within ten (10) days after
receipt of any invoice from the Acquiring Party, and such participating party
shall assume its proportionate share of all obligations relating to the Acquired
Interest. Each of the participating parties agrees to execute and deliver all
such assignments, conveyances and other such documents as may be necessary to
vest title to the Acquired Interest in the parties entitled to participate
therein.

      

      

      (See
Next Page for Signatures)

      

      
        
           

        

        
          15

          
            

          

        

        
           

        

      

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

      

       

       

      
 

      

      IN
WITNESS WHEREOF, this agreement shall be effective as of       1st         
day of       February       ,
2008 .

      

      OPERATOR

      

      

      
        	
                Transco Oil and Gas, Inc.

              	 
      	
                By:

              	
                Larry J. Messmer,
  President

              
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	
                NON-OPERATORS

              
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	
                Petrosouth Energy Corp.

              	 
      	
                By:

              	
                Fred B. Zaziski,
Chairman

              
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	
              	 
      	
                By:

              	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	
              	 
      	
                By:

              	 
      
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	
              	 
      	
                By:

              	 
      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      16Exhibit
10.1

 

Execution Copy

 

FOURTH
AMENDMENT TO

CREDIT AGREEMENT

 

THIS FOURTH
AMENDMENT TO CREDIT AGREEMENT (this “Fourth Amendment”),
dated as of February 6, 2008 (the “Fourth Amendment Closing Date”)
is among HILAND OPERATING, LLC, a
Delaware limited liability company (the “Borrower”), the banks and other
financial institutions listed on the signature pages hereto (together with
each other person who becomes a Lender, collectively the “Lenders”), and
MIDFIRST BANK, a federally
chartered savings association, individually as a Lender and as the
Administrative Agent (the “Administrative Agent”).

 

Preliminary
Statement

 

WHEREAS, the Borrower, the Administrative Agent
and the Lenders are parties to that certain Credit Agreement dated as of February 15,
2005 (as same may be further amended, restated, increased and extended, the “Original
Credit Agreement”), under and subject to the terms of which the Lenders
have committed to make Revolving Loans and issue Letters of Credit to the
Borrower; and

 

WHEREAS, the Borrower, the Administrative Agent and the
Lenders are parties to that certain First Amendment to Credit Agreement dated
as of September 26, 2005 (the “First Amendment”); and

 

WHEREAS, the Borrower, the Administrative Agent
and the Lenders are parties to that certain Second Amendment to Credit
Agreement dated as of June 8, 2006; and

 

WHEREAS, the Borrower,
the Administrative Agent and the Lenders are parties to that certain Third
Amendment to Credit Agreement dated as of July 13, 2007 (the “Third
Amendment”; together with the First Amendment, the Second Amendment and the
Original Credit Agreement, the “Credit Agreement”); and

 

WHEREAS, the Borrower has requested that the
Administrative Agent and Lenders modify the Credit Agreement to change certain
terms thereof, including, among other things, to increase the size of the
Revolver A Commitment from $241,000,000 to $291,000,000; and

 

WHEREAS, the Administrative Agent and Lenders
have agreed to modify the Credit Agreement in accordance with the terms and
conditions contained in this Fourth Amendment; and

 

WHEREAS, the Borrower, the Administrative Agent
and the Lenders wish to execute this Fourth Amendment to evidence such
agreement;

 

NOW, THEREFORE, in consideration of the premises and
the mutual covenants herein contained and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Borrower, the Administrative Agent and the Lenders hereby 

 

 

agree as follows (all
capitalized terms used herein and not otherwise defined shall have the meanings
as defined in the Credit Agreement):

 

Section 1.               Amendment
to Section 1.01.  Section 1.01
of the Credit Agreement is hereby amended as follows:

 

(a)           The definition of “Revolver A Commitment” is
hereby amended by deleting such definition in its entirety and replacing it
with the following:

 

““Revolver A Commitment” means, with respect to
each Lender, the commitment of such Lender to make Revolver A Loans and to
acquire participations in Letters of Credit hereunder, expressed as an amount
representing the maximum aggregate amount of such Lender’s Revolver A Credit
Exposure hereunder, as such commitment may be (a) reduced from time to
time pursuant to Section 2.09, (b) increased from time to time
pursuant to Section 2.20, and (c) reduced or increased from
time to time pursuant to assignments by or to such Lender pursuant to Section 9.04.  The initial amount of each Lender’s Revolver
A Commitment is set forth on Schedule 2.01, or in the Assignment and
Assumption pursuant to which such Lender shall have assumed its Commitment, as
applicable.  The initial aggregate amount
of the Lenders’ Revolver A Commitments is $291,000,000.”

 

(b)           The following definition of “Fourth Amendment”
is hereby added in proper alphabetical order:

 

““Fourth Amendment” means that certain Fourth
Amendment to Credit Agreement by and between the Borrower, the Administrative
Agent and the Lenders dated as of the Fourth Amendment Closing Date, amending
this Agreement.”

 

(c)           The following definition of “Fourth Amendment
Closing Date” is hereby added in proper alphabetical order:

 

““Fourth Amendment Closing Date” shall mean February 6,
2008.”

 

(d)           The definition of “Security Documents” is
hereby deleted in its entirety and replaced with the following:

 

““Security Documents” means the guaranty of
each of the Guarantors, together with any guaranty delivered pursuant to Section 5.16
hereof, and any and all other security agreements, pledge agreements,
mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust, guaranty
agreements, landlord’s consents, estoppels, assignments, UCC financing
statements and all similar documents executed by any Person in connection
herewith, including, without limitation, all documents and instruments listed
on Schedule 1.01 attached hereto, together with any agreements delivered
pursuant to Section 5.12 hereof, granting to the 

 

2

 

Administrative Agent for the benefit of the Lenders a
first Lien and security interest in substantially all of the Collateral of the
Borrower and its Subsidiaries as security for the Obligations, including,
without limitation, any such documents or agreements delivered with respect to
the Bakken System pursuant to the First Amendment; with respect to the Kinta
Area Gas Gathering System pursuant to the Second Amendment; and in connection
with the Third Amendment and the Fourth Amendment, in each case subject only to
Liens permitted by Section 6.02 hereof.”

 

Section 2.               Amendment
to Section 2.20(a).  Section 2.20(a) of
the Credit Agreement is hereby deleted in its entirety and replaced with the
following:

 

“SECTION 2.20.    Increase
of Revolver A Commitments.  (a) If,
prior to and after giving effect to any increase in the Revolver A
Commitments pursuant to this Section 2.20, no Default, Event of
Default or Material Adverse Effect shall have occurred and be continuing, the
Borrower may at any time and from time to time, but in no event more than one (1) time
in any fiscal year, request an increase of the aggregate Revolver A Commitments
by notice to the Administrative Agent in writing of the amount of such proposed
increase (such notice, a “Commitment Increase Notice”); provided,
however, that (i) each such increase shall be at least $10,000,000,
(ii) the cumulative increase in Revolver A Commitments pursuant to
this Section 2.20 shall not exceed $50,000,000, (iii) the
Revolver A Commitment of any Lender may not be increased without such
Lender’s consent, (iv) the aggregate amount of the Lenders’
Revolver A Commitments shall not exceed $341,000,000 and (v) such
proposed increase shall be further conditioned upon the Borrower’s delivery to
the Administrative Agent, who shall distribute such information to the Lenders,
of the following, in each case reasonably acceptable to the Required Lenders,
both in form and substance: (x) reasonable evidence that collateral, in
addition to any and all Collateral securing the Obligations as of the date of
the Commitment Increase Notice, has been acquired, or will be acquired with
Borrowings made in connection with such increase in the Revolver A
Commitments, to secure the full amount of the Obligations, as increased as
contemplated by the Commitment Increase Notice and (y) cash flow
projections, including with respect to such acquired or to be acquired
collateral, which projections shall be prepared in good faith, based on
reasonable assumptions as of the date of the Commitment Increase Notice and if
requested by the Required Lenders, verified by independent third-parties
selected by the Administrative Agent. 
Each Lender will notify the Administrative Agent within fifteen (15)
days after receipt of the evidence described in clause (v) immediately
above whether or not the additional collateral, and the evidence thereof, is
acceptable to such Lender provided that if such notice is not received by the
Administrative Agent within such time, such Lender shall be deemed to be
satisfied with such evidence.  If the
conditions in clauses (i) through (v) above have been satisfied, the 

 

3

 

Administrative Agent shall, within five (5) Business
Days after the Administrative Agent is aware that such conditions have been
satisfied, notify each Lender thereof. 
Each Lender desiring to increase its Revolver A Commitment shall
notify the Administrative Agent in writing no later than fifteen (15) days
after receipt by the Lender of such notice from the Administrative Agent.  Any Lender that accepts an offer to it by the
Borrower to increase its Revolver A Commitment pursuant to this Section 2.20
shall, in each case, execute an agreement (a “Commitment Increase Agreement”),
in substantially the form attached hereto as Exhibit B, with the
Borrower and the Administrative Agent, whereupon such Lender shall be bound by
and entitled to the benefits of this Agreement with respect to the full amount
of its Revolver A Commitment as so increased, and the definition of
Revolver A Commitment in Section 1.01 and Schedule 2.01
hereof shall be deemed to be amended to reflect such increase.  Any Lender that does not notify the
Administrative Agent within such period that it will increase its
Revolver A Commitment shall be deemed to have rejected such offer to
increase its Revolver A Commitment. 
No Lender shall have any obligation whatsoever to agree to increase its
Revolver A Commitment.  Any
agreement to increase a Lender’s pro rata share of the increased
Revolver A Commitment shall be irrevocable and shall be effective upon
notice thereof by the Administrative Agent at the same time as that of all
other increasing Lenders.”

 

Section 3.               Amendment
to Section 9.04(b)(i).  Section 9.04(b)(i) of
the Credit Agreement is hereby deleted in its entirety and replaced with the
following:

 

“Subject to the conditions set forth in paragraph (b)(ii) below,
any Lender may assign to one or more banks, insurance companies, investment
companies or funds or other institutional lenders (other than Borrower or any
Affiliate or Subsidiary thereof) all or a portion of its rights and obligations
under this Agreement (including all or a portion of its Commitment and the
Loans at the time owing to it) with the prior written consent (such
consent not to be unreasonably withheld) of: (A) the Borrower, provided
that no consent of the Borrower shall be required for an assignment to a
Lender, an Affiliate of a Lender,
an Approved Fund or, if an Event of Default has occurred and is continuing, any
other assignee; (B) the Administrative Agent, provided that no
consent of the Administrative Agent shall be required for an assignment to a
Lender, an Affiliate of a Lender or an Approved Fund; and (C) the Issuing
Bank.”

 

Section 4.               Amendment
to Section 9.04(b)(ii)(C).  Section 9.04(b)(ii)(C) of
the Credit Agreement is hereby deleted in its entirety and replaced with the following:

 

“the parties to each assignment shall execute
and deliver to the Administrative Agent an Assignment and Assumption, together
with a processing and recordation fee of $5,000; and”

 

4

 

Section 5.               Amendment
to Section 9.04(b).  The
following is hereby added as Section 9.04(b)(vi) of the Credit
Agreement.

 

“Prior to assigning all or a portion of its rights and
obligations under this Agreement (including all or any portion of its
Commitment and the Loans at the time owing to it) (such portion, the “Proposed
Assignment Interest”), the assigning Lender shall deliver to MidFirst Bank,
as a Lender, written notice (the “Assignment
Notice”) of its intention to make such an assignment to an assignee
(other than an Affiliate of such Lender). 
The Assignment Notice shall designate the terms and conditions such
Lender proposes to govern the assignment. 
MidFirst Bank, as a Lender, shall have ten (10) days after receipt
of the Assignment Notice to accept in writing the terms of any such proposed
assignment in which event MidFirst Bank, as a Lender, and such assigning Lender
shall enter into an assignment agreement for the Proposed Assignment Interest
on the terms and conditions set forth in the Assignment Notice.  In the event MidFirst Bank does not so accept
the terms of the proposed assignment set forth in the Assignment Notice,
MidFirst Bank’s rights with respect to such Proposed Assignment Interest shall
terminate.  The rights of MidFirst Bank
set forth in this Section 9.04(b)(vi) shall be restored in the
event such Lender does not consummate a transaction with a third party on
substantially the same terms as set out in the Assignment Notice (taking into
consideration all economic terms of the proposed assignment agreement).  No assignee of MidFirst Bank (other than an
Affiliate of MidFirst Bank), may exercise the rights set forth in this Section 9.04(b)(vi).”

 

Section 6.               Amendment
to Schedule 1.01.  Schedule 1.01 to
the Credit Agreement is hereby deleted in its entirety and replaced by Schedule
1.01 attached hereto.

 

Section 7.               Amendment
to Schedule 2.01.  Schedule 2.01 to
the Credit Agreement is hereby deleted in its entirety and replaced by Schedule
2.01 attached hereto.

 

Section 8.               Amendment
to Schedule 3.06(b).  Schedule 3.06(b) to
the Credit Agreement is hereby deleted in its entirety and replaced by Schedule
3.06(b) attached hereto.

 

Section 9.               Amendment to Schedule 3.24. 
Schedule 3.24 to the Credit Agreement is hereby deleted in its entirety
and replaced by Schedule 3.24 attached hereto.

 

Section 10.             Re-allocation
of Commitments.  Notwithstanding the
terms of Section 2.20(e) or Section 2.20(f) of the Credit
Agreement, on the Effective Date there shall either be no Loans outstanding or
arrangements satisfactory to the Administrative Agent shall have been made to
prepay all outstanding Loans, together with accrued interest thereon; provided,
however, that the Borrower shall not be required to make any payments required
under Section 2.16 of the Credit Agreement in connection with the increase
adjustments in the Commitments as are evidenced by this Fourth Amendment.  Any prepayment made by the Borrower in
accordance with the preceding sentence of this Section 10 may be made with
the 

 

5

 

proceeds of an Advance made by each of the Lenders in connection with
the increase and adjustment of the Commitments pursuant to this Section 10.  The Borrower and all Lenders hereby instruct
and irrevocably authorize the Administrative Agent to accept such prepayments,
affect such offsets, and distribute the proceeds of each Loan made by any
Lender on the Effective Date as are necessary to effect the adjustments in the
Commitments as are evidenced by this Fourth Amendment.

 

Section 11.             Representations
True; No Default.  The Borrower
represents and warrants that:

 

(a)                                  this Fourth Amendment has been duly
authorized, executed and delivered on its behalf; the Credit Agreement, as
amended hereby, together with the other Loan Documents to which the Borrower is
a party, constitute valid and legally binding agreements of the Borrower
enforceable in accordance with their terms;

 

(b)                                 the representations and warranties of the
Borrower contained in Article III of the Credit Agreement are true and correct
in all material respects on and as of the date hereof as though made on and as
of the date hereof except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true and
correct in all material respects on and as of such earlier date; and

 

(c)                                  no Default or Event of Default under the
Credit Agreement has occurred and is continuing.

 

Section 12.             Expenses,
Additional Information.  The Borrower
shall pay to the Administrative Agent all reasonable expenses incurred in
connection with the execution of this Fourth Amendment, including all
reasonable expenses incurred in connection with any previous negotiation and
loan documentation.  The Borrower shall
furnish to the Administrative Agent and Lenders all such other documents,
consents and information relating to the Borrower and each other Loan Party as
the Administrative Agent or any Lender may reasonably require to accomplish the
purposes hereof.

 

Section 13.             Conditions
to Effectiveness.  This Fourth
Amendment shall become effective on the date (the “Effective Date”)
when, and only when:

 

(a)                                  The Borrower, the Guarantors, the
Administrative Agent and each Lender shall have executed and delivered to the
Administrative Agent a counterpart of this Fourth Amendment;

 

(b)                                 The Administrative Agent shall have
received resolutions, in form and substance reasonably satisfactory to the
Administrative Agent, of the Borrower and each Guarantor authorizing the
execution, delivery and performance of this Fourth Amendment, each such copy
being attached to an original certificate of an authorized officer of the
Borrower and each Guarantor, dated as of the Fourth Amendment Closing Date
certifying (i) that the resolutions attached thereto are true, correct and
complete copies of resolutions duly adopted by the Borrower and each Guarantor,
as applicable, (ii) that such resolutions constitute all resolutions 

 

6

 

                                                adopted with respect to the transactions
contemplated hereby, (iii) that such resolutions have not been amended,
modified, revoked or rescinded as of the Fourth Amendment Closing Date, (iv) that
the articles of organization and regulations of the Borrower and each
Guarantor, as applicable, have not been amended or otherwise modified since the
effective date of the Credit Agreement, except pursuant to any amendments
attached thereto, and (v) as to the incumbency and signature of the
officers of the Borrower and each Guarantor executing this Fourth Amendment;

 

(c)           Each of the representations and warranties made by the
Borrower and each Guarantor in or pursuant to the Loan Documents shall be true
and correct in all material respects on and as of the Fourth Amendment Closing
Date, except to the extent such representation and warranties specifically
relate to an earlier date, in which case they were true and correct in all
material respects on and as of such earlier date;

 

(d)           No Default or Event of Default shall have occurred and
be continuing;

 

(e)           No event shall have occurred with respect to the
Parent, the Borrower and its Subsidiaries, taken as a whole, which, in the
reasonable opinion of any of the Lenders, has had, or could reasonably be
expected to have, a Material Adverse Effect;

 

(f)            The Administrative Agent shall have received a fully
executed copy of that certain fee letter between the Borrower and the
Administrative Agent pertaining to certain fees and expenses payable by the
Borrower to such parties as set forth in such letter and all fees and other
amounts due and payable on or prior to the Fourth Amendment Closing Date,
including, to the extent invoiced, reimbursement or payment of all out of
pocket expenses required to be reimbursed or paid by the Borrower hereunder;

 

(g)           The Administrative Agent shall have received each of
the Security Documents, duly executed and completed in sufficient number of
counterparts for recording, if necessary, and they shall constitute
satisfactory security documentation to create first priority security interests
in the Collateral, (free and clear of all Liens, other than Liens permitted by Section 6.02
of the Credit Agreement);

 

(h)           The Administrative Agent shall have received the
following:

 

(i)            Uniform Commercial Code Financing Statements (Form UCC-1)
and such evidence of filing or arrangements for filing as may be acceptable to
the Administrative Agent, naming the relevant Loan Party as the debtor and the
Administrative Agent as the secured party, or other similar instruments or
documents, filed or to be filed under the Uniform Commercial Code of all
jurisdictions as may be necessary or, in the opinion of the Administrative
Agent, desirable to perfect the security interest of the Administrative Agent
pursuant to the Security Documents;

 

7

 

(ii)           certified copies of Uniform Commercial
Code Requests for Information or Copies (Form UCC-11), or a similar search
report certified by a party acceptable to the Administrative Agent, dated a
date reasonably near to the Effective Date, listing all effective financing
statements which name any Loan Party (under its present name and any previous
names) as the debtor and which are filed in the jurisdictions in which filings
of any Security Documents are made pursuant to this Agreement, together with copies
of such financing statements none of which (other than those (i) securing
the Obligations, if such Form UCC-11 or search report, as the case may be,
is current enough to list such financing statements, or (ii) that are
terminated as of the Effective Date or within a time frame otherwise acceptable
to the Administrative Agent) shall cover any Collateral described in the
Security Documents; and

 

(iii)          copies of tax Lien searches for each
jurisdiction in which a Security Document is filed or recorded pursuant to this
Agreement, certified by a party acceptable to the Administrative Agent, listing
all tax Liens imposed on any Loan Party or any of its assets (none of which
shall cover any Collateral described in the Security Documents);

 

(i)            The Administrative Agent shall have received, and be
satisfied with, the title information with respect to the Collateral and shall,
in its sole and absolute discretion, be satisfied with the status of title to
the Collateral;

 

(j)            The Administrative Agent or any Lender or counsel to
the Administrative Agent shall receive such other instruments or documents as
they may reasonably request;

 

(k)           The Administrative Agent shall have received a
favorable written opinion (addressed to the Administrative Agent and the
Lenders and dated the Effective Date) of McAfee & Taft, counsel for
the Borrower, relating to the Parent, the Borrower and its Subsidiaries, this
Fourth Amendment and the Transactions and any other matters as any Lender shall
reasonably request.  The Borrower hereby
requests such counsel to deliver such opinion;

 

(l)            The Administrative Agent shall have received a
favorable written opinion (addressed to the Administrative Agent and the
Lenders and dated the Effective Date) of Vinson & Elkins LLP, outside
counsel for the Borrower, relating to certain of the Loan Parties and any other
matters as any Lender shall reasonably request. 
The Borrower hereby requests such counsel to deliver such opinion;

 

(m)          The Administrative Agent shall have received favorable
written opinions (addressed to the Administrative Agent and the Lenders and
dated the Effective Date) of each local counsel of the Borrower approved by the
Administrative Agent, for each state where any portion of the Collateral is
located, relating to the enforceability of the Security Documents in such state
and any other matters as any Lender shall reasonably request;

 

8

 

(n)           The Administrative Agent shall have received such
documents and certificates as the Administrative Agent or its counsel may
reasonably request relating to the organization, existence and good standing of
the Borrower, the Guarantors, the Parent and the General Partner, the
authorization of the Transactions and any other legal matters relating to the
Borrower, the Guarantors, Parent and the General Partner, this Fourth
Amendment, the Credit Agreement or the Transactions, all in form and substance
satisfactory to the Administrative Agent and its counsel; and

 

(o)           The Administrative Agent shall have received a
certificate, dated the Effective Date and signed by the President, a Vice
President or a Financial Officer of the Borrower, confirming compliance with
the conditions set forth in paragraphs (a) and (b) of Section 4.02
of the Credit Agreement.

 

The Administrative Agent shall notify the Borrower and
the Lenders of the Effective Date upon the satisfaction of all of the foregoing
conditions, and such notice shall be conclusive and binding.  Notwithstanding the foregoing, the rights and
obligations of the parties hereunder shall not become effective unless each of
the foregoing conditions is satisfied (or waived pursuant to Section 9.02
of the Credit Agreement) at or prior to 3:00 p.m. Oklahoma City, Oklahoma
time, on February 6, 2008 (and, in the event such conditions are not so
satisfied or waived, this Fourth Amendment shall be null and void and of no
further force and effect).

 

Section 14.             Miscellaneous
Provisions.

 

(a)           From and after the execution and delivery of this
Fourth Amendment, the Credit Agreement shall be deemed to be amended and
modified as herein provided, and except as so amended and modified the Credit
Agreement shall continue in full force and effect.

 

(b)           The Credit Agreement, the First Amendment, the Second
Amendment, the Third Amendment and this Fourth Amendment shall be read and
construed as one and the same instrument.

 

(c)           Any reference in any of the Loan Documents to the
Credit Agreement shall be a reference to the Credit Agreement as amended by the
First Amendment, the Second Amendment, the Third Amendment and this Fourth
Amendment.

 

(d)           This Fourth Amendment shall be construed in accordance
with and governed by the laws of the State of Oklahoma and of the United States
of America.

 

(e)           This Fourth Amendment may be signed in any number of
counterparts and by different parties in separate counterparts and may be in
original or facsimile form, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.

 

(f)            The headings herein shall be accorded no significance
in interpreting this Fourth Amendment.

 

9

 

Section 15.             Binding
Effect.  This Fourth Amendment shall
be binding upon and inure to the benefit of the Borrower, Lenders and the Administrative
Agent and their respective successors and assigns, except that the Borrower
shall not have the right to assign its rights hereunder or any interest herein
except as contemplated by the Credit Agreement.

 

[The
remainder of this page intentionally left blank.]

 

10

 

IN WITNESS WHEREOF, the parties have caused this
Fourth Amendment to be executed by their respective duly authorized officers on
the Fourth Amendment Closing Date, to be effective as of the Effective Date.

 

 

	
   

  	
  HILAND OPERATING, LLC,

  a Delaware
  limited liability company

  
	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Ken Maples

  
	
   

  	
   

  	
  Name:
  

  	
  Ken
  Maples

  
	
   

  	
   

  	
  Title:
  

  	
  Chief
  Financial Officer,

  
	
   

  	
   

  	
   

  	
  Vice
  President - Finance and Secretary

  

 

[Signature Page to Fourth Amendment to Credit Agreement]

 

 

	
   

  	
  MIDFIRST BANK,

  
	
   

  	
  in
  its capacity as the Administrative Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  James P. Boggs

  	
   

  
	
   

  	
   

  	
   

  	
  James
  P. Boggs

  
	
   

  	
   

  	
   

  	
  Senior
  Vice President

  
	
   

  	
  Address:

  
	
   

  	
  MidFirst
  Bank

  
	
   

  	
  MidFirst
  Plaza

  
	
   

  	
  501
  N.W. Grand Blvd., Suite 100

  
	
   

  	
  Oklahoma
  City, Oklahoma 73118

  
	
   

  	
  Attention:
  James P. Boggs

  
	
   

  	
  Telephone
  No. : (405) 767-7115

  
	
   

  	
  Telecopy
  No. : (405) 767-7120

  
	
   

  	
  e-mail:
  james.boggs@midfirst.com

  
						

 

[Signature Page to Fourth Amendment to Credit Agreement]

 

 

	
   

  	
  MIDFIRST BANK,

  
	
   

  	
  in
  its capacity as a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  James P. Boggs

  	
   

  
	
   

  	
   

  	
   

  	
  James
  P. Boggs

  
	
   

  	
   

  	
   

  	
  Senior
  Vice President

  
	
   

  	
  Address:

  
	
   

  	
  MidFirst
  Bank

  
	
   

  	
  MidFirst
  Plaza

  
	
   

  	
  501
  N.W. Grand Blvd., Suite 100

  
	
   

  	
  Oklahoma
  City, Oklahoma 73118

  
	
   

  	
  Attention:
  James P. Boggs

  
	
   

  	
  Telephone
  No. : (405) 767-7115

  
	
   

  	
  Telecopy
  No. : (405) 767-7120

  
	
   

  	
  e-mail:
  james.boggs@midfirst.com

  
						

 

[Signature Page to Fourth Amendment to Credit Agreement]

 

 

	
   

  	
  BANK OF AMERICA, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Stephen J. Hoffman

  	
   

  
	
   

  	
  Name:
  Stephen J. Hoffman

  
	
   

  	
  Title:
  Managing Director

  

 

[Signature Page to Fourth Amendment to Credit Agreement]

 

 

	
   

  	
  WACHOVIA BANK, NATIONAL

  
	
   

  	
  ASSOCIATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Shawn Young

  	
   

  
	
   

  	
  Name:
  Shawn Young

  
	
   

  	
  Title:
  Director

  

 

[Signature Page to Fourth Amendment to Credit Agreement]

 

 

	
   

  	
  BANK OF SCOTLAND

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Karen Weich

  	
   

  
	
   

  	
  Name:
  Karen Weich

  
	
   

  	
  Title:  Vice President

  

 

[Signature Page to Fourth Amendment to Credit Agreement]

 

 

	
   

  	
  FORTIS CAPITAL CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Deirdre Sanborn

  
	
   

  	
  Name:
  Deirdre Sanborn

  
	
   

  	
  Title:
  Director

  

 

 

	
   

  	
  By:

  	
  /s/
  Farhan Iqbal

  
	
   

  	
  Name:
  Farhan Iqbal

  
	
   

  	
  Title:
  Vice President

  

 

[Signature Page to Fourth
Amendment to Credit Agreement]

 

 

	
   

  	
  COMPASS BANK

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Kathleen J. Bowen

  
	
   

  	
  Name:  Kathleen J. Bowen

  
	
   

  	
  Title:  Senior Vice President

  

 

[Signature Page to Fourth Amendment to Credit
Agreement]

 

 

	
   

  	
  U.S. BANK NATIONAL ASSOCIATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Tyler Fauerbach

  
	
   

  	
  Name:  Tyler Fauerbach

  
	
   

  	
  Title:  Vice President

  

 

[Signature Page to Fourth Amendment to Credit
Agreement]

 

 

	
   

  	
  BANK OF OKLAHOMA

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Mike Weatherholt

  
	
   

  	
  Name:  Mike Weatherholt

  
	
   

  	
  Title:  Officer

  

 

[Signature Page to Fourth Amendment to Credit
Agreement]

 

 

ANNEX A

 

ACKNOWLEDGMENT OF
GUARANTORS

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00136-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00136-of-00352.parquet"}]]