Document:

Exhibit
10.1

 

FIRST
AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT

 

THIS FIRST AMENDMENT OF AMENDED AND RESTATED CREDIT
AGREEMENT (this “Amendment”), dated as of March 24, 2003, is by and between
CARBON ENERGY CORPORATION (USA), a Colorado corporation (“Borrower”), and BANK
OF OKLAHOMA, NATIONAL ASSOCIATION, a national banking association (“BOK”).

 

RECITALS

 

A.                  Borrower and BOK entered into an Amended and
Restated Credit Agreement dated as of December 31, 2002 (the “Credit
Agreement”), in order to set forth the terms upon which BOK would make advances
to Borrower, issue letters of credit at the request of Borrower and extend
credit to Borrower in connection with Borrower’s hedging activities and by
which such advances, letters of credit and credit extensions would be governed
and repaid.  Capitalized terms used
herein but not defined herein shall have the same meanings as set forth in the
Credit Agreement.

 

B.                    Borrower and BOK desire that this Amendment
be executed and delivered in order to amend certain terms and provisions of the
Credit Agreement.

 

AMENDMENT

 

NOW, THEREFORE, in consideration of $10.00 and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereby agree as follows:

 

1.                             Credit Agreement.  The
Credit Agreement shall be, and hereby is, amended as follows as of the date
hereof:

 

(a)                                            By substituting the following for the
definition of “Borrowing Base” in Section 1.1 on page 2 of the Credit
Agreement:

 

“Borrowing Base” means, at any time prior to the Maturity Date,
the aggregate loan value of all Borrowing Base Properties, as determined by BOK
in its sole and absolute discretion, using such assumptions as to pricing,
discount factors, discount rates, expenses and other factors as BOK customarily
uses as to borrowing-base oil and gas loans at the time such determination is
made; provided that the Borrowing Base for the time period from March 25, 2003
through the ensuing redetermination or reduction of the Borrowing Base pursuant
to Section 2.9 below shall be $14,000,000, unless Borrower and BOK hereafter
mutually agree upon a different amount.

 

 

(b)                                           By substituting the following for the
definition of “Borrowing Base Period” in Section 1.1 on page 2 of the Credit
Agreement:

 

“Borrowing Base Period” means: (a) the time period from the date
of this Agreement through March 24, 2003; (b) the time period from March 25,
2003 through November 30, 2003; (c) thereafter, each six-month period beginning
on June 1 or December 1 of each year, until the June 1 or December 1 most
nearly preceding the Maturity Date; and (d) thereafter, the time period from
the June 1 or December 1 most nearly preceding the Maturity Date through the
Maturity Date.

 

(c)                                            By substituting the following for the
definition of “Maximum Loan Amount” in Section 1.1 on page 8 of the Credit
Agreement:

 

“Maximum Loan Amount” means $14,000,000; provided that, upon the
request of Borrower, BOK may, in its sole discretion and upon such terms and
conditions as BOK may determine, increase said amount to an amount not greater
than $40,000,000 by giving written notice of such increase to Borrower, but
nothing contained in this Agreement, the Note or any other Loan Document shall
be deemed to commit or require BOK to grant any such increase.

 

2.                               Loan Documents.  All
references in any document to the Credit Agreement shall be deemed to refer to
the Credit Agreement, as amended pursuant to this Amendment.

 

3.                               Conditions Precedent.  The
obligations of the parties under this Amendment are subject, at the option of
BOK, to the prior satisfaction of the condition that Borrower shall have
delivered to BOK the following (all documents to be satisfactory in form and
substance to BOK and, if appropriate, duly executed and/or acknowledged on
behalf of the parties other than BOK):

 

(a)                                            This Amendment.

 

(b)                                           A Consent of Guarantor in the form of Exhibit
A attached hereto and made a part hereof.

 

(c)                                            Any and all other loan documents required by
BOK, including without limitation any and all amendments to the Security
Documents as may be required by BOK.

 

2

 

4.                              Certification by Borrower. 
Borrower hereby certifies to BOK that, as of the date of this Amendment,
except as previously disclosed by Borrower to BOK: (a) all of Borrower’s
representations and warranties contained in the Credit Agreement are true,
accurate and complete in all material respects, (b) Borrower has performed and
complied with all agreements and conditions required to be performed or
complied with by Borrower under the Credit Agreement and/or any Loan Document
on or prior to this date, and (c) no Default or Event of Default has occurred
under the Credit Agreement.

 

5.                              Continuation of the Credit Agreement. 
Except as specified in this Amendment, the provisions of the Credit
Agreement shall remain in full force and effect, and if there is a conflict
between the terms of this Amendment and those of the Credit Agreement, the
terms of this Amendment shall control.

 

6.                              Expenses.  Borrower shall pay all expenses
incurred in connection with the transactions contemplated by this Amendment,
including without limitation all fees and expenses of the attorney for BOK and
any and all filing and recording expenses.

 

7.                              Miscellaneous. 
This Amendment shall be governed by and construed under the laws of the
State of Colorado and shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns.  This Amendment may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.

 

EXECUTED
as of the date first above written.

 

 

	
   

  	
  BANK OF OKLAHOMA, NATIONAL
  ASSOCIATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Thomas M. Foncannon, 

  
	
   

  	
   

  	
  Senior Vice President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CARBON ENERGY CORPORATION
  (USA)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Kevin D. Struzeski, 

  
	
   

  	
   

  	
  Chief Financial Officer

  
					

 

3

 

EXHIBIT A

 

CONSENT OF GUARANTOR

 

THIS
CONSENT OF GUARANTOR (this “Consent”), dated as of March 24, 2003, is from
CARBON ENERGY CORPORATION, a Colorado corporation (“Guarantor”), to BANK OF
OKLAHOMA, NATIONAL ASSOCIATION, a national banking association (“BOK”).

 

RECITALS

 

A.                 Guarantor has executed and delivered to BOK a
Guaranty dated as of December 31, 2002 (the “Guaranty”), to guaranty certain
obligations of Carbon Energy Corporation (USA) (“Borrower”) to BOK under or in
connection with an Amended and Restated Credit Agreement dated as of December
31, 2002 (the “Credit Agreement”).

 

B.                   The Credit Agreement is being amended
pursuant to a First Amendment of Amended and Restated Credit Agreement of even
date herewith (the “Amendment”), between Borrower and BOK.

 

C.                   The parties desire that Guarantor consent to
the modifications of the Credit Agreement being made pursuant to the Amendment.

 

CONSENT

 

NOW,
THEREFORE, in consideration of $10.00 and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Guarantor hereby consents to the transactions set forth in and contemplated by
the Amendment, including without limitation the change in the “Maximum Loan
Amount” (as defined in the Credit Agreement) and the “Borrowing Base” (as
defined in the Credit Agreement) to $14,000,000.

 

This
Consent may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one and the same
instrument.  Guarantor hereby ratifies
the Guaranty.

 

EXECUTED
as of March 24, 2003.

 

 

	
   

  	
  CARBON ENERGY CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  ,

  
	
   

  	
   

  	
   

  	
   

  
						

 

A-1Exhibit 10.2

 

FINANCING COMMITMENT

FOR

CARBON ENERGY
CANADA CORPORATION

 

This Financing Commitment constitutes the whole and entire agreement
between the Borrower, CIBC and PLC and cancels and supersedes any prior
agreements, undertakings, declarations, representations and warranties, written
or verbal, among the parties in respect of the subject matter of this Financing
Commitment, including any prior Financing Commitment or arrangements.

 

MAY 14, 2003

 

	
  BORROWER:

  	
   

  	
  Carbon Energy Canada Corporation (the “Borrower”)

  
	
   

  	
   

  	
   

  
	
  GUARANTOR:

  	
   

  	
  Carbon Energy Corporation (the “Guarantor”)

  
	
   

  	
   

  	
   

  
	
  LENDER:

  	
   

  	
  Canadian Imperial Bank of Commerce (“CIBC”)

  
	
   

  	
   

  	
   

  
	
  GAS
  PURCHASE AND

  SALE TRANSACTIONS

  FACILITATOR:

  	
   

  	
  CIBC World Markets PLC or any other subsidiary of CIBC from time to
  time (“PLC”)

  
	
   

  	
   

  	
   

  
	
  CONFIDENTIALITY:

  	
   

  	
  The contents
  of this Financing Commitment are confidential and shall not be disclosed in
  whole or part to any unaffiliated third party, except to their professional
  advisers in connection herewith and as otherwise required by law.

  
	
   

  	
   

  	
   

  
	
  EXISTING
  FACILITY:

  	
   

  	
  This
  Financing Commitment replaces the existing facility already provided by CIBC
  to the Borrower (formerly named CEC Resources Ltd.) as set forth in CIBC’s
  financing commitment dated May 9, 2002 (the “Existing Facility”), such
  that all indebtedness of the Borrower to CIBC under the Existing Facility
  will be deemed to be an Advance under this Facility and subject to the terms
  and conditions of this Facility.

  
	
   

  	
   

  	
   

  
	
  AMOUNT:

  	
   

  	
  Cdn. $22,000,000 as an Extendible Revolving Term Credit Facility (the
  “Credit
  Facility”) and,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  U.S. $5,000,000 as a swap facility (the “Swap Facility”)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (collectively, the “Facility”).

  
	
   

  	
   

  	
   

  
	
  PURPOSE OF

  THE
  FACILITY:

  	
   

  	
  Credit
  Facility

  
	
   

  	
   

  	
  For normal operating requirements and to assist the Borrower in the
  exploration, development, production and/or acquisition of oil and gas
  reserves in Western Canada.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Swap
  Facility

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  To provide for the Borrower’s contingent exposure under commodity
  swaps either financially or physically settled.

  

 

 

 

	
  HOSTILE

  ACQUISITION:

  	
   

  	
  The Borrower shall not utilize whether directly or indirectly
  Availments to facilitate, assist or participate in a hostile acquisition
  without the prior written consent of CIBC, which consent may be withheld in
  CIBC’s sole discretion.

  
	
   

  	
   

  	
   

  
	
  BORROWING
  BASE:

  	
   

  	
  Subject to the satisfaction of the conditions precedent under the
  heading “Conditions Precedent to Funding”, the Credit Facility currently
  permits draws of up to Cdn. $22,000,000 (the “Borrowing Base”), subject
  to adjustment as herein provided, and will remain in effect until expiration
  of the Revolving Phase.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CIBC will undertake at any time, but not less frequently than
  semi-annually, a review of the Borrower’s oil and gas properties evaluated in
  an independently prepared economic and reserve evaluation report (to be
  provided by the Borrower annually and from time to time as reasonably
  requested by CIBC) for purposes of redetermining the Borrowing Base
  applicable to the Facility.  To assist
  in such redetermination, the Borrower will provide to CIBC operating
  statements and such other technical information with respect to the
  properties being reviewed as CIBC may request.  The next review is to occur on or before September 30, 2003.  

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Should CIBC determine at any time that there is a Borrowing Base
  Shortfall, during either the Revolving Phase and the Term Phase, the Borrower
  will, within 60 days, use whatever means necessary to reduce its indebtedness
  under this Financing Commitment by that amount stipulated by CIBC, or alternatively
  pledge additional security to CIBC sufficient to cover, in CIBC’s opinion,
  such deficiency.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  While a Borrowing Base Shortfall exists, the
  Borrower shall:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  not request new Availments;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  provide CIBC with information needed to determine the Borrower’s
  Available Cash Flow;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  dedicate on a monthly basis for repayment of this Financing Commitment
  such portion of its Available Cash Flow as is required to eliminate the
  Borrowing Base Shortfall within 60 days from the date CIBC delivers notice to
  the Borrower of the Borrowing Base Shortfall (the “Shortfall Notice”) with the
  first such repayment being due 30 days after the date of the Shortfall Notice
  and further payments will be required every 30 days thereafter while a
  Borrowing Base Shortfall exists; and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  pay the increased compensation required under the heading “Borrowing
  Base Rate Shortfall or Event of Default”

  
	
   

  	
   

  	
   

  
	
  TOTAL DEBT:

  	
   

  	
  To determine
  Principal Indebtedness, outstanding borrowings in U.S. Dollars will be the
  Cdn. Dollar Exchange Equivalent thereof.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  To the
  extent the Borrower does not have sufficient U.S. Dollar revenue to service
  the U.S. Dollar borrowings under the Facility such borrowings, in an amount
  to be determined by CIBC, must be hedged to CIBC’s satisfaction acting
  reasonably.

  

 

2

 

	
  CREDIT
  FACILITY

  AVAILABILITY:

  	
   

  	
  The Credit
  Facility can be advanced by way of any
  combination of the following Availments:

   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  overdraft borrowings in Cdn. Dollars;

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  banker’s acceptances in Cdn. Dollars, in minimum aggregate amounts of
  Cdn. $2,500,000 for each drawdown, rollover or conversion and in minimum
  incremental amounts of Cdn. $500,000 thereafter;

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  direct
  borrowings in Cdn. Dollars and/or U.S. Dollars

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  LIBOR
  borrowings in U.S. Dollars, in minimum aggregate
  amounts of U.S. $2,500,000 for each drawdown, rollover or conversion and in
  minimum incremental amounts of U.S. $500,000 thereafter; and

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  letters of credit, letters of guarantee, cheque credits and corporate
  visa (collectively the “Sundry Options”).

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  SWAP
  FACILITY

  AVAILABILITY:

  	
   

  	
  At the Borrower’s request and subject to market availability, CIBC
  and/or PLC will provide quotes for (i) forward rate agreements to provide fixed
  or floating rate funding for part or all of the Credit Facility, (ii)
  commodity swaps covering a portion of the Borrower’s oil and gas production,
  (iii) forward exchange contracts and (iv) firm gas purchase and sale
  transactions, subject to the following:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Forward Rate Agreements - terms shall not exceed the lesser of two
  years and the date of expiry or termination of the Credit Facility, with
  aggregate amounts hedged not to exceed 60% of the average Principal
  Indebtedness outstanding during the Borrower’s previous fiscal quarter;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Commodity Swaps - terms shall not exceed the lesser of two years and
  the date of expiry or termination of the Credit Facility, with aggregate
  production volumes hedged from all sources, for both natural gas and oil,
  (calculated separately, not collectively) not to exceed 60% of the Borrower’s
  net average production as forecast by CIBC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Forward Exchange Contracts - terms shall not exceed the lesser of two
  years and the date of expiry or termination of the Credit Facility, with
  aggregate amounts hedged not to exceed 60% of the Borrower’s applicable
  foreign revenue;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Physical Gas Purchase and Sale Transactions - terms and conditions as
  outlined in the Master Firm Gas Purchase/Sale Agreement, terms shall not
  exceed the lesser of two years and the date of expiry or termination of the
  Credit Facility, with aggregate production volumes hedged from natural gas
  not to exceed 60% of the Borrower’s current daily production volume as
  determined by CIBC;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  provided that in all instances, the Borrower’s contingent liability to
  CIBC and/or PLC under the Swap Facility shall be secured and rank pari passu
  with the Principal Indebtedness.

  

 

3

 

	
   

  	
   

  	
  Notwithstanding the foregoing, the sum of the
  aggregate production volumes hedged with CIBC and/or PLC from natural gas
  under both the commodity swaps and physical gas purchase and sale
  transactions described above shall not at any time exceed 60% of the
  Borrower’s current daily production volumes of natural gas as determined by
  CIBC.

  
	
   

  	
   

  	
   

  
	
  TERM AND

  REPAYMENT:

  	
   

  	
  The Credit Facility will revolve and fluctuate at the Borrower’s
  option until March 31, 2004 (the “Revolving Phase”) with interest payable
  monthly in arrears, or with respect to LIBOR borrowings, as otherwise
  provided herein.  At the request of
  the Borrower, the Credit Facility may
  be renewed upon such terms and for such period, and subject to the
  requirements listed below, as CIBC may in its discretion agree to (a “Revolving
  Period”).  CIBC may elect
  to renew all or only a portion of the Credit Facility for a further Revolving Phase.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Revolving
  Phase

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  While the Credit Facility is in the Revolving Phase, the Borrower may,
  at least 60 days prior to the termination of the then current Revolving
  Phase, request an extension of the Revolving Phase provided:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  the extension is for 364 days or less;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  the extension will not result in the then current Revolving Period
  extending beyond 364 days; and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  CIBC, in its unrestricted discretion, consents to the extension.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  An extension of the Revolving Phase will create a new and separate
  Revolving Phase which in turn can only be extended as provided above.  If the Borrower does not make the request
  during the required period described above or if CIBC does not agree to such
  an extension, then the Revolving Phase will expire on the last day of the
  Revolving Phase.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Upon the expiration or termination of the then current Revolving
  Phase, any amount undrawn under the Credit Facility will be permanently
  cancelled.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Term Phase

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  During the Term Phase, the Credit Facility will be permanently reduced
  by way of consecutive monthly principal payments commencing 30 days after the
  end of the Revolving Phase over an amortization period consistent with the
  Borrower’s cash flow profile, as determined by CIBC, by applying its usual
  practice for similar type loans in comparable circumstances, provided that
  such amortization period shall not exceed 24 months.  On the last day of the Term Phase, all
  principal, interest and other amounts owing hereunder will become immediately
  due and payable.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Where used herein, the term “Term Phase” means the period commencing
  immediately after the end of the Revolving Phase until repayment of the
  Credit Facility in full.

  
	
   

  	
   

  	
   

  
	
  PREPAYMENT
  AND

  CANCELLATION:

  	
   

  	
  The Borrower may permanently prepay the Facility in whole or in part,
  subject to the following:

  

 

4

 

	
   

  	
   

  	
  •

  	
  Availments by way of bankers’ acceptances may only be paid at maturity
  dates.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  All prepayments, during the Term Phase, will be made in inverse order
  of maturity.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Availments by way of commodity swaps (financial or physical), forward
  rate agreements and forward exchange contracts may be prepaid only at
  maturity except where the Borrower agrees to pay CIBC’s breaking costs due to
  early redemption of offsetting positions or otherwise, including all costs
  associated with reversing positions, provided such early redemption is
  possible.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Availments by way of LIBOR borrowings may be prepaid only at maturity
  except where the Borrower agrees to pay CIBC’s breaking costs due to early
  redemption of offsetting deposits or otherwise, provided such early
  redemption is possible.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  The Borrower may at any time, upon giving CIBC two Banking Days prior
  notice, cancel any unused part of the Facility and any cancelled portion will
  not be reinstated.

  
	
   

  	
   

  	
   

  
	
  RATES AND

  STAMPING FEES:

  	
   

  	
  Revolving
  Phase

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Cdn. Dollar
  Advances

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  CIBC Prime Rate in effect from time to time plus 1⁄2 of 1%
  per annum with interest payable monthly in arrears.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  The stamping fees for each banker’s acceptance shall be calculated on
  the face amount of the bankers’ acceptances for the term thereof and shall be
  equal to 125 basis points per annum;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  U.S. Dollar Advances

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  U.S. Base
  Rate in effect from time to time plus 1⁄2 of 1% per annum.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  For LIBOR
  borrowings, LIBOR plus 125 basis points per annum.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Term Phase

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  During the Term Phase, the interest rates then in effect from time to
  time for CIBC Prime Rate loans, U.S. Base Rate loans and LIBOR based loans
  and stamping fees on bankers’ acceptances shall increase by 1% per annum with
  interest payable monthly in arrears.

  
	
   

  	
   

  	
   

  
	
  STANDBY FEE:

  	
   

  	
  During the Revolving Phase, a standby fee of
  1/4 of 1% per annum calculated on the undrawn portion of the available and
  unused Credit Facility
  is payable monthly in arrears.

  

 

5

 

	
  SUNDRY OPTIONS:

  	
   

  	
  Fees on Sundry Options are subject to change
  without notice and are payable as follows:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Letters of Credit/ 

  Letters of Guarantee

  	
  -

  	
  125 basis
  points per annum or portion thereof in
  advance with a minimum of $250

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Corporate Visa

  	
  -

  	
  CIBC standard fees

  
	
   

  	
   

  	
   

  
	
  BORROWING
  BASE

  SHORTFALL
  OR

  EVENT
  OF DEFAULT:

  	
   

  	
  Effective immediately upon receipt by the Borrower of a notice of a
  Borrowing Base Shortfall or an Event of Default (the “Effective Date”), the
  interest rates then applicable to CIBC Prime Rate loans, U.S. Base Rate
  loans, LIBOR based loans and stamping fees on bankers’ acceptances shall
  increase by 2% per annum and such increase shall remain in effect for as long
  as a Borrowing Base Shortfall or Event of Default subsists.  An increase in interest rates as aforesaid
  arising from a Borrowing Base Shortfall or Event of Default shall on the
  Effective Date apply proportionately to each such Availment outstanding on
  the basis of the number of days remaining in the term to maturity of each
  such Availment.  The Borrower shall
  pay to CIBC any resulting increase in stamping fees with respect to
  outstanding bankers’ acceptances on or prior to the third Banking Day
  following the Effective Date.  In addition to the
  conditions set forth above, CIBC’s obligation to provide Availments, other
  than rollovers or conversions of a then maturing Availment (in each case not
  to exceed a 30 day term), will be suspended for as long as there exists a
  Borrowing Base Shortfall or Event of Default

  
	
   

  	
   

  	
   

  
	
  RENEWAL FEE:

  	
   

  	
  Cdn. $24,000 is payable by the Borrower to
  CIBC upon the Borrower’s acceptance of this Financing Commitment.

  
	
   

  	
   

  	
   

  
	
  LEGAL FEES:

  	
   

  	
  CIBC’s costs, including legal and the cost to
  prepare any environmental assessments, in connection with the preparation,
  establishment, operation or enforcement of this Financing Commitment,
  including the Security, are for the account of the Borrower.

  
	
   

  	
   

  	
   

  
	
  SECURITY:

  	
   

  	
  The Borrower will provide, or cause to be provided, to CIBC and PLC,
  to the extent not already provided, and maintain the following as security
  for all obligations of the Borrower arising under this Financing Commitment,
  including any liability or exposure of CIBC under the Sundry Options and CIBC
  and/or PLC under the Swap Facility;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  a Debenture in the amount of $50,000,000 conveying a first floating
  charge (with right to fix) over all the present and after-acquired property
  of the Borrower together with a pledge thereof;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Acknowledgement from Carbon Energy Corporation that its unconditional
  guarantee of the Borrower’s indebtedness to CIBC and PLC dated May 9,
  2002 continues in full force and effect;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  General Security Agreement providing a first priority security
  interest in all present and after-acquired personal property of the Borrower;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Standard CIBC agreement and documentation relative to Sundry Options;

  
						

 

6

 

	
   

  	
   

  	
  •

  	
  Standard ISDA form agreement relative to swap transactions, (when
  required);

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Master Firm Gas Purchase/Sale Agreement with any relating documents as
  required by CIBC or its counsel, (when required); and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  Any and all other security or documents as required by CIBC or its
  counsel.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (collectively the “Security”).

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  In the event of any conflict between this Financing Commitment and the
  Security, this Financing Commitment shall govern.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The Security will secure all indebtedness of the Borrower to CIBC and
  its affiliates, including PLC, under the Facilities, including all amendments
  thereto or substitutions, replacements or modifications thereof.  CIBC will be entitled to apply and realize
  on the Security in such manner and in such order as CIBC deems appropriate in
  the circumstances, subject to applicable law.

  
	
   

  	
   

  	
   

  
	
  OTHER COVENANT:

  	
   

  	
  The Borrower covenants not to provide any financial support by
  guarantee, pledge of its shares, granting of a security interest or other
  mortgage, charge, lien or encumbrance of any kind, or otherwise to an
  affiliate (as such term is defined in the Business Corporations Act (Alberta))
  without the prior written consent of CIBC, in its sole discretion.

  
	
   

  	
   

  	
   

  
	
  UNDERTAKING:

  	
   

  	
  Upon request, the Borrower agrees to provide CIBC with such additional
  security that in CIBC’s reasonable opinion is required to cover its or PLC’s contingent
  exposure and all indebtedness under the Swap Facility, including without
  limitation, an acknowledgement and amending agreement and such other
  documentation as CIBC may request to confirm that the Security held by CIBC
  as at date hereof secures such contingent exposure and indebtedness to PLC
  and to amend the Security accordingly.

  
	
   

  	
   

  	
   

  
	
  CONDITIONS

  PRECEDENT

  TO FUNDING:

  	
   

  	
  CIBC’s obligation to provide increased Availments shall be subject to
  the following conditions precedent being met, unless waived in writing by
  CIBC:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  execution and delivery of this Financing Commitment;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  to the extent not already delivered, the Security in form and
  substance satisfactory to CIBC;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  the receipt by CIBC of a duly executed environmental certificate in
  CIBC’s standard form;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  the receipt
  by CIBC of a duly executed officer’s certificate with respect to general
  corporate matters and the ownership of properties and interests as evaluated
  by CIBC;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  no Event of Default shall have occurred nor any event which, after
  notice or lapse of time or both, would become an Event of Default; 

  

 

7

 

	
   

  	
   

  	
  •

  	
  delivery of
  an opinion of the Borrower’s counsel, in form satisfactory to CIBC and its
  counsel;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  the appropriate notice of borrowing shall have been delivered in
  accordance with the notice provisions provided herein; and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  receipt by CIBC of the renewal fee.

  
	
   

  	
   

  	
   

  
	
  ADDITIONAL

  CONDITION:

  	
   

  	
  In addition to the conditions set forth above, CIBC’s obligation to
  provide Availments, other than rollovers or conversions of a then maturing
  advance, shall be suspended for as long as there exists a Borrowing Base
  Shortfall.

  
	
   

  	
   

  	
   

  
	
  REPORTING

  REQUIREMENTS:

  	
   

  	
  The Borrower will provide to CIBC:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  audited financial statements of the Guarantor within 120 days of the
  Borrower’s fiscal year-end;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  the Guarantor’s quarterly 10 Q filings within 60 days of the end of
  the first three fiscal quarters of each fiscal year;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  unaudited annual financial statements of the Borrower within 120 days
  of the Borrower’s fiscal year-end;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  unaudited quarterly financial statements within 60 days of the end of
  the first three fiscal quarters of each fiscal year;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  an independently prepared economic and reserve evaluation report
  covering the Borrower’s oil and gas properties along with annual cash flow
  projections and capital expenditure budgets within 90 days of the end of each
  fiscal year;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  production revenue statements on a quarterly basis within 60 days of
  the end of each fiscal quarter of the Borrower, such statements indicating
  the gross oil and gas production, net production, total revenues, royalties
  and other burdens, operating expenses and net revenues, in a format
  acceptable to CIBC;

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  compliance certificate substantially in the form of Schedule B hereto
  within 60 days of the end of each fiscal quarter; and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •

  	
  such other documentation and information as CIBC may reasonably
  request, including any internally or independently prepared environmental
  assessment reports in the Borrower’s possession.

  
	
   

  	
   

  	
   

  
	
  DISPOSITION

  LIMIT:

  	
   

  	
  In addition to the Borrower’s covenants found
  in Schedule A hereto, the Borrower will not sell, convey or otherwise dispose
  of any of its Proved Producing Reserves or related facilities, other than in
  the normal course of business and on arm’s length terms, provided that, if
  cumulative proceeds of all dispositions to be received by the Borrower exceed
  10% of the Borrowing Base since the last Borrowing Base determination, such
  proceeds will be used to permanently repay the Principal Indebtedness, unless
  other arrangements are made with CIBC.

  

 

8

 

	
  CHANGE

  OF CONTROL:

  	
   

  	
  The Borrower shall notify CIBC of a Change of Control as soon as it
  becomes aware thereof, and CIBC may at its sole discretion, by written notice
  to the Borrower, terminate the Facility upon a Change of Control
  occurring.  Such termination will be
  effective immediately upon such Change of Control and thereupon all Principal
  Indebtedness, interest, fees and all amounts due by the Borrower to CIBC or
  PLC under the Facility will be due and payable.

  
	
   

  	
   

  	
   

  
	
  INDEMNITY:

  	
   

  	
  The Borrower agrees to indemnify and hold CIBC and its officers,
  directors, employees and agents harmless against any and all liabilities and
  costs associated with or as a result of CIBC and PLC entering into and
  performing their obligations under this Financing Commitment, including but
  not limited to liabilities or costs associated with or as a result of (i) any
  transaction financed or to be financed in whole or part, directly or
  indirectly, by the proceeds of this Facility; or (ii) any breach or
  non-compliance of any legislation, order, directive or judgment by the
  Borrower for the protection of the environment. This indemnity will survive
  the repayment, cancellation or termination of this Financing Commitment.

  
	
   

  	
   

  	
   

  
	
  NOTICES:

  	
   

  	
  Any notice or communication to be given hereunder and under the
  Security may be effectively given by delivering the same at the addresses
  hereinafter set forth or by telecopy or by sending the same by prepaid
  registered mail to the parties at such addresses.  Any notice so mailed will be deemed to have been given upon
  actual receipt thereof.  The address
  of the parties are:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Carbon Energy Canada Corporation

  1750, 530 - 8th Avenue S.W.

  Calgary, Alberta

  T2P 3S8

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Attention:                                         Robert
  R. Morrison

  President

  
	
   

  	
   

  	
   

  	
  Telecopy:                                         (403)
  262-8167

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Canadian Imperial Bank of Commerce

  Oil and Gas Group

  9th Floor Bankers Hall

  855 - 2nd Street S.W.

  Calgary, Alberta

  T2P 2P2

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Attention:                                         Vice
  President, Oil & Gas

  
	
   

  	
   

  	
   

  	
  Telecopy:                                           (403)
  221-5779

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Either party may from time to time notify the other, in accordance
  with the provisions hereof, of any change of address or addressee, which
  thereafter, until changed by like notice, will be the address of such party
  for all purposes of this Financing Commitment and the Security.

  

 

9

 

	
  PRIOR

  INDEBTEDNESS:

  	
   

  	
  All amounts owing by the Borrower as at the
  effective date hereof under any other financing commitment or agreement shall
  be deemed to be amounts owing under this Facility and this Financing
  Commitment as of the effective date hereof. The Borrower acknowledges that all
  security granted with respect to any existing facility or any previous
  financing commitment, including the Existing Facility, or agreement between
  CIBC and/or PLC and the Borrower continues in full force and effect without
  in any way impairing or derogating from any of the mortgages, charges,
  pledges, assignments, security interests and covenants therein contained or
  thereby constituted, as continuing security for all obligations, indebtedness
  and liabilities of the Borrower under this Financing Commitment.

  
	
   

  	
   

  	
   

  
	
  EXECUTION:

  	
   

  	
  This Financing Commitment and the Security may
  be executed in separate counterparts and delivered by electronic facsimile
  and when so executed and delivered, will be deemed to be an original, all of
  which taken together will constitute one and the same instrument, and
  production of an originally executed or copy of a transmittal facsimile of
  each counterpart execution page hereof shall be sufficient for purposes of
  proof of the execution and delivery of this Financing Commitment and the
  Security.

  
	
   

  	
   

  	
   

  
	
  GENERAL TERMS

  AND
  CONDITIONS:

  	
   

  	
  Schedule A hereto contains general definitions, covenants, events of
  default, terms and conditions which form part of this Financing Commitment.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  OUR FINANCING COMMITMENT IS OPEN TO ACCEPTANCE BY YOU ON OR
  PRIOR TO MAY 14, 2003.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CANADIAN
  IMPERIAL BANK OF COMMERCE

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Per:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  David W. Richardson

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Per:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Glenn Kalyniuk

  
	
   

  	
   

  	
  Title:

  	
  Director, Commercial Credit

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  THE ABOVE
  TERMS AND CONDITIONS AND THOSE CONTAINED IN THE ATTACHED SCHEDULE “A” ARE
  AGREED TO BE EFFECTIVE THE 14th DAY OF MAY, 2003.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  CARBON
  ENERGY CANADA CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Per:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Robert Morrison

  
	
   

  	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Per:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Kevin D. Struzeski

  
	
   

  	
   

  	
  Title:

  	
  Treasurer

  
	
   

  	
   

  	
   

  
						

 

10

THIS IS
SCHEDULE A TO THE FINANCING COMMITMENT OF

CANADIAN IMPERIAL BANK OF COMMERCE IN FAVOUR OF

CARBON ENERGY CANADA CORPORATION DATED MAY 16, 2003

 

ARTICLE 1

DEFINITIONS

 

1.1                               Definitions.  Capitalized words and phrases used in the
Financing Commitment, including this Schedule A, and in all notices,
communications, certificates and other documents expressed to be made pursuant
thereto shall have the meanings set out below, unless otherwise defined in this
Financing Commitment.

 

“affiliates” has the meaning set forth in
the Business
Corporations Act (Alberta).

 

“Available Cash Flow”
means, in respect of the Borrower for any period, its revenue from operations
(including net proceeds of a Property Disposition) for such period, less:

 

(a)                                  royalties and other contractual obligations necessary
to preserve and maintain title to its oil and gas properties for such period;

 

(b)                                 interest or other fees pursuant to this Financing
Commitment;

 

(c)                                  its reasonable general, administrative and operating
expenses for such period;

 

(d)                                 taxes applicable to such period;

 

(e)                                  reasonable abandonment and reclamation costs
consistent with industry standards; and

 

(f)                                    any other amounts that CIBC may allow in writing.

 

“Availment” means an availment by the Borrower permitted under
this Financing Commitment.

 

“Banking Day”
means any day, other than a Saturday or Sunday, on which Canadian chartered
banks are open for domestic and foreign exchange business in Calgary, Alberta,
and with respect to Availments by way of LIBOR borrowing means any day, other
than a Saturday or Sunday, on which dealings in U.S. Dollars may be carried on
by and between prime banks in the London Interbank Eurodollar Market.

 

“Borrowing Base Shortfall”
means that amount expressed in Cdn. Dollars by which the Principal Indebtedness
under the Credit Facility at
any time exceeds the then existing Borrowing Base applicable to the Credit
Facility.

 

“Cdn. Dollars”
or “Cdn.
$” means such currency of Canada which, as at the time of
payment or determination, is legal tender in Canada for the payment of public
or private debts.

 

“Cdn. Dollar Exchange Equivalent” means, with reference to an amount (the “original
amount”) expressed in a currency other than Cdn. Dollars, the amount
expressed in Cdn. Dollars which CIBC would be required to pay in Calgary at the
opening of business on the date specified, in order to purchase the original
amount, in accordance with CIBC’s usual foreign exchange practice.

 

“CDOR Screen Rate”
means the average bid rate for bankers’ acceptances (expressed to five decimal
places) quoted on the Reuters’ Canadian discount offer rate screen at 10:00
a.m., (Toronto time) on the applicable date for bankers’ acceptances having a
term to maturity of one month.

 

“Change of Control” means
if any Person acquires, directly or indirectly, alone or in concert with other
Persons within the meaning of the Alberta Securities  Act, over a period of time
or at any one time, shares in the capital of the Borrower aggregating in excess
of 30% of all of the then issued and outstanding Voting Shares of the Borrower.

 

“CIBC Prime Rate”
means the variable rate of interest quoted by CIBC from time to time as the
reference rate of interest which it employs to determine the interest rate it will
charge for demand loans in Cdn. Dollars to its customers in Canada and which it
designates as its prime rate.  If on the
date an outstanding advance under the Facility is converted into a CIBC Prime
Rate loan, CIBC Prime Rate is less than the Floor Rate on that date, then the
interest rate applicable to such CIBC Prime Rate loan shall be the Floor Rate.

 

“Default” means
any event which, after notice or lapse of time or both, would become an Event
of Default.

 

“Distribution”
means any:

 

(a)                                  payment of any dividend on or in respect of any shares
of any class in the capital of the Borrower (including any shares thereof
acquired through the exercise of warrants or rights of conversion, exchange or
purchase);

 

(b)                                 redemption, retraction, purchase or other acquisition
or retirement, in whole or in part, of shares of any class in the capital of
the Borrower (including any shares thereof acquired through the exercise of
warrants or rights of conversion, exchange or purchase); or

 

(c)                                  payment of principal, interest or other amounts in
whole or in part, of any indebtedness of the Borrower for borrowed money
(including without limitation, any indebtedness incurred or assumed by the
Borrower pursuant to a capital lease or operating lease);

 

to (in the case of (a) and (c))
or by or from (in the case of (b)) any shareholder or any affiliate of a
shareholder of the Borrower, whether made or paid in or for cash, property or
both, or the transfer of any property for consideration of less than fair
market value to any shareholder or any affiliate of a shareholder of the
Borrower.

 

“Event of Default”
means an Event of Default as set out in Section 11.1 of this Schedule A.

11

“Floor Rate”
means, for any day, the CDOR Screen Rate at or about 10:00 a.m., Toronto time
on that day, plus 1%.

 

“Full Life Net Present Worth” means, at any time, the discounted net present value,
as determined by CIBC, of the Borrower’s forecasted cash flow, based on CIBC’s
estimate of the present and future production derived from those Proved
Producing Reserves as are considered by CIBC in determining the Borrowing Base,
and as adjusted by CIBC using the discount rates, inflation rates and pricing
forecast as applied by CIBC based on its then current lending practice for
loans of a similar nature to the Facility and with respect to similar type
property.

 

“including”
means “including, without limitation”.

 

“Material Adverse Change”
means a material adverse change in:

 

(a)                                  the financial condition of the Borrower;

 

(b)                                 the Borrower’s ability to perform its obligations
under this Financing Commitment;

 

(c)                                  the property, business, operations or liabilities of
the Borrower; or

 

(d)                                 the lending value of the Borrower’s oil and gas
properties.

 

“Material Adverse Effect”
means a material adverse effect on:

 

(a)                                  the financial condition of the Borrower;

 

(b)                                 the Borrower’s ability to perform its obligations
under this Financing Commitment;

 

(c)                                  the property, business, operations or liabilities of
the Borrower; or

 

(d)                                 the lending value of the Borrower’s oil and gas
properties.

 

“Permitted Encumbrances”
means:

 

(a)                                  undetermined or inchoate liens arising in the ordinary
course of and incidental to construction or current operations which have not
been filed pursuant to law against the Borrower or in respect of which no steps
or proceedings to enforce such lien have been initiated or which relate to
obligations which are not due or delinquent or if due or delinquent, any lien
which the Borrower will be contesting in good faith if such contest will
involve, in the opinion of CIBC, no risk of loss of any material part of the
property of the Borrower;

 

(b)                                 liens incurred or created in the Borrower’s ordinary
course of business and in accordance with sound industry practice in respect of
the joint operation of oil and gas properties or related production or
processing facilities as security in favour of a Person conducting the
development or operation of the property to which such liens relate, for the
Borrower’s portion of the costs and expenses of such development or operation,
provided that such costs or expenses are not due or delinquent or if due or
delinquent, any lien which the Borrower will be contesting in good faith if
such contest will involve, in the opinion of CIBC, no risk of loss of any
material part of the property of the Borrower;

 

(c)                                  to the extent a security interest is constituted or
created thereby, a sale or disposition of oil and gas properties resulting from
any pooling or unit agreement entered into in the ordinary course of business
when, in the Borrower’s reasonable judgement, it is necessary to do so to
facilitate the orderly exploration, development or operation of such
properties, provided that the Borrower’s resulting pooled or unitized interest
is proportional to the interest contributed by it and is not materially less
than the Borrower’s interest in such oil and gas properties prior to such
pooling or unitization, and its obligations in respect thereof, are not greater
than its proportional share based on the interest acquired by it;

 

(d)                                 to the extent a security interest is constituted or
created thereby, farmouts or overriding royalty interests, net profit
interests, reversionary interests and carried interests in respect of the
Borrower’s oil and gas properties that are entered into with or granted to
arm’s length third parties in the ordinary course of business and in accordance
with sound industry practice;

 

(e)                                  liens for penalties arising under non-participation
provisions of operating agreements in respect of the Borrower’s oil and gas
properties, if such liens do not, in the opinion of CIBC, materially detract
from the value of any material part of the property of the Borrower;

 

(f)                                    easements, rights-of-way, servitudes, zoning or other
similar rights or restrictions in respect of land owned by the Borrower
(including, without limitation, rights-of-way and servitudes for railways,
sewers, drains, pipe lines, gas and water mains, electric light and power and
telephone or telegraph or cable television conduits, poles, wires and cables)
which, either alone or in the aggregate, do not, in the opinion of CIBC,
materially detract from the value of such land or materially impair its use in
the operation of the business of the Borrower;

 

(g)                                 any lien or trust arising in connection with worker’s
compensation, unemployment insurance, pension and employment laws or
regulations;

 

(h)                                 the right reserved to or vested in any municipality or
governmental or other public authority by the terms of any lease, license, franchise,
grant or permit acquired by the Borrower, or by any statutory provision to
terminate any such lease, license, franchise, grant or permit or to require
annual or other periodic payments as a condition of the continuance thereof;

 

(i)                                     all reservations in the original grant from the Crown
of any lands and premises or any interests therein and all statutory
exceptions, qualifications and reservations in respect of title;

 

(j)                                     to the extent a security interest is constituted or
created thereby, any right of first refusal in favour of any Person granted in
the ordinary course of business with respect to the oil and gas properties of
the Borrower;

12

(k)                                  any claim or encumbrance from time to time disclosed
by the Borrower to CIBC and which is consented to in writing by CIBC;

 

(l)                                     to the extent a security interest is constituted or
created thereby, sales of production made in the ordinary course of business,
sale and leaseback transactions and purchase money security interests on
property other than property used by CIBC to establish the then applicable
Borrowing Base; and

 

(m)                               public and statutory liens not yet due arising by
operation of law.

 

“Permitted Indebtedness”
means:

 

(a)                                  all trade payables and other similar indebtedness of
the Borrower not past due by more than 60 days (other than indebtedness for
borrowed money) incurred in the normal course of business, provided each such
indebtedness is classified as a current liability on the Borrowers’ financial
statements and based on generally accepted accounting principles in Canada;

 

(b)                                 all indebtedness of the Borrower to CIBC and/or PLC
under this Financing Commitment;

 

(c)                                  all indebtedness arising from the sale and leaseback
by the Borrower of personal property to be used in its ongoing oil and gas
operations, provided such indebtedness does not in the aggregate exceed at any
one time 5% of the then applicable Borrowing Base; and

 

(d)                                 any other indebtedness of the Borrower consented to in
writing by CIBC.

 

“Person” is to be
broadly interpreted and will include an individual, a corporation, a
partnership, a trust, an unincorporated organization, a joint venture, the
government of a country or any political subdivision thereof, or an agency or
department of any such government, and the executors, administrators or other
legal representatives of an individual in such capacity.

 

“Principal Indebtedness”
means at anytime the outstanding principal indebtedness owed by the Borrower to
CIBC and/or PLC under this Financing Commitment, including, without limitation,
any contingent obligations or exposure of CIBC and/or PLC arising from the
Sundry Options or Availments pursuant to the Swap Facility.

 

“Property Disposition”
means any sale, transfer or swap of, grant of a security interest in or loss,
destruction or any other disposition whatsoever, whether voluntary or
involuntary, of any of the Borrower’s oil and gas properties used in the
determination of the Borrowing Base.

 

“Proved Producing Reserves” means those oil and gas reserves estimated as
recoverable under current technology and existing economic conditions from that
portion of a reservoir which can be reasonably evaluated as economically
productive on the basis of analysis of drilling, geological, geophysical and
engineering data, including reserves to be obtained by enhanced recovery
processes demonstrated to be economic and technically successful in the subject
reservoir and which are actually on production.

 

“Quarter” means a
3 month period commencing on the first day of each and every January, April,
July and October.

 

“U.S. Base Rate”
means the variable rate of interest quoted by CIBC from time to time as the
reference rate of interest which it employs to determine the interest rate it
will charge for demand loans in U.S. Dollars to its customers in Canada and
which it designates as its “U.S. Base Rate”.

 

“U.S. Dollars”
or “U.S.
$” means such currency of the United States of America which, as
at the time of payment or determination, is legal tender in the United States
of America for the payment of public or private debts.

 

“Voting Shares” means
shares of capital stock of any class of any corporation carrying voting rights
under all circumstances, provided that, for the purposes of this definition,
shares which only carry the right to vote conditionally on the happening of an
event shall not be considered Voting Shares, whether or not such event shall
have occurred, nor shall any shares be deemed to cease to be Voting Shares of
another class or classes by reason of the happening of such event.

 

1.2                               Number.  Wherever the context of this Financing
Commitment so requires, a term used herein importing the singular shall also
include the plural and vice versa.

 

1.3                               Monetary References.  Whenever an amount of money is referred to
in this Financing Commitment or any document entered into pursuant hereto, such
amount shall, unless otherwise expressly stated, be in Cdn. Dollars.

 

1.4                               Time.  Time shall be of the essence in this
Financing Commitment.

 

1.5                               Governing Law.  This Financing Commitment shall be governed
by and construed in accordance with the laws in force in the Province of
Alberta from time to time.

 

1.6                               Enurement.  This Financing Commitment shall be binding
upon and shall enure to the benefit of the Borrower and its respective
successors and permitted assigns.

 

1.7                               Amendments.  This Financing Commitment may only be
amended by an instrument in writing signed by the parties.

 

1.8                               No Waiver.

 

(a)          No
waiver by a party of any provision or of the breach of any provision of any of
this Financing Commitment shall be effective unless it is contained in a
written instrument duly executed by an authorized officer or representative of
such party.  Such written waiver shall
affect only the matter specifically identified in the instrument granting the
waiver and shall not extend to any other matter, provision or breach.

 

13

 

(b)         The
failure of a party to take any steps in exercising any right in respect of the
breach or nonfulfillment of any provision of any of this Financing Commitment
shall not operate as a waiver of that right, breach or provision, nor shall any
single or partial exercise of any right preclude any other or future exercise
of that right or the exercise of any other right, whether in law or otherwise.

 

1.9                               Severability.  If the whole or any portion of this
Financing Commitment or the application thereof to any circumstance shall be
held invalid or unenforceable to an extent that does not affect the operation
of this Financing Commitment in a fundamental way, the remainder of the
provision in question, or its application to any circumstance other than that
to which it has been held invalid or unenforceable, and the remainder of this
Financing Commitment, shall not be affected thereby and shall be valid and
enforceable to the fullest extent permitted by law.

 

1.10                        Accounting Terms and Principles.  Except as otherwise expressly provided, all
accounting terms, principles and calculations applicable to this Financing Commitment,
including the financial statements of the Borrower shall be interpreted,
applied and calculated, as the case may be, in accordance with Canadian or
United States generally accepted accounting principles, as applicable.  The basis of accounting shall be applied and
made on a consistent basis and shall not be changed unless agreed to by CIBC in
writing, such consent not to be unreasonably withheld.

 

ARTICLE 2

FUNDING AND OTHER MECHANICS

 

2.1                               Funding of Availments.  Where applicable, all Availments requested
by the Borrower shall be made available by deposit of the applicable funds
(which in the case of bankers’ acceptances shall be the net proceeds thereof)
into the appropriate Borrower’s account for value on the Banking Day on which
the advance is to take place.

 

2.2                               Notice Provisions.  Availments (other than by way of overdraft borrowings where no
notice is required) shall be made available to the Borrower and the Borrower
shall be entitled to rollover or convert maturing Availments where permitted hereunder,
provided a notice of borrowing or a notice of rollover or notice of conversion,
as applicable, is received from the Borrower by CIBC as follows:

 

(a)          with respect to Availments, other than LIBOR based
loans, of Cdn. $5,000,000 or less in the applicable currency, no later than
10:00 a.m. Calgary, Alberta time on the Banking Day of the drawdown date or the
date of rollover or conversion, as applicable;

 

(b)         with respect to Availments, other than LIBOR based
loans, in excess of Cdn. $5,000,000 in the applicable currency, no later than
10:00 a.m. Calgary, Alberta time on the second Banking Day immediately
preceding the drawdown date or the date of rollover or conversion, as
applicable; and

 

(c)          with respect to a drawdown, rollover or conversion of
or into a LIBOR based loan, regardless of amount, no later than 10:00 a.m.
Calgary, Alberta time on the third Banking Day immediately preceding the
drawdown date or the date of rollover or conversion, as applicable.

 

Any of the notices referred to in the foregoing
paragraphs may be given by the Borrower, at its sole risk, to CIBC by telephone
and in such case shall be immediately followed by the Borrower delivering to
CIBC on the same day the written notice required hereunder confirming such
instructions.

 

2.3                               Irrevocability.  A notice of borrowing, notice of rollover or
notice of conversion shall be in such form as the Borrower and CIBC agree and
when given by the Borrower shall be irrevocable and shall oblige the Borrower
and CIBC to take the action contemplated herein and therein on the date
specified therein.

 

2.4                               Rollover or Conversion of Availments

 

(a)          The Borrower shall be entitled to rollover one type of
Availment into the same type of Availment or convert one type of Availment into
another type of Availment on the terms herein provided.

 

(b)         If the Borrower fails to give CIBC a duly completed
notice of rollover or notice of conversion if and as required, or if in giving
such notice the Borrower fails to provide for the rollover or conversion of all
of the Availment then maturing, the Borrower shall be deemed to have
irrevocably elected to convert a maturing advance, or that part of such
maturing advance which the Borrower has failed to provide for in such notice,
as the case may be, into a CIBC Prime Rate loan with respect to a Cdn. Dollar
borrowing or a U.S. Base Rate loan with respect to a U.S. Dollar borrowing.

 

(c)          No repayment or conversion of a bankers’ acceptance
shall be made prior to its maturity date.

 

2.5                               Exchange Rate Fluctuations.  If as a result of currency fluctuation the
Cdn. Dollar Exchange Equivalent of the Principal Indebtedness exceeds the then
applicable Borrowing Base (the “Excess”), the Borrower shall forthwith pay
the Excess to CIBC as a repayment of principal.

 

2.6                               Excess Relating to Bankers’ Acceptances.  If to pay an Excess, it is necessary to repay an advance by way
of bankers’ acceptances, prior to the maturity date thereof, the Borrower shall
not be required to repay such advances until the maturity date applicable
thereto, provided, however, that at the request of CIBC, the Borrower shall
forthwith pay to CIBC for deposit into an escrow account maintained by and in
the name of CIBC the Excess, to be held by CIBC for set-off against future
indebtedness owing by the Borrower to CIBC under the Financing

 

14

 

Commitment
and, pending such application, shall bear interest at the rate declared by CIBC
from time to time as that payable by it in respect of deposits for such amount
and for the period from the date of deposit to the maturity date of the
advance.

 

ARTICLE 3

CALCULATION OF INTEREST AND FEES

 

3.1                               Records.  CIBC shall maintain records, in written or
electronic form, evidencing all advances and all other indebtedness owing by
the Borrower to CIBC under this Financing Commitment.  CIBC shall enter in such records details of all amounts from time
to time owing, paid or prepaid by the Borrower to it hereunder.  The information entered in such records
shall constitute prima facie evidence of the indebtedness of the Borrower to
CIBC under this Financing Commitment.

 

3.2                               Payment of Interest and Fees.

 

(a)          Interest.  Except as expressly stated otherwise herein,
all CIBC Prime Rate loans, U.S. Base Rate loans and LIBOR based loans from time
to time outstanding hereunder shall bear interest, as well after as before
maturity, default and judgment, with interest on overdue interest, at the
applicable rates.  Interest payable at a
variable rate shall be adjusted automatically without notice to the Borrower
whenever there is a variation in such rate.

 

(b)         Calculation
of Interest and Stamping Fees.  Interest on CIBC Prime Rate loans and U.S.
Base Rate loans shall accrue and be calculated daily and be payable on such
Banking Day as is customary for CIBC having regard to its then existing
practice.  Interest on CIBC Prime Rate
loans and U.S. Base Rate loans and stamping fees on bankers’ acceptances shall
be calculated on the basis of a 365 day year.

 

(c)          Interest Act (Canada).  For the purposes of the Interest Act (Canada) and
all other applicable laws which may hereafter regulate the calculation or
computation of interest in this Financing Commitment, the annual rates of
interest and fees applicable to CIBC Prime Rate loans and U.S. Base Rate loans
and stamping fees on bankers’ acceptances, respectively, are the rates as
determined under this Financing Commitment multiplied by the actual number of
days in a period of one year commencing on the first day of the period for
which such interest or stamping fee is payable and divided by 365.

 

(d)         LIBOR Based Loans.  Interest on LIBOR based loans shall accrue and be calculated
daily and be payable at the end of each applicable LIBOR period, provided that,
where the LIBOR period exceeds 90 days, interest shall be calculated and
payable every 90 days during the term of the LIBOR period and on the last day
of the applicable LIBOR period. 
Interest on LIBOR based loans shall be calculated on the basis of the
actual number of days in each LIBOR period divided by 360.  For the purposes of the Interest Act (Canada) and
other applicable laws, the annual rates of interest applicable to LIBOR based
loans are the rates as determined hereunder multiplied by the actual number of
days in a period of one year commencing on the first day of the period for
which such interest is payable and divided by 360.

 

3.3                               Conversion to Another Currency.  A conversion of an advance from one currency
to another currency shall not be made by a netting out of funds unless agreed
upon by CIBC.

 

3.4                               Waiver of Judgment Interest Act (Alberta).  To the extent permitted by applicable law,
the provisions of the Judgment Interest Act (Alberta) shall not
apply to this Financing Commitment and are hereby expressly waived by the
Borrower.

 

3.5                               Deemed Reinvestment
Not Applicable.  For the purposes of the Interest Act (Canada), the principle of
deemed reinvestment of interest shall not apply to any interest calculation
under this Financing Commitment and the rates of interest stipulated in this
Financing Commitment are intended to be nominal rates and not effective rates
or yields.

 

ARTICLE 4

LETTERS OF CREDIT AND LETTERS OF GUARANTEE

 

4.1                               Conditions Precedent to Issuance.  CIBC shall issue letters of credit and give letters of guarantee
on behalf of the Borrower upon execution by the Borrower of CIBC’s standard
forms applicable thereto.

 

4.2                               Issuance Fees.

 

(a)          The Borrower shall pay to CIBC an issuance
fee in respect of each outstanding letter of credit and letter of guarantee at
CIBC’s standard charges applicable thereto provided that such fee shall be in a
minimum amount of $150.

 

(b)         Issuance fees in respect of letters of
credit and letters of guarantee shall be calculated on the face amount thereof
and shall be payable annually in advance commencing on the date of
issuance.  If any letter of credit or
letter of guarantee is cancelled, there shall be a rebate of such fee to take
into account the number of days remaining in the annual period of its
cancellation.

 

4.3                               Payments Pursuant to Letters of
Credit and Letters of Guarantee. The Borrower shall forthwith reimburse
CIBC for any payment made by it pursuant to a letter of credit or letter of
guarantee issued under the Facility either by:

 

(a)          payment thereof in full; or

 

15

 

(b)         utilization of another Availment; or

 

(c)          a combination of payment and utilization of another
Availment.

 

4.4                               Reliance.  CIBC shall be entitled to honour each demand made under a letter
of credit or letter of guarantee in accordance with the terms thereof without
inquiring as to the propriety, sufficiency or genuineness of any such demand,
provided that if the letter of credit or letter of guarantee is a documentary
letter of credit or letter of guarantee, CIBC must receive to CIBC’s satisfaction
the required documents in the prescribed form under applicable law prior to
honouring any such demand.

 

ARTICLE 5

GENERAL PROVISIONS RELATING TO LIBOR BASED LOANS

 

5.1                               General.

 

(a)          The aggregate amount of each advance by way of a LIBOR
based loan shall be at least U.S. $2,500,000 and in multiples of U.S. $500,000
for any amount in excess thereof.

 

(b)         If the Borrower elects an Availment by way of a LIBOR
based loan or a rollover or a conversion into a LIBOR based loan, the Borrower
shall specify in its notice of borrowing, notice of rollover or notice of
conversion, as applicable, the LIBOR period (which shall begin and end on a
Banking Day) applicable to such LIBOR based loan.

 

5.2                               Inability to Make LIBOR Based Loans.  If
on any date CIBC determines in good faith (which determination shall be
conclusive as between the parties hereto), that its ability to make a requested
LIBOR based loan has become impracticable, impossible or unlawful, or has been
materially adversely affected, because:

 

(a)          of any change in applicable law or in the
interpretation or administration thereof by authorities having jurisdiction in
the matter, whether or not having the force of law;

 

(b)         of any material adverse change in, or the termination
of, the London Interbank Eurodollar Market for eurodollars; or

 

(c)          there exists no adequate or fair measure to ascertain
the LIBOR for any LIBOR period for the LIBOR based loan,

 

then
CIBC shall give the Borrower written notice thereof and thereupon, CIBC shall
have no further obligation with respect to such LIBOR based loan, provided
that, the Borrower may elect to drawdown, rollover or convert the amount
originally requested by way of such LIBOR based loan, into some other type of
Availment upon compliance with the applicable notice requirements set out
herein.

 

ARTICLE 6

BANKERS’ ACCEPTANCES

 

6.1                               General.  Each bankers’ acceptance draft tendered by the Borrower for
acceptance by CIBC shall be in a form acceptable to CIBC and the advance in
respect thereof shall be in a principal amount of not less than Cdn. $2,500,000
and in multiples of Cdn. $500,000 for any amounts in excess thereof and shall
have a term of not less than 30 days and not more than 180 days, unless
otherwise agreed to by the CIBC.

 

6.2                               Terms of Acceptance by CIBC.

 

(a)          Power of
Attorney.  To facilitate the procedures
contemplated in this Agreement, the Borrower appoints CIBC from time to time as
the attorney-in-fact of the Borrower to execute, endorse and deliver on behalf
of the Borrower drafts or depository bills in the form or forms prescribed by
CIBC for bankers’ acceptances denominated in Canadian Dollars (each such
executed draft or depository bill which has not yet been accepted by CIBC being
referred to as a “Draft”). 
Each bankers’ acceptance executed and delivered by CIBC on behalf of the
Borrower as provided for in this Section 0 will be as binding upon the Borrower
as if it had been executed and delivered by a duly authorized officer of the
Borrower.  The foregoing appointment
will cease to be effective three Banking Days following receipt by CIBC of a
notice from the Borrower revoking such appointment provided that any such
revocation will not affect bankers’ acceptances previously executed and
delivered by CIBC pursuant to such appointment.

 

(b)         Payment.  The Borrower shall provide for payment to CIBC of each bankers’
acceptance at its maturity, either by payment of the face amount thereof or
through the utilization of an Availment in accordance with this Financing Commitment,
or through a combination thereof.  The
Borrower waives presentment for payment of bankers’ acceptances by CIBC and
shall not claim from CIBC any days of grace for the payment at maturity of
bankers’ acceptances.  Any amount owing
by the Borrower in respect of any bankers’ acceptance which is not paid in
accordance with the foregoing, shall, as and from its maturity date, be deemed
to be outstanding hereunder as a CIBC Prime Rate loan.

 

(c)          No Liability.  CIBC shall not be liable for any damage, loss or improper use of
any bankers’ acceptance draft endorsed in blank except for any loss arising by
reason of CIBC failing to use the same standard of care in the custody of such
bankers’ acceptance drafts as CIBC uses in the custody of its own property of a
similar nature.

 

16

 

(d)         Marketing of
Bankers’ Acceptances.  The Borrower
shall be responsible for, and shall make its own arrangements with respect to,
the sale of bankers’ acceptances in the market place.  Notwithstanding the foregoing, CIBC may purchase from the
Borrower for its own account any bankers’ acceptance issued by it at a discount
rate to be agreed upon between the Borrower and CIBC.

 

(e)          Depository Bills.  It is the
intention of the Borrower and CIBC that pursuant to the Depository Bills and Notes Act
(“DBNA”),
all bankers’ acceptances accepted by CIBC under the Financing Commitment shall
be issued in the form of a “depository bill” (as defined in the DBNA),
deposited with the Canadian Depository for Securities Ltd. (“CDS”)
and will be made payable to CDS & Co. 
In order to give effect to the foregoing, CIBC shall, subject to the
approval of the Borrower, such approval not to be unreasonably withheld,
establish and notify the Borrower of any additional procedures, consistent with
the terms of the Financing Commitment and the requirements of the DBNA, as are
reasonably necessary to accomplish such intention, including, without
limitation:

 

(i)             any instrument held by CIBC for the purposes of
bankers’ acceptances shall have marked prominently, and legibly on its face and
within its text, at or before the time of issue, the words “This is a
depository bill subject to the Depository Bills and Notes Act (Canada)”;

 

(ii)          any reference to the authentication of the bankers’
acceptance will be removed; and

 

(iii)       any reference to “bearer” will be removed and such bankers’ acceptance
shall not be marked with any words prohibiting negotiation, transfer or
assignment of it or of an interest in it.

 

(f)            Records.  As a
condition precedent to CIBC’s obligation to accept bankers’ acceptances
hereunder, the Borrower shall have either delivered to CIBC at the branch of
account used by the Borrower sufficient bankers’ acceptances executed in blank
in sufficient time for CIBC to forward to and hold same at its Toronto offices
for issuance in accordance with a request from the Borrower or provide CIBC
with an authorization in a form acceptable to it, authorizing the designated
securities officers of CIBC to complete and issue such bankers’ acceptances
and, on behalf of the Borrower, to sign such bankers’ acceptances as drawer by
affixing a reproduction of the signatures of CIBC’s designated securities
officers thereon.  CIBC will not be
liable for any damage, loss or other claim arising by reason of any loss or
improper use of any such bankers’ acceptance endorsed in blank except any loss
arising by reason of CIBC or its officers, employees, agents or representatives
failing to use the same standard of care in the custody of such bankers’
acceptances executed in blank as CIBC uses in the custody of its own property
of a similar nature.  CIBC will shall
maintain a record with respect to such bankers’ acceptances endorsed in blank
that are:

 

(i)             received by CIBC from the Borrower;

 

(ii)          voided by CIBC for any reason;

 

(iii)       accepted by CIBC hereunder; and

 

(iv)      cancelled by CIBC at the maturity thereof.

 

6.3                               General Mechanics.

 

(a)          Notice.  Subject to
Section 0 of this Schedule “A”, the Borrower may in the notice of borrowing,
notice of rollover or notice of conversion requesting an Availment by way of
bankers’ acceptances or by subsequent notice to CIBC, provide CIBC with
information as to the discount proceeds payable by the purchasers of the
bankers’ acceptances and the party to whom delivery of the bankers’ acceptances
is to be made against delivery of such discount proceeds to CIBC for the credit
of the Borrower.

 

(b)         Rollovers.  In the case
of a rollover of maturing bankers’ acceptances, CIBC, in order to satisfy the
continuing liability of the Borrower to CIBC for the face amount of the
maturing bankers’ acceptances, shall retain for its own account the net
proceeds of each new bankers’ acceptance issued by it in connection with such
rollover and the Borrower shall, on the maturity date of the maturing bankers’
acceptances, pay to CIBC an amount equal to the difference between the face
amount of the maturing bankers’ acceptances and the aggregate net proceeds of
the new bankers’ acceptances.

 

(c)          Conversion from Canadian Dollar Availments.  In the case of a conversion from a CIBC Prime Rate loan into an
Availment by way of bankers’ acceptances, CIBC, in order to satisfy the
continuing liability of the Borrower to CIBC for the principal amount of the
CIBC Prime Rate loan being converted, shall retain for its own account the net
proceeds of each new bankers’ acceptance issued by it in connection with such
conversion and the Borrower shall, on the date of issuance of the bankers’
acceptances pay to CIBC an amount equal to the difference between the aggregate
principal amount of the CIBC Prime Rate loan being converted, including any
accrued interest thereon, owing to CIBC and the aggregate net proceeds of such
bankers’ acceptances.

 

(d)         Conversion to Canadian Dollar Availment.  In the case of a conversion of an Availment by way of bankers’
acceptances into a CIBC Prime Rate loan, CIBC, in order to satisfy the
liability of the Borrower to CIBC for the face amount of the maturing bankers’
acceptances, shall record the obligation of the Borrower to it as a CIBC Prime
Rate loan, unless the Borrower provides for payment to CIBC of the face amount
of the maturing bankers’ acceptance in some other manner acceptable to CIBC.

 

(e)          Authorization.  The Borrower
hereby authorizes CIBC to complete, stamp, hold, sell, rediscount or otherwise
dispose of all bankers’ acceptances accepted by it in accordance with the
instructions provided by the Borrower hereunder.

 

17

 

6.4                               Escrowed Funds.  Upon the occurrence of an Event of Default, the Borrower shall
forthwith pay to CIBC for deposit into an escrow account maintained by and in
the name of CIBC an amount equal to CIBC’s maximum potential liability under
then outstanding bankers’ acceptances, letters of credit and other similar
Availments, including CIBC’s contingent exposure under swap contracts entered
into with the Borrower (the “Escrow Funds”).  The Escrow Funds shall be held by CIBC for set-off against future
indebtedness owing by the Borrower to CIBC in respect of such bankers’ acceptances
and pending such application shall bear interest at the rate declared by CIBC
from time to time as that payable by it in respect of deposits for such amount
and for the period from the date of deposit to the maturity date of the
bankers’ acceptances.  If such Event of
Default is either waived or cured in compliance with the terms of this
Financing Commitment, then the remaining Escrow Funds if any, together with any
accrued interest to the date of release, shall be released to the Borrower

 

6.5                               Execution of Bankers’ Acceptances. The signatures of any
authorized signatory on bankers’ acceptances may, at the option of the
Borrower, be reproduced in facsimile and such bankers’ acceptances bearing such
facsimile signatures shall be binding on the Borrower as if they had been
manually signed by such authorized signatory. 
Notwithstanding that any person whose signature appears on any bankers’
acceptance as a signatory may no longer be an authorized signatory of the Borrower
at the date of issuance of a bankers’ acceptance, and notwithstanding that the
signature affixed may be a reproduction only, such signature shall nevertheless
be valid and sufficient for all purposes as if such authority had remained in
force at the time of such issuance and as if such signature had been manually
applied, and any such bankers’ acceptance so signed shall, subject to Section 0
of this Schedule “A”, be binding on and at the risk of the Borrower.

 

ARTICLE 7

OVERDRAFT BORROWINGS

 

7.1                               Overdraft Borrowings.

 

(a)          At any time that the Borrower would be
entitled to obtain CIBC Prime Rate loans under the Credit Facility, it will be
entitled to draw cheques on its Cdn. Dollar chequing account number 96-02216
Transit # 9 at CIBC’s 309- 8th Avenue S.W., Calgary, Alberta
branch.  The debit balance from time to
time in any such account will be deemed to be a CIBC Prime Rate loan
outstanding to the Borrower under the Credit Facility.  If at any time the Borrower is a party to a
cash concentration arrangement with CIBC, the amount of any overdraft from time
to time in the Cdn. Dollar concentration account of the Borrower established
pursuant to such arrangement will also be deemed to be a CIBC Prime Rate loan
outstanding to the Borrower under the Credit Facility.

 

(b)         The Borrower agrees to repay all overdrafts
on demand, together with interest calculated on the daily balance of the amount
owing and payable monthly, both before and after demand and judgment, at the
rates described in this Financing Commitment with interest on overdue interest at
the same rate; provided the interest rate hereunder will vary automatically on
the day such rate is varied by CIBC and without notice by CIBC to the
Borrower.  Interest charges may be
debited to the account designated above.

 

(c)          The Borrower agrees not to make any
drawings which would cause the Credit Facility limit or the Borrowing Base to
be exceeded and CIBC reserves the right to refuse to honour any drawing which
in CIBC’s opinion would have the effect of causing the Credit Facility limit or
the Borrowing Base to be exceeded.

 

(d)         Notwithstanding that the Credit Facility is
restricted to the amount set out herein and to the account designated above,
any overdraft which may occur in excess of the Credit Facility limit or the
Borrowing Base or which may occur in other accounts of the Borrower, will be
governed by the provisions hereof, except that the rate of interest will be
calculated at a variable nominal rate per annum equal to CIBC’s standard
overdraft rate as declared by CIBC from time to time with interest on overdue
interest at the same rate, such rate to vary automatically on the day the
standard overdraft rate is varied by CIBC and without notice by CIBC to the
Borrower.  CIBC’s standard overdraft
rate on the date hereof is 21 per cent per annum.

 

ARTICLE 8

INCREASED COSTS

 

8.1                               Changes in
Law.

 

(a)          If due
to either:

 

(i)             the
introduction of, or any change in, or in the interpretation of any law, whether
having the force of law or not, resulting in the imposition or increase of
reserves, deposits or similar requirements by any central bank or
administrative body charged with the administration thereof; or

 

(ii)          the
compliance with any guideline or request from any central bank or other
administrative body which CIBC, acting reasonably, determines that it is
required to comply with,

 

there shall be any increase in
the cost to CIBC of agreeing to make or making, funding or maintaining this
Financing Commitment or there shall be any reduction in the effective return to
CIBC thereunder, then, subject to the paragraph below, the Borrower shall,
within 5 Banking Days after being notified by CIBC of such event, pay to CIBC
quarterly in arrears, that amount (the “Additional Compensation”) which CIBC,
acting reasonably, determines shall compensate it, after taking into account
all applicable taxes, for any such increased costs or reduced returns incurred
or suffered by CIBC.

 

(b)         If
Additional Compensation is payable pursuant to the above paragraph, the
Borrower shall have the option to prepay any amount of the Principal
Indebtedness owed to CIBC, subject to provisions herein.

 

18

 

8.2                               Changes in
Circumstances.  Notwithstanding anything to the contrary herein contained, if on
any date CIBC determines in good faith, which determination shall be conclusive
and binding on the parties, and provided written notice is given to the
Borrower that its ability to maintain, or continue to offer any Availment has
become unlawful or impossible due to:

 

(a)          any
change in applicable laws, or in the interpretation or administration thereof
by authorities having jurisdiction in the matter;

 

(b)         any material adverse change in, or the
termination of, the London Interbank Eurodollar Market for eurodollars; or

 

(c)          the
imposition of any condition, restriction or limitation upon CIBC which is
outside of its control,

 

then, in any such case, the
Borrower shall forthwith repay to CIBC all principal amounts affected thereby,
together with all unpaid interest accrued thereon to the date of repayment and
all other expenses incurred in connection with the termination of any such
Availment.  The Borrower may utilize
other forms of Availments not so affected in order to make any required
repayment and after any such repayment, the Borrower may elect to re-borrow the
amount repaid by way of some other Availment upon complying with applicable
requirements thereof.

 

ARTICLE 9

REPRESENTATIONS AND WARRANTIES OF THE BORROWER

 

9.1                               Representations
and Warranties.  The Borrower hereby represents and warrants to CIBC as of the
date of this Financing Commitment and each time the Borrower requests an
Availment that:

 

(a)          Incorporation,
Organization and Power.  The Borrower has been duly incorporated and is validly existing
under the laws of its jurisdiction of incorporation and is duly registered to
carry on business in each jurisdiction in Canada in which the nature of any
material business carried on by it or the character of any property owned or
leased by it makes such registration necessary, and it has full corporate power
and capacity to enter into and perform its obligations under this Financing
Commitment and to carry on its business as currently conducted.

 

(b)         Authorization
and Status of Agreements.  This Financing Commitment and the Security have been duly
authorized, executed and delivered by the Borrower and does not conflict with
or contravene or constitute a default or create an encumbrance, other than a
Permitted Encumbrance, under:

 

(i)             its
constating documents or by-laws or any resolution of its directors or
shareholders, as the case may be;

 

(ii)          any
agreement or document to which it is a party or by which any of its property is
bound; or

 

(iii)       any
applicable law,

 

the contravention of which would
have a Material Adverse Effect.

 

(c)          Enforceability.  This Financing Commitment and the Security
constitutes the Borrower’s valid and binding obligations and each is
enforceable against it in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, or similar statutes affecting the enforcement of creditors’
rights generally and by general principles of equity.

 

(d)         Litigation.  There are no actions, suits or proceedings
at law or before or by any administrative body existing or pending, or to the
Borrower’s knowledge threatened, or which, to the Borrower’s knowledge, it is
threatened to be made a party and the result of which would, if successful
against it, have a Material Adverse Effect or cause a Material Adverse Change.

 

(e)          Environmental
Laws.  The Borrower
has obtained all material permits, licenses and other authorizations which are
required under environmental laws.  The
Borrower is in full compliance with environmental laws and with the terms and
conditions of all such permits, licenses and authorizations, except to the
extent that failure to so comply would not have a Material Adverse Effect or
cause a Material Adverse Change.

 

(f)            Environmental
Condition of Property.  The property or any part thereof owned, operated or controlled by
the Borrower:

 

(i)             is
not, to the knowledge of the Borrower, the subject of any outstanding claim,
charge or order from an administrative body alleging violation of environmental
laws or, if subject to any such claim, charge or order, the Borrower is taking
or causing to be taken, with respect to its subsidiaries all such remedial,
corrective or other action required under the claim, charge or order or is
diligently and in good faith contesting or causing its subsidiaries to contest
the validity thereof; and

 

(ii)          complies,
with respect to each of its use and operation, in all material respects with
environmental laws and with the terms and conditions of all permits, licenses
and other authorizations which are required to be obtained by each of them
under applicable environmental laws.

 

(g)         Title to
Properties.  The
Borrower has and shall continue to maintain good, beneficial and valid title to
its oil and gas properties, subject only to Permitted Encumbrances, and is
entitled to charge its interest in such properties in favour of CIBC under the
Security without the need to obtain the consent of or release from any other
Person and such oil and gas properties are not held in trust for any other
Person other than as disclosed in writing to CIBC.

 

19

 

(h)         Operation of
Properties.  To
the best of the Borrower’s knowledge, information and belief, after due
enquiry, all oil, gas and other wells have been and shall continue to be
drilled, completed, shut-in, abandoned (and if required to be so abandoned,
abandoned in accordance with applicable law), and the facilities, plants and
equipment in respect thereof have been and shall continue to be operated and
maintained, as the case may be, in a good and workmanlike manner in accordance
with sound industry practice and in accordance with all applicable laws, except
to the extent that the failure to comply would not have a Material Adverse
Affect or cause a Material Adverse Change.

 

(i)             No Adverse
Change.  The
most recent audited financial statements of the Borrower provided to CIBC were
prepared in accordance with generally accepted accounting principles and such
audited financial statements present fairly in all material respects the
Borrower’s financial position as at the date thereof and since that date there
has been no Material Adverse Change.

 

(j)             Information.  All factual information heretofore or
contemporaneously furnished by or on behalf of the Borrower to CIBC in
connection with this Financing Commitment is true and accurate in all material
respects and the Borrower is not aware of any omission of any material fact
which renders such factual information incomplete or misleading in any material
way.

 

(k)          No Breach of
Orders, Licences or Statutes.  The Borrower is not in breach of:

 

(i)             any
order, approval or mandatory requirement or directive of any administrative
body;

 

(ii)          any
governmental licence or permit; or

 

(iii)       any
applicable law,

 

the breach of which would have a
Material Adverse Effect.

 

(l)             No Default.  No Event of Default has occurred and no
event with the passage of time or the giving of notice, or both, has occurred
which would become an Event of Default.

 

(m)       Approvals.  All material regulatory approvals, permits
and licenses necessary for the Borrower to carry on its business, as currently
carried on, and all approvals, and consents necessary for it to enter into this
Financing Commitment and the Security and perform its obligations thereunder
have, in each case, been obtained and are in good standing.

 

(n)         Subsidiaries.  The Borrower has no direct or indirect
subsidiaries other than as disclosed in writing to CIBC.

 

(o)         Ownership of
Voting Shares. The Voting Shares of the
Borrower are 99.7% owned the Guarantor.

 

(p)         Affiliates. The
Borrower’s only affiliates are Carbon Energy Corporation and Bonneville Fuels
Corporation and its subsidiaries, Bonneville Fuels Operating Corporation,
Bonneville Fuels Marketing Corporation, Bonneville Fuels Management Corporation
and Colorado Gathering Corporation.

 

9.2                               Acknowledgement.  The Borrower acknowledges that CIBC is
relying upon the representations and warranties in this Article 6 in making
this Financing Commitment available to the Borrower and that the
representations and warranties herein shall be deemed to be restated in every
respect effective on the date each and every Availment is made under this
Financing Commitment.

 

ARTICLE 10

COVENANTS OF THE BORROWER

 

10.1                        Affirmative
Covenants.  While
any indebtedness under this Financing Commitment and the Security is
outstanding or any of the Availments remains available to the Borrower and
except with the written consent of CIBC, the Borrower covenants with CIBC that:

 

(a)          Punctual
Payment.  The
Borrower shall pay or cause to be paid all indebtedness and other amounts
payable under this Financing Commitment and the Security punctually when due.

 

(b)         Corporate
Existence.  The
Borrower shall do or shall cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence in good standing as a
corporation under the laws of its jurisdiction of incorporation.

 

(c)          Inspection by
CIBC.  The Borrower
shall allow and do all things necessary to enable CIBC, acting reasonably, from
time to time to inspect all of the Borrower’s corporate and financial records
located at its plants and sites including where the Borrower may otherwise
carry on business.

 

(d)         Notice of
Event of Default.  The Borrower shall notify CIBC of the occurrence of any Event of
Default, or of any event which with the passage of time or the giving of
notice, or both, would become an Event of Default, forthwith upon becoming
aware thereof and specify in such notice the nature of the event and the steps
taken or proposed to be taken to remedy the same.

 

20

 

(e)          Notice of
Environmental Damage.  The Borrower shall, promptly upon acquiring knowledge thereof,
notify CIBC of the discovery of any contaminant or of any release of a
contaminant into the environment from or upon the land or property owned,
operated or controlled by the Borrower which could reasonably be expected to
have a Material Adverse Effect.

 

(f)            Environmental
Certificates.  The Borrower shall provide an environmental certificate in CIBC’s
standard form to CIBC at the same time as the delivery of its annual financial
statements.

 

(g)         Additional
Environmental Information.  The Borrower shall upon the request of CIBC make available for
discussion with CIBC and its nominee at all reasonable times the individuals
who were involved in the preparation of any environmental certificate given
hereunder.

 

(h)         Operation of
Properties.  The
Borrower shall operate its property or, if it is not the operator, use
reasonable efforts to ensure that such property is operated, in accordance with
sound industry practice and in accordance with all applicable laws.

 

(i)             Performance
of Leases.  The
Borrower shall perform or cause to be performed all obligations under all
leases relating to its oil and gas properties, including payment of rentals,
royalties, taxes or other charges in respect thereof which are necessary to
maintain all such leases in good standing in all material respects, provided
that this covenant shall not restrict their right to surrender leases which are
uneconomic to maintain.

 

(j)             Insurance.  The Borrower shall maintain or cause to be
maintained adequate insurance in respect of its property, including all
wellhead equipment and other plant and equipment according to prudent industry
standards, and shall provide CIBC with copies of all insurance policies
relating thereto if so requested.

 

(k)          Material
Adverse Claims.  The Borrower shall, except for Permitted Encumbrances, defend its
property from all material adverse claims where the failure to do so may have a
Material Adverse Effect.

 

(l)             Protection of
Security.  The
Borrower shall do all things reasonably requested by CIBC to protect and
maintain the Security and the priority thereof in relation to other Persons.

 

(m)       Environmental
Audit.  If CIBC,
acting reasonably, determines that the Borrower’s obligations or other
liabilities in respect of matters dealing with the protection or contamination
of the environment or the maintenance of health and safety standards, whether
contingent or actual, may have a Material Adverse Effect then, at the request
of CIBC, the Borrower shall assist CIBC in conducting an environmental audit of
the property which is the subject matter of such contingent or actual
obligations or liabilities, by an independent consultant selected by CIBC.  The cost of such audit shall be for the
account of the Borrower, provided that, CIBC shall carry out such audit in
consultation with the Borrower to expedite its completion in a cost effective
manner.  Should the result of such audit
indicate that the Borrower is in breach, or with the passage of time is likely
to be in breach, of any environment law and such breach or potential breach has
or may have, in the opinion of CIBC, acting reasonably, a Material Adverse
Effect, and without in any way prejudicing or suspending any of the rights and
remedies of CIBC under this Financing Commitment, the Borrower shall forthwith
commence and diligently proceed to rectify or cause to be rectified such breach
or potential breach, as the case may be, and shall keep CIBC fully advised of
the actions it intends to take and has taken to rectify such breach or
potential breach and the progress it is making in rectifying same.  CIBC shall be permitted to retain, for the
account of the Borrower, the services of a consultant to monitor the Borrower’s
compliance with this Section 10.1(m).

 

(n)         Other
Information.  The Borrower shall provide to CIBC, at the request of CIBC acting
reasonably, such other documentation and information concerning the Borrower
and its business as CIBC may require.

 

(o)         Security.  The Security shall be in such form or forms
as shall be required by CIBC acting reasonably, and shall be registered in such
offices in Canada or any Province thereof or in any other jurisdiction in which
the Borrower carries on business as CIBC may from time to time require to
protect the security interests created thereby.  Should CIBC determine at any time and from time to time that the
form and nature of the then existing Security is deficient in any way or does
not fully provide CIBC with the security interests and priority to which CIBC
is entitled hereunder, the Borrower shall forthwith execute and deliver or
cause to be executed and delivered to CIBC, at the Borrower’s expense, such
amendments to the Security or provide such new security as CIBC may reasonably
request.

 

(p)         Fixed Charge
Security.  If
CIBC determines in its sole discretion that there has been a Material Adverse
Change (including the occurrence of a Borrowing Base Shortfall) and CIBC
considers it necessary for its adequate protection, the Borrower, at the
request of CIBC, shall forthwith grant or cause to be granted to CIBC and/or
PLC, a fixed charge and security interest (subject only to Permitted
Encumbrances which under applicable law rank in priority thereto) in such of
the Borrower’s property as CIBC shall, in its sole discretion, determine as
security for all then present and future indebtedness of the Borrower to CIBC
and/or PLC under this Financing Commitment. 
In this connection, the Borrower shall:

 

(i)    provide CIBC with
such information as is reasonably required by CIBC to identify the property to
be so charged;

 

(ii)   do all
such things as are reasonably required to grant in favour of CIBC and/or PLC, a
fixed charge and security interest (subject only to Permitted Encumbrances
which under applicable law rank in priority thereto) in respect of such
property to be so charged;

 

(iii)  provide
CIBC and/or PLC with all corporate resolutions and other action, as reasonably
required for the Borrower, to grant to CIBC and/or PLC a fixed charge and
security interest (subject only to Permitted Encumbrances which under
applicable law rank in priority thereto) in their respective property
identified by CIBC to be so charged;

 

21

 

(iv)      provide
CIBC and/or PLC with such security instruments and other documents which CIBC,
acting reasonably, deems are necessary to give full force and effect to the
provisions of this Section 10.1(p);

 

(v)         assist
CIBC and/or PLC in the registration or recording of such agreements and
instruments in such public registry offices in Canada or any Province thereof
as CIBC, acting reasonably, deems necessary to give full force and effect to
these provisions; and

 

(vi)      pay
all reasonable costs and expenses incurred by CIBC and/or PLC in connection
with the preparation, execution and registration of all agreements, documents
and instruments, including any amendments to the Security, made in connection
herewith.

 

(q)         Section 426 Security.  This
agreement applies to all security under Section 426 of the Bank Act (Canada) now or
hereafter granted by the undersigned to CIBC (herein called “Section 426
Security”) and to the property covered thereby.

 

(i)             The Borrower covenants and agrees with CIBC to sign
and deliver with regard to the Section 426 Security and/or the property covered
thereby, such other and further assurances by way of transfer and otherwise as
CIBC may request.

 

(ii)          A notice of general intention to realize by way of
sale of such property given to the undersigned at least three (3) clear days
before any sale thereof will be sufficient in respect of any sale or sales of
the property (or any part thereof) covered by any Section 426 Security held by
CIBC at the date of such notice, and no further or other notice of sale whether
by mail, publication, advertisement, posting of public notice or otherwise need
by given at any time by CIBC.  The said
property of any part thereof may be sold at any time and from time to time
after the expiration of the said three (3) day period by public auction or
private sale or partly by each mode.

 

(iii)       In order to take possession of, seize, care for, maintain, protect,
preserve, use, operate and sell such property or any part thereof or for all or
any of such purposes CIBC may from time to time and without any previous notice
or demand, free of charge and to the exclusion of others including the
Borrower, enter upon or into, occupy, possess and/or use for such time or times
as CIBC may see fit all or any of the lands, premises, buildings, plant,
undertaking, tools, machinery, casing and equipment of or occupied or used by
the Borrower in any manner in connection with any such property, and CIBC will
not be or become in any way liable to the Borrower for or in respect of any
rent, charges, depreciation or damages arising in any manner whatsoever.

 

(iv)      The Borrower will not remove any such property except in accordance
with the terms of CIBC’s written consent; provided that until default in
payment of all or any part of the said indebtedness and liability to CIBC, or
until failure of the Borrower to care for, maintain, protect and/or preserve
any such property or until notice by CIBC to the Borrower to cease so doing,
the Borrower may remove and/or deal with such property from time to time in the
ordinary course of business.

 

(v)         The Borrower hereby appoints the manager or acting
manager from time to time of the 309 – 8 Avenue S.W., Calgary, Alberta branch
of CIBC its attorney for the purpose of executing and delivering for and on
behalf of the Borrower any agreements, conveyances, assignments, transfers or
other instruments required by CIBC in connection with the operation or sale of
the property covered by any Section 426 Security, including where the property
assigned or to be assigned to CIBC includes natural gas required to be gathered
and processed in a plant or plants, all conveyances, assignments and transfers
of all agreements relating to the interest, if any, of the Borrower in such
plant or plants, the gathering and processing of such natural gas and the sale
thereof; such appointment to be irrevocable for so long as any Section 426
Security is held by CIBC.

 

(vi)      The Borrower covenants and agrees with CIBC to obtain all consents
required to any agreements, conveyances, assignments, transfers or other
instruments executed by its said attorney pursuant to the powers herein granted
and agrees to ratify and confirm all acts and things done by the said attorney
pursuant to the powers herein granted.

 

10.2                        Negative
Covenants.  While
any indebtedness under this Financing Commitment and the Security is
outstanding or any of the Availments remain available to the Borrower, and
except with the prior written consent of CIBC, such consent not to be
unreasonably withheld, the Borrower shall not:

 

(a)          incur
indebtedness except for Permitted Indebtedness;

 

(b)         provide
or permit a security interest or lien over its property, except for Permitted
Encumbrances;

 

(c)          make
any Distribution;

 

(d)         merge, amalgamate, or consolidate with
another Person or permit a Change of Control;

 

(e)          make
any material change in the nature of its business as now carried on;

 

(f)            make
material investments or enter into ventures of a material nature which are
outside the scope of its normal course of business;

 

(g)         grant
a security interest or lien over any shares it owns, either directly or
indirectly, in any of its subsidiaries, if any, other than pursuant to the
Security; and

 

22

 

(h)         make
any sale or disposition of its property, other than in the ordinary course of
business.

 

ARTICLE 11

EVENTS OF DEFAULT

 

11.1                        Event of
Default.  Each
of the following events shall constitute an Event of Default under this
Financing Commitment:

 

(a)          Failure to Pay.  If the Borrower makes default in the due and
punctual payment of any principal, interest, fees or other amounts owing under
or pursuant to this Financing Commitment as and when the same becomes due and
payable, whether at maturity or otherwise and such default continues for a
period of 3 days after notice of such default is given by CIBC to the Borrower.

 

(b)         Breach of
Covenants. 
Except for an Event of Default set out in the above paragraph or
elsewhere in this Section 11.1, if the Borrower defaults in the performance or
observance of any covenant, obligation or condition to be observed or performed
by it under or pursuant to this Financing Commitment or any other agreement now
or hereafter made by the Borrower with CIBC, and such default continues for a
period of 30 days after notice is given to the Borrower by CIBC.

 

(c)          Incorrect
Representations.  If any representation or warranty made to CIBC by the Borrower
shall prove to have been incorrect in any material respect when so made or
deemed to have been repeated as herein provided and, as a result of such
incorrect representation or warranty, there has been a Material Adverse Change
or such incorrect representation or warranty has a Material Adverse Effect.

 

(d)         Insolvency.  If a judgment, decree or order of a court of
competent jurisdiction is entered against the Borrower, (i) adjudging it
bankrupt or insolvent, or approving a petition seeking its reorganization or
winding-up under the Bankruptcy and Insolvency Act (Canada),
the Companies’
Creditors Arrangement Act (Canada) or any other bankruptcy,
insolvency or analogous Law, or (ii) appointing a receiver, trustee,
liquidator, or other Person with like powers, over all, or substantially all,
of its property or (iii) ordering the involuntary winding up or liquidation of
affairs or (iv) if any receiver or other Person with like powers is appointed
over all, or substantially all, of its property, unless such appointment is
stayed and of no effect against the Security and the rights of CIBC and/or PLC
thereunder.

 

(e)          Winding-Up.  If (i) an order or a resolution is passed
for the dissolution, winding-up, reorganization or liquidation of the
Borrower, pursuant to applicable laws, including the Business Corporations Act
(Alberta), or (ii) the Borrower institutes proceedings to be adjudicated
bankrupt or insolvent, or consents to the institution of bankruptcy or
insolvency proceedings against it under the Bankruptcy and Insolvency Act (Canada),
the Companies’
Creditors Arrangement Act (Canada) or any other bankruptcy,
insolvency or analogous law, or (iii) the Borrower consents to the filing of
any petition under any such law or to the appointment of a receiver, or other
Person with like powers, over all, or substantially all, of such party’s
property, or (iv) the Borrower makes a general assignment for the benefit of
creditors, or becomes unable to pay its debts generally as they become due, or
(v) the Borrower takes or consents to any action in furtherance of any of the
aforesaid purposes.

 

(f)            Other
Indebtedness.  The Borrower fails to make any payment of principal or interest
in regard to any indebtedness whatsoever owed by it after the expiry of any
applicable grace period or demand therefor, whether incurred before or after
the date hereof, to any Person other than CIBC and/or PLC, where the
outstanding principal amount of such indebtedness is more than $500,000, unless
(i) the Borrower is contesting the validity of such indebtedness in good faith
by appropriate proceedings diligently conducted, as long as such proceedings do
not involve any risk of unindemnified liability on the part of CIBC and/or PLC,
(ii) the Borrower notifies CIBC of such contest, and (iii) the Borrower has
established reasonable reserves therefor, adequate in the opinion of CIBC, in
accordance with the generally accepted accounting principles in effect in
Canada at the time of such contest.

 

(g)         Carbon Energy
Corporation Indebtedness. Carbon Energy Corporation
fails to make any payment of principal or interest in regard to any
indebtedness whatsoever owed by it, including without limitation, pursuant to
any judgment, loan agreement, guarantee, letter of credit, lease or any other
agreement evidencing indebtedness, after the expiry of any applicable grace
period or demand therefor, whether incurred before or after the date hereof, to
any Person, where the outstanding principal amount of such indebtedness is, in
the case of a single such failure, more than $100,000 or, in the case of the
aggregate of all such failures, more than $500,000, unless (i) Carbon Energy
Corporation is contesting the validity of such indebtedness in good faith by
appropriate proceedings diligently conducted, as long as such proceedings do
not involve any risk of unindemnified liability on the part of CIBC and/or PLC,
(ii) the Borrower notifies CIBC of such contest, and (iii) Carbon Energy
Corporation has established reasonable reserves therefor, adequate in the
opinion of CIBC, in accordance with the generally accepted accounting
principles in effect in Canada or the United States, as applicable, at the time
of such contest.

 

(h)         Other
Defaults.  The
Borrower defaults in the observance or performance of any non-monetary
obligation, covenant or condition to be observed or performed by it pursuant to
any agreement to which it is a party or by which any of its property is bound,
where such default would have a Material Adverse Effect and it fails to remedy
such default within a period of 30 days after notice of such default.

 

(i)             Adverse
Proceedings.  The occurrence of any action, suit or proceeding against or
affecting the Borrower before any court or before any administrative body
which, if successful, would constitute a Material Adverse Change, unless the
action, suit, or proceedings shall be contested diligently and in good faith
and, in circumstances where a lower court or tribunal has rendered a decision
adverse to such party, such party is appealing such decision, and has provided
CIBC with a reserve in respect thereof, adequate in the opinion of CIBC.

 

(j)             Cessation of
Business.  The
Borrower ceases or proposes to cease carrying on business, or a substantial
part thereof, or makes or threatens to make a bulk sale of its property.

 

23

 

(k)          Material
Adverse Change.  Any Material Adverse Change occurs, as determined by CIBC acting
reasonably, and the Borrower fails to remedy such Material Adverse Change
within a period of 30 days after notice thereof from CIBC.

 

(l)             Pledge of
Shares.  Shares
of the Borrower become pledged or otherwise encumbered by the owner thereof
without the prior written consent of CIBC, in its sole discretion.

 

11.2                        Remedies.  Upon the occurrence of an Event of Default,
CIBC may forthwith terminate any further obligation to provide Availments, make
advances or to grant any further credits to the Borrower and may declare the
Principal Indebtedness together with unpaid accrued interest thereon and any
other amounts owing under or pursuant to this Financing Commitment, contingent
or otherwise, to be immediately due and payable, whereupon the Borrower shall
be obligated without any further grace period to forthwith pay such amounts to
CIBC and CIBC may exercise any and all rights, remedies, powers and privileges
afforded by applicable law or under any and all other instruments, documents
and agreements made to secure or assure payment and performance of the
obligations of the Borrower under this Financing Commitment, including, without
limitation, the Security.

 

11.3                        Waivers.  An Event of Default may only be waived in
writing by CIBC.

 

ARTICLE 12

ASSIGNMENT

 

12.1                        Assignment of
Interests.  The rights and obligations of the Borrower under this Financing
Commitment shall not be assignable, in whole or in part, without the prior
written consent of CIBC.

 

12.2                        Assignment by CIBC.  CIBC will have the right to syndicate, participate, sell or
assign any portion of the Credit Facility to one or more Persons acceptable to
the Borrower, acting reasonably; provided, that, such Person is a Canadian
chartered bank and is a resident of Canada for the purposes of the Income Tax
Act (Canada), such syndication, participation, sale or assignment
does not result in the imposition of any additional obligation upon the
Borrower or result in the Borrower incurring any additional costs or liabilities
hereunder, and all expenses incurred by CIBC and the Borrower in connection
with such syndication, participation, sole or assignment (including legal costs
and agency fees) will be for the account of CIBC.  In the event of such syndication, participation, sale or
assignment, the Borrower will, subject to the preceding limitations, execute
and deliver all such agreements, documents and instruments as CIBC may
reasonably request to effect and recognize such syndication, participation,
sale or assignment, including amendments to this Financing Commitment, the
Security or any other documents related thereto.

 

ARTICLE 13

MISCELLANEOUS

 

13.1                        Telephone
Instructions.  Any verbal instructions given by the Borrower in relation to this
Financing Commitment shall be at the risk of the Borrower, and CIBC shall have
no liability for any error or omission in such verbal instructions or in the
interpretation or execution thereof by CIBC provided CIBC acted without gross
negligence in the circumstances.

 

13.2                        No Partnership,
Joint Venture or Agency.  The Borrower agrees that nothing contained in this Financing
Commitment nor the conduct of any party shall in any manner whatsoever
constitute or be intended to constitute any party as the agent or
representative or fiduciary of the other, constitute or be intended to
constitute a partnership or joint venture between CIBC and the Borrower.

 

13.3                        Judgment
Currency Deficiency.  If, for the purposes of obtaining judgment in any court or any
other related purpose hereunder, it is necessary to convert an amount due to
CIBC in U.S. Dollars into Cdn. Dollars, the exchange rate shall be the daily
noon day rate quoted by the Bank of Canada on the relevant date to purchase in
Calgary the U.S Dollars with the Cdn. Dollars, and includes any premium or
costs payable by the purchaser.  The
Borrower agrees that its obligation in respect of any U.S. Dollars owed to CIBC
shall, notwithstanding any judgment or payment in the Cdn. Dollars, be discharged
only to the extent CIBC may, in accordance with normal banking procedures,
purchase in the Calgary foreign exchange market the U.S. Dollars with the
amount of the Cdn. Dollars paid; and if the amount of the U.S. Dollars
purchased is less than the amount originally due, the Borrower agrees that the
deficiency shall be a separate and continuing obligation of it, and shall
constitute in favour of CIBC a cause of action which shall continue in full
force and effect notwithstanding any such judgment, or order to the contrary,
and the Borrower agrees, notwithstanding any such payment or judgment, to
indemnify CIBC against any such loss or deficiency.  The Borrower acknowledges that any indebtedness it may incur or
suffer under this paragraph shall be secured by the Security unless earlier
discharged as provided herein.

 

13.4                        Further
Assurances.  The Borrower shall, from time to time forthwith at CIBC’s request
and at the Borrower’s own cost and expense, do, make, execute and deliver, or
cause to be done, made, executed and delivered, all such further documents,
financing statements, assignments, acts, matters and things which may be
reasonably required by CIBC with respect to this Financing Commitment, the
Security or any part thereof and to give effect to any provision thereof.

 

13.5                        Waiver of
Laws.  To the
extent legally permitted, the Borrower hereby irrevocably and absolutely waives
the provisions of any applicable law which may be inconsistent at any time
with, or which may delay or limit in any way, the enforcement of this Financing
Commitment and the Security in accordance with their terms.

 

13.6                        Attornment.  The Borrower does hereby irrevocably submit
and attorn to the non-exclusive jurisdiction of the courts of the
Province of Alberta for all matters arising out of or relating to this
Financing Commitment and the Security or any of the transactions contemplated
thereby.

 

24

 

13.7                        Interest on
Payments in Arrears.  Except as otherwise provided in this Financing Commitment,
interest shall be paid by the Borrower as follows:

 

(a)          on
amounts for which CIBC has actually incurred an out-of-pocket
expense and for which CIBC has an obligation under this Financing Commitment to
reimburse such amounts to any third party incurring the expenses, interest
shall be payable on such amount at the CIBC Prime Rate plus 2% from and
including the day on which the amount was incurred to but excluding the day on
which the amount is reimbursed; and

 

(b)         on
amounts payable by the Borrower to CIBC under this Financing Commitment where
such payment is in default but the non-payment of such amount has not
required an actual out-of-pocket expense by CIBC, at the CIBC Prime Rate plus
2% from and including the day on which the payment was due, but excluding the
day on which the payment is made whether before or after judgment.

 

13.8                        Payments Due
on Banking Day.  Whenever any payment hereunder shall be due on a day other than a
Banking Day, such payment shall be made on the next succeeding Banking Day and
such extension of time shall in such case be included in the computation of
payment of interest thereunder.

 

13.9                        Application
of Proceeds.  Except as otherwise agreed to by CIBC in its sole discretion and
as otherwise expressly provided hereunder, all payments made by or on behalf of
the Borrower under this Financing Commitment, after acceleration of the
Principal Indebtedness, shall be applied by CIBC in the following order:

 

(a)          in
payment of any amounts due and payable by way of recoverable expenses;

 

(b)         in
payment of any amounts by way of any fees (other than standby fees);

 

(c)          in
payment of any amounts due and payable as and by way of interest or standby
fees, including any interest on overdue amounts;

 

(d)         in
payment of the Principal Indebtedness; and

 

(e)          in
payment of all other indebtedness under this Financing Commitment or the
Security.

 

13.10                 Counterparts.  This Financing Commitment may be executed in
counterpart, each of which when so executed shall be deemed to be an original
and both of which taken together shall constitute one and the same instrument.

 

13.11                 Whole
Agreement.  This Financing Commitment constitutes the whole and entire
agreement between the Borrower and CIBC and cancels and supersedes any prior
agreements, undertakings, declarations, representations and warranties, written
or verbal among all the parties in respect of the subject matter of this
Financing Commitment.

 

25

 

THIS IS SCHEDULE B TO THE
FINANCING COMMITMENT OF

CANADIAN IMPERIAL BANK OF COMMERCE IN FAVOUR OF

CARBON ENERGY CANADA CORPORATION DATED MAY 16, 2003

 

COMPLIANCE CERTIFICATE

 

TO:                                                                            CANADIAN IMPERIAL BANK OF
COMMERCE

 

[AND TO:                                      CIBC WORLD MARKETS PLC – when
required]

 

Re:                                                                               CEC RESOURCES LTD. –
FINANCING COMMITMENT dated as of May 16, 2003, between Carbon Energy Canada
Corporation (the “Borrower”) and CIBC (the “Financing
Commitment”).

 

This
Compliance Certificate is delivered pursuant to the Financing Commitment.

 

1.                                       We are respectively the [Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, President,
any Vice President or Treasurer] of Carbon Energy Canada Corporation (the “Borrower”);

 

2.                                       This Compliance Certificate
applies to the fiscal [quarter/year] of the Borrower ending
                              ,
              ;

 

3.                                       We are familiar with and have
examined the provisions of the Financing Commitment and we have made such
reasonable investigations of corporate records and inquiries of other officers
and senior personnel of the Borrower [and each of its subsidiaries] as we have
deemed necessary for purposes of this Compliance Certificate;

 

4.                                       Based on the foregoing, the
Borrower is not in breach of nor has it breached any provision of the Financing
Commitment (other than as previously disclosed in writing to CIBC) and no event
or circumstance has occurred which constitutes, or which with the giving of
notice, lapse of time or both would constitute, an Event of Default thereunder;

 

5.                                       Except as disclosed to CIBC in
writing, each of the representations and warranties made in the Financing
Commitment were true and correct as at the
             day of
                              ,
             ,
being the last day of the fiscal [quarter/year] of the Borrower most
recently ended;

 

6.                                       No Borrowing Base Shortfall
exists;

 

7.                                       The cumulative proceeds
received by the Borrower in respect of sales, conveyances and dispositions of
Proved Producing Resaves or related facilities since the last Borrowing Base
determination is $                                  ;

 

8.                                       The Borrower has made
available to the independent petroleum engineer that prepared the economic and
reserve evaluation report [provided concurrently herewith] [most recently
provided to CIBC] all relevant information relating to the petroleum
or natural gas reserves and related facilities of the Borrower [and each of
its subsidiaries] and any royalties, overriding royalties, carried
interests, reversionary interests, net profits interest and other burdens
related thereto and there is not, to the best of the knowledge of the Borrower,
any material error in such economic and reserve evaluation report or material
omission therefrom nor is the Borrower [or any of its subsidiaries] aware of any
subsequent event or circumstance (excluding matters in respect of which the
independent petroleum engineer has made pricing, discount rate or other similar
assumptions) which would affect, in any material manner, the information,
conclusion, or calculations contained in such economic and reserve evaluation
report;

 

9.                                       The indebtedness of the Borrower
under all swaps as at the last day of the fiscal [quarter/year] of the
Borrower most recently ended is as follows:

 

(a)                                  Currency Swaps – Cdn. 
$                          
and the notional amount swapped thereunder is Cdn.
$                          ;
covering           % of the
U.S. Dollar indebtedness of the Borrower;

 

(b)                                 Interests Swaps - Cdn.
$                          
and the notional amount thereof is Cdn. $                          ;
covering           % of the
principal indebtedness of the Borrower; and

 

(c)                                  Commodity Swaps – Cdn.
$                          
and the quantity of Petroleum Substances subject to such swaps is (          
MMCF or barrels); covering
          % of the B.O.E./day
of the Borrower.

 

The
foregoing amounts were calculated by the Borrower on a mark-to-market basis as
at the end of the fiscal [quarter/year] of the Borrower most
recently ended, and by converting all amounts in U.S. Dollars at such date
based on the Bank of Canada noon spot exchange rate on such date.  The details of all of the Borrower’s hedging
agreements are set forth in Exhibit 1 hereto.

 

26

 

10.                                 The Borrower has no
subsidiaries other than [list Subsidiaries here].

 

11.                                 Since the date of the last
Compliance Certificate delivered to CIBC, the Borrower has not received notice
of:

 

(a)                                  the discovery of any
contaminant or of any release of a contaminant into the environment from or
upon the land or property of the Borrower or any subsidiary thereof;

 

(b)                                 any order, judgment or claim
(if such claim is determined adversely) that has been made by any Person
against the Borrower[, any subsidiary thereof] or any of [their/its]  assets
and properties that would give rise to any environmental liability;

 

(c)                                  any governmental approval that
has been issued or made by any governmental authority to the effect that the
Borrower or any subsidiary thereof has failed to comply in any respect with any
environmental laws or requiring any remediation, stop work, cleanup otherwise;
or

 

(d)                                 any claim that has been made
by any person against the Borrower, any subsidiary thereof or the Borrowing
Base assets that, if determined adversely, would give rise to any environmental
liability.

 

This
Compliance Certificate is given by the undersigned officers in their capacity
as officers of the Borrower without any personal liability on the part of such
officers.

 

WITNESS OUR HANDS on behalf of Carbon Energy
Canada Corporation at the City of Calgary, in the Province of Alberta, this
           day of
                              ,
          .

 

 

	
   

  	
  CARBON ENERGY CANADA
  CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

27

 

EXHIBIT “1” TO THE
COMPLIANCE CERTIFICATE

Applicable
to the Fiscal Quarter of Carbon Energy Canada Corporation  Ending
                            

 

Details of Hedging
Agreements to which Carbon Energy Canada Corporation and its subsidiaries are a
party as of
                                       ,
                 .

 

(Note:
List all hedging agreements to which Carbon Energy Canada Corporation  or
any subsidiary thereof is a party)

 

	
  Deal Type

  	
   

  	
  Counterparty

  	
   

  	
  Notional

  Amounts or

  Volumes

  	
   

  	
  Start

  Date

  	
   

  	
  Maturity

  Date

  	
   

  	
  Mark-to

  Market

  	
   

  	
  Deal

  Description

  	
   

  	
  Collateral

  posted (if any)

  
	
  Currency

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest rate

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Commodity

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (a)
  physically settled

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (b)
  financially settled

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

28

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00052-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00052-of-00352.parquet"}]]