Document:

EXHIBIT 10.1

 

Offer
to Sell Notes

 

1.             Defined
Terms. Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings ascribed to such terms in the Securities Purchase
Agreement dated as of July 19, 2006 (as amended, the “Purchase Agreement”)
among SatCon Technology Corporation (the “Company”) and the Purchasers,
including the signatories hereto (such signatories being hereinafter referred
to as the “Investors”). Pursuant to the Purchase Agreement, the Purchasers
purchased Senior Secured Convertible Notes from the Company in the aggregate
amount of $12,000,000 (individually a “Note” and collectively, the “Notes”)

 

2.             Offer
to Sell Notes. Each Investor hereby irrevocably offers to sell its Note to
the Company upon the following terms (the “Offer”):  At any time from the date hereof to and
including November 9, 2007 (the “Outside Date”), the Company shall be entitled
to purchase each Investor’s Note for an amount in cash equal to 120% of the
aggregate outstanding principal amount of such Note plus any accrued and unpaid
interest thereon (the “Purchase Price”). The Company shall have the right to
elect to effect such purchase by delivering a written notice to each Investor
at least three (3) business days prior to the date of purchase, such notice to
be in the form of Exhibit A hereto and sent via facsimile or e-mail
transmission and over night courier to the address of each Investor set forth
in the Purchase Agreement. Payments shall be made by wire transfer of
immediately available funds to the accounts where the Company regularly makes
payments of principal and interest on the Note.

 

To the extent the Company exercises this purchase right, it
must purchase all of the Notes held by each Investor on the date of purchase. Upon
the Company’s payment of the Purchase Price for the Notes hereunder, such Notes
shall be deemed cancelled and no longer outstanding. Notwithstanding the
foregoing, if the Company has not purchased such Notes prior to 5:00 p.m. New
York time on the Outside Date, this Offer shall terminate and be of no further
force or effect except for the consideration to be paid by the Company to the
Investors as inducement for them to make this Offer which consideration shall
become the un-recallable property of the Investors once paid. In the event that
the Company purchases all of the Notes pursuant hereto, all collateral securing
the Notes shall be discharged and released, the Company is hereby authorized to
file any UCC-3 financing statements to reflect same and the Agent (as such term
is defined in the Security Agreement) shall forthwith take all action necessary
to terminate and discharge all collateral securing the Notes and shall
forthwith return to the Company the certificates representing the Pledged Stock
(as such term is defined in the Security Agreement). Notwithstanding anything
to the contrary contained herein, this Offer shall not derogate from each
Investor’s right to convert any portion of its Note prior to the purchase
thereof hereunder in accordance with the terms of the Note.

 

In exchange for the Investors keeping this Offer open from
the date hereof to and including the Outside Date, the Company hereby agrees to
provide the following consideration to the Investors:  within 10 days after the Company’s counter-execution
of this Offer (2 business days if payment is made is stock), the Company shall
pay to the each Investor its pro rata share of $750,000, payment of which shall
be made, at the option of the Company, either (i) in immediately available
funds or (ii) in shares of the Company’s Common Stock with piggy-back
registration rights with respect to the next registration filed by the Company
(with the precise number of shares to be delivered in satisfaction of this
obligation being based on a 15% discount to the 5 day VWAP for the five (5)
trading days preceding the date hereof with a ceiling price of $1.00). Such
determination with respect to the method of 

 

 

payment
shall be made by the Company on the date that this Agreement is fully executed.
The issuance of stock in connection with the inducement for the Investors to
make and hold open the Offer will not violate or trigger the rights of the
Investors under Section 9(d) of the Warrant As, the Warrant Bs or the Warrant
Cs, Section 10(d) of the Notes or Section 4.6 of the Purchase Agreement.

 

3.             Consent.
For the purpose of Section 4.13(a)(i) of the Purchase Agreement, in connection
with the purchase of Notes in accordance with Section 2 hereof, this Offer
shall constitute the approval, by written consent, of the holders of a majority
of the outstanding principal face amount of the Notes to purchase, redeem or
set aside any sums for the purchase or redemption of any shares of capital
stock or other securities that are convertible into or exercisable for such stock.
Upon execution of this Offer by the holders of not less than 66% of the
aggregate principal amount outstanding under the Notes and the Company’s
exercise of this purchase right, Sections 4.10(a) and 4.16 of the Purchase
Agreement shall be deemed amended to enable the Company and its Subsidiaries to
incur indebtedness secured by liens on any of its (or their) property or assets
solely to pay the purchase price for the Notes being sold pursuant hereto.

 

4.             Title.
Each Investor hereby represents and warrants that it is the owner of good and
marketable title to such Investor’s Notes, free and clear of all liens, pledges
and encumbrances.

 

5.             Information.
In connection with the Note purchases contemplated hereunder, each Investor
hereby acknowledges and agrees that: (i) the Company (or any assignee thereof)
may be in possession of material nonpublic information concerning the Company
(the “Information”) that may not be known to such Investor, including, without
limitation Information concerning capital raising efforts, operational and
financial performance, and future prospects; (ii) such Investor represents and
warrants to the Company (and any such assignee) that such Investor has
sufficient knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the Note purchases contemplated
hereunder; (iii) such Investor has not relied upon any written or verbal
representations of the Company (or any such assignee) in making this Offer;
(iv) such Investor’s decision to allow the purchase of such Investor’s Note in
accordance with the terms hereof is based entirely upon publicly available
information concerning the Company and such Investor’s own investigation and
due diligence concerning the Company, and such Investor has not relied on the
Company (or any such assignee) to provide access to information concerning the
Company or its securities and such Investor is not relying on the Company (or
any such assignee) to disclose the Information; and (v) to the full extent
permissible by applicable law, the Company (or any such assignee) shall have no
liability to such Investor or its affiliates and such Investor, on behalf of
itself, its officers, directors, stockholders and affiliates, hereby waives,
releases and discharges forever any claim, action or proceeding that it might
have against the Company (or any such assignee), based on, arising out of or
related to the Company’s (or any such assignee’s) knowledge, possession or
nondisclosure of the Information in connection with the Note purchases
contemplated hereunder.

 

6.             Successors and Assigns. This Offer shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns. The Company may assign its rights and/or
obligations hereunder to any person.

 

2

 

7.             Counterparts.
This Offer may be executed in
any number of counterparts, each of which when so executed shall be deemed to
be an original and, all of which taken together shall constitute one and the
same offer. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.

 

IN WITNESS WHEREOF, the parties hereto have executed this
Offer by their duly authorized representatives effective as of the October 19,
2007.

 

	
  SATCON
  TECHNOLOGY CORPORATION

  
	
   

  
	
  By:

  	
  /s/
  David B. Eisenhaure

  	
   

  
	
  Name:
  David B. Eisenhaure

  
	
  Title:
  President / CEO

  

 

[SIGNATURE PAGES OF INVESTORS
FOLLOW]

 

3

 

[SIGNATURE PAGE OF INVESTORS TO OFFER TO SELL NOTES]

 

 

	
  IROQUOIS MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  Joshua Silverman

  	
   

  
	
  Name:

  	
  Joshua Silverman

  
	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  ROCKMORE INVESTMENT MASTER 

  
	
  FUND LTD

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Bruce Bernstein

  	
   

  
	
  Name:

  	
  Bruce Bernstein

  
	
  Title:

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
  HIGHBRIDGE INTERNATIONAL LLC

  
	
   

  	
   

  
	
  By:  Highbridge
  Capital Management, LLC

  
	
   

  
	
  By:

  	
  /s/ Adam J. Chill

  	
   

  
	
  Name:

  	
  Adam J. Chill

  
	
  Title:

  	
  Managing Director

  
	
   

  	
   

  
	
   

  	
   

  
	
  RHP MASTER FUND, LTD

  
	
   

  	
   

  
	
  By:  Rock
  Hill Investment Management, L.P.

  
	
  By:  RHP
  General Partner, LLC

  
	
   

  	
   

  
	
  By:

  	
  /s/ Keith Marlow

  	
   

  
	
  Name:

  	
  Keith Marlow

  
	
  Title:

  	
  Director

  
	
   

  	
   

  
	
   

  	
   

  
	
  BRISTOL INVESTMENT FUND,
  LTD.

  
	
   

  	
   

  
	
  By:

  	
  /s/ Paul Kessler

  	
   

  
	
  Name:

  	
  Paul Kessler

  
	
  Title:

  	
  Director

  
									

 

4

 

[SIGNATURE PAGE OF INVESTORS TO OFFER TO SELL NOTES]

 

	
  HUDSON BAY FUND, LP

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
    /s/ Yoav Roth

  	
   

  
	
  Name:

  	
  Yoav Roth

  
	
  Title:

  	
  Principal and Portfolio
  Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
  HUDSON BAY OVERSEAS FUND, LTD

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
    /s/ Yoav Roth

  	
   

  
	
  Name:

  	
  Yoav Roth

  
	
  Title:

  	
  Principal and Portfolio
  Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
  CAPITAL VENTURES
  INTERNATIONAL

  
	
   

  	
   

  
	
  By:  Heights Capital Management, Inc., its 

  
	
  authorized agent

  
	
   

  	
   

  
	
  By:

  	
  /s/ Martin Kobinger

  	
   

  
	
  Name:

  	
  Martin Kobinger

  
	
  Title:

  	
  Investment
  Manager

  
					

 

5

 

[SIGNATURE PAGE OF INVESTORS TO OFFER TO SELL NOTES]

 

	
  ENABLE GROWTH PARTNERS LP

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Adam Epstein

  	
   

  
	
  Name:

  	
  Adam Epstein

  
	
  Title:

  	
  Principal

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ENABLE OPPORTUNITY PARTNERS LP

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Adam Epstein

  	
   

  
	
  Name:

  	
  Adam Epstein

  	
   

  
	
  Title:

  	
  Principal

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  PIERCE DIVERSIFIED STRATEGY 

  	
   

  
	
  MASTER FUND LLC, ENA

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Adam Epstein

  	
   

  	
   

  
	
  Name:

  	
  Adam Epstein

  	
   

  
	
  Title:

  	
  Principal

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  ALPHA CAPITAL ANSTALT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Kougad Ackermann

  	
   

  	
   

  
	
  Name:

  	
  Kougad Ackermann

  	
   

  
	
  Title:

  	
  Director

  	
   

  
					

 

6

 

EXHIBIT A

 

[LETTERHEAD OF COMPANY]

October   , 2007

 

[Insert address of Investor]

 

Re: 
Offer to Sell Notes to SatCon Technology Corporation

 

Ladies/Gentlemen:

 

Capitalized
terms used in this letter have the same meanings herein as in the Securities Purchase
Agreement dated as of July 19, 2006 (as amended to date) among SatCon
Technology Corporation (the “Company”) and certain Purchasers (as therein defined).

 

You
are hereby notified that, pursuant to and in accordance with the above
referenced Offer to Sell Notes, the Company has elected to purchase your Note
in accordance with Section 2 thereof. Payment of the purchase price will be
made on October [], 2007.

 

Very truly yours,

 

 

	
  SATCON TECHNOLOGY CORPORATION

  
	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
  Name:

  
	
  Title:

  

 

7Exhibit
10.16

AMENDED
AND RESTATED OPERATING AGREEMENT

(Tennessee Operations)

THIS AMENDED AND RESTATED OPERATING AGREEMENT (the “Agreement”),
is executed this October 2, 2007, but is entered into effective January 5,
2007, by and between VINLAND ENERGY OPERATIONS, LLC, hereinafter designated and
referred to as “Operator,” and ARIANA ENERGY, LLC (“AE”) and VINLAND ENERGY
EASTERN, LLC (“VEE”), hereinafter referred to as “Non-Operators.”

WITNESSETH

WHEREAS, the Non-Operators have entered into a
Participation Agreement, also effective January 5, 2007, pursuant to which they
have agreed to jointly develop certain oil and gas interests defined therein
and herein as the “AMI Interests”; and

WHEREAS, the Non-Operators desired to contract with
the Operator (which is an affiliate of VEE) to operate the Contract Area (as
defined herein) for their benefit and on the terms and conditions, and for the
compensation as set forth herein; and

WHEREAS, on or about April 18, 2007, the parties
entered into an Operating Agreement which was attached to and made a part of
the Participation Agreement (the “Original Agreement”); and

WHEREAS, the parties subsequently discovered several
typographical errors in the Original Agreement, and to correct those errors,
the parties desire to, and do hereby, amend and restate the Original Agreement
effective as of January 5, 2007, as provided herein.

NOW, THEREFORE, for and
in consideration of the mutual covenants contained herein, the sufficiency of
which consideration is hereby acknowledged, it is agreed as follows:

ARTICLE
I

DEFINITIONS

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

A.            The term “AE Proved
Undeveloped Oil and Gas Properties” or “AE PUD Properties” shall mean the
properties (and the strata therein) in which AE reserved a 40% working interest
in that certain assignment effective January 5, 2007, and which is attached
hereto as Exhibit “E.”

B.            The term “AE PUD
Interests” shall mean the 40% interest in the AE PUD Properties held by AE. A.

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

 1
 

D.            The terms “Area of
Mutual Interest” and “AMI” shall mean those certain areas outlined on the plats
attached hereto as Exhibits “A-1,”  “A-2,” “A-3,” “A-4”  and  “A-5.”

E.             The Term “AMI
Interests” shall mean the AE PUD Interests, the Vinland PUD Interests, and the
New AMI Leases.

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

G.            The term “Contract
Area” shall mean all of the lands and the AMI Interests intended to be
developed and operated for the production of Oil and Gas under this Agreement.

H.            The terms “Deepen” or “Deepening”
shall mean a single operation whereby a well is drilled to an objective Zone
below the deepest Zone in which the well was previously drilled, or below the
deepest Zone proposed in the associated AFE, whichever is the lesser.

I.              The terms “Drilling
Party,” “Drilling Parties” and “Consenting Party” shall mean a party or parties
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this Agreement.

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

K.            The term “Drillsite”
shall mean the oil and gas lease on which a proposed well is to be located.

L.             The term “New AMI
Leases” shall mean any oil, gas and mineral leases acquired by a party and
added to the AMI Interests pursuant to Section 2.1 of the Participation
Agreement.

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

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

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

P.             The term “Oil and Gas
Interest” or “Interests” shall mean the AMI Interests.

Q.            Unless the context
clearly indicates to the contrary, the terms “party” and “parties” shall mean
AE and VEE.

 2
 

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

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

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

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

V.            The term “Vinland PUD
Interests” shall mean the 60% working interest in the AE PUD Properties
conveyed to Vinland in the assignment attached hereto as Exhibit “E.”

W.           The term “Zone” shall
mean a stratum or geologic horizon of earth containing or thought to contain a
common accumulation of Oil and Gas separately producible from any other common
accumulation of Oil and Gas.

Unless the context
otherwise clearly indicates, words used in the singular include the plural, the
word “person” includes natural and artificial persons, the plural includes the
singular, and any gender includes the masculine, feminine, and neuter.  Unless the context otherwise indicates, the
terms “parties” and “party” shall refer to the Non-Operators or one of them.

ARTICLE II

EXHIBITS

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

A.            Exhibit “A”shall
include the following information:

(1)           Description of lands
subject to this Agreement,

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

(3)           Parties to the
Agreement and Operator with addresses and telephone numbers for notice
purposes,

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

(5)           Oil and Gas Interests
subject to this Agreement,

(6)           Burdens on production
other than landowner royalties,

 3
 

(7)           Exhibits “A-1,” “A-2,”“A-3,”
“A-4,” and A-5” shall be the plats delineating the Area of Mutual Interest

B.            Exhibit “B,”
Participation Agreement,

C.            Exhibit “C,”
Accounting Procedure,

D.            Exhibit “D,”
Insurance,

E.             Exhibit
“E,” AE PUD Assignment.

If any provision
contained in the body of this Agreement is inconsistent with the provisions of
Exhibits “B” or “E”, the provisions of Exhibits “B” or “E” shall prevail.

ARTICLE III

INTERESTS OF PARTIES

A.            Interests of Parties in Costs and
Production:

Unless changed by other
provisions, all costs and liabilities incurred in operations under this
Agreement shall be borne and paid, and all equipment and materials acquired in
operations on the Contract Area shall be owned by the parties as their
interests are set forth in Exhibit “A” as it may be amended from time-to-time
and in accordance with the terms of the Participation Agreement.  In the same manner, the parties shall also
own all production of Oil and Gas from the Contract Area subject, however, to
the payment of royalties and other burdens on production as described
hereafter.

Each party shall pay or
deliver, or cause to be paid or delivered, all burdens on its share of the
production from the Contract Area as indicated in Exhibit “A” hereto and shall
indemnify, defend and hold the other parties free from any liability
therefor.  Each party so burdened shall
assume and alone bear all such excess obligations and shall indemnify, defend
and hold the other parties hereto harmless from any and all claims attributable
to such excess burden.  Nothing contained
in this Article III.A. shall be deemed an assignment or cross-assignment of
interests covered hereby.

B.            Subsequently Created Interests:

If any party has
contributed hereto an Oil and Gas Interest that is burdened with an assignment
of production given as security for the payment of money, or if, after the date
of this Agreement, any party creates an overriding royalty, production payment,
net profits interest, assignment of production or other burden payable out of
production attributable to its working interest hereunder, such burden shall be
deemed a “Subsequently Created Interest.” 
Further, if any party has contributed hereto an AMI Interest burdened
with an overriding royalty, production payment, net profits interest, or other
burden payable out of production created prior to the date of this Agreement,
and such burden is not shown on Exhibit “A,” such burden also shall be deemed a
Subsequently Created Interest.

The party whose interest
is burdened with the Subsequently Created Interest (the “Burdened Party”) shall
assume and alone bear, pay and discharge the Subsequently Created Interest and
shall indemnify, defend and hold harmless the other parties from and against
any liability therefore.  Further, if the
Burdened Party fails to pay, when due, its share of expenses chargeable
hereunder, all 

 4
 

provisions of Article
VII.B. shall be enforceable against the Subsequently Created Interest in the
same manner as they are enforceable against the working interest of the
Burdened Party.  If the Burdened Party is
required under this Agreement to assign or relinquish to any other party, or
parties, all or a portion of its working interest and/or the production
attributable thereto, said other party, or parties, shall receive said
assignment and/or production free and clear of said Subsequently Created
Interest, and the Burdened Party shall indemnify, defend and hold harmless said
other party, or parties, from any and all claims and demands for payment
asserted by owners of the Subsequently Created Interest.

ARTICLE IV

TITLES

A.            Title Examination:

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

Operator shall be responsible for securing curative
matter and pooling amendments or agreements required in connection with Oil and
Gas Interests contributed by the parties. 
Operator shall be responsible for the preparation and recording of
pooling designations or declarations and communitization agreements as well as
the conduct of hearings before governmental agencies for the securing of
spacing or pooling orders or any other orders necessary or appropriate to the
conduct of operations hereunder.  This
shall not prevent any party from appearing on its own behalf at such
hearings.  Costs incurred by Operator,
including fees paid to outside attorneys, which are associated with hearings
before governmental agencies, and which costs are necessary and proper for the
activities contemplated under this Agreement, shall be direct charges to the
joint account and shall not be covered by the administrative overhead charges
as provided in Exhibit “C.”  Operator
shall make no charge for services rendered by its staff attorneys or other
personnel in the performance of the above functions.

No well shall be drilled on the Contract Area until
after (1) the title to the Drillsite has been examined as above provided, and
(2) the title has been accepted by all of the Parties.

 5
 

B.            Losses:

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

ARTICLE
V

OPERATOR

A.            Designation and
Responsibilities of Operator:

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

B.            Resignation or Removal
of Operator and Selection of Successor:

1.             Resignation
or Removal of Operator:  Operator may
resign at any time by giving one hundred eighty (180) days written notice
thereof to Non-Operators.  If Operator
terminates its legal existence or is no longer capable of serving as Operator,
Operator shall be deemed to have resigned without any action by Non-Operators,
except the selection of a successor. 
Operator may be removed only for good cause.  In the case of gross negligence, the Operator
may be removed upon notice from either AE or VEE, regardless of the ownership
interest held by the party giving notice. 
In all other cases, the Operator may be removed by the affirmative vote
of one or more Non-Operators owning a majority interest based on ownership as
shown on Exhibit “A”; such vote shall not be deemed effective until a written
notice has been delivered to the Operator by a Non-Operator detailing the
alleged default and Operator has failed to cure the default within thirty (30)
days from its receipt of the notice or, if the default concerns an operation
then being conducted, within forty-eight (48) hours of its receipt of the
notice.  For purposes hereof, “good cause”
shall mean not only gross negligence or willful misconduct, but also the
material breach of or inability to meet the standards of operation contained in
Article V.A. or material failure or inability to perform its obligations under
this Agreement.

If VEE should sell its interest in the AMI Interests,
upon such sale, AE shall have the right, in its sole discretion, to remove the
Operator and to appoint a successor Operator of its choosing.

 6
 

Subject to Article VII.D.1., the resignation or
removal of the Operator shall not become effective until 7:00 o’clock A.M. on
the first day of the calendar month following the expiration of one hundred
eighty (180) days after the giving of notice of resignation by Operator or
action by the Non-Operators to remove Operator, unless a successor Operator has
been selected and assumes the duties of Operator at an earlier date.  A change of a corporate name or structure of
Operator or transfer of Operator’s interest to any single subsidiary, parent or
successor corporation shall not be the basis for removal of Operator.

2.             Selection
of Successor Operator:  Except as
otherwise provided herein, upon the resignation or removal of Operator under
any provision of this Agreement, a successor Operator shall be selected by the
parties.  The successor Operator shall be
selected from the parties owning an interest in the Contract Area at the time
such successor Operator is selected.  The
successor Operator shall be selected by the affirmative vote of one or more
parties owning a majority interest based on ownership as shown on Exhibit “A”.  The former Operator shall promptly deliver to
the successor Operator all records and data relating to the operations conducted
by the former Operator to the extent such records and data are not already in
the possession of the successor Operator. 
Any cost of obtaining or copying the former Operator’s records and data
shall be charged to the joint account.

3.             Effect
of Bankruptcy:  If Operator becomes
insolvent, bankrupt or is placed in receivership, it shall be deemed to have
resigned without any action by Non-Operators, except the selection of a
successor.  If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this Agreement pursuant to
the Bankruptcy Code, and an election to reject this Agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor.  During the
period of time the operating committee controls operations, all actions shall
require the approval of two (2) or more parties, one of which must be AE.

C.            Employees and
Contractors:

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

D.            Rights and Duties of
Operator:

1.             Competitive
Rates and Use of Affiliates:  Except
as otherwise provided herein, all work performed or materials supplied by
affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with
customs and standards prevailing in the industry.

2.             Discharge
of Joint Account Obligations:  Except
as herein otherwise specifically provided, Operator shall promptly pay and
discharge expenses incurred in the development and operation of the Contract
Area pursuant to this Agreement and shall charge each of the parties hereto
with their respective proportionate shares upon the expense basis provided in
Exhibit “C”.  

 7
 

Operator shall keep an accurate record of the joint
account hereunder, showing expenses incurred and charges and credits made and
received.

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

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

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

6.             Filing
and Furnishing Governmental Reports: 
Operator will file, and upon written request promptly furnish copies to
each requesting Non-Operator all operational notices, reports or applications
required to be filed by local, state, federal or Indian agencies or authorities
having jurisdiction over operations hereunder. 
Each Non-Operator shall provide to Operator on a timely basis all information
necessary to Operator to make such filings.

7.             Drilling
and Testing Operations:  The
following provisions shall apply to each well drilled hereunder:

 8
 

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

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

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

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

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

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

ARTICLE VI

DRILLING AND DEVELOPMENT

A.            Procedures for
Drilling Wells in the AMI:

1.  During the Term of the Participation
Agreement.  So long as the
Participation Agreement is in effect all wells are to be drilled pursuant to
the terms of the Participation Agreement which is attached hereto as Exhibit “B”.

2.  After Termination of the Participation
Agreement.  After the termination of
the Participation Agreement, all wells shall be drilled according to the
following procedures.

(a)           If
any party hereto should desire to drill a well in the Contract Area, the party
desiring to drill such a well shall give written notice of the proposed
operation to the other parties, specifying the work to be performed, the
location, proposed depth, objective Zone and the estimated cost of the
operation.  The parties to whom such a
notice is delivered shall have fifteen (15) days after receipt of the notice
within which to notify the proposing party proposing whether they elect to
participate in the cost of the proposed operation. Failure of a party to whom
such notice is delivered 

 9
 

to reply within the period above fixed shall
constitute an election by that party not to participate in the proposed
well.  In such case the non-participating
party:  (i) thereby forfeits any interest
it might otherwise have in and to the proposed well and the Oil and Gas produced
thereby, and (ii) will promptly transfer any interest it may have in and to the
applicable lease to the extent of the well and the producing Zones of such well
and to the extent of the well unit as prescribed by the relevant regulatory
authority. Any proposal by a party to conduct an operation conflicting with the
operation initially proposed shall be delivered to all parties within the time
and in the manner provided in Article VI.B.6.

If all parties to whom such notice is delivered elect
to participate in such a proposed operation, the parties shall be contractually
committed to participate therein provided such operations are commenced within
the time period hereafter set forth, and Operator shall, no later than ninety
(90) days after expiration of the notice period of fifteen (15) days, actually
commence the proposed operation and thereafter complete it with due diligence
at the risk and expense of the parties participating therein; provided,
however, said commencement date may be extended upon written notice of same by
Operator to the other parties, for a period of up to thirty (30) additional
days if, in the sole opinion of the Operator, such additional time is
reasonably necessary to obtain permits from governmental authorities, surface
rights (including rights-of-way) or appropriate drilling equipment, or to
complete title examination or curative matter required for title approval or
acceptance.  If the actual operation has
not been commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior proposal had been made.

B.            Subsequent Operations:

1.             Proposed
Operations:  If any party hereto
should desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole
or a well no longer capable of producing in paying quantities in which such party
has not otherwise relinquished its interest in the proposed objective Zone
under this Agreement, the party desiring to Rework, Sidetrack, Deepen,
Recomplete or Plug Back such a well shall give written notice of the proposed
operation to the parties who have not otherwise relinquished their interest in
such objective Zone under this Agreement and to all other parties in the case
of a proposal for Sidetracking or Deepening, specifying the work to be
performed, the location, proposed depth, objective Zone and the estimated cost
of the operation.  The parties to whom
such a notice is delivered shall have thirty (30) days after receipt of the
notice within which to notify the party proposing to do the work whether they elect
to participate in the cost of the proposed operation.  If a drilling rig is on location, notice of a
proposal to Rework, Sidetrack, Recomplete, Plug Back or Deepen may be given by
telephone and the response period shall be limited to forty-eight (48) hours,
exclusive of Saturday, Sunday and legal holidays.  Failure of a party to whom such notice is
delivered to reply within the period above fixed shall constitute an election
by that party not to participate in the cost of the proposed operation.  Any proposal by a party to conduct an operation
conflicting with the operation initially proposed shall be delivered to all
parties within the time and in the manner provided in Article VI.B.6.

If all parties to whom such notice is delivered elect
to participate in such a proposed operation, the parties shall be contractually
committed to participate therein provided such operations are commenced within
the time period hereafter set forth, and Operator shall, no later 

 10
 

than ninety (90) days after expiration of the notice
period of thirty (30) days (or as promptly as practicable after the expiration
of the forty-eight (48) hour period when a drilling rig is on location, as the
case may be), actually commence the proposed operation and thereafter complete
it with due diligence at the risk and expense of the parties participating
therein; provided, however, said commencement date may be extended upon written
notice of same by Operator to the other parties, for a period of up to thirty
(30) additional days if, in the sole opinion of the Operator, such additional
time is reasonably necessary to obtain permits from governmental authorities,
surface rights (including rights-of-way) or appropriate drilling equipment, or
to complete title examination or curative matter required for title approval or
acceptance.  If the actual operation has
not been commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior proposal had been made.

2.             Operations by Less
Than All Parties:

(a)           Determination of
Participation.  If any party to whom
such notice is delivered as provided in Article VI.B.1. elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as practicable after the expiration of the forty-eight (48)
hour period when a drilling rig is on location, as the case may be) actually
commence the proposed operation and complete it with due diligence.  Operator shall perform all work for the
account of the Consenting Parties. 
Consenting Parties, when conducting operations on the Contract Area
pursuant to this Article VI.B.2., shall comply with all terms and conditions of
this Agreement.

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

 11
 

proposed operation is
obtained, the proposing party shall promptly notify the Consenting Parties of
their proportionate interests in the operation and the party serving as
Operator shall commence such operation within the period provided in Article
VI.B.1., subject to the same extension right as provided therein.

(b)           Relinquishment of
Interest for Non-Participation.  The
entire cost and risk of conducting such operations shall be borne by the
Consenting Parties in the proportions they have elected to bear same under the
terms of the preceding paragraph. 
Consenting Parties shall keep the Interests involved in such operations
free and clear of all liens and encumbrances of every kind created by or
arising from the operations of the Consenting Parties.  If such an operation results in a dry hole,
then subject to Articles VI.B.6. and VI.E.3., the Consenting Parties shall plug
and abandon the well and restore the surface location at their sole cost, risk
and expense; provided, however, that those Non-Consenting Parties that
participated in the drilling, Deepening or Sidetracking of the well shall
remain liable for, and shall pay, their proportionate shares of the cost of
plugging and abandoning the well and restoring the surface location insofar
only as those costs were not increased by the subsequent operations of the
Consenting Parties.  If any well
Reworked, Sidetracked, Deepened, Recompleted or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or
Gas in paying quantities, the Consenting Parties shall Complete and equip the
well to produce at their sole cost and risk, and shall be operated by it at the
expense and for the account of the Consenting Parties.  Upon commencement of operations for the
Reworking, Sidetracking, Recompleting, Deepening or Plugging Back of any such
well by Consenting Parties in accordance with the provisions of this Article,
each Non-Consenting Party shall be deemed to have relinquished to Consenting
Parties, and the Consenting Parties shall own and be entitled to receive, in
proportion to their respective interests, all of such Non-Consenting Party’s
interest in the well and share of production therefrom or, in the case of a
Reworking, Sidetracking, Deepening, Recompleting or Plugging Back, all of such
Non-Consenting Party’s interest in the production obtained from the operation
in which the Non-Consenting Party’s interest in the production obtained from
the operation in which the Non-Consenting Party did not elect to
participate.  Such relinquishment shall
be effective until the proceeds of the sale of such share, calculated at the
well, or market value thereof if such share is not sold (after deducting
applicable ad valorem, production, severance, and excise taxes, royalty,
overriding royalty and other interests not excepted by Article III.C. payable
out of or measured by the production from such well accruing with respect to
such interest until it reverts), shall equal the total of the following:

(i) 200% of each such
Non-Consenting Party’s share of the cost of any newly acquired surface
equipment beyond the wellhead connections (including but not limited to stock
tanks, separators, treaters, pumping equipment and piping), plus 100% of each
such Non-Consenting Party’s share of the cost of operation of the well
commencing with first production and continuing until each such Non-Consenting
Party’s relinquished interest shall revert to it under other provisions of this
Article, it being agreed that each Non-Consenting Party’s share of such costs
and equipment will be that interest which would have been chargeable to such
Non-Consenting Party had it participated in the well from the beginning of the
operations; and

 12
 

(ii) 200% of (a) that
portion of the costs and expenses of Reworking, Sidetracking, Deepening,
Plugging Back, testing, Completing and Recompleting, after deducting any cash
contributions received under Article VIII.C., and of (b) that portion of the
cost of newly acquired equipment in the well (to and including the wellhead
connections), which would have been chargeable to such Non-Consenting Party if
it had participated therein.

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

(c)   Reworking,
Recompleting or Plugging Back.  An
election not to participate in the Sidetracking or Deepening of a well shall be
deemed an election not to participate in any Reworking or Plugging Back
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party’s recoupment
amount.  Similarly, an election not to
participate in the Completing or Recompleting of a well shall be deemed an
election no to participate in any Reworking operation proposed in such a well,
or portion thereof, to which the initial non-consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party’s recoupment amount. 
Any such Reworking, Recompleting or Plugging Back operation conducted
during the recoupment period shall be deemed part of the cost of operation of
said well and there shall be added to the sums to be recouped by the Consenting
Parties 200% of that portion of the costs of the Reworking, Recompleting or
Plugging Back operation which would have been chargeable to such Non-Consenting
Party had it participated therein.  If
such a Reworking, Recompleting or Plugging Back operation is proposed during
such recoupment period, the provisions of this Article VI.B. shall be
applicable as between said Consenting Parties in said well.

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

In the case of any Reworking, Sidetracking, Plugging
Back, Recompleting or Deepening operation, the Consenting Parties shall be
permitted to use, free of cost, all casing, tubing and other equipment in the
well, but the ownership of all such equipment shall remain unchanged; and upon 

 13
 

abandonment of a well after such Reworking,
Sidetracking, Plugging Back, Recompleting or Deepening, the Consenting Parties
shall account for all such equipment to the owners thereof, with each party
receiving its proportionate part in kind or in value, less cost of salvage.

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

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

3.             Stand-By
Costs:  When a well which has been
Deepened has reached its authorized depth and all tests have been completed and
the results thereof furnished to the parties, or when operations on the well
have been otherwise terminated pursuant to Article VI.F., stand-by costs
incurred pending response to a party’s notice proposing a Reworking.,
Sidetracking, Deepening, Recompleting, Plugging Back or Competing operation in
such a well (including the period required under Article VI.B.6. to resolve
competing proposals) shall be charged and borne as part of the Deepening
operation just completed.  Stand-by costs
subsequent to all parties responding, or expiration of the response time
permitted, whichever first occurs, and prior to this Agreement as to the participating
interests of all Consenting Parties pursuant to the terms of the second
grammatical paragraph of Article VI.B.2. (a), shall be charged to and borne as
part of the proposed operation, but if the proposal is subsequently withdrawn
because of insufficient participation, such stand-by costs shall be allocated
between the Consenting Parties in the proportion each Consenting Party’s
interest as shown on Exhibit “A” bears to the total interest as shown on
Exhibit “A” of all Consenting Parties.

 14
 

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

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

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

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

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

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

 15
 

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

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

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

C.            Completion
of Wells; Reworking and Plugging Back:

1.             Completion.           Without the consent of
all parties, no well shall be Reworked, or Sidetracked, except any well
drilled, Deepened or Sidetracked pursuant to the provisions of Article VI.B.2.
of this Agreement.  Consent to the
drilling, Deepening or Sidetracking shall include all necessary expenditures
for the drilling, Deepening or Sidetracking, testing, Completing and equipping
of the well, including necessary tankage and/or surface facilities.

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

D.            Other
Operations:

Operator shall not undertake any single project
reasonably estimated to require an expenditure in excess of Fifteen Thousand
Dollars ($15,000.00) except in connection with the Sidetracking, Reworking,
Deepening, Completing, Recompleting or Plugging Back of a well that has been
previously authorized by or pursuant to this Agreement; provided, however,
that, in case of explosion, fire, flood or other sudden emergency, whether of
the same of different nature, Operator may take such steps and incur such
expenses as in its opinion are required to deal with the emergency to safeguard
life and property but Operator, as promptly as possible, shall report the
emergency to the other parties.  If
Operator prepares an AFE for its own use, Operator shall furnish the
Non-Operators an information copy thereof for any single project costing in
excess of Fifteen Thousand Dollars ($15,000.00).  Any party who has not relinquished its
interest in a well shall have the right to propose that Operator perform repair
work or undertake the installation of artificial lift

 16

equipment or ancillary
production facilities such as salt water disposal wells or to conduct
additional work with respect to a well drilled hereunder or other similar
project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. which shall be governed exclusively by that
Articles).  Operator shall deliver such
proposal to all parties entitled to participate therein.  If within thirty (30) days thereof Operator
secures the written consent of any party or parties owning at least 100% of the
interests of the parties entitled to participate in such operation, each party
having the right to participate in such project shall be bound by the terms of
such proposal and shall be obligated to pay its proportionate share of the
costs of the proposed project as if it had consented to such project pursuant
to the terms of the proposal.

E.                                     Abandonment
of Wells:

1.                                       Abandonment
of Dry Holes: Except for any well Deepened pursuant to Article VI.B.2., any
well which has been drilled or Deepened under the terms of this Agreement and
is proposed to be completed as a dry hole shall not be plugged and abandoned
without the consent of all parties. 
Should Operator, after diligent effort, be unable to contact any party,
or should any party fail to reply within forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays) after delivery of notice of the proposal
to plug and abandon such well, such party shall be deemed to have consented to the
proposed abandonment.  All such wells
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of the parties who participated in the cost of
drilling or Deepening such well.  Any
party who objects to plugging and abandoning such well by notice delivered to
Operator within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after delivery of notice of the proposed plugging shall take over the
well as of the end of such forty-eight (48) hour notice period and conduct
further operations in search of Oil and/or Gas subject to the provisions of
Article VI.B.; failure of such party to provide proof reasonably satisfactory
to Operator of its financial capability to conduct such operations or to take
over the well within such period or thereafter to conduct operations on such
well or plug and abandon such well shall entitle Operator to retain or take
possession of the well and plug and abandon the well.  The party taking over the well shall indemnify
Operator (if Operator is an abandoning party) and the other abandoning parties
against liability for any further operations conducted on such well except for
the costs of plugging and abandoning the well and restoring the surface, for
which the abandoning parties shall remain proportionately liable.

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

 17
 

the well conducted by
such parties.  Failure of such party or
parties to provided proof reasonably satisfactory to Operator of their
financial capability to conduct such operations or to take over the well within
the required period or thereafter to conduct operations on such well shall
entitle Operator to retain or take possession of such well and plug and abandon
the well.

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

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

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

 18
 

F.                                     Termination
of Operations:

Upon the commencement of
an operation for the drilling, Reworking, Sidetracking, Plugging Back,
Deepening, testing, Completion or plugging of a well such operation shall not
be terminated without consent of parties bearing one-hundred percent (100 %) of
the costs of such operation; provided, however, that in the event granite other
practically impenetrable substance or condition in the hole is encountered
which renders further operations impractical, Operator may discontinue
operations and give notice of such condition in the manner provided in Article
VI.B.1, and the provisions of Article VI.B or VI.E. shall thereafter apply to
such operation, as appropriate.

G.                                   Taking
Production in Kind:

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

To the extent reasonably possible, the parties will
agree on the joint marketing of the oil produced from the Contract Area.

Each party shall execute
such division orders and contracts as may be necessary for the sale of its
interest in production from the Contract Area, and, except as provided in
Article VII.B., shall be entitled to receive payment directly from the
purchaser thereof for its share of all production.

If any party fails to
make the arrangements necessary to take in kind or separately dispose of its
proportionate share of the Oil produced from the Contract Area, Operator shall
have the right, subject to the revocation at will by the party owning it, but
not the obligation, to purchase such Oil or sell it to others at any time and
from time to time, for the account of the non-taking party.  Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written notice to the owner
of said production and shall be subject always to the right of the owner of the
production upon at least ten (10) days written notice to Operator to exercise
at any time its right to take in kind, or separately dispose of, its share of
all Oil not previously delivered to a purchaser.  Any purchase or sale by Operator of any party’s
share of Oil shall be only for such reasonable periods of time as are
consistent with the minimum needs of the industry under the particular
circumstances, but in no event for a period in excess of one (1) year without
the consent of all of the parties hereto.

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

All parties shall give
timely written notice to Operator of their Gas marketing arrangements for the
following month, excluding price, and shall notify Operator immediately in the
event of a change in such arrangements. 
Operator shall maintain records of all marketing arrangements, and 

 19
 

of volumes actually sold
or transported, which records shall be made available to Non-Operator upon
reasonable request.  Operator shall give
notice to all parties of the first sale of Gas from any well under this
Agreement.

ARTICLE VII

EXPENDITURES AND LIABILITY OF PARTIES

A.
                                Liability
of Parties:

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

B.                                   Liens
and Security Interests:

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

To perfect the lien and
security agreement provided herein, each party hereto shall execute and
acknowledge the recording supplement and/or any financing statement prepared
and submitted by an party hereto in conjunction herewith or at any time
following execution hereof, and Operator is authorized to file this Agreement
or the recording supplement executed herewith as a lien or mortgage in the
applicable real estate records and as a financing statement with the proper
officer under the Uniform Commercial Code in the state in which the Contract
Area is situated and such 

 20
 

other states as Operator
shall deem appropriate to perfect the security interest granted hereunder.  Any party may file this Agreement, the
recording supplement executed herewith, or such other documents as it deems
necessary as a lien or mortgage in the applicable real estate records and/or a
financing statement with the proper officer under the Uniform Commercial Code.

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

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

If any party fails to pay
its share of cost within one hundred twenty (120) days after rendition of a
statement therefore by Operator, the non-defaulting parties may, but shall
have no obligation to do so, upon request by Operator, pay the unpaid
amount in the proportion that the interest of each such party bears to the
interest of all such parties.  Any amount paid by a party so paying its share of the unpaid
amount shall be secured by the liens and security rights described in Article
VII.B., and each paying party may independently pursue any remedy available
hereunder or otherwise.

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

 21
 

exercised in the manner
provided by applicable law or otherwise in a commercially reasonable manner and
upon reasonable notice.

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

C.                                   Advances:

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

D.                                   Defaults
and Remedies:

If any party fails to
discharge any financial obligation under this Agreement, including without
limitation the failure to make any advance under the preceding VII.C. or any
other provision of this Agreement, within the period required for such payment
hereunder, then in addition to the remedies provided in Article VII.B. or
elsewhere in This Agreement, the remedies specified below shall be
applicable.  For purposes of this Article
VII.D., all notices and elections shall be delivered only by Operator, except
that Operator shall deliver any such notice and election requested by a
non-defaulting Non-Operator, and when Operator is the party in default, the
applicable notices and elections can be delivered by an Non-Operator.  Election of any one or more of the following
remedies shall not preclude the subsequent use of any other remedy specified
below or otherwise available to a non-defaulting party.

1.                                       Suspension
of Rights:  Any party may deliver to
the party in default a Notice of Default, which shall specify the default,
specify the action to be taken to cure the default, and specify that failure to
take such action will result in the exercise of one or more of the remedies
provided in this Article.  If the default
is not cured within thirty (30) days of the delivery of such Notice of Default,
all of the rights of the defaulting party granted by this Agreement may upon
notice be suspended until the default is cured, without prejudice to the right
of the non-defaulting party or parties to continue to enforce the obligations
of the defaulting party previously accrued or thereafter accruing under this
Agreement.  The rights of a defaulting
party that may be suspended hereunder at the election of the non-defaulting
parties shall include, without limitation, the right to

 22
 

 receive information as to any operation
conducted hereunder during the period of such default, the right to elect to
participate in an operation proposed under Article VI.B. of  this Agreement, the right to participate in
an operation being conducted under  this
Agreement even if the party ahs previously elected to participate in such
operation, and the right to receive proceeds of production from any well
subject to  this Agreement.

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

3.                                       Deemed
Non-Consent:  The non-defaulting
party may deliver a written Notice of Non-Consent Election to the defaulting
party at any time after the expiration of the thirty-day cure period following
delivery of the Notice of Default, in which event if the billing is for the
drilling of a new well or the Plugging Back, Sidetracking, Reworking or
Deepening of a well which is to be or has been plugged as a dry hole, or for
the Completion or Recompletion of any well, the defaulting party will be
conclusively deemed to have elected not to participate in the operation and to
be a Non-Consenting Party with respect thereto under Article VI.B. or VI.C., as
the case may be, to the extent of the costs unpaid by such party,
notwithstanding any election to participate theretofore made.  If election is made to proceed under this
provision, then the non-defaulting parties may not elect to sue for the unpaid amount
pursuant to Article VII.D.2.

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

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

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

 23
 

E.                                     Rental,
Shut-in Well Payments and Minimum Royalties:

Rentals, shut-in payments
and minimum royalties which may be required under the terms of any lease shall
be paid by Operator, and said expenses shall be born by the parties in
proportion to their respective working interests.  Any party may request, and shall be entitled
to receive, proper evidence of all such payments.  In the event of failure to make proper
payment of any rental, shut-in well payment or minimum royalty through mistake
or oversight where such payment is required to continue the lease in force, any
loss which results from such non-payment shall be borne in accordance with the
provisions of Article IV.B.2.

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

F.                                     Taxes:

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

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

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

 24
 

ARTICLE VIII.

ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

A.                                    Surrender of Leases:

The Leases associated
with the Oil and Gas Interests covered by 
this Agreement shall not be surrendered in whole or in part unless all
parties consent thereto.

D.                                    Assignment:

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

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

D.                                    Waiver of Rights to
Partition:

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

ARTICLE IX

[INTENTIONALLY OMITTED]

ARTICLE X

CLAIMS AND LAWSUITS

 25
 

Operator may settle any
single uninsured third party damage claim or suit arising from operations
hereunder if the expenditure does not exceed Fifteen Thousand Dollars
($15,000.00) and if the payment is in complete settlement of such claim or
suit.  If the amount required for
settlement exceeds the above amount, the parties hereto shall assume and take
over the further handling of the claim or suit, unless such authority is
delegated to Operator.  All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation
from which the claim or suit arises.  If
a claim is made against any party or if any party is used on account of any
matter arising from operations hereunder over which such individual has no
control because of the rights given Operator by this Agreement, such party
shall immediately notify all other parties, 
and the claim or suit shall be treated as any other claim or suit
involving operations hereunder.

ARTICLE XI

FORCE MAJEURE

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

 26
 

ARTICLE XII

NOTICES

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

ARTICLE XIII

TERM OF AGREEMENT

This Agreement shall remain in full force and effect
as to the Oil and Gas Interests subject hereto so long as any of the Oil and
Gas Interests subject to this Agreement remain or are continued in force as to
any part of the Contract Area, whether by production extension, renewal or
otherwise.

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

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

 27
 

ARTICLE XIV

COMPLIANCE WITH LAWS AND REGULATIONS

A.                                   Laws,
Regulations and Orders:

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

B.                                   Governing
Law:

This Agreement and all matters pertaining hereto,
including but not limited to matter of performance, non-performance, breach,
remedies, procedures, rights, duties, and interpretation or construction, shall
be governed and determined by the law of the state in which the Contract Area
is located.  If the Contract Area is in
two or more states, the law of the State of Tennessee shall govern.

C.                                   Arbitration:

Notwithstanding any other provision of this Agreement to
the contrary, if
any controversy, claim or dispute arising out of or relating to this Agreement
or the breach or performance thereof occurs, the parties shall meet and exert
reasonable efforts to reach an amicable settlement for a period not to exceed
twenty (20) days from the date written notice of the controversy, claim or
dispute is served by the complaining party to the other party under this
Agreement.  If for any reason such
settlement fails to occur within such twenty-day period (or such other period
as the parties may agree in writing), the controversy, claim or dispute shall
be finally and conclusively resolved by binding
arbitration administered
by the American Arbitration Association in accordance with its Commercial
Arbitration Rules (“AAA Rules”) and subject to the Federal Arbitration Act, 9
U.S.C. Sections 1 et  seq., and judgment on any award thereby
rendered may be entered in any court having jurisdiction thereof.

(a)                                  Any such arbitration
shall proceed as promptly and as expeditiously as possible (and the parties
shall cooperate to this end) before three arbitrators, consisting of one
arbitrator appointed by the claimant, one arbitrator appointed by the
respondent, and the third arbitrator appointed by the two party-appointed
arbitrators.  Arbitration shall be
initiated by written notice of intention to arbitrate made pursuant the AAA
Rules.  The claimant shall identify its
appointed arbitrator in the notice of intention to arbitrate, and the
respondent shall identify its appointed arbitrator within ten (10) days of its
receipt of the notice of intention to arbitrate.  The two party-appointed arbitrators shall
agree upon and appoint the third arbitrator within the ten (10) day period
following the appointment of the second party-appointed arbitrator.  If either the claimant or the respondent fail
to appoint an arbitrator pursuant to the foregoing, or if the two
party-appointed arbitrators fail to agree upon and appoint the third arbitrator
within the above-referenced ten (10) day period, then such arbitrator or
arbitrators shall be appointed by the AAA pursuant to the AAA Rules.  The arbitrators chosen or appointed shall
have expertise and/or experience in the oil and gas industry.

(b)                                 Nothing in this
Section shall be deemed to preclude any party from applying to any court of
competent jurisdiction at any time prior to the formation of the arbitration
panel 

 28
 

(including before or during the twenty (20) day
negotiation period referenced in the first sentence of this Section) for
injunctive, provisional or other emergency relief pertaining to the subject
matter of a controversy, claim or dispute that is arbitrable hereunder, or
applying for such relief in aid of arbitration after formation of the
arbitration panel, where (i) the arbitration award to which the party may be
entitled may be rendered ineffectual without such relief, (ii) the party
seeking such relief is not in breach of this Section, and (iii) the relief
sought will not materially delay or frustrate the arbitration.  The grant or denial of any court-ordered
relief pursuant to this paragraph shall not constitute or be deemed to be a
ruling on the merits of the matter to be arbitrated, nor shall any application
for such relief be deemed to be a waiver of any right to arbitration hereunder.

(c)                                  The parties hereby
agree that the costs and expenses, including attorneys’ fees, incurred in
connection with any arbitration or court proceeding hereunder shall be awarded
in favor of the prevailing party and against the losing party as determined by
the arbitration panel or court, as the case may be.

D.                                   Regulatory
Agencies:

Nothing herein contained
shall grant, or be construed to grant, Operator the right or authority to waive
or release any rights, privileges, or obligations which Non-Operators may have
under federal or state laws or under rules, regulations or orders promulgated
under such laws in reference to oil, gas and mineral operations, including the
location, operation, or production of wells, on tracts offsetting or adjacent
to the Contract Area.

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

ARTICLE XV

MISCELLANEOUS

A.                                   Execution:

This Agreement shall be
binding upon each Non-Operator when this Agreement or a counterpart thereof has
been executed by all Non-Operators and Operator.

B.                                   Successors
and Assigns; Counterparts:

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

 29
 

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

D.                                   Severability:

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

[End of Text. 
Signatures on Following Page]

 30
 

IN WITNESS WHEREOF, this
Agreement shall be effective as of the date first set forth above.

	
   

  	
  OPERATOR:

  
	
   

  	
   

  
	
   

  	
  VINLAND
  ENERGY OPERATIONS, LLC

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Majeed S.
  Nami

  	
   

  
	
   

  	
   

  
	
   

  	
  Its: Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  NON-OPERATORS:

  
	
   

  	
   

  
	
   

  	
  ARIANA
  ENERGY, LLC

  
	
   

  	
  By: Vanguard
  Natural Gas, LLC

  
	
   

  	
  Its: Sole Member

  
	
   

  	
  By: 

  	
  /s/ Scott W.
  Smith

  	
   

  
	
   

  	
   

  
	
   

  	
  Its: Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  VINLAND
  ENERGY EASTERN LLC

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Mike S. Nami

  	
   

  
	
   

  	
   

  
	
   

  	
  Its: Manager

  
								

 

 31

EXHIBIT A

to the Operating Agreement
(Tennessee)

INFORMATION
FORM

To be completed in the future on
a well-by-well basis

EXHIBIT A-1

to the Operating Agreement
(Tennessee)

AMI Map

EXHIBIT A-2

to the Operating Agreement
(Tennessee)

AMI Map

EXHIBIT A-3

to the Operating Agreement
(Tennessee)

AMI Map

EXHIBIT A-4

to the Operating Agreement
(Tennessee)

AMI Map

EXHIBIT A-5

to the Operating Agreement
(Tennessee)

AMI Map

EXHIBIT B

PARTICIPATION AGREEMENT

THIS PARTICIPATION AGREEMENT (this “Agreement”)
is made effective as of January 5, 2007 (the “Effective Date”), between and
among VINLAND ENERGY EASTERN, LLC, a Delaware
limited liability company (“VEE” or “Vinland”), VANGUARD
NATURAL GAS, LLC a Kentucky limited liability company (“VNG”), and
its subsidiaries, ARIANA ENERGY, LLC,
a Tennessee limited liability company (“AE”) and TRUST ENERGY
COMPANY, LLC, a Kentucky limited liability company (“TEC”)
(sometimes collectively referred to herein as “Vanguard”).

RECITALS:

WHEREAS, Vinland
and VNG through its subsidiaries, AE and TEC, jointly own  those certain interests in the oil and gas
leases as set forth on Exhibit A (the “Jointly
Owned Leases”);

WHEREAS, VNG has
entered into a Management Services Agreement, Well Services Agreement, and
Gathering and  Compression Agreement with
VEE’s affiliates;

WHEREAS, a portion of the oil
and gas mineral leases jointly owned by Vanguard and Vinland have been
identified as “Proved Undeveloped Oil and Gas Properties” or “Initial PUD
Properties” (as defined herein);

WHEREAS, it is contemplated that
as development drilling activity takes place over the term of this Agreement on
the Jointly Owned Leases, additional locations will be identified and certified
as “Proved Undeveloped Oil and Gas Properties.”

WHEREAS, the Initial PUD
Properties and any Proved Undeveloped Oil and Gas Properties are sometimes
collectively referred to as the “PUD Properties.”

WHEREAS; VEE holds an undivided
sixty percent (60%) working interest in the PUD Properties (the “Vinland PUD
Interests”);

WHEREAS, Vanguard holds an
undivided forty percent (40%) working interest in the PUD Properties (the “Vanguard
PUD Interests”);

WHEREAS, Vanguard desires that
the Vanguard PUD Interests be developed in accordance with the terms of this
Agreement;

WHEREAS, Vinland desires that
the Vinland PUD Interests be developed in accordance with the terms of this
Agreement;

WHEREAS, during the term of this
Agreement, it is anticipated that either Vinland or Vanguard will acquire
additional producing and/or non-producing oil and gas leases or leasehold
interests for properties lying within the Area of Mutual Interest as defined
herein (the “New Leases”);

WHEREAS,
as provided for herein, Vinland and Vanguard have agreed on a procedure whereby
each Party will offer the other Party the right to acquire said Party’s
proportionate

interest in any
New Leases acquired by either Party in accordance with the terms of this
Agreement, and if such offer is accepted any such New Leases will become part
of the AMI Interests, (as defined herein); and

WHEREAS, Vinland and Vanguard
contemplate that any New Leases that are made a part of the AMI Interests (the “New
AMI Leases”) will be developed in accordance with the terms of this Agreement;

NOW, THEREFORE, for and in
consideration of the mutual covenants and agreements contained herein, and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Parties hereto agree as follows:

SECTION I.

DEFINITIONS AND REFERENCES

1.1          Recitals.  The foregoing recitals are a substantive part
of this Agreement.

1.2          Defined
Terms. 
Certain of the capitalized terms utilized herein shall have the
following meanings:

“Affiliate”
shall mean, with respect to a Person, any other Person controlling, controlled
by or under common ownership with such Person.

“Area of
Mutual Interest” or “AMI” shall
mean those certain areas outlined on the plats attached hereto as Exhibits B-1, B-2, B-3, B-4 and B-5.

“AMI
Interests” shall mean the Vanguard PUD Interests, the Vinland
PUD Interests and the New AMI Leases.

“Business
Day” shall mean a day on which the banks in the Commonwealth of
Kentucky are customarily open for business.

“Force
Majeure” shall mean anything that is beyond the reasonable
control, and occurs without the fault, negligence or willful misconduct of the
party asserting the force majeure, including, without limitation, any act of
God, strike, lockout, or other industrial disturbance, act of the public enemy,
war (declared or undeclared), terrorism, blockade, public riot, lightning,
fire, storm, flood or other act of nature, explosion, governmental action,
governmental delay, restraint or inaction, unavailability of equipment or
materials, and any other cause, whether of the kind specifically enumerated or
otherwise.  An event of force majeure
that only partially prevents performance shall not relieve the party affected
thereby from performing its other obligations under this Agreement.

“Law”
shall mean any applicable statute, law, ordinance, regulation, rule, ruling,
order, restriction, requirement, writ, injunction, decree or other official act
of or by any governmental authority.

“Mcf” shall
mean one thousand cubic feet of natural gas.

 2
 

“New AMI Leases”
shall have the meaning given to that term in the Recitals.

“New Leases”
shall have the meaning given to that term in the Recitals.

“Party”
or “Parties” shall mean one, more or
all of Vanguard Natural Gas, LLC (including its subsidiaries, AE and TEC), and
Vinland Energy Eastern, LLC, as the context requires.

“Person”
shall mean an individual, an estate, a corporation, a partnership, a joint
venture, a limited liability company, an association, a joint stock company, a
government or any department or agency of a government, a trust and/or any
other entity.

“Producing
Strata” shall mean, for each field, those geologic formations
identified in Exhibit A as the Producing Strata
for the field.

“Production
Unit” shall mean: (i) for each Well in Kentucky, an area
configured in a circle with a diameter of 1,000 feet (or approximately 18.03
acres) around such Well, or such greater or lesser area as may be, or may have
been, established for such Well by the relevant governmental authority; (ii)
for each Well in Tennessee, the Production Unit shall be an area configured in
a square or rectangle containing twenty (20) acres centered on the well bore or
such greater or lesser area as may be, or may have been, established for such
Well by the relevant governmental agency.

“Proved
Undeveloped Oil and Gas Properties” and “PUD
Properties” shall both mean all oil and gas interests associated
with the Producing Strata on the leases described on Exhibit A
relating to locations with a high degree of certainty for an economic reserve
outcome.

“PUD Wells”
means those Wells drilled on any of the PUD Properties.

“Vanguard
PUD Interests” shall mean Vanguard’s undivided 40% working
interest in the PUD Properties.

“Vinland
PUD Interests” shall mean Vinland’s undivided 60% working interest
in the PUD Properties.

“Well” shall
mean any oil and/or gas well that is drilled pursuant to this Agreement.

SECTION II.

LEASES AND TERM

2.1          Ownership
of Interests; Treatment of New Leases.

(a)                                  General.
AE and TEC are the respective owners of the Vanguard PUD Interests, being an
undivided 40% working interest in the properties described on the attached Exhibit A. 
VEE is the owner of the Vinland PUD Interests, being an undivided 60%
working interest in the properties described in Exhibit A.  To the extent
Vinland or Vanguard (acting individually or through one of its subsidiaries)

 3
 

obtains New Leases covering or affecting property within the AMI during
the term of this Agreement, those New Leases shall be treated in accordance
with  Section 2.1(b) and Section 2.1(d).

(b)                                  Treatment
of New Leases. Should Vanguard or Vinland acquire any New Leases within
the AMI, the Parties shall proceed as follows:

(i)                                    within
thirty (30) Business Days after acquiring any New Lease, the Party which
obtained the New Lease (the “Leasing Party”), shall provide the other Party
(the “Receiving Party”) with a copy of the New Lease and such information as is
within the Leasing Party’s possession, custody or control regarding the New
Lease, the title thereto, and the price or other financial terms on which the
Leasing Party acquired the New Lease (the “Lease Information”);

(ii)                                the
Receiving Party shall have thirty (30) Business Days after its receipt of the
Lease Information to notify the Leasing Party whether it will purchase its
undivided working interest share (60% of the interest acquired in the New Lease
by Vanguard if Vinland is the Receiving Party, and 40% of the interest acquired
in the New Lease by Vinland if Vanguard is the Receiving Party) by paying the
Leasing Party its share of the acquisition cost of the New Lease as disclosed
in the Lease Information, which purchase shall be closed within 20 Business
Days of the expiration of the 30 day period referred to in this Section 2.1 (b)
(ii).

(iii)                            any
lands covered by a New Lease in which the Receiving Party does not acquire a
working interest as provided for in this Agreement shall be excluded from the
AMI and remain the sole property of the Leasing Party.

(c)                                  Sales
by Vinland Within the AMI.  Should Vinland desire to sell all or any part
of its oil and gas interests (being producing and/or non-producing assets,
including but not limited to working interests, mineral interests, royalty
interests, overriding royalty or net profits interests) in the AMI, Vinland
shall inform Vanguard in writing of its intention to sell said assets prior to
engaging in negotiations for such sale with a third party. In the notice of
intent to sell, Vinland shall include a list of assets to be sold, along with
the working and net revenue interests associated any Wells which Vinland
intends to sell. Vanguard shall have thirty (30) Business Days after receipt of
such notice in which to make an offer to purchase such interests.  Vinland agrees any such offer will receive
good faith consideration, but Vinland shall have no obligation to accept such
offer. Notwithstanding the foregoing, if Vinland elects to consider bids from
third parties for any such interests in the AMI, Vinland shall permit Vanguard
to participate in such bidding along with any third parties.

(d)                                  Certain
Acquisitions By Vinland. Vanguard acknowledges that a part of VEE’s
strategic plan is to acquire lower value prospective oil and gas properties for
the purpose of enhancing the production from existing wells thereon and
developing

 4
 

the associated leasehold. 
Vanguard acknowledges that VEE can acquire for itself and its sole
benefit producing oil and gas properties within the AMI, without having to
offer participation in said acquisition to Vanguard, provided the purchase
price of said properties is less than Five Million Dollars ($5,000,000.00) (a “Permitted
Acquisition). Provided however, that VEE may not complete more than two (2)
such Permitted Acquisitions in a calendar year without Vanguard’s written
consent. Any acquisitions by Vanguard or VEE within the AMI shall be offered
according to this Agreement. Once any of said properties are acquired and
developed, any sale of the properties by VEE shall be done in accordance with
Section 2.1(c), affording Vanguard the first right of offer.

2.2          Term
of Agreement. 
This Agreement shall be effective as of the date hereof and shall remain
in force and effect for five (5) years after the Effective Date of this
Agreement and shall continue year to year thereafter until cancellation by
either Party upon not less than ninety (90) days notice prior to the
anniversary date of this Agreement in all cases, unless sooner terminated as
provided in Section 8.3. The termination of this Agreement shall not relieve
any Party hereto from any liability which has accrued or attached prior to the
date of such termination.  After the
termination of this Agreement, the rights and obligations of the Parties with
regard to the Wells and wells subsequently drilled on areas subject to the AMI
Interests will be governed by the Operating Agreement applicable to such
property which is executed pursuant to Section 3.1(f).

SECTION III.

PROCEDURES FOR DRILLING WELLS IN THE AMI

3.1          The
Proposed Quarterly Drilling Program. 
The following procedures shall apply to all PUD
Wells to be drilled on the oil and gas leases which comprise the AMI Interests.

(a)                                  During
the first two weeks of December, March, June and September (each, a “Well
Proposal Period”) of each year during the term of this Agreement, Vinland shall
deliver to Vanguard Authorizations for Expenditures (“AFEs”), subject to the
requirements set forth in Section 3.2 herein, for the drilling and completion
of each PUD Well proposed to be drilled on the AMI Interests during each of the
following calendar quarters (the “Proposed Quarterly Drilling Program” or “PQDP”).  Each AFE shall describe the location of each
such Well (each, a “PQDP Well” and collectively, the “PQDP Wells”), the
proposed timing for the drilling and completion of such well, and the AFE shall
provide the cost for the drilling and completion of such PQDP Well (including
the cost of the flow lines from the wellhead to the first meter).  Each AFE shall include a $15,000 drilling
rate charge for each PQDP Well (which will be reflected in the accounting
procedure attached to and made part of the Operating Agreement) to be borne by
the Parties in proportion to their working interests in such PQDP Well.  Beginning on January 1, 2011, the drilling
rate stipulated in this Section 3.1 shall be increased by eleven percent (11%)
and shall be adjusted annually thereafter based upon the wage index adjustment
published by COPAS.

(b)                                  Within
five (5) Business Days after delivery of the AFEs, representatives of Vinland
and Vanguard shall meet to discuss the PQDP.

 5
 

(c)                                  Within
five (5) Business Days after the meeting referenced in Section 3.1(b), but in
no event more than ten (10) Business Days after Vanguard’s receipt of the AFEs
for the PQDP, Vanguard will advise Vinland in writing whether it will
participate in the PQDP with respect to the immediately succeeding calendar
quarter for its proportionate working interest. If Vanguard so elects to
participate, Vinland shall promptly instruct the Operator under the Operating
Agreements to commence drilling of the PQDP Wells.

(d)                                  If
Vanguard does not agree to participate in a PQDP with respect to the calendar
quarter immediately succeeding that applicable Well Proposal Period, or it does
not timely respond to the PQDP proposal within ten (10) Business Days following
its receipt of the PQDP AFEs from Vinland, then Vinland may elect to drill the
PQDP Wells proposed for that quarter for its own account, and at its own
expense, and thereafter those PQDP Wells shall not be subject to this
Agreement.  In such event, and if the
proposed PQDP Wells are timely drilled within the calendar quarter as proposed,
Vanguard shall assign to Vinland upon completion of the drilling and completion
of such  PQDP Wells, all of its right,
title and interest in such PQDP Wells using the form attached hereto as Exhibit C. 
Any subsequent costs and expenses of plugging and abandoning such PQDP
Well shall be borne by Vinland, and Vinland shall indemnify and hold Vanguard
harmless from and against same.

(e)                                  If
Vinland does not timely submit to Vanguard PQDP AFEs for the drilling and
completion of at least the minimum number of PUD Wells as required by Section
3.2, during any applicable Well Proposal Period, Vanguard shall give written
notice to Vinland of such deficiency.  If
Vinland does not submit the requisite number of PQDP AFEs in the manner
required by Section 3.1 (a) within five (5) Business Days of such notice,
Vanguard may direct the Operator under the Operating Agreements to drill up to
fourteen (14) PUD Wells (assuming the combined working interest of Vinland and
Vanguard is 100% in such PUD Wells, if the combined working interest is less
than 100%, the number of PUD Wells shall be proportionately adjusted)  in the AMI Interests during the relevant
calendar quarter, the cost for which Wells will be borne solely by
Vanguard.  Provided such PUD Wells are so
drilled during the applicable calendar quarter (i) those PUD Wells shall be for
Vanguard’s own account and thereafter not be subject to this Agreement and (ii)
Vinland shall assign to AE or TEC, as directed, all of Vinland’s right, title
and interest in such PUD Wells using the form attached hereto as Exhibit C, which assignment shall be
consummated no later than twenty (20) Business Days after the date on which
such Wells are completed.  Any subsequent
costs and expenses of plugging and abandoning such PQDP Well shall be borne by
Vanguard, and Vanguard shall indemnify and hold Vinland harmless from and
against same.

(f)                                    All
PQDP Wells proposed pursuant to the Participation Agreement shall be drilled
and operated pursuant to the Operating Agreements, as applicable to each of AE
and TEC as attached hereto as Exhibit D-1
and D-2 (the “Operating Agreements”).

 6
 

3.2          Well
Limits. 
Vinland shall not propose less than twenty five (25) PUD Wells, nor more
than forty (40) PUD Wells in any PQDP. It is expressly understood that Vinland
may not, without the express written consent of Vanguard, propose the drilling
of more than forty (40) PUD Wells during any PQDP.  Notwithstanding anything herein to the
contrary, Vinland’s obligations to propose the drilling of a minimum number of
wells during each PQDP during the term of this Agreement will terminate four
(4) years after the Effective Date of this Agreement. It is expressly
understood that after the termination of said obligation, but during the term
of this Agreement (the “Interim Period”) the Parties will still meet during the
PQDP period as described above, but there shall be no obligation by either
Party to propose the drilling of a minimum or maximum number of wells.  If a proposal is made by either Party for the
drilling of wells during the Interim Period, the terms of this Agreement will
apply to such wells. After the expiration of the Interim Period and this
Agreement, the terms of the relevant Operating Agreement shall control the
development of the AMI Interests.

3.3          Payments.  If Vanguard elects to participate in a PQDP,
within fifteen (15) days of Vinland’s receipt of Vanguard’s written response,
Vinland shall provide Vanguard with an AFE for the drilling costs for each of
the PUD Wells to be drilled during the first month of the applicable calendar
quarter (a “Monthly Well AFE”).  Vanguard
shall advance its proportionate share of all Monthly Well AFE’s for PUD Wells
to be drilled during the following month within five (5) Business Days of its
receipt thereof.  Thereafter, Vinland
will submit a Monthly Well AFE by the fifteenth day of each month for each of
the PUD Wells to be drilled in the following month.  Within sixty (60) days after the end of each
PQDP quarter, Vinland shall prepare and deliver to Vanguard a true accounting
of all PUD Wells drilled during the previous calendar quarter. Should the
actual costs incurred in the drilling of the PQDP Wells be less than the
amounts set forth in the Monthly Well AFE, then Vinland will remit back to
Vanguard its proportionate share of any overpayment. However, should the costs
incurred in the drilling of the PQDP Wells be greater than the amounts set
forth in the Monthly Well AFE, then Vanguard will remit to Vinland its
proportionate share of the underfunded costs.

Vinland agrees to use all funds from Vanguard’s
payment of the Monthly Well AFEs to pay for the drilling, completion and
equipping of the relevant PUD Wells.

3.4          Undrilled
Wells.

(a)                                  If
a Well is proposed in the PQDP, but is not drilled during the relevant calendar
quarter (an “Undrilled Well”), such Undrilled Well shall not be drilled
pursuant to the PQDP as originally proposed. 
Such Undrilled Well may be added to a subsequent PQDP, and it will be
subject to the approval and other procedures provided in Section 3.1, above. It
is expressly agreed and understood that (i) no more than twenty percent (20%)
of the total number of Wells proposed in a PQDP can be carried over and added
to the Wells to be drilled in the subsequent Well Proposal Period and (ii) in
any event no fewer than one hundred (100) gross wells will be drilled in any
four calendar quarter period.

(b)                                  If
Vanguard has advanced funds to Vinland for an Undrilled Well, Vinland will
return such funds to Vanguard within five (5) Business Days after the end of
the relevant calendar quarter with interest at the Prime Rate designated as
such from

 7
 

time to time by Citibank, N.A. from the date such funds were advanced
by Vanguard to the date of repayment by Vinland.

(c)                                  For
purposes of this Section 3.4, a Well shall be deemed to be drilled within a
calendar quarter if it has been spudded prior to 11:59 p.m. on the last day of
the calendar quarter.

SECTION IV.

OPERATING 
AGREEMENTS

4.1          Operating
Agreements.

(a)                                  All
Wells in the AMI which are jointly owned by Vinland and Vanguard, or its
subsidiaries, shall be drilled and operated, and except as explicitly provided
for in this Agreement, the associated costs and expenses shall be borne by the
Parties pursuant to the applicable Operating Agreements.

(b)                                  The
Operating Agreements have been entered into and executed by the appropriate
Parties concurrent with the execution of this Agreement.

(c)                                  In
the event of a conflict between this Agreement and the Operating Agreements,
the terms of this Agreement shall control during the term of this Agreement.

SECTION V.

TRANSFERS

5.1          Transfers.
Subject to the provisions of Section 2.1(c), neither this Agreement, nor the
benefits, rights, and obligations accruing thereunder to any Party, nor the AMI
Leases may be assigned or transferred in whole or in part, during the term
hereof, without the prior written consent of the other Parties, which consent
shall not be unreasonably withheld, provided, however, the foregoing
prohibitions shall not apply to assignments or transfers by a Party to its
Affiliates, or assignments or transfers by reason of the merger or sale of
substantially all of a Party’s assets. Upon assignment, the provisions hereof
shall extend to the heirs, successors and permitted assigns of the Parties
hereto.

5.2          Further
Conditions. It is a further condition hereof that
before making any assignment or transfer of any interest herein, the Party
proposing so to do shall be required first to settle for and discharge its portion
of all obligations accrued under the terms of this Agreement as of the
effective  date of such assignment.  In the event of an assignment of all or any
interest covered hereby, such transfer shall include therein specific and
definite recognition of the rights of the other Parties under this Agreement,
reciting that the interest so transferred is subject hereto.

SECTION VI.

NOTICES

6.1          Notices.  Any notice which may be given hereunder shall
be ineffective unless in writing and either delivered by registered or
certified mail with return receipt requested to the addresses

 8
 

set out below or delivered by hand with
written acknowledgment of receipt.  The
addresses for notice are as follows:

For Vinland:   Vinland
Energy Eastern, LLC

104 Nami Plaza, Suite 1

London, Kentucky 40741

Attention: 
Thomas H. Blake, President

For Vanguard:  c/o
Vanguard Natural Gas, LLC

7700 San Felipe, Suite
485

Houston, Texas 77063

Attention: 
Scott W. Smith, President

Any such address may be
changed at any time by written notice in accordance herewith.  Each notice hereunder shall be deemed to have
been given when delivered in person or by courier service and signed for
against receipt thereof, or three (3) Business Days after depositing it in the
United States mail with postage prepaid and properly addressed.

SECTION VII.

REPRESENTATIONS
AND WARRANTIES

7.1          Representations
and Warranties of Vinland.  Vinland represents and warrants to Vanguard
that:

(a)                                  Organization
and Good Standing.  Vinland is
duly organized, validly existing and in good standing under the Laws of its
jurisdiction of organization, having all powers required to carry on its
business and enter into and carry out the transactions contemplated
hereby.  Vinland is duly qualified, in
good standing, and authorized to do business in all other jurisdictions within
the United States wherein the character of the properties owned or held by it
or the nature of the business transacted by it makes such qualification
necessary.

(b)                                  Authorization.  Vinland has duly taken all action necessary
to authorize the execution and delivery by it of this Agreement and to
authorize the consummation of the transactions contemplated hereby and the
performance of its obligations hereunder.

(c)                                  No
Conflicts or Consents.  The
execution and delivery by Vinland of this Agreement, the performance by Vinland
of its obligations hereunder, and the consummation of the transactions
contemplated hereby, do not and will not (i) conflict with any provision of (1)
any law, (2) the organizational documents of Vinland, or (3) any judgment,
license, order, permit or material agreement applicable to or binding upon
Vinland, (ii) result in the acceleration of any indebtedness owed by Vinland,
or (iii) result in or require the creation of any lien upon any assets or properties
of Vinland.  No permit, consent,
approval,

 9
 

authorization or order of, and no notice to or filing with, any
governmental authority or third party is required in connection with the
execution, delivery or performance by Vinland of this Agreement or to
consummate any transactions contemplated hereby.

(d)                                  Enforceable
Obligations.  This Agreement is
the legal, valid and binding obligation of Vinland, enforceable in accordance
with the terms hereof except as such enforcement may be limited by bankruptcy,
insolvency or similar laws of general application relating to the enforcement
of creditors’ rights.

7.2          Representations
and Warranties of Vanguard.  Each of VNG, AE and TEC represents and
warrants to Vinland that:

(a)                                  Organization
and Good Standing.  Each of VNG,
AE and TEC is duly organized, validly existing and in good standing under the
Laws of its jurisdiction of organization, having all powers required to carry
on its business and enter into and carry out the transactions contemplated
hereby.  Each of VNG, AE and TEC is duly
qualified, in good standing, and authorized to do business in all other
jurisdictions within the United States wherein the character of the properties
owned or held by it or the nature of the business transacted by it makes such qualification
necessary.

(b)                                  Authorization.  Each of VNG, AE and TEC has duly taken all
action necessary to authorize the execution and delivery by it of this
Agreement and to authorize the consummation of the transactions contemplated
hereby and the performance of its obligations hereunder.

(c)                                  No
Conflicts or Consents.  The
execution and delivery by each of VNG, AE and TEC of this Agreement, the
performance by them of their obligations hereunder, and the consummation of the
transactions contemplated hereby, do not and will not (i) conflict with any
provision of (1) any law, (2) the organizational documents of any of VNG, AE or
TEC, or (3) any judgment, license, order, permit or material agreement
applicable to or binding upon any of VNG, AE or TEC, (ii) result in the
acceleration of any indebtedness owed by any of VNG, AE or TEC, or (iii) result
in or require the creation of any lien upon any assets or properties of any of
VNG, AE or TEC.  No permit, consent,
approval, authorization or order of, and no notice to or filing with, any
governmental authority or third party is required in connection with the
execution, delivery or performance by each of VNG, AE or TEC of this Agreement
or to consummate any transactions contemplated hereby.

(d)                                  Enforceable
Obligations.  This Agreement is
the legal, valid and binding obligation of each of VNG, AE or TEC, enforceable
in accordance with the terms hereof except as such enforcement may be limited
by bankruptcy, insolvency or similar laws of general application relating to
the enforcement of creditors’ rights.

 10
 

SECTION VIII.

MISCELLANEOUS

8.1          Competition. As to any activity conducted
outside of the AMIs established pursuant to this Agreement, both the Company
and its affiliates, and Vinland and its affiliates are and shall be free to
engage in any business or investment activity whatsoever, including those that
may be in direct competition with the other party.

8.2          Entire
Agreement, Amendment and Binding Effect.  This Agreement constitutes the entire
agreement between the Parties and supersedes all prior agreements, whether
verbal or in writing, relating to the subject matter hereof which are not
contained herein.  This Agreement may be
amended only by a written document duly executed by the Parties, and any
alleged amendment which is not so documented shall not be effective as to
either party.  This Agreement shall be
binding upon, and shall inure to the benefit of, the Parties hereto and their
respective successors and permitted assigns.

8.3          Default.  Should a Party, its successors or assigns,
fail to comply with any of the terms and obligations contained herein, the
other Party shall give written notice to such Party specifying the
non-compliance.  If the non-performing
Party does not correct the breach within thirty (30) days, then the Party
giving notice of non-compliance shall have the right to terminate this
Agreement upon written notice to the other Party effective on the date
specified in such written notification, which shall be on or after the date
such notice is given, in addition to all other rights and remedies allowed by
law or in equity.  No delay or omission
by a Party in the exercise of any right, power or remedy under this Agreement
will impair any such right, power or remedy or operate as a waiver thereof or
of any other right, power or remedy then or thereafter existing.
Notwithstanding anything to the contrary herein, in the event of a termination
due to a default by either Party, the Operating Agreements governing the
properties shall remain in full force and effect.

8.4          Construction.  As used in this Agreement: the word “or” is
not exclusive; the word “including” (in its various forms) means “including
without limitation”; pronouns in masculine, feminine and neuter genders shall
be construed to include any other gender; and words in the singular form shall
be construed to include the plural and vice versa, unless the context otherwise
requires.  References herein to any
Section, Appendix, Schedule or Exhibit shall be to a Section, an Appendix, a
Schedule or an Exhibit hereof unless otherwise specifically provided.  This Agreement is the result of negotiations
between, and has been reviewed by Vanguard and Vinland, and their respective
counsel.  Accordingly, this Agreement
shall be deemed to be the joint product of the parties hereto, and no ambiguity
shall be construed in favor of or against any party hereto or beneficiary
hereof.

8.5          Amendment.  No amendment of any provision of this
Agreement shall be effective unless it is in writing and signed by all parties
hereto and Agent, and no waiver of any provision of this Agreement, and no
consent to any departure by any party hereto therefrom, shall be effective
unless it is in writing and signed by the other parties hereto and Agent, and
then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.

 11
 

8.6          Unenforceability.  Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or invalidity without
invalidating the remaining portions hereof or thereof or affecting the validity
or enforceability of such provision in any other jurisdiction.

8.7          Governing Law; Submission to Process.  THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF KENTUCKY, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.  EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS SITTING IN THE STATE OF KENTUCKY AND THE COUNTY OF LAUREL AND AGREES AND
CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING
RELATING HERETO BY ANY MEANS ALLOWED UNDER KENTUCKY OR FEDERAL LAW.  EACH OF THE PARTIES HERETO IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH
A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

8.8          Waiver of Jury
Trial, Punitive Damages, Etc.  EACH OF THE PARTIES HERETO HEREBY KNOWINGLY,
VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY (A) WAIVES, TO THE MAXIMUM EXTENT
NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT
OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY OR ASSOCIATED HEREWITH, BEFORE OR AFTER MATURITY; (B) WAIVES, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER
IN ANY SUCH LITIGATION ANY PUNITIVE DAMAGES, (C) CERTIFIES THAT NO PARTY HERETO
NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT IT
HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
HEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED
IN THIS SECTION 8.8.

8.9          Arbitration.  If any controversy, claim or dispute arising out of or relating to this
Agreement or the breach or performance thereof occurs, the parties shall meet and
exert reasonable efforts to reach an amicable settlement for a period not to
exceed twenty (20) days from the date written notice of the controversy, claim
or dispute is served by the complaining party to the other party under this
Agreement.  If for any reason such
settlement fails to occur within such twenty-day period (or such other period
as the parties may agree in writing), the parties will then enlist the services
of a mutually agreed upon industry representative to facilitate settlement
negotiations for an additional twenty (20) day period in an attempt to resolve
the controversy. If a favorable resolution is not attained within the
additional twenty (20) day period, the controversy, claim or dispute shall be
submitted to binding arbitration administered by the

 12
 

American Arbitration
Association in accordance with its Commercial Arbitration Rules (“AAA Rules”)
and subject to the Federal Arbitration Act, 9 U.S.C. Sections 1 et  seq.,
and judgment on any award thereby rendered may be entered in any court having
jurisdiction thereof.

(a)                                 Any such arbitration shall proceed as promptly
and as expeditiously as possible (and the parties shall cooperate to this end)
before three arbitrators, consisting of one arbitrator appointed by the
claimant, one arbitrator appointed by the respondent, and the third arbitrator
appointed by the two party-appointed arbitrators.  Arbitration shall be initiated by written
notice of intention to arbitrate made pursuant the AAA Rules.  The claimant shall identify its appointed arbitrator
in the notice of intention to arbitrate, and the respondent shall identify its
appointed arbitrator within ten (10) days of its receipt of the notice of
intention to arbitrate.  The two
party-appointed arbitrators shall agree upon and appoint the third arbitrator
within the ten (10) day period following the appointment of the second
party-appointed arbitrator.  If either
the claimant or the respondent fail to appoint an arbitrator pursuant to the
foregoing, or if the two party-appointed arbitrators fail to agree upon and
appoint the third arbitrator within the above-referenced ten (10) day period,
then such arbitrator or arbitrators shall be appointed by the AAA pursuant to
the AAA Rules.  The arbitrators chosen or
appointed shall have expertise and/or experience in the oil and gas industry.

(b)                                 Nothing in this Section shall be deemed to
preclude any party from applying to any court of competent jurisdiction at any
time prior to the formation of the arbitration panel (including before or
during the 20-day negotiation period referenced in the first sentence of this
Section) for injunctive, provisional or other emergency relief pertaining to
the subject matter of a controversy, claim or dispute that is arbitrable
hereunder, or applying for such relief in aid of arbitration after formation of
the arbitration panel, where (i) the arbitration award to which the party may
be entitled may be rendered ineffectual without such relief, (ii) the party
seeking such relief is not in breach of this Section, and (iii) the relief
sought will not materially delay or frustrate the arbitration.  The grant or denial of any court-ordered
relief pursuant to this paragraph shall not constitute or be deemed to be a
ruling on the merits of the matter to be arbitrated, nor shall any application
for such relief be deemed to be a waiver of any right to arbitration hereunder.

(c)                                 The parties hereby agree that the costs and
expenses, including attorneys’ fees, incurred in connection with any
arbitration or court proceeding hereunder shall be awarded in favor of the
prevailing party and against the losing party as determined by the arbitration
panel or court, as the case may be.

8.10        Counterparts.
This instrument may be executed in one or more counterparts, which when
executed shall constitute but one and the same instrument.

8.11        Authority
to Execute. 
The person executing this Agreement on behalf of each of the Parties
warrants and represents that such person is duly authorized and empowered to
execute this Agreement on behalf of such Party.

 13
 

8.12        Severability.  This Agreement is intended to be performed in
accordance with and only to the extent permitted by all legal
requirements.  If any provision of this
Agreement or the application thereof to any person or circumstance shall, for any
reason and to any extent, be invalid or unenforceable, but the extent of the
invalidity or unenforceability does not destroy the basis of the bargain
between the Parties as contained herein, the remainder of this Agreement and
the application of such provision to other persons and circumstances shall not
be affected thereby, but rather shall be enforced to the greatest extent
permitted by law.

 14
 

IN WITNESS WHEREOF, the
undersigned have executed this Participation Agreement effective as of the date
first above written.

	
  

  	
  (“VINLAND”)

  
	
   

  	
  VINLAND ENERGY EASTERN, LLC

  
	
   

  	
  By:

  	
  /s/ Majeed S. Nami

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (“VANGUARD”)

  
	
   

  	
  VANGUARD NATURAL GAS, LLC

  
	
   

  	
  By:

  	
  /s/ Majeed S. Nami

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARIANA ENERGY, LLC

  
	
   

  	
  By:

  	
  Vanguard Natural Gas, LLC

  	
   

  
	
   

  	
  Its:

  	
  Sole Member

  
	
   

  	
  By:

  	
  /s/ Majeed S. Nami

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TRUST ENERGY COMPANY, LLC

  
	
   

  	
  By:

  	
  Vanguard Natural Gas, LLC

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
  By:

  	
  /s/ Majeed S. Nami

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
						

 

 15

EXHIBIT C

ACCOUNTING PROCEDURE

JOINT OPERATIONS

(Tennessee)

Attached to and made part of that certain Operating
Agreement dated January 5, 2007 by and between VINLAND ENERGY OPERATING, LLC,
as Operator and ARIANA ENERGY, LLC and VINLAND ENERGY EASTERN, LLC, as
Non-Operators

I. GENERAL PROVISIONS

1.                                      DEFINITIONS

All terms used in this Accounting Procedure shall have
the following meaning, unless otherwise expressly defined in the Agreement:

“Affiliate” means for a person, another person that
controls, is controlled by, or is under common control with that person.  In this definition, (a) control means the
ownership by one person, directly or indirectly, of more than fifty percent
(50%) of the voting securities of a corporation or, for other persons, the
equivalent ownership interest (such as partnership interests), and (b) “person”
means an individual, corporation, partnership, trust, estate, unincorporated
organization, association, or other legal entity.

“Agreement” means the operating agreement between the
Parties and the Operator to which this Accounting Procedure is attached.

“Controllable Material” means Material that, at the
time of acquisition or disposition by the Joint Account, as applicable, is so
classified in the Material Classification Manual most recently recommended by
the Council of Petroleum Accountants Societies (COPAS).

“Equalized Freight” means the procedure of charging
transportation cost to the Joint Account based upon the distance from the
nearest Railway Receiving Point to the property.

“Excluded Amount” means a specified excluded trucking
amount most recently recommended by COPAS.

“Field Office” means a structure, or portion of a
structure, whether a temporary or permanent installation, the primary function
of which is to directly serve daily operation and maintenance activities of the
Joint Property and which serves as a staging area for directly chargeable field
personnel.

“First Level Supervision” means those employees whose
primary function in Joint Operations is the direct oversight of the Operator’s
field employees and/or contract labor directly employed On-site in a field
operating capacity.  First Level
Supervision functions may include, but are not limited to:

·                                          Responsibility
for field employees and contract labor engaged in activities that can include
field operations, maintenance, construction, well remedial work, equipment
movement and drilling

·                                          Responsibility
for day-to-day direct oversight of rig operations

·                                          Responsibility
for day-to-day direct oversight of construction operations

·                                          Coordination
of job priorities and approval of work procedures

·                                          Responsibility
for optimal resource utilization (equipment, Materials, personnel)

·                                          Responsibility
for meeting production and field operating expense targets

·                                          Representation
of the Parties in local matters involving community, vendors, regulatory agents
and landowners, as an incidental part of the supervisor’s operating
responsibilities

·                                          Responsibility
for all emergency responses with field staff

·                                          Responsibility
for implementing safety and environmental practices

·                                          Responsibility
for field adherence to company policy

·                                          Responsibility
for employment decisions and performance appraisals for field personnel

·                                          Oversight
of sub-groups for field functions such as electrical, safety, environmental,
telecommunications, which may have group or team leaders.

“Joint Account” means the account showing the charges
paid and credits received in the conduct of the Joint Operations that are to be
shared by the Parties, but does not include proceeds attributable to
hydrocarbons and by-products produced under the Agreement.

“Joint Operations” means all operations necessary or
proper for the exploration, appraisal, development, production, protection,
maintenance, repair, abandonment, and restoration of the Joint Property.

“Joint Property” means the real and personal property
subject to the Agreement.

“Laws” means any laws, rules, regulations, decrees,
and orders of the United States of America or any state thereof and all other
governmental bodies, agencies, and other authorities having jurisdiction over
or affecting the provisions contained in or the transactions contemplated by
the Agreement or the Parties and their operations, whether such laws now exist
or are hereafter amended, enacted, promulgated or issued.

 2
 

“Material” means personal property, equipment,
supplies, or consumables acquired or held for use by the Joint Property.

“Non-Operators” means the Parties to the Agreement
other than the Operator.

 “Off-site”
means any location that is not considered On-site as defined in this Accounting
Procedure.

“On-site” means on the Joint Property when in direct
conduct of Joint Operations “Operator” means the Entity designated pursuant to
the Agreement to conduct the Joint Operations.

“Parties” means the Non-Operators to the Agreement or
their successors and assigns.  Parties
shall be referred to individually as “Party.”

“Participating Interest” means the percentage of the
costs and risks of conducting an operation under the Agreement that a Party
agrees, or is otherwise obligated, to pay and bear.

“Participating Party” means a Party that approves a
proposed operation or otherwise agrees, or becomes liable, to pay and bear a
share of the costs and risks of conducting an operation under the Agreement.

“Participation Agreement” means that agreements
between Vanguard Natural Gas, LLC, and its affiliates, and Vinland Energy
Eastern, LLC, to which this Operating Agreement is made a part of and is
subject thereto.”Personal Expenses” means reimbursed costs for travel and
temporary living expenses.

“Railway Receiving Point” means the railhead nearest
the Joint Property for which freight rates are published, even though an actual
railhead may not exist.

“Supply Store” means a recognized source or common
stock point for a given Material item.

“Technical Services” means services providing specific
engineering, geoscience, or other professional skills, such as those performed
by engineers, geologists, geophysicists, and technicians, required to handle
specific operating conditions and problems for the benefit of Joint Operations;
provided, however, Technical Services shall not include those functions
specifically identified as overhead under the second paragraph of the
introduction of Section III (Overhead). 
Technical Services may be provided by the Operator, Operator’s
Affiliate, Non-Operators, Non-Operators’ Affiliates, and/or third parties.

2.                                      STATEMENTS AND BILLINGS

Except as otherwise provided in the Agreement with
regard to the drilling of wells thereunder, the Operator shall bill
Non-Operators on or before the last day of the month for their proportionate
share of the Joint Account for the preceding month.  Such bills shall be accompanied by statements
that identify the AFE (authority for expenditure),

 3
 

lease or facility, and all charges and credits
summarized by appropriate categories of investment and expense.  Controllable Material shall be separately
identified and fully described in detail, or at the Operator’s option,
Controllable Material may be summarized by major Material classifications.  Intangible drilling costs, audit adjustments,
and unusual charges and credits shall be separately and clearly identified.

The Operator may make available to Non-Operators any
statements and bills required under Section I.2 and/or Section I.3.A (Advances and Payments by the Parties) via email, electronic
data interchange; internet websites or other equivalent electronic media in
lieu of paper copies.  The Operator shall
provide the Non-Operators instructions and any necessary information to access
and receive the statements and bills within the timeframes specified
herein.  A statement or billing shall be
deemed as delivered twenty-four (24) hours (exclusive of weekends and holidays)
after the Operator notifies the Non-Operator that the statement or billing is
available on the website and/or sent via email or electronic data interchange
transmission.  Each Non-Operator
individually shall elect to receive statements and billings electronically, if
available from the Operator, or request paper copies.  Such election may be changed upon thirty (30)
days prior written notice to the Operator.

3.                                      ADVANCES AND PAYMENTS BY THE
PARTIES

A.                                   Unless (i) the
Agreement is in effect, and (ii) the Agreement provides otherwise, the Operator
may require the Non-Operators to advance their share of the estimated cash
outlay for the succeeding month’s operations within fifteen (15) days after
receipt of the advance request or by the first day of the month for which the
advance is required, whichever is later. 
The Operator shall adjust each monthly billing to reflect advances
received from the Non-Operators for such month. 
If a refund is due, the Operator shall apply the amount to be refunded
to the subsequent month’s billing or advance, unless the Non-Operator sends the
Operator a written request for a cash refund. 
The Operator shall remit the refund to the Non-Operator within fifteen
(15) days of receipt of such written request.

B.                                     Except as provided
below, each Party shall pay its proportionate share of all bills in full within
fifteen (15) days of receipt date.  If
payment is not made within such time, the unpaid balance shall bear interest
compounded monthly at the prime rate published by Citibank, N.A. on the first
day of each month the payment is delinquent, plus three percent (3%), per
annum, or the maximum contract rate permitted by the applicable usury Laws
governing the Joint Property, whichever is the lesser, plus attorney’s fees,
court courts, and other costs in connection with the collection of unpaid
amounts.  If Citibank, N.A. fails to
establish a prime rate, the unpaid balance shall bear interest compounded
monthly at the prime rate published by the Federal Reserve plus three percent
(3%), per annum.  Interest shall begin
accruing on the first day of the month in which the payment was due.  Payment shall not be reduced or delayed as a
result of inquiries or anticipated credits unless the Operator has agreed.  Notwithstanding the foregoing, the
Non-Operator may increase or reduce payment, provided it furnishes
documentation and explanation to the Operator at the time payment is made, to
the extent such increase or reduction is caused by:

 4
 

(1)                                  being billed at an
incorrect working interest or Participating Interest that is lower or higher
than such Non-Operator’s actual working interest or Participating Interest, as
applicable; or

(2)                                  being billed for a
project or AFE requiring approval of the Parties under the Agreement that the
Non-Operator has not approved or is not otherwise obligated to pay under the
Agreement; or

(3)                                  being billed for a
property in which the Non-Operator no longer owns a working interest, provided
the Non-Operator has furnished the Operator a copy of the recorded assignment
or letter in-lieu.  Notwithstanding the foregoing,
the Non-Operator shall remain responsible for paying bills attributable to the
interest it sold or transferred for any bills rendered during the thirty (30)
day period following the Operator’s receipt of such written notice; or

(4)                                  charges outside the
adjustment period, as provided in Section I.4 (Adjustments).

4.                                      ADJUSTMENTS

A.                                   Payment of any such
bills shall not prejudice the right of any Party to protest or question the
correctness thereof; however, all bills and statements, including payout
statements, rendered during any calendar year shall conclusively be presumed to
be true and correct, with respect only to expenditures, after twelve (12)
months following the end of any such calendar year, unless within said period a
party takes specific detailed written exception thereto making a claim for
adjustment.  The Operator shall provide a
response to all written exceptions, whether or not contained in an audit
report, within the time periods prescribed in Section I.5 (Expenditure
Audits).

B.                                     All adjustments initiated
by the Operator, except those described in items (1) through (4) of this
Section I.4.B, are limited to the twelve (12) month period following the end of
the calendar year in which the original charge appeared or should have appeared
on the Operator’s Joint Account statement or payout statement.  Adjustments that may be made beyond the
twelve (12) month period are limited to adjustments resulting from the
following:

(1)                                  a physical inventory
of Controllable Material as provided for in Section V (Inventories
of Controllable Material), or

(2)                                  an offsetting entry
(whether in whole or in part) that is the direct result of a specific joint
interest audit exception granted by the Operator relating to another property,
or

(3)                                  a
government/regulatory audit, or

(4)                                  a working interest
ownership or Participating Interest adjustment.

 5
 

5.                                      EXPENDITURE AUDITS

A.                                   A Non-Operator, upon
written notice to the Operator and all other Non-Operators, shall have the
right to audit the Operator’s accounts and records relating to the Joint
Account within the twelve (12) month period following the end of such calendar
year in which such bill was rendered; however, conducting an audit shall not
extend the time for the taking of written exception to and the adjustment of
accounts as provided for in Section I.4.

When there are two or more Non-Operators, the
Non-Operators shall make every reasonable effort to conduct a joint audit in a
manner that will result in a minimum of inconvenience to the Operator.  The Operator shall bear no portion of the
Non-Operators’ audit cost incurred under this paragraph unless agreed to by the
Operator.  The audits shall not be
conducted more than once each year without prior approval of the Operator,
except upon the resignation or removal of the Operator, and shall be made at
the expense of those Non-Operators approving such audit.

The Non-Operator leading the audit (hereinafter “lead
audit company”) shall issue the audit report within ninety (90) days after
completion of the audit testing and analysis; however, the ninety (90) day time
period shall not extend the twenty-four (24) month requirement for taking
specific detailed written exception as required in Section I.4.A (Adjustments) above. 
All claims shall be supported with sufficient documentation.

A timely filed written exception or audit report
containing written exceptions (hereinafter “written exceptions”) shall, with
respect to the claims made therein, preclude the Operator from asserting a
statute of limitations defense against such claims, and the Operator hereby
waives its right to assert any statute of limitations defense against such
claims for so long as any Non-Operators continue to comply with the deadlines
for resolving exceptions provided in this Accounting Procedure.  If the Non-Operators fail to comply with the
additional deadlines in Section I.5.B or I.5.C, the Operator’s waiver of its
rights to assert a statute of limitations defense against the claims brought by
the Non-Operators shall lapse, and such claims shall then be subject to the
applicable statute of limitations, provided that such waiver shall not lapse in
the event that the Operator has failed to comply with the deadlines in Section
I.5.B or I.5.C.

B.                                     The Operator shall
provide a written response to all exceptions in an audit report within one
hundred eighty (180) days after Operator receives such report.  Denied exceptions should be accompanied by a
substantive response.  If the Operator
fails to provide substantive response to an exception within this one hundred
eighty (180) day period, the Operator will owe interest on that exception or
portion thereof, if ultimately granted, from the date it received the audit
report.  Interest shall be calculated
using the rate set forth in Section I.3.B (Advances and Payments by
the Parties).

 6
 

C.                                     The lead audit
company shall reply to the Operator’s response to an audit report within ninety
(90) days of receipt, and the Operator shall reply to the lead audit company’s
follow-up response within ninety (90) days of receipt; provided, however, each
Non-Operator shall have the right to represent itself if it disagrees with the
lead audit company’s position or believes the lead audit company is not
adequately fulfilling its duties.  If the
Operator fails to provide substantive response to an exception within this
ninety (90) day period, the Operator will owe interest on that exception or
portion thereof, if ultimately granted, from the date it received the audit
report.  Interest shall be calculated
using the rate set forth in Section I.3.B (Advances and Payments by
the Parties).

D.                                    If any Party fails
to meet the deadlines in Sections I.5.B or I.5.C or if any audit issues are
outstanding fifteen (15) months after Operator receives the audit report, the
Operator or any Non-Operator participating in the audit has the right to call a
resolution meeting, as set forth in this Section I.5.D or it may invoke the
dispute resolution procedures included in the Agreement, if applicable.  The meeting will require one month’s written
notice to the Operator and all Non-Operators participating in the audit.  The meeting shall be held at the Operator’s
office or mutually agreed location, and shall be attended by representatives of
the Parties with authority to resolve such outstanding issues.  Any Party who fails to attend the resolution
meeting shall be bound by any resolution reached at the meeting.  The lead audit company will make good faith
efforts to coordinate the response and positions of the Non-Operator
participants throughout the resolution process; however, each Non-Operator
shall have the right to represent itself. 
Attendees will make good faith efforts to resolve outstanding issues,
and each Party will be required to present substantive information supporting
its position.  A resolution meeting may
be held as often as agreed to by the Parties. 
Issues unresolved at one meeting may be discussed at subsequent meetings
until each such issue is resolved.

6.                                      APPROVAL BY PARTIES

A.                                   GENERAL MATTERS

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

This Section I.6.A applies to specific situations of
limited duration where a Party proposes to change the accounting for charges
from that prescribed in this Accounting Procedure.  This provision does not apply to amendments
to this Accounting Procedure, which are covered by Section I.6.B.

 7
 

B.                                     AMENDMENTS

If the Agreement to which this Accounting Procedure is
attached contains no contrary provision in regard thereto, this Accounting
Procedure can be amended by an affirmative vote of two (2) or more Parties, and
the Operator, having a combined working interest of at least sixty-seven
percent (67%), which approval shall be binding on all Parties and the Operator.

C.                                     AFFILIATES

For the purpose of administering the voting procedures
of Sections 1.6.A and 1.6.B, if Parties to this Agreement are Affiliates of
each other, then such Affiliates shall be combined and treated as a single Party
having the combined working interest or Participating Interest of such
Affiliates.

II. DIRECT CHARGES

The Operator shall charge
the Joint Account with the following items:

1.                                      RENTALS AND ROYALTIES

Lease rentals and royalties paid by the Operator, on behalf
of all Parties, for the Joint Operations.

2.                                      LABOR

A.                                   Salaries and wages
for:

(1)                                  Operator’s field
employees directly employed On-site in the conduct of Joint Operations,

(2)                                  Operator’s employees
providing First Level Supervision,

(3)                                  Operator’s employees
providing On-site Technical Services for the Joint Property if such charges are
excluded from the overhead rates in Section III (Overhead),

(4)                                  Operator’s employees
providing Off-site Technical Services for the Joint Property if such charges
are excluded from the overhead rates in Section III (Overhead).

Charges for the Operator’s employees identified in
Section II.2.A may be made based on the employee’s actual salaries and wages
including payroll taxes, or in lieu thereof, a day rate representing the
Operator’s average salaries and wages of the employee’s specific job category.

B.                                     Operator’s cost of
holiday, vacation, sickness, and disability benefits, and other customary
allowances paid to employees whose salaries and wages are chargeable to the Joint
Account under Section II.2.A, excluding severance payments or other termination
allowances.  Such costs under this
Section II.2.B may be charged on a “when and as-paid basis” or by “percentage
assessment” on the amount of salaries

 8
 

and wages chargeable to the Joint Account under Section II.2.A.  If percentage assessment is used, the rate
shall be based on the Operator’s cost experience.

C.                                     Expenditures or
contributions made pursuant to assessments imposed by governmental authority
that are applicable to costs chargeable to the Joint Account under Sections
II.2.A and B.

D.                                    Personal Expenses
of personnel whose salaries and wages are chargeable to the Joint Account under
Section II.2.A when the expenses are incurred in connection with directly
chargeable activities.

E.                                      Reasonable
relocation costs incurred in transferring to the Joint Property personnel whose
salaries and wages are chargeable to the Joint Account under Section
II.2.A.  Notwithstanding the foregoing,
relocation costs that result from reorganization or merger of a Party, or that
are for the primary benefit of the Operator, shall not be chargeable to the
Joint Account.  Extraordinary relocation
costs, such as those incurred as a result of transfers from remote locations,
such as Alaska or overseas, shall not be charged to the Joint Account unless
approved by the parties pursuant to Section 1.6.A (General
Matters).

F.                                      Operator’s
current cost of established plans for employee benefits, as described in COPAS
MFI-27 (“Employee Benefits Chargeable to Joint Operations and Subject to
Percentage Limitation”), applicable to the Operator’s labor costs chargeable to
the Joint Account under Sections II.2.A and B based on the Operator’s actual
costs not to exceed the employee benefits limitation percentage most recently
recommended by COPAS.

G.                                     Award payments to
employees, in accordance with COPAS MFI-49 (“Awards to Employees and
Contractors”) for personnel whose salaries and wages are chargeable under
Section II.2.A.

3.                                      MATERIAL

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

4.                                      TRANSPORTATION

A.                                   Transportation of
the Operator’s, Operator’s Affiliate’s, or contractor’s personnel necessary for
Joint Operations.

B.                                     Transportation of
Material between the Joint Property and another property, or from the Operator’s
warehouse or other storage point to the Joint Property, shall be charged to the
receiving property using the method listed below.

 9
 

Transportation of Material from the Joint Property to the Operator’s
warehouse or other storage point shall be paid for by the Joint Property using
the method listed below:

(1)                                  If the actual
trucking charge is less than or equal to the Excluded Amount the Operator may
charge actual trucking cost incurred in transporting materials from the Railway
Receiving Point or supply store to the Joint Property.  The basis for the theoretical charge is the
per hundred weight charge plus fuel surcharges from the Railway Receiving Point
to the Joint Property.  The Operator
shall consistently apply the selected alternative.

(2)                                  Accessorial charges
such as loading and unloading costs, split pick-up costs, detention, call out
charges, and permit fees shall be charged directly to the Joint Property.

5.                                      SERVICES

The cost of contract services, equipment, chart
integration, meter calibration and utilities used in the conduct of Joint
Operations, except for contract services, equipment, and utilities covered by
Section III (Overhead), or Section II.7 (Affiliates), or excluded under Section II.9 (Legal Expenses). 
Awards paid to contractors shall be chargeable pursuant to COPAS MFI-49
(“Awards to Employees and Contractors”).

The costs of third party Technical Services are
chargeable to the extent excluded from the overhead rates under Section III
(Overhead).

 10
 

6.                                      EQUIPMENT AND FACILITIES
FURNISHED BY OPERATOR

In the absence of a separately negotiated agreement,
equipment and facilities furnished by the Operator will be charged as follows:

A.                                   The Operator shall
charge the Joint Account for use of Operator-owned equipment and facilities, at
rates commensurate with the costs of ownership and operation.

B.                                     In lieu of charges
in Section II.6.A above, the Operator may elect to use average commercial rates
prevailing in the immediate area of the Joint Property, less five percent
(5%).  If equipment and facilities are
charged under this Section II.6.B, the operator shall adequately document and
support commercial rates and shall periodically review and update the rate and
the supporting documentation.  For
automotive equipment, the Operator may elect to use rates published by the
Petroleum Motor Transport Association (PMTA) or such other organization
recognized by COPAS as the official source of rates.

7.                                      AFFILIATES

A.                                   Charges for an
Affiliate’s goods and/or services used in operations requiring an AFE or other
authorization from the Non-Operators may be made without the approval of the
Parties provided (i) the Affiliate is identified and the Affiliate goods and
services are specifically detailed in the approved AFE or other authorization,
and (ii) the total cost for such Affiliate’s goods and services billed to such
individual project do not exceed $50,000. 
If the total costs for such Affiliate’s goods and services charged to
such individual project are not specifically detailed in the approved AFE or
authorization or exceed such amount, charges for such Affiliate shall require
approval of the Parties, pursuant to Section I.6A (General
Matters).

B.                                     For an Affiliate’s
goods and/or services used in operations not requiring an AFE or other
authorization from the Non-Operators, charges for such Affiliate’s goods and
services shall require approval of the Parties, pursuant to Section I.6A (General Matters), if the charges exceed $50,000 in a given
calendar year.

C.                                     The cost of the
Affiliate’s goods or services shall not exceed average commercial rates
prevailing in the area of the Joint Property. 
Notwithstanding the foregoing, direct charges for Affiliate-owned
communication facilities or systems shall be made pursuant to Section II.12 (Communications).

If the Parties fail to designate an amount in Sections
II.7.A or II.7.B, in each instance the amount deemed adopted by the Parties as
a result of such omission shall be the amount established as the Operator’s
expenditure limitation in the Agreement. 
If the Agreement does not contain an Operator’s expenditure limitation,
the amount deemed adopted by the Parties as a result of such omission shall be
zero dollars ($0.00).

 11
 

8.                                      DAMAGES AND LOSSES TO JOINT
PROPERTY

All costs or expenses necessary for the repair or
replacement of Joint Property resulting from damages or losses incurred, except
to the extent such damages or losses result from a Party’s or Parties’ gross
negligence or willful misconduct, in which case such Party or Parties shall be
solely liable.

The Operator shall furnish the Non-Operator written
notice of damages or losses incurred as soon as practicable after a report has
been received by the Operator.

9.                                      LEGAL EXPENSE

Recording fees and costs of handling, settling, or
otherwise discharging litigation, claims, and liens incurred in or resulting
from operations under the Agreement, or necessary to protect or recover the
Joint Property, to the extent permitted under the Agreement.  Costs of the Operator’s or Affiliate’s legal
staff or outside attorneys, including fees and expenses, are not chargeable
unless approved by the Parties pursuant to Section I.6.A (General
Matters) or otherwise provided for in the Agreement.

Notwithstanding the foregoing paragraph, costs for
procuring abstracts, fees paid to outside attorneys for title examinations
(including preliminary, supplemental, shut-in royalty opinions, division order
title opinions), and curative work shall be chargeable to the extent permitted
as a direct charge in the Agreement.

10.                               TAXES AND PERMITS

All taxes and permitting fees of every kind and
nature, assessed or levied upon or in connection with the Joint Property, or
the production therefrom, and which have been paid by the Operator for the
benefit of the Parties, including penalties and interest, except to the extent
the penalties and interest result from the Operator’s gross negligence or
willful misconduct.

If ad valorem taxes paid by the Operator are based in
whole or in part upon separate valuations of each Party’s working interest,
then notwithstanding any contrary provisions, the charges to the Parties will
be made in accordance with the tax value generated by each Party’s working
interest.

Costs of tax consultants or advisors, the Operator’s
employees, or Operator’s Affiliate employees in matters regarding ad valorem or
other tax matters, are not permitted as direct charges unless approved by the
Parties pursuant to Section I.6.A (General Matters).

Charges to the Joint Account resulting from sales/use
tax audits, including extrapolated amounts and penalties and interest, are
permitted, provided the Non-Operator shall be allowed to review the invoices
and other underlying source documents which served as the basis for tax charges
and to determine that the correct amount of taxes were charged to the Joint
Account.  If the Non-Operator is not
permitted to review such documentation,

 12
 

the sales/use tax amount shall not be directly charged
unless the Operator can conclusively document the amount owed by the Joint
Account.

11.                               INSURANCE

Net premiums paid for insurance required to be carried
for Joint Operation for the protection of the Parties.  If Joint Operations are conducted at
locations where the Operator acts as self-insurer in regard to its worker’s
compensation and employer’s liability insurance obligation, the Operator shall
charge the Joint Account manual rates for the risk assumed in its
self-insurance program as regulated by the jurisdiction governing the Joint
Property.

12.                               COMMUNICATIONS

Costs of acquiring, leasing, installing, operating,
repairing, and maintaining communication facilities or systems, between the
Joint Property and the Operator’s office(s) directly responsible for field
operations in accordance with the provisions of COPAS MFI-44 (“Field Computer
and Communication Systems”). If the communication facilities or systems serving
the Joint Property are Operator-owned, charges to the Joint Account shall be made
as provided in Section II.6 (Equipment and Facilities
Furnished by Operator).  If
the communication facilities or systems serving the Joint Property are owned by
the Operator’s Affiliate, charges to the Joint Account shall not exceed average
commercial rates prevailing in the area of the Joint Property.  The Operator shall adequately document and
support commercial rates and shall periodically review and update the rate and
the supporting documentation.

13.                               ECOLOGICAL, ENVIRONMENTAL,
AND SAFETY.

Costs incurred for Technical Services and drafting to
comply with ecological, environmental and safety Laws or standards recommended
by Occupational Safety and Health Administration (OSHA) or other regulatory
authorities.  All other labor and
functions incurred for ecological, environmental and safety matters, including
management, administration, and permitting, shall be covered by Sections II.2
(Labor), II.5 (Services), or Section III (Overhead), as applicable.

Costs to provide or have available pollution containment
and removal equipment plus actual costs of control and cleanup and resulting
responsibilities of oil and other spills as well as discharges from permitted
outfalls as required by applicable Laws, or other pollution containment and
removal equipment deemed appropriate by the Operator for prudent operations,
are directly chargeable.

14.                               ABANDONMENT AND RECLAMATION

Costs incurred for abandonment and reclamation of the
Joint Property, including costs required by lease agreements or by Laws.

 13

15.                               OTHER EXPENDITURES

Any other expenditure not covered or dealt with in the
foregoing provisions of this Section II (Direct Charges),
or in Section III (Overhead) and
which is of direct benefit to the Joint Property and is incurred by the
Operator in the necessary and proper conduct of the Joint Operations.  Charges made under this Section II.15 shall
require approval of the Parties, pursuant to Section I.6.A (General Matters).

III. OVERHEAD

As compensation for costs not specifically identified as chargeable to
the Joint Account pursuant to Section II (Direct Charges),
the Operator shall charge the Joint Account in accordance with this Section
III.

Functions included in the overhead rates regardless of whether
performance by the Operator, Operator’s Affiliates or third parties and
regardless of location, shall include, but not be limited to, costs and
expenses of:

·                                          warehousing,
other than for warehouses that are jointly owned under this Agreement

·                                          design
and drafting (except when allowed as a direct charge under Sections II.13,
III.1.A(ii), and III.2, Option B)

·                                          inventory
costs not chargeable under Section V (Inventories of Controllable Material)

·                                          procurement

·                                          administration

·                                          accounting
and auditing

·                                          gas
dispatching

·                                          human
resources

·                                          management

·                                          supervision
not directly charged under Section II.2 (Labor)

·                                          legal
services not directly chargeable under Section II.9 (Legal Expense)

·                                          taxation,
other than those costs identified as directly chargeable under Section II.10 (Taxes and Permits)

 14
 

·                                          preparation
and monitoring of permits and certifications; preparing regulatory reports;
appearances before or meetings with governmental agencies or other authorities
having jurisdiction over the Joint Property, other than On-site inspections;
reviewing, interpreting, or submitting comments on or lobbying with respect to
Laws or proposed Laws.

Overhead charges shall include the salaries or wages plus applicable
payroll burdens, benefits, and Personal Expenses of personnel performing
overhead functions, as well as office and other related expenses of overhead
function.

1.                                      OVERHEAD - DRILLING AND
PRODUCING OPERATIONS

As compensation for costs incurred but not chargeable
under Section II (Direct Charges) and not covered by other provisions of this
Section III, the Operator shall charge on either:

x  (Alternative
1) Fixed Rate Basis, Section III.1.B.

o  (Alternative
2) Percentage Basis, Section III.1.C.

A.                                   TECHNICAL SERVICES

(i)                                     Except
as otherwise provided in Section II.13 (Ecological Environmental,
and Safety) and Section III.2 (Overhead - Major
Construction and Catastrophe), or by approval of the Parties
pursuant to Section I.6.A (General Matters),
the salaries, wages, related payroll burdens and benefits, and Personal
Expenses for On-site Technical Services, including third party Technical
Services:

x  (Alternative 1 - Direct) shall be
charged direct to the Joint Account.

o  (Alternative 2 - Overhead) shall
be covered by the overhead rates

(ii)                                  Except
as otherwise provided in Section II.13 (Ecological, Environmental, and Safety)
and Section III.2 (Overhead - Major
Construction and Catastrophe), or by approval of the Parties
pursuant to Section I.6.A (General Matters),
the salaries, wages, related payroll burdens and benefits, and Personal
Expenses for Off-site Technical Services, including third party Technical
Services:

x  (Alternative
1 - All Overhead) shall be covered by the overhead rates.

o  (Alternative
2 - All Direct)  shall be charged direct
to the Joint Account.

o  (Alternative
3 - Drilling Direct) shall be charged direct to the Joint Account, only to the
extent such Technical Services are directly attributable to drilling,
redrilling, deepening, or sidetracking operations, through completion,
temporary abandonment, or abandonment if a dry hole.  Off-site Technical Services for all other
operations, including workover, recompletion, abandonment of producing wells,
and the construction or expansion of fixed assets not covered by Section III.2
(Overhead - Major Construction and Catastrophe)
shall be covered by the overhead rates.)

 15
 

Notwithstanding anything to the contrary in this
Section III, Technical Services provided by Operator’s Affiliates are subject
to limitations set forth in Section II.7 (Affiliates).  Charges for Technical personnel performing
non-technical work shall not be governed by this Section III.1.A., but instead
governed by other provisions of this Accounting Procedure relating to the type
of work being performed.

B.                                     OVERHEAD - FIXED
RATE BASIS

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

Producing Well Rate per
month $60.00.

Drilling Well Rate
$15,000.

(2)                                  Application of
Overhead - Producing Well Rate shall be as follows:

(a)                                  An
active well that is produced, injected into for recovery or disposal, or used to
obtain water supply to support operations for any portion of the month shall be
considered as a one-well charge for the entire month.

(b)                                 A
one-well charge shall be made for the month in which plugging and abandonment
operations are completed on any well, unless the Drilling Well Rate applies, as
provided in Sections III.1.B.(2)(a) or (b). 
This one-well charge shall be made whether or not the well has produced.

(c)                                An
active gas well shut in because of overproduction or failure of a purchaser,
processor, or transporter to take production shall be considered as a one-well
charge provided the gas well is directly connected to a permanent sales outlet.

(d)                                 Any
well not meeting the criteria set forth in Sections III.1.B.(3)(a), (b), or
(c)shall not qualify for a producing overhead charge.

(3)                                  Upon approval by all
of the Parties hereto, the well rates shall be adjusted on the first day of
April each year following the effective date of the Agreement; provided,
however, if this Accounting Procedure is attached to or otherwise governing the
payout accounting under a farmout agreement, the rates shall be adjusted on the
first day of April each year following the effective date of such farmout
agreement.  The adjustment shall be
computed by applying the adjustment factor most recently published by
COPAS.  The adjusted rates shall be the
initial or amended rates agreed to by the parties increased or decreased by the
adjustment factor described herein, for each year from the effective date of
such rates, in accordance with COPAS MFI-47 (“Adjustment of Overhead Rates”).

 16
 

C.                                     OVERHEAD-PERCENTAGE
BASIS

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

(a)                                  Development Rate N/A
percent(        )% of the cost
development of the Joint Property, exclusive of costs provided under Section
II.9(Legal Expenses) and all
Material salvage credits.

(b)                                 Operating Rate N/A
percent(        )% of the cost of
operating the Joint Property, exclusive of costs provided under Sections II.1(Rentals and Royalties) and II.9 (Legal Expense); al Material salvage
credits; the value of substance purchased for enhanced recovery; all property
and ad valorem taxes, and any other taxes and assessments that are levied,
assessed, and paid upon the mineral interest in and to the Joint Property.

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

(a)                                  The Development Rate
shall be applied to all costs in connection with:

[i]                                     drilling,
redrilling, sidetracking, or deepening of a well

[ii]                                  a well undergoing
plugback or workover operations for a period of five (5) or more consecutive
work-days

[iii]                               preliminary expenditures
necessary in preparation for drilling

[iv]                              expenditure incurred in
abandoning when the well is not completed as a producer

[v]                                 construction or
installation of fixed assets, the expansion of fixed assets and any other
project clearly discernible as a fixed asset, other than Major Construction or
Catastrophe as defined in Section III.2 (Overhead-Major
Construction and Catastrophe).

(b)                                 The Operating Rate
shall be applied to all other costs in connection with Joint Operations, except
those subject to Section III.2 (Overhead-Major
Construction and Catastrophe).

2.                                      OVERHEAD - MAJOR
CONSTRUCTION AND CATASTROPHE

To compensate the Operator for overhead costs incurred
in connection with a Major Construction project or Catastrophe, the Operator
shall either negotiate a rate prior to the beginning of the project, or shall
charge the Joint Account for overhead based on the following rates for any
Major Construction project in excess of the Operator’s

 17
 

expenditure limit under the Agreement, or for any
Catastrophe regardless of the amount.  If
the Agreement to which this Accounting Procedure is attached does not contain
an expenditure limit, Major Construction Overhead shall be assessed for any
single Major Construction project costing in excess of $100,000 gross.

Major Construction shall mean the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernible as a fixed asset required for the development and
operation of the Joint Property, or in the dismantlement, abandonment, removal,
and restoration of platforms, production equipment, and other operating
facilities.

Catastrophe is defined as a sudden calamitous event
bringing damage, loss, or destruction to property or the environment, such as
an oil spill, blowout, explosion, fire, storm, hurricane, or other
disaster.  The overhead rate shall be
applied to those costs necessary to restore the Joint Property to the
equivalent condition that existed prior to the event.

A.                                   If the Operator
absorbs the engineering, design and drafting costs related to the project:

(1)                                  10% of total costs if
such costs are less than $100,000; plus

(2)                                  4% of total costs in
excess of $100,000 but less than $1,000,000; plus

(3)                                  2% of total costs in
excess of $1,000,000.

B.                                     If the Operator
charges engineering, design and drafting costs related to the project directly
to the Joint Account:

(1)                                  5% of total costs if
such costs are less than $100,000; plus

(2)                                  2% of total costs in
excess of $100,000 but less than $1,000,000; plus

(3)                                  1% of total costs in
excess of $1,000,000.

Total cost shall mean the gross cost of any one
project.  For the purpose of this
paragraph, the component parts of a single Major Construction project shall not
be treated separately, and the cost of drilling and workover wells and
purchasing and installing pumping units and downhole artificial lift equipment
shall be excluded. For Catastrophes, the rates shall be applied to all costs associated
with each single occurrence or event.

On each project, the Operator shall advise the
Non-Operator(s) in advance which of the above options shall apply.

For the purposes of calculating Catastrophe Overhead,
the cost of drilling relief wells, substitute wells, or conducting other well
operations directly resulting from the catastrophic even shall be
included.  Expenditures to which these
rates apply shall not be reduced by salvage or insurance recoveries.  Expenditures that qualify for Major

 18
 

Construction or Catastrophe Overhead shall not qualify
for overhead under any other overhead provisions.

In the event of any conflict between the provisions of
this Section III.2 and the provisions of Sections II.2 (Labor),
II.5 (Services), or II.7 (Affiliates),
the provisions of this Section III.2 shall govern.

3.                                      AMENDMENT OF OVERHEAD RATES

The overheard rates provided for in this Section III
may be amended from time to time upon approval of the Parties.

IV. MATERIAL PURCHASES,
TRANSFERS, AND DISPOSITIONS

The Operator is responsible for Joint Account Material and shall make
proper and timely charges and credits for direct purchases, transfers, and
dispositions.  The Operator shall provide
all Material for use in the conduct of Joint Operations; however, Material may
be supplied by the Non-Operators, at the Operator’s option.  Material furnished by any Party shall be
furnished without any express or implied warranties as to quality, fitness for
use, or any other matter.

1.                                      DIRECT PURCHASES

Direct purchases shall be charged to the Joint Account
at the price paid by the Operator after deduction of all discounts
received.  The Operator shall make good
faith efforts to take discounts offered by suppliers, but shall not be liable
for failure to take discounts except to the extent such failure was the result
of the Operator’s gross negligence or willful misconduct.  A direct purchase shall be deemed to occur
when an agreement is made between an Operator and a third party for the
acquisition of Material for a specific well site or location.  Material provided by the Operator under “vendor
stocking programs,” where the initial use is for a Joint Property and title of
the Material does not pass from the manufacturer, distributor, or agent until
usage, is considered a direct purchase. 
If Material is found to be defective or is returned to the manufacturer,
distributor, or agent for any other reason, credit shall be passed to the Joint
Account within sixty (60) days after the Operator has received adjustment from
the manufacturer, distributor, or agent.

2.                                      TRANSFERS

A transfer is determined to occur when the Operator
(i) furnishes Material from a storage facility or from another operated
property, (ii) has assumed liability for the storage costs and changes in
value, and (iii) has previously secured and held title to the transferred
Material.  Similarly, the removal of
Material from the Joint Property to a storage facility or to another operated
property is also considered a transfer; provided, however, Material that is
moved from the Joint Property to a storage location for safe-keeping pending
disposition may remain charged to the Joint Account and is not considered a
transfer.  Material shall be disposed of
in accordance with Section IV.3 (Disposition of Surplus)
and the Agreement to which this Accounting Procedure is attached.

 19
 

A.                                   PRICING

The value of Material transferred to/from the Joint
Property should generally reflect the market value on the date of physical
transfer.  Regardless of the pricing
method used, the Operator shall make available to the Non-Operators sufficient
documentation to verify the Material valuation. 
When higher than specification grade or size tubulars are used in the
conduct of Joint Operations, the Operator shall charge the Joint Account at the
equivalent price for well design specification tubulars, unless such higher
specification grade or sized tubulars are approved by the Parties pursuant to
Section I.6.A (General Matters).  Transfers of new Material will be priced
using one of the following pricing methods, and not alternate between methods
for the purpose of choosing the method most favorable to the Operator for a
specific transfer:

(1)                                  Using published
prices in effect on date of movement as adjusted by the appropriate COPAS
Historical Price Multiplier (HPM) or prices provided by the COPAS Computerized
Equipment Pricing System (CEPS).

(a)                                  For oil country
tubulars and line pipe, the published price shall be based upon eastern mill
carload base prices (Houston, Texas, for special end) adjusted as of date of
movement, plus transportation cost as defined in Section IV.2.B (Freight).

(b)                                 For other Material,
the published price shall be the published list price in effect at date of
movement, as listed by a Supply Store nearest the Joint Property where like Material
is normally available, or point of manufacture plus transportation costs as
defined in Section IV.2.B (Freight).

(2)                                  Based on a price
quotation from a vendor that reflects a current realistic acquisition cost.

(3)                                  Based on the amount
paid by the Operator for like Material in the vicinity of the Joint Property
within the previous twelve (12) months from the date of physical transfer.

(4)                                  As agreed to by the
Participating Parties for Material being transferred to the Joint Property, and
by the Parties owning the Material for Material being transferred from the
Joint Property.

B.                                     FREIGHT

Transportation costs
shall be added to the Material transfer price using the method prescribed by
the COPAS Computerized Equipment Pricing System (CEPS).  If not using CEPS, transportation costs shall
be calculated as follows:

(1)                                  Transportation costs
for oil country tubulars and line pipe shall be calculated using the distance
from eastern mill to the Railway Receiving

 20
 

Point based on the carload weight basis as recommended by the COPAS
MFI-38 (“Material Pricing Manual”) and other COPAS MFIs in effect at the time
of the transfer.

(2)                                  Transportation costs
for special mill items shall be calculated from that mill’s shipping point to
the Railway Receiving Point.  For transportation
costs from other than eastern mills, the 30,000-pound interstate truck rate
shall be used.  Transportation costs for
macaroni tubing shall be calculated based on the interstate truck rate per
weight of tubing transferred to the Railway Receiving Point.

(3)                                  Transportation costs
for special end tubular goods shall be calculated using the interstate truck
rate from Houston, Texas, to the Railway Receiving Point.

(4)                                  Transportation costs
for Material other than that described in Sections IV.2.B.(1) through (3),
shall be calculated from the Supply Store or point of manufacture, whichever is
appropriate, to the Railway Receiving Point.

Regardless of whether using CEPS or manually
calculating transportation costs, transportation costs from the Railway Receiving
Point to the Joint Property are in addition to the foregoing, and may be
charged to the Joint Account based on actual costs incurred.  All transportation costs are subject to
Equalized Freight as provided in Section II.4 (Transportation)
of this Accounting Procedure.

C.                                     TAXES

Sales and use taxes shall be added to the Material
transfer price using either the method contained in the COPAS Computerized
Equipment Pricing System (CEPS) or the applicable tax rate in effect for the
Joint Property at the time and place of transfer.  In either case, the Joint Account shall be
charged or credited at the rate that would have governed had the Material been
a direct purchase.

D.                                    CONDITION

(1)                                  Condition “A” - New
and unused Material in sound and serviceable condition shall be charged at one
hundred percent (100%) of the price as determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and
IV.2.C (Taxes). 
Material transferred from the Joint Property that was not placed in
service shall be credited as charged without gain or loss; provided, however,
any unusual Material that was charged to the Joint Account through a direct
purchase will be credited to the Joint Account at the original cost paid less
restocking fees charged by the vendor. 
New and unused Material transferred from the Joint Property may be
credited at a price other than the price originally charged to the Joint
Account provided such price is approved by the Parties owning such Material,
pursuant to Section I.6.A (General Matters).  All refurbishing costs required or necessary
to return the Material to original condition or to correct

 21
 

handling, transportation, or other damages will be borne by the
divesting property.  The Joint Account is
responsible for Material preparation, handling, and transportation costs for
new and unused Material charged to the Joint Property either through a direct
purchase or transfer.  Any preparation
costs incurred, including any internal or external coating and wrapping, will
be credited on new Material provided these services were not repeated for such
Material for the receiving property.

(2)                                  Condition “B” - Used
Material in sound and serviceable condition and suitable for reuse without
reconditioning shall be priced by multiplying the price determined in Sections
IV.2.A (Pricing), IV.2.B (Freight), and
IV.2.C (Taxes) by seventy-five percent (75%).

Except
as provided in Section IV.2.D(3), all reconditioning costs required to return
the Material to Condition “B” or to correct handling, transportation or other
damages will be borne by the divesting property.

If
the Material was originally charged to the Joint Account as used Material and
placed in service for the Joint Property, the Material will be credited at the
price determined in Sections IV.2.A (Pricing),
IV.2.B (Freight), and IV.2.C (Taxes) multiplied by sixty-five percent (65%).

Unless
otherwise agreed to by the Parties that paid for such Material, used Material
transferred from the Joint Property that was not placed in service on the
property shall be credited as charged without gain or loss.

(3)                                  Condition “C” -
Material that is not in sound and serviceable condition and not suitable for
its original function until after reconditioning shall be priced by multiplying
the price determined in Sections IV.2.A (Pricing), IV.2.B
(Freight), and IV.2.C (Taxes) by fifty percent (50%).

The
cost of reconditioning may be charged to the receiving property to the extent
Condition “C” value, plus cost of reconditioning, does not exceed Condition “B”
value.

(4)                                  Condition “D” -
Material that (i) is no longer suitable for its original purpose but useable
for some other purpose, (ii) is obsolete, or (iii) does not meet original
specifications but still has value and can be used in other applications as a
substitute for items with different specifications, is considered Condition “D”
Material.  Casing, tubing, or drill pipe
used as line pipe shall be priced as Grade A and B seamless line pipe of
comparable size and weight.  Used casing,
tubing, or drill pipe utilized as ling pipe shall be priced at used line pipe
prices.  Casing, tubing, or drill pipe
used as higher pressure service lines than standard line pipe, e.g., power oil
lines, shall be priced under normal pricing procedures for casing, tubing, or
drill pipe.  Upset tubular goods shall be
priced on a non-upset basis.  For other
items, the price used should result in the Joint Account being charged or
credited with the value of the service rendered

 22
 

or use of the Material, or as agreed to by the Parties pursuant to
Section I.6.A (General Matters).

(5)                                  Condition “E” - Junk
shall be priced at prevailing scrap value prices.

E.                                      OTHER PRICING
PROVISIONS

(1)                                  Preparation Costs

Subject
to Section II (Direct Charges) and Section III (Overhead) of this Accounting Procedure, costs incurred by
the Operator in making Material serviceable including inspection, third party
surveillance services, and other similar services will be charged to the Joint
Account at prices which reflect the Operator’s actual costs of the
services.  Documentation must be provided
to the Non-Operators upon request to support the cost of service.  New coating and/or wrapping shall be
considered a component of the Materials and priced in accordance with Sections
IV.1 (Direct Purchases) or IV.2.A (Pricing), as applicable. 
No charges or credits shall be made for used coating or wrapping.  Charges and credits for inspections shall be
made in accordance with COPAS MFI-38 (“Material Pricing Manual”).

(2)                                  Loading and Unloading
Costs

Loading
and unloading costs related to the movement of the Material to the Joint
Property shall be charged in accordance with the methods specified in COPAS
MF1-38 (Material Pricing Manual”).

3.                                      DISPOSITION OF SURPLUS

Surplus Material is that Material, whether new or
used, that is no longer required for Joint Operations.  The Operator may purchase, but shall be under
no obligation to purchase, the interest of the Non-Operators in surplus
Material.

Dispositions for the purpose of this procedure are
considered to be the relinquishment of title of the Material from the Joint
Property to either a third party, a Non-Operator, or to the Operator.  To avoid the accumulation of surplus
Material, the Operator should make good faith efforts to dispose of surplus
within twelve (12) months through buy/sale agreements, trade, sale to a third
party, division in kind, or other dispositions as agreed to by the Parties.

Disposal of surplus Materials shall be made in
accordance with the terms of the Agreement to which this Accounting Procedure
is attached.  If the Agreement contains
no provisions governing disposal of surplus Material, the following terms shall
apply:

·                                          The
Operator may, through a sale to an unrelated third party or entity, dispose of
surplus Material having a gross sale value that is less than or equal to the
Operator’s expenditure limit as set forth in the Agreement to

 23
 

which this Accounting
Procedure attached without the prior approval of the Parties owning such
Material.

·                                          If
the gross sale value exceeds the Agreement expenditure limit, the disposal must
be agreed to by the Parties owning such Material.

·                                          Operator
may purchase surplus Condition “A” or “B” Material without approval of the
Parties owning such Material, based on the pricing methods set forth in Section
IV.2 (Transfers).

·                                          Operator
may purchase Condition “C” Material without prior approval of the Parties
owning such Material if the value of the Materials, based on the pricing
methods set forth in Section IV.2 (Transfers), is
less than or equal to the Operator’s expenditure limitation set forth in the Agreement.  The Operator shall provide documentation
supporting the classification of the Material as Condition C.

·                                          Operator
may dispose of Condition “D” or “E” Material under procedures normally utilized
by Operator without prior approval of the Parties owning such Material.

4.                                      SPECIAL PRICING PROVISIONS

A.                                   PREMIUM PRICING

Whenever Material is available only at inflated prices
due to national emergencies, strikes, government imposed foreign trade
restrictions, or other unusual causes over which the Operator has no control,
for direct purchase the Operator may charge the Joint Account for the required
Material at the Operator’s actual cost incurred in providing such Material,
making it suitable for use, and moving it to the Joint Property.  Material transferred or disposed of during
premium pricing situations shall be valued in accordance with Section IV.2 (Transfers) or Section IV.3 (Disposition
of Surplus), as applicable.

B.                                     SHOP-MADE ITEMS

Items fabricated by the Operator’s employees, or by
contract laborers under the direction of the Operator, shall be priced using
the value of the Material used to construct the item plus the cost of labor to
fabricate the item.  If the Material is
from the Operator’s scrap or junk account, the Material shall be priced at
either twenty-five percent (25%) of the current price as determined in Section
IV.2.A (Pricing) or scrap value, whichever is
higher.  In no event shall the amount
charged exceed the value of the item commensurate with its use.

C.                                     MILL REJECTS

Mill rejects purchased as “limited service” casing or
tubing shall be priced at the price paid by the Operator after deduction of all
discounts received. Said

 24
 

purcheses shall be handled as in Section IV.1.  Line pipe converted to casing or tubing with
casing or tubing couplings attached shall be priced as K-55/J-55 casing or
tubing at the nearest size and weight.

V.  INVENTORIES OF CONTROLLABLE MATERIAL

The Operator shall maintain records of Controllable Material charged to
the Joint Account, with sufficient detail to perform physical inventories.

Adjustments to the Joint Account by the Operator resulting from a
physical inventory of Controllable Material shall be made within twelve (12)
months following the taking of the inventory or receipt of Non-Operator
inventory report.  Charges and credits
for overages or shortages will be valued for the Joint Account in accordance
with Section IV.2 (Transfers) and
shall be based on the Condition “B” prices in effect on the date of physical
inventory unless the inventorying Parties can provide sufficient evidence
another Material condition applies.

1.                                      DIRECTED INVENTORIES

Physical inventories shall be performed by the
Operator upon written request of a majority in working interests of the
Non-Operators (hereinafter, “directed inventory”); provided, however, the
Operator shall not be required to perform directed inventories more frequently
than once every five (5) years.  Directed
inventories shall be commenced within one hundred eighty (180) days after the
Operator receives written notice that a majority in interest of the
Non-Operators has requested the inventory. 
All parties shall be governed by the results of any directed inventory.

Expenses of directed inventories will be borne by the
Joint Account; provided, however, costs associated with any post-report
follow-up work in settling the inventory will be absorbed by the Party
incurring such costs.  The Operator is
expected to exercise judgment in keeping expenses within reasonable limits.  Any anticipated disproportionate or extraordinary
costs should be discussed and agreed upon prior to commencement of the
inventory.  Expenses of directed
inventories may include the following:

A.                                   A per diem rate for
each inventory person, representative of actual salaries, wages, and payroll
burdens and benefits of the personnel performing the inventory or a rate agreed
to by the Parties pursuant to Section I.6.A (General
Matters).  The per diem rate
shall also be applied to a reasonable number of days for pre-inventory work and
report preparation.

B.                                     Actual
transportation costs and Personal Expenses for the inventory team.

C.                                     Reasonable charges
for report preparation and distribution to the Non-Operators.

2.                                      NON-DIRECTED INVENTORIES

A.                                   OPERATOR INVENTORIES

Physical inventories that are not requested by the
Non-Operators may be performed by the Operator, at the Operator’s
discretion.  The expenses of

 25
 

conducting such Operator-initiated inventories shall
not be charged to the Joint Account.

B.                                     NON-OPERATOR
INVENTORIES

Subject to the terms of the Agreement to which this
Accounting Procedure is attached, the Non-Operators may conduct a physical
inventory at reasonable times at their sole cost and risk after giving the
Operator at least ninety (90) days prior written notice.  The Non-Operator inventory report shall be
furnished to the Operator in writing within ninety (90) days of completing the
inventory fieldwork.

C.                                     SPECIAL
INVENTORIES

The expense of conducting
inventories other than those described in Sections V.1 (Directed
Inventories), V.2.A (Operator Inventories), or V.2.B (Non-Operator
Inventories), shall be charged to the Party requesting such inventory;
provided, however, inventories required due to a change of Operator shall be
charged to the Joint Account in the same manner as described in Section V.1 (Directed Inventories).

 26

EXHIBIT D

to the Operating Agreement (Tennessee)

INSURANCE

Insurance
Coverages

Operator, at all times while conducting operations under the Operating
Agreement to which this Exhibit is attached, shall carry the following
insurance:

A.                                   Workmen’s
Compensation Insurance to cover full liability under the Workmen’s Compensation
Law of the State where the operations are being conducted:

	
  Employer’s Liability

  	
   

  	
  $

  	
  1,000,000

  	
   

  

 

B.                                     Comprehensive
General Liability Insurance including:

	
  General Aggregate Limit
  (Other than Prod-Comp Operations)

  	
   

  	
  $

  	
  2,000,000

  	
   

  
	
  Products-Completed
  Operations Aggregate Limit

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
  Personal &
  Advertising Injury Limit

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
  Each Occurrence
  Limit

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
  Fire Damage
  Limit (Any One Fire)

  	
   

  	
  $

  	
  100,000

  	
   

  
	
  Medical Expense Limit
  (Any One Person)

  	
   

  	
  $

  	
  5,000

  	
   

  

 

C.                                     Comprehensive
Automobile Liability Insurance having a Combined Single Limit of $1,000,000 per
occurrence for Bodily Injury and Property Damage.  Coverage is to include owned, non-owned and
hired vehicles.

D.                                    Commercial
Property Policy covers Real and Personal Property and Contractor’s Equipment up
to a Limit of $3,400,000 per Occurrence all Coverages combined.

E.                                      Commercial
Umbrella Liability Policy including:

	
  Each Occurrence Limit

  	
   

  	
  $

  	
  9,000,000

  	
   

  
	
  General
  Aggregate

  	
   

  	
  $

  	
  9,000,000

  	
   

  
	
  Products-Completed
  Operations Aggregate

  	
   

  	
  $

  	
  9,000,000

  	
   

  
	
  Crisis Response
  Sublimit of Insurance

  	
   

  	
  $

  	
  250,000

  	
   

  
	
  Excess Casualty Crisis
  Fund Limit of Insurance

  	
   

  	
  $

  	
  50,000

  	
   

  

 

F.                                      Additional
Insureds:

Amendments may be made to
this Exhibit to reflect any future changes in insurance coverages as needed.

 

EXHIBIT E

AE PUD ASSIGNMENT

ASSIGNMENT OF OIL AND GAS INTERESTS

(PUD ASSIGNMENT – AE TO VEE)

THIS ASSIGNMENT OF OIL AND GAS
INTERESTS
(“Assignment”), dated this 18th day of April, 2007, is made by and between ARIANA ENERGY
COMPANY, LLC, a Tennessee limited liability company, with an office
at 7700 San Felipe, Suite 485, Houston, Texas 77063 (“Assignor”), and VINLAND ENERGY EASTERN, LLC, a Delaware limited liability
company, with an office at 104 Nami Plaza, Suite 1,
London, Kentucky 40741, (“Assignee”), is effective for the purposes of this
transfer as of 12:01 a.m. Eastern Time, on January 5, 2007 (the “Effective
Time” hereunder).

WHEREAS, Assignor is in the business of leasing and
developing properties in Tennessee for the production of natural gas and/or oil
and of delivering and selling such production;

WHEREAS, Assignee is also engaged in the business of
leasing and developing properties in Kentucky and Tennessee for the production
of natural gas and/or oil and of delivering and selling such production; and

WHEREAS, as part of a restructuring and realignment
of the business activities of Assignor, it desires to transfer certain assets
and business activities to Assignee

NOW, THEREFORE, for and in consideration of the covenants
and agreements contained herein, the sum of TEN DOLLARS ($10.00), and other
good and valuable consideration, the receipt and sufficiency of all of which
are hereby acknowledged by the parties, the parties agree as follows:

1.                                     Assets Assigned or Granted.    Assignor hereby GRANTS, BARGAINS,
SELLS, ASSIGNS, TRANSFERS, CONVEYS and DELIVERS unto Assignee, and its
successors and assigns sixty percent (60%) of Assignor’s working interest in
the oil, gas and mineral leases described in the attached Exhibit A
insofar, and only insofar, as the leases cover the strata described as the
“Producing Strata” for each field listed on Exhibit A
but excluding from the foregoing any production from or interest in the wells
listed on Exhibit A (the “Wells”), and excluding
the reserved and excepted interests referenced below.

The assets and interest described in this Section 1
are hereafter collectively referred to as the “Subject Properties.”

2.                                     Reservation and Exception.    Assignor excepts and reserves from this conveyance, and
does not hereby convey:

i.                                         All interests of every kind in the Wells, and
all of the fixtures and equipment associated with the Wells; and

3

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