Document:

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                                                                   Exhibit 10.16

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                              SHAREHOLDER AGREEMENT

                                   dated as of

                                February 10, 1997

                                      among

                           URAL PETROLEUM CORPORATION,

                              CHELSEA CORPORATION.

                       RH. SMITH INTERNATIONAL CORPORATION

                                       and

                                J. THOMAS WILSON

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                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
                                    ARTICLE I
                                   Definitions

SECTION 1.1.     Definitions ..............................................    1

                                   ARTICLE II
                              Corporate Governance

SECTION 2.1.     The UPC Board of Directors ...............................    6
SECTION 2.2.     Information ..............................................    7
SECTION 2.3.     Voting of Shares .........................................    7

                                   ARTICLE III
                                   Standstill

SECTION 3.1.     Standstill ...............................................    8
SECTION 3.2.     Third Party Offers .......................................    9

                                   ARTICLE IV
                              Transfer Restrictions

SECTION 4.1.     Restrictions .............................................   10
SECTION 4.2.     Right of First Offer .....................................   11
SECTION 4.3.     Legend ...................................................   12
SECTION 4.4.     Compliance with Applicable Law ...........................   12
SECTION 4.5      Effect ...................................................   12

                                    ARTICLE V
                                Preemptive Rights

SECTION 5.1.     Preemptive Rights ........................................   13

                                   ARTICLE VI
                               Registration Rights

SECTION 6.1.     Incidental Registration ..................................   14
SECTION 6.2      Registration Procedures ..................................   15
SECTION 6.3      Indemnification ..........................................   18

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                                                                            Page
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                                   ARTICLE VII
                                   Termination

SECTION 7.1.     Termination ..............................................   19

                                  ARTICLE VIII
                                  Miscellaneous

SECTION 8.1.     Effectiveness ............................................   20
SECTION 8.2.     Notices ..................................................   20
SECTION 8.3.     Interpretation ...........................................   22
SECTION 8.4.     Severability .............................................   22
SECTION 8.5.     Counterparts .............................................   22
SECTION 8.6.     Entire Agreement; No Third Party Beneficiaries ...........   23
SECTION 8.7.     Further Assurances .......................................   23
SECTION 8.8.     Governing Law; Equitable Remedies ........................   23
SECTION 8.9.     Amendments; Waivers ......................................   23
SECTION 8.10.    Assignment ...............................................   24

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            SHAREHOLDER AGREEMENT, dated as of February 10, 1997, among Ural
Petroleum Corporation, a Delaware corporation ("UPC"), Chelsea Corporation, a
Colorado corporation ("Chelsea"), R.H. Smith International Corporation, an
Oklahoma corporation ("RHSI" and, together with Chelsea, the "Shareholders")
and for purposes of Section 5.1, Article VI, Section 8.9 and the definitions
relating thereto, J. Thomas Wilson ("Wilson").

            WHEREAS UPC and the Shareholders are parties to an Acquisition
Agreement, dated as of December 16, 1996 (the "Acquisition Agreement"), and upon
consummation of the transactions contemplated therein (the "Transactions"), the
Shareholders will hold 6,000.06 shares (the "Contribution Shares") of Common
Stock, no par value, of UPC (the "UPC Common Stock");

            WHEREAS UPC and Wilson are parties to a Stock Purchase Agreement,
dated February 10, 1997 (the "Stock Purchase Agreement"), and upon consummation
of the transactions contemplated therein, Wilson will hold 6,000.06 shares of
UPC Common Stock; and

            WHEREAS the parties hereto wish to set forth their agreement
concerning certain governance matters of UPC following consummation of the
Transactions as well as certain matters relating to the Shareholders' ownership
and disposition of the Contribution Shares and any other shares of UPC
securities acquired by the Shareholders after the Effective Date (collectively,
the "Shares").

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

                                    ARTICLE I
                                   Definitions

            SECTION 1.1. Definitions. As used in this Agreement, the following
terms shall have the following meanings:

            "Acquisition Agreement" has the meaning set forth in the recitals to
this Agreement.

            An "affiliate" of any Person means any other Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is
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under common control with, such first Person. For purposes of the definition of
affiliate, "control" has the meaning specified in Rule 12b-2 under the Exchange
Act as in effect on the date of this Agreement.

            "Applicable Law" shall mean, with respect to any Person, any
statute, law, regulation, ordinance, rule, judgment, rule of common law, order,
decree, award, Governmental Approval, concession, grant, franchise, license,
agreement, directive, guideline, policy, requirement, or other governmental
restriction or any similar form of decision of, or determination by, or any
interpretation or administration of any of the foregoing by, any Governmental
Authority, whether in effect as of the date hereof or thereafter and in each
case as amended, applicable to such Person or its subsidiaries or their
respective assets.

            "ASIC" means Anderman/Smith International - Chernogoskoye
Partnership, a Colorado general partnership.

            A Person shall be deemed to "Beneficially Own", to have "Beneficial
Ownership" of, or to be "Beneficially Owning" any securities (which securities
shall also be deemed "Beneficially Owned" by such Person) that such Person is
deemed to "beneficially own" within the meaning of Rule 13d-3 under the Exchange
Act as in effect on the date of this Agreement; provided, however, that for
purposes of this Agreement, the Shareholders shall be deemed to "Beneficially
Own", to have "Beneficial Ownership" of, or to be "Beneficially Owning" all
shares of UPC securities, which securities shall also be deemed "Beneficially
Owned" (by such Shareholders), the Beneficial Ownership of which the
Shareholders have a right to acquire pursuant to the elections set forth in
Sections 2.6.2 and 2.6.5 of the Acquisition Agreement or otherwise, irrespective
of whether such right is exercisable within 60 days. In determining the number
of shares of UPC Securities the Shareholders shall be deemed to "Beneficially
Own", to have "Beneficial Ownership" of, or to be "Beneficially Owning" pursuant
to Sections 2.6.2 and 2.6.5 of the Acquisition Agreement, the Seller LLC
Interest shall be Valued at US$12,000,000 less any distributions to Chelsea or
RHSI pursuant to the Seller LLC Interest plus accrued unpaid Interest.

            "best efforts" with respect to any action subject to such a best
efforts obligation shall mean all efforts to take such action as may be taken in
a commercially reasonable manner.

            "Change of Control" with respect to UPC shall be deemed to have
occurred at such time as a "person" or "group" (within the meaning of Sections

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13(d) and 14(d)(2) of the Exchange Act) (i) becomes the Beneficial Owner,
directly or indirectly, of more than 50% of the Voting Securities of UPC or (ii)
otherwise obtains control of UPC.

            "Chelsea Designee" means such Person, reasonably acceptable to the
UPC Board, as is designated by the Shareholders in accordance with Section 2.1,
as such designation may change from time to time in accordance with this
Agreement, to serve as members of the UPC Board pursuant to Section 2.1 hereof.

            "Contribution Shares" means the shares of UPC Common Stock
contributed to the LLC by UPC pursuant to the Acquisition Agreement on the
Effective Date.

            "Effective Date" means the date of the closing of the transactions
contemplated by the Acquisition Agreement.

            "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.

            "First Offer Price" has the meaning set forth in Section 4.2(a).

            "Future LLC Distributions" means Total LLC Distributions (excluding
any Interest that may be paid on Future LLC Distributions) less any
distributions made to the Shareholders pursuant to the Seller LLC Interests.

            "Governmental Approval" means any action, order, authorization,
consent, approval, license, lease, ruling, permit, tariff, rate, certification,
exemption, filing or registration by or with any Governmental Authority.

            "Governmental Authority" means any government or political
subdivision thereof, governmental department, commission, board, bureau, agency,
regulatory authority, instrumentality, judicial or administrative body having
jurisdiction over the matter or matters in question.

            A "group" has the meaning set forth in Section 13(d) of the Exchange
Act as in effect on the date of this Agreement.

            "Holder" shall mean a Shareholder or Wilson for purposes of Section
5.1 and Article VI.

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            "Incentive Securities" has the meaning set forth in Section 5.1.

            "Interest" shall equal 10% per annum on an amount equal to
$12,000,000 (U.S.) less any distributions to the Shareholders pursuant to the
Seller LLC Interests (excluding any Interest paid prior thereto).

            The "LLC" means Ural Investments LLC.

            "LLC Agreement" means the limited liability company agreement of
Ural Investments LLC, dated February 10, 1997.

            "Offered Shares" has the meaning set forth in Section 4.2(a).

            "Other UPC Holders" means the holders of the Other UPC Shares.

            "Other UPC Shares" means securities of UPC not held by the
Shareholders or any of its affiliates.

            "Permitted Transferee" has the meaning set forth in Section 4.1.

            "Person" means any individual, group, corporation, firm,
partnership, joint venture, trust, business association, organization,
governmental entity or other entity.

            "Proposed Issuance" has the meaning set forth in Section 6.1.

            "Public Offering" means any offering of stock registered under the
Securities Act.

            "Registrable Shares" means the Shares and any shares of UPC Common
Stock held by J. Thomas Wilson.

            "Response Period" has the meaning set forth in Section 4.2(b).

            "Restricted Period" means the period that commences on the Effective
Date and ends on the fourth anniversary of the Effective Date; provided,
however, that if a Shareholder has converted its Seller LLC Interest into UPC
Common Stock, the Restricted Period, with respect to such Shareholder, shall end
on the earlier of (i) the fourth anniversary of the Effective Date and (ii) the
later

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of (y) the second anniversary of the conversion of the Seller LLC Interest and
(z) the third anniversary of the Effective Date.

            "SEC" means the Securities and Exchange Commission or any successor
governmental entity.

            "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.

            "Seller LLC Interest" means the preferred limited liability company
interest of Chelsea or RHSI in the LLC.

            "Selling Shareholder" has the meaning set forth in Section 4.2(a).

            "Shareholders", together with any subsidiary of the Shareholders
that holds shares of UPC Common Stock, has the meaning set forth in the recitals
to this Agreement.

            "Shares" has the meaning set forth in the recitals to this
Agreement.

            "Subsidiary" means, with respect to any Person, as of any date of
determination, any other Person as to which such Person owns, directly or
indirectly, or otherwise controls, more than 50% of the voting shares or other
similar interests.

            "Third Party Offer" means a bona fide offer to enter into a
transaction by a Person other than the Shareholders or any of their respective
affiliates or any other Person acting on behalf of the Shareholders or any of
their respective affiliates which would result in a Change of Control of UPC or
a transfer of all or substantially all of the assets of UPC.

            "Total LLC Distributions" means US$12,000,000 plus accrued unpaid
Interest.

            "Transactions" has the meaning set forth in the recitals to this
Agreement.

            "Transfer Notice" has the meaning set forth in Section 4.2(a).

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            "UPC", together with any subsidiary of UPC that holds the UPC LLC
Interest, has the meaning set forth in the recitals to this Agreement.

            "UPC Board" means the board of directors of UPC.

            "UPC Common Stock" has the meaning set forth in the recitals to this
Agreement.

            "UPC LLC Interest" means the preferred limited liability company
interest of UPC in the LLC.

            "UPC Voting Securities" means UPC Common Stock and any other issued
and outstanding securities of UPC generally entitled to vote in the election of
directors of UPC.

                                   ARTICLE II
                              Corporate Governance

            SECTION 2.1. The UPC Board of Directors.

            (a) So long as Chelsea and its affiliates collectively Beneficially
Own Shares aggregating more than 10% of the UPC Voting Securities, upon written
notice from Chelsea to UPC naming a Chelsea Designee, UPC shall cause such
designee to become a director of UPC.

            (b) From the date of the election of a Chelsea Designee pursuant to
Section 2.1(a) until the earlier of (i) a reduction in the percentage Beneficial
Ownership of Shares below the amount set forth in Section 2.1(a) and (ii)
receipt of written notice by UPC from Chelsea that it no longer wishes to have a
Chelsea Designee on the UPC Board, UPC shall use its best efforts to ensure that
each slate of persons nominated by the UPC Board for election as directors of
UPC includes a Chelsea Designee.

            (c) Chelsea shall use its best efforts to cause the Chelsea Designee
to resign promptly following a reduction in its Beneficial Ownership of Shares
below the amount specified in Section 2.1(a).

            (d) If at any time a Chelsea Designee ceases to be a member of the
UPC Board and Chelsea continues to be entitled to a Chelsea Designee pursuant to
Section 2.1(a), UPC shall use its best efforts to cause the resulting vacancy

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on the UPC Board to be filled by a replacement Chelsea Designee at the next
meeting of the UPC Board.

            (e) So long as Chelsea is entitled but declines to designate a
Chelsea Designee, Chelsea shall be entitled to have an observer attend meetings
of the UPC Board and to receive materials distributed to members of the UPC
Board; provided, however, that any information received by such individual may
be subject to appropriate confidentiality restrictions; provided, further,
however, that such observer shall not be present at meetings of the UPC Board or
receive materials distributed to members of the UPC Board (i) relating to issues
which are subject to privilege concerns, or (ii) if the UPC Board reasonably
believes that such attendance or distribution would constitute a breach by the
members of the UPC Board of their fiduciary duties to the shareholders of UPC.

            SECTION 2.2. Information. In the event that Chelsea is not entitled
to a Chelsea Designee pursuant to Section 2.1 and is entitled to Future LLC
Distributions of US$2,000,000 or more, Chelsea shall be entitled to receive
materials pertaining to ASIC which are distributed to members of the UPC Board,
provided, however, that such materials may be subject to appropriate
confidentiality restrictions; provided, further, however, that Chelsea shall not
be entitled to receive materials distributed to members of the UPC Board (i)
relating to issues which are subject to privilege concerns, or (ii) if the UPC
Board reasonably believes that such distribution would constitute a breach by
the members of the UPC Board of their fiduciary duties to the shareholders of
UPC. Such right to such materials shall terminate immediately following a
reduction in the Future LLC Distributions to which Chelsea is entitled to less
than US$2,000,000.

            SECTION 2.3. Voting of Shares. During the Restricted Period, each of
the Shareholders and their respective affiliates shall cause all Shares
Beneficially Owned by it to be present for quorum and other purposes at all
shareholder meetings of UPC. During the Restricted Period, so long as the
Shareholders and their affiliates collectively Beneficially Own Shares
aggregating more than 20% of the UPC Voting Securities, each of the Shareholders
and their respective affiliates shall vote all Shares Beneficially Owned by it
and entitled to vote, in favor of any director nomination recommended by the UPC
Board for approval by shareholders.

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                                   ARTICLE III
                                   Standstill

            SECTION 3.1. Standstill.

            (a) During the Restricted Period, so long as the Shareholders and
their affiliates collectively Beneficially Own Shares aggregating more than 20%
of the UPC Voting Securities, except as otherwise expressly provided in this
Agreement, neither of the Shareholders nor any of their respective affiliates,
alone or with any other Person or group, shall without the express written
approval of the UPC Board directly or indirectly, (i) acquire any additional
securities of UPC, (ii) take any action to acquire or affect control of UPC or
to encourage or assist any other Person or group to do so, (iii) enter, propose
to enter into, solicit or support any merger, business combination, Change of
Control, restructuring or similar transaction involving UPC or any of its
Subsidiaries, or purchase, acquire, propose to purchase or acquire or solicit or
support the purchase or acquisition of any portion of the business, assets or
securities of UPC or any of its Subsidiaries, (iv) seek additional
representation on the UPC Board, the removal of any directors from the UPC
Board, or a change in the size or composition of the UPC Board, (v) initiate or
propose any securityholder proposal without the approval of the UPC Board,
granted in accordance with this Agreement or make, engage in, or in any way
participate in, any "solicitation" of "proxies" (as such terms are used in the
proxy rules promulgated by the SEC under the Exchange Act) to vote, or seek to
advise or influence any Person with respect to the voting of, any securities or
request or take any action to obtain any list of security holders for such
purposes with respect to any matter (or, as to such matters, solicit any Person
in a manner that would require the filing of a proxy statement under Regulation
14A of the Exchange Act), (vi) deposit any securities in a voting trust or enter
into any voting agreement or arrangement with respect thereto (other than this
Agreement), (vii) make any public announcement concerning this Section 3.1 or
disclose any intent, purpose, plan, arrangement or proposal inconsistent with
the foregoing (including any such intent, purpose, plan, arrangement or proposal
that is conditioned on or would require the waiver, amendment nullification or
invalidation of any of the foregoing) or take any action that would require
public disclosure of any such intent, purpose, plan, arrangement or proposal,
(viii) make any request to amend or waive any provision of this Section 3.1,
which request would require public disclosure under applicable law, rule or
regulation, (ix) take any action challenging the validity or enforeability of
the foregoing or (x) assist, advise, encourage or negotiate with any Person with
respect to, or seek to do, any of the foregoing.

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            (b) Nothing in this Section 3.1 shall (i) restrict the right of the
Chelsea Designee to vote on any matter as such individual believes appropriate
in light of his or her duties to the shareholders of UPC; or (ii) prohibit the
Shareholders from holding securities of UPC issued as dividends or distributions
in respect of, or issued upon conversion, exchange or exercise of, Shares which
the Shareholders are permitted to hold under this Agreement.

            SECTION 3.2. Third Party Offers. If, prior to the tenth anniversary
of the Effective Date, UPC becomes the subject of a Third Party Offer that is
(a) approved by a majority of the UPC Board and (b) supported by the holders of
a majority of the UPC Voting Securities (i) in the event of a Third Party Offer,
the consummation of which does not require action by the holders of the UPC
Voting Securities, that have taken a position on such transaction, other than
the Shareholders, or (ii) in the event of a Third Party Offer, the consummation
of which requires action of the holders of UPC Voting Securities, whether at a
meeting or by written consent, that have voted in favor of such Third Party
Offer, other than the Shareholders, at a time when the Shareholders and their
affiliates collectively Beneficially Own Shares aggregating more than 20% of the
UPC Voting Securities, UPC shall deliver a written notice to the Shareholders,
briefly describing the material terms of such Third Party Offer, and each of the
Shareholders shall, within ten business days after receipt of such notice,
either (x) offer to acquire all or substantially all of the assets of UPC or the
Other UPC Shares, as the case may be, on terms at least as favorable to the
Other UPC Holders as those contemplated by such Third Party Offer or (y) confirm
in writing that it will support, and at the appropriate time support, such Third
Party Offer, including by voting and causing each of its affiliates to vote all
Shares Beneficially Owned by such Shareholder eligible to vote thereon in favor
of such Third Party Offer or, if applicable, tendering or selling and causing
each of its affiliates to tender or sell all of the Shares Beneficially Owned by
it to the Person making such Third Party Offer. For purposes of (b)(i) of the
foregoing sentence of this Section 3.2, in order to determine whether a Third
Party Offer is supported by other holders of UPC Voting Securities, UPC may use
any reasonable method, taking into account confidentiality concerns, including
engaging the services of a proxy solicitor or similar firm. The notice referred
to in the first sentence of this Section 3.2 shall be delivered promptly after
the approval of the Third Party Offer by the UPC Board and the determination of
the support by the holders of a majority of the UPC Voting Securities who have
taken a position on such transaction or the approval by the holders of a
majority of the UPC Voting Securities that have voted in favor of such Third
Party Offer, as the case may be.

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                                   ARTICLE IV
                              Transfer Restrictions

            SECTION 4.1. Restrictions. Except in connection with a Third Party
Offer as provided in Section 3.2 and subject to Section 4.2, neither of the
Shareholders, nor any of their affiliates, shall, directly or indirectly, sell,
transfer or otherwise dispose of any securities of UPC except in accordance with
one of the following:

            (a) pursuant to a sale to any one Person or group in an amount less
than 5% of the outstanding securities of any class of UPC; provided, however,
that the Shares shall not be subject to this Section 4.1(a) following the fifth
anniversary of the Effective Date and provided, further that the sale or
transfer of the Contribution Shares shall not be subject to this Section 4.1(a);

            (b) pursuant to a merger, consolidation or other business
combination of either of the Shareholders, where such Shareholder is not the
surviving entity, or a sale of all or substantially all of such Shareholder's
assets; provided, however, that the surviving or purchasing entity agrees to be
bound by the terms of this Agreement; or

            (c) pursuant to a transfer of Shares by either of the Shareholders
to an affiliate of such Shareholder, from an affiliate of the Shareholder to
such Shareholder or between affiliates of such Shareholder (any such transferee
shall be referred to herein as a "Permitted Transferee"), provided that in the
case of any such transfer, such Shareholder shall have provided UPC with written
notice of such proposed transfer at least 15 days prior to consummating such
transfer stating the name and address of the Permitted Transferee, the
relationship between the transferring shareholder and the Permitted Transferee,
and the permitted transferee shall have executed a copy of this Agreement as a
shareholder of UPC. If any Permitted Transferee to whom Shares have been
transferred Pursuant to this Section 4.1 by a Shareholder ceases to be a
Permitted Transferee, such Shares shall be transferred back to the transferring
Shareholder immediately prior to the time such Person ceases to be a Permitted
Transferee of such Shareholder. The transferring Shareholder and such Permitted
Transferee shall be jointly and severally liable for any breach of this
Agreement by such Permitted Transferee.

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            SECTION 4.2. Right of First Offer.

            (a) If any Shareholder (the "Selling Shareholder") desires to
transfer any Shares to any Person other than pursuant to Section 4.1(b) or
4.1(c), such Shareholder shall first give written notice (a "Transfer Notice")
to that effect to UPC containing (i) the number of Shares proposed to be
transferred (the "Offered Shares"), and (ii) the purchase price (the "First
Offer Price") which such Shareholder proposes to be paid for the Offered Shares.

            (b) UPC shall have the irrevocable and exclusive right, (i) if the
Offered Shares represent less than 10% of the then outstanding UPC Common Stock,
for a period of 30 days or (ii) if the Offered Shares represent 10% or more of
the then outstanding UPC Common Stock, for a period of 90 days, after the
Transfer Notice is received (the "Response Period") to purchase, pursuant to the
Transfer Notice, all or any part of the Offered Shares at the First Offer Price,
exercisable by delivering a written notice to the Selling Shareholder within the
Response Period, stating therein the number of Offered Shares UPC intends to
purchase.

            (c) If, at the end of the Response Period, UPC has not given notice
of its decision to purchase all of the Offered Shares, then a Selling
Shareholder who has duly given such Transfer Notice shall be entitled for a
period of 75 days beginning the day after the expiration of the Response Period
to sell those Offered Shares which UPC does not intend to purchase at a price
not lower than the First Offer Price and on terms not more favorable to the
transferee than were contained in the Transfer Notice. Promptly after any sale
pursuant to this Section 4.2, the Selling Shareholder shall notify UPC of the
consummation thereof and shall furnish such evidence of the completion
(including time of completion) of such sale and of the terms thereof as UPC may
request.

            (d) If, at the end of any such 60-day period provided for in this
Section 4.2, the Selling Shareholder has not completed the sale of the Offered
Shares, the Selling Shareholder shall no longer be permitted to sell any of such
Offered Shares pursuant to this Section 4.2 without again fully complying with
the provisions of this Section 4.2 and all the restrictions on sale, transfer,
assignment or other disposition contained in this Agreement shall again be in
effect.

            (e) Following a Public Offering of UPC Common Stock, the obligations
of the Shareholders and the rights of UPC under this Section 4.2 shall not be
triggered by the desire to sell or transfer or the actual sale or transfer by

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the Shareholders to any one transferee within a 90-day period of Shares
aggregating less than 2% of the then outstanding UPC Common Stock.

            SECTION 4.3. Legend. Each certificate representing the Shares shall
be stamped or otherwise imprinted with a legend in substantially the following
form:

            The security evidenced by this certificate is subject to a
      Shareholder Agreement, dated as of February 10, 1997, between the Issuer
      and the Shareholders named therein. A copy of such Agreement is on file
      with the Issuer. This Security has been acquired for investment and has
      not been registered under the United States Securities Act of 1933, as
      amended (the "Securities Act") or the securities laws of any other
      jurisdiction, and may not be offered, sold or otherwise transferred,
      pledged or hypothecated (i) unless and until (A) registered under the
      Securities Act or the securities laws of any other jurisdiction, or (B) in
      the opinion of counsel, in form and substance satisfactory to the Issuer,
      such offer, sale, transfer, pledge or hypothecation is in compliance
      therewith and (ii) in accordance with the terms and conditions hereof and
      of the Acquisition Agreement.

            SECTION 4.4. Compliance with Applicable Law, Etc. The exercise of
the rights of first offer set forth in Section 4.2 and the completion of any
transfer or sale of Shares contemplated hereunder shall be subject to compliance
with Applicable Law. UPC and each of the Shareholders shall cooperate with each
other and shall take all such action, including, without limitation, obtaining
all Governmental Approvals required to comply with Applicable Law in connection
with the sale or transfer of the Shares pursuant to this Agreement. Each of UPC
and the Shareholders shall bear its own costs and expenses in connection with
obtaining any such Governmental Approvals, provided, however, that no
Shareholder shall be required to bear any costs or expenses in order for another
Shareholder to obtain any such Governmental Approvals.

            SECTION 4.5 Effect. Any purported transfer of securities that is
inconsistent with the provisions of this Article IV shall be null and void and
of no force or effect and will not be registered on the stock transfer books of
UPC.

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                                    ARTICLE V
                  Preemptive Rights and Additional Stock Sales

            SECTION 5.1. Preemptive Rights. Prior to a Public Offering of UPC
Common Stock, the Holders shall be entitled to participate in all future sales
or issuances by UPC of UPC Common Stock (or rights to acquire UPC Common Stock
or securities convertible into, or exchangeable for, UPC Common Stock) to the
extent necessary to maintain their proportionate fully diluted equity interest
in UPC as that interest exists at the time of such issuance. UPC will provide
the Holders with at least 20 days advance written notice of any such proposed
sale or issuance (a "Proposed Issuance"), which notice shall contain all
relevant information pertaining thereto (including without limitation the
identity of the proposed beneficial and record owners of the UPC Common Stock to
be issued or sold and the purchase price per share) and an offer to the Holders
to participate in the Proposed Issuance (at a price per share and upon terms and
conditions no less favorable than those provided to other offerees or purchasers
of UPC Common Stock in the Proposed Issuance) to the extent necessary for the
Holders to maintain their proportionate fully diluted equity interest in UPC. At
the Holders' sole option, either of the Holders may participate in the Proposed
Issuance by purchasing the full number of UPC Common Stock necessary to maintain
its proportionate equity interest or any lesser number thereof. In the event the
terms of the Proposed Issuance change, UPC will provide the Holders with a new
20-day advance notice period prior to consummating the transaction contemplated
by the Proposed Issuance. All rights of the Shareholders under this Section 5.1
shall cease at such time as the Shareholders' collective Beneficial Ownership
percentage of UPC Voting Securities is less than five percent. These preemptive
rights shall not apply to the following sales or issuances: (i) pursuant to an
employee stock option plan, stock purchase plan or similar benefit program,
agreement or sale or issuance to directors, employees or consultants which sales
or issuances do not exceed 15%, on a fully diluted basis, of the then
outstanding capitalization of UPC ("Incentive Securities"); (ii) as
consideration for the acquisition by UPC or any of its affiliates of all or a
part of another business or the merger of any business entity with or into UPC
or any of its affiliates; or (iii) issuances of securities described in Exhibit
5.1 hereof.

            SECTION 5.2 Additional Stock Sales. So long as the Shareholders and
their Affiliates collectively Beneficially Own Shares aggregating more than 5%,
of UPC Voting Securities, UPC shall not sell any securities, other than
Incentive Securities, in any transaction which does not result in full and fair
consideration being received therefor by UPC. Notwithstanding the foregoing,

                                       13
<PAGE>

the Board of Directors shall remain subject to such fiduciary duties as are
imposed by law with respect to such issuances of securities.

                                   ARTICLE VI
                               Registration Rights

            SECTION 6.1. Incidental Registration. If UPC proposes at any time to
register the UPC Common Stock under the Securities Act (other than pursuant to a
registration statement on Form S-8 or Form S-4 (or a similar successor form))
with respect to an offering of UPC Common Stock for its own account or for the
account of any of its security holders, it will promptly give written notice
thereof to the Holders (but in no event less than fifteen days before the
anticipated filing date), and offer the Holders the opportunity to register such
number of Registrable Shares as the Holders may request. Upon the written
request of any such holder made within 30 days after the receipt of any such
notice (which request shall specify the Registrable Shares intended to be
disposed of by such holder and the intended method of disposition thereof), UPC
will, subject to the terms of this Agreement, use its best efforts to include
the Registrable Shares which UPC has been requested to register in such
registration.

            (a) If the proposed registration by UPC is an underwritten Public
Offering of UPC Common Stock, then UPC will use its best efforts to cause the
managing underwriter or underwriters to include such Registrable Shares among
those securities to be distributed by or through such underwriters (on the same
terms and conditions as the UPC Common Stock of UPC included therein to the
extent appropriate). Notwithstanding the foregoing, if in the reasonable
judgment of the managing underwriters or underwriters, the success of the Public
Offering would be adversely affected by inclusion of the Registrable Shares
requested to be included, UPC shall include in such registration the number (if
any) of Registrable Shares so requested to be included which in the opinion of
such underwriters can be sold, but only after the inclusion in such registration
of UPC Common Stock being sold by UPC. If, in the opinion of such underwriters,
some but not all of the Registrable Shares may be included in such registration,
all holders of Registrable Shares requested to be included therein shall share
pro rata in the number of Registrable Shares requested to be included therein.

            (b) If, at any time after giving written notice of its intention to
register UPC Common Stock and prior to the effective date of the registration
statement filed in connection with such registration, UPC shall determine for
any

                                       14
<PAGE>

reason either not to register, or to delay registration of, such securities, UPC
may, at its election, give written notice of such determination to each holder
of Registrable Shares and, thereupon, (i) in the case of a determination not to
register, shall be relieved of its obligation to register any Registrable Shares
in connection with such registration or (ii) in the case of a determination to
delay registering, shall be permitted to delay registering any Registrable
Shares, for the same period as the delay in registering such other UPC Common
Stock.

            (c) The selection of the underwriters for any such offering shall be
at the sole discretion of UPC.

            (d) UPC will pay expenses associated with the registration and sale
of the Holders' Registrable Shares including without limitation legal,
accounting, printing and distribution fees and expenses, except that any Holder
whose Registrable Shares are registered pursuant to this Section 6.1 shall pay
the registration fee associated with such Registrable Shares and for commissions
and underwriting discounts payable with respect to such Holder's Registrable
Shares.

            SECTION 6.2. Registration Procedures.

            (a) If and whenever UPC is required by the provisions of Section 6.1
hereof to effect the registration of Registrable Shares, UPC will as promptly as
practicable:

            (i) furnish to each seller of Registrable Shares such number of
      conformed copies of such registration statement and of each such amendment
      and supplement thereto (in each case including all exhibits), such number
      of copies of the prospectus included in such registration statement
      (including each preliminary prospectus and any summary prospectus), in
      conformity with the requirements of the Securities Act, such documents
      incorporated by reference in such registration statement or prospectus,
      and such other documents, as such seller may reasonably request to
      facilitate the disposition of Shares owned by such seller;

            (ii) use its best efforts to register or qualify the securities
      covered by such registration statement under such state securities or blue
      sky laws of such jurisdictions, if applicable, as shall be reasonably
      appropriate for distribution of the Registrable Shares; provided, however,
      that UPC shall not be required, solely in order

                                       15
<PAGE>

      to accomplish the foregoing, to qualify to do business as a foreign
      corporation in any jurisdiction where it would not otherwise be required
      to qualify, subject itself to taxation in any such jurisdiction or consent
      to general service of process in any such jurisdiction;

            (iii) advise the seller of Registrable Shares, promptly after it
      shall receive notice or obtain knowledge thereof, of the issuance of any
      stop order by the SEC or any state securities commission or agency
      suspending the effectiveness of such registration statement or the
      initiation or threatening of any proceeding for that purpose and use its
      best efforts to prevent the issuance of any stop order to obtain its
      withdrawal if such stop order should be issued;

            (iv) notify each seller of Registrable Shares upon UPC's discovery
      that, or upon the happening of any event as a result of which any
      prospectus included in any registration statement which includes
      Registrable Shares, as then in effect, includes an untrue statement of a
      material fact or omits to state any material fact required to be stated
      therein or necessary to make the statements therein not misleading in the
      light of the circumstances then existing, and at the request of such
      sellers prepare and furnish to such sellers a reasonable number of copies
      of a supplement to or an amendment of such prospectus as may be necessary
      so that, as thereafter delivered to the purchasers of such Registrable
      Shares, such prospectus shall not include an untrue statement of a
      material fact or omit to state a material fact required to be stated
      therein necessary to make the statements therein not misleading in the
      light of the circumstances then existing;

            (v) use its best efforts to cause all such Registrable Shares to be
      listed on each securities exchange or inter-dealer quotation system on
      which the UPC Common Stock is then listed or will be listed following the
      Public Offering, provided that the applicable listing requirements are
      satisfied.

            (b) If any registration pursuant to Section 6.1 shall be in
connection with an underwritten Public Offering and regardless of whether the
Holders participate in such registration, the Holders agree not to, and agree to
cause their affiliates not to, unless agreed to in writing by the managing
under-

                                       16
<PAGE>

writer or underwriters or UPC, effect any public sale or distribution, including
any sale pursuant to Rule 144 of the Securities Act, of any Registrable Shares
(other than as part of such underwritten Public Offering) within the period
commencing on a date specified by the underwriter, not to exceed 30 days prior
to the effective date of such registration statement, and ending on a date
specified by the underwriter, not to exceed 180 days after the effective date of
such registration statement or such shorter period as any other holder of
securities of UPC being sold pursuant to the registration statement has agreed
not to effect any public sale or distribution. The Holders agree that UPC may
instruct its transfer agent to place stop transfer notations in its records to
enforce this Section 6.2(b).

            (c) Each holder of Registrable Shares included in such registration
agrees that, upon receipt of any notice from UPC of the occurrence of any event
of the kind described in Section 6.2(a)(iv), it will forthwith discontinue the
disposition of Registrable Shares pursuant to the registration statement
relating to such Registrable Shares until its receipt of a supplemented or
amended prospectus from UPC and, if so directed by UPC, will deliver to UPC all
copies, other than permanent file copies, then in such seller's possession, of
the prospectus relating to such Registrable Shares at the time of receipt of
such notice; provided, that if the registration statement is for an underwritten
Public Offering, the holders of Registrable Shares included in such registration
will use their best efforts to cause the underwriters of such Public Offering to
discontinue the disposition of Registrable Shares.

            (d) If any Registrable Shares are included in any registration
pursuant to this Article VI, the seller of such Shares shall take such actions
and furnish UPC with such information regarding itself and relating to the
distribution of the Registrable Shares as UPC may from time to time reasonably
request and as shall be required in connection with any registration,
qualification or compliance referred to in this Agreement, including, without
limitation, the following: (i) enter into an appropriate underwriting agreement
containing terms and provisions then customary in agreements of that nature and
cause each underwriter of the Registrable Shares to be sold to agree in writing
with UPC to provisions with respect to indemnification and contribution that are
substantially the same as set forth in Section 6.3 hereof; (ii) enter into such
custody agreements, powers of attorney and related documents at such time and on
such terms and conditions as may then be customarily required in connection with
such offering; and (iii) distribute the Registrable Shares in accordance with
and in the manner of the distribution contemplated by the applicable
registration statement and prospectus.

                                       17
<PAGE>

            SECTION 6.3. Indemnification.

            (a) Indemnification by UPC. In the event of any registration of
Registrable Shares pursuant to Section 6.1, UPC agrees to indemnify and hold
harmless the seller of Registrable Shares and its directors and officers (each,
an "Indemnified Person") from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable attorneys' fees and costs of
investigation) to which such Indemnified Person becomes subject under the
Securities Act or otherwise, insofar as such losses, claims, damages,
liabilities or expenses arise out of or based upon (i) any untrue statement or
alleged untrue statement of material fact contained in any registration
statement under which such securities were registered or qualified under the
Securities Act or otherwise, any preliminary prospectus, final prospectus or
summary prospectus included therein, or any amendment or supplement thereto, or
(ii) any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
provided that UPC shall not be liable to such Indemnified Person in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and in
conformity with information furnished by such seller of Registrable Shares to
UPC.

            (b) Indemnification by the Holders. Each of the Holders agree to
indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 6.3(a)), UPC and its directors and officers and each other
person, if any, who controls UPC within the meaning of the Securities Act
arising out of or based upon (i) any untrue statement or alleged untrue
statement of material fact contained in any registration statement under which
such securities were registered or qualified under the Securities Act or
otherwise, any preliminary prospectus, final prospectus or summary prospectus
included therein, or any amendment or supplement thereto, or (ii) any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such
statement or omission was made solely in reliance upon and in conformity with
information furnished to UPC by such Holder for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement.

                                       18
<PAGE>

            (c) Defense of Claim. If any action or proceeding (including any
governmental investigation) shall be brought or directed against any party
hereto (or its officers, directors or agents), the party against whom
indemnification is sought shall be permitted to (or, if requested, shall) assume
the defense of such claim, including the employment of counsel and the payment
of all expenses, unless a conflict of interest may exist which respect to such
claim or differing or additional defenses may be available to the other party.
If defense of a claim is assumed by an indemnifying party, the indemnified party
shall not be liable for any settlement of such action or proceedings effected
without their prior written consent. No indemnifying party shall not consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to the
indemnified party of release from all liability in respect to such claim or
litigation. Any party entitled to indemnification hereunder agrees to give
prompt written notice to the other party of any written notice of the
commencement of any action, suit, proceedings or investigation or threat thereof
for which such party may claim indemnification or contribution pursuant to this
Agreement; provided, however, that failure to give such notice shall not limit
any party's right to indemnification or contribution hereunder. Notwithstanding
the foregoing, an indemnified party hereunder shall always have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such indemnified party.

                                   ARTICLE VII
                                   Termination

            SECTION 7.1. Termination.

            (a) Except with respect to sections of this Agreement which shall
terminate on an earlier date as expressly provided herein, this Agreement shall
automatically terminate, with respect to each Shareholder, on the date such
Shareholder no longer Beneficially Owns any shares of UPC Common Stock.

            (b) This Agreement shall automatically terminate with respect to
Wilson, on the date on which the percentage of UPC Common Stock Beneficially
Owned by Wilson aggregates less than 5% of the then outstanding UPC Common
Stock.

                                       19
<PAGE>

                                  ARTICLE VIII
                                  Miscellaneous

            SECTION 8.1. Effectiveness. This Agreement shall be effective as of
the Effective Date.

            SECTION 8.2. Notices. All notices, requests and other communications
hereunder shall be in writing and shall be delivered by hand, by nationally
recognized courier service, by facsimile transmission, receipt confirmed or
certified mail (postage prepaid, return receipt requested, if available):

                  (a)   if to UPC, to:

                        Ural Petroleum Corporation
                        125 Park Avenue, 8th Floor
                        New York, New York 10017
                        (T) (212) 479-2398
                        (F) (212) 479-2505
                        Attention: John B. Fitzgibbons

                        with a copy to:

                        Skadden, Arps, Slate, Meagher & Flom LLP
                        919 Third Avenue
                        New York, New York 10022
                        (T) (212) 735-3000
                        (F) (212) 735-2000
                        Attention: Eric L. Cochran, Esq.

                   (b)  if to Chelsea, to:

                        Chelsea Corporation
                        c/o St. Mary Land & Exploration Company
                        1776 Lincoln Street
                        Suite 1100
                        Denver, Colorado 80203
                        (T)
                        (F)
                        Attention: Mark H. Hellerstein
                                   John P. Congdon

                                       20
<PAGE>

                           with a copy to:

                           Cohen Brame & Smith
                           Professional Corporation
                           Attorneys At Law
                           1800 One United Bank Center
                           1700 Lincoln Street
                           Denver, Colorado 80203
                           (T)(303) 837-8800
                           (F)(303)894-0475
                           Attention: Roger C. Cohen, Esq.

                     (c)   if to RHSI, to:

                           Ralph H. Smith
                           Copper Oaks Center, Suite 800
                           7060 South Yale
                           Tulsa, Oklahoma 74136-5741
                           (T)
                           (F)

                           with a copy to:

                           Cohen Brame & Smith
                           Professional Corporation
                           Attorneys At Law
                           1800 One United Bank Center
                           1700 Lincoln Street
                           Denver, Colorado 80203
                           (T)(303)837-8800
                           (F)(303)894-0475
                           Attention: Roger C. Cohen, Esq.

                     (d)   if to Wilson, to:

                           J. Thomas Wilson
                           1776 Lincoln Street, Suite 9500
                           Denver, Colorado

                           with a copy to:

                                       21
<PAGE>

                           Cohen Brame & Smith
                           Professional Corporation
                           Attorneys At Law
                           1800 One United Bank Center
                           1700 Lincoln Street
                           Denver, Colorado 80203
                           (T)(303)837-8800
                           (F)(303)894-0475
                           Attention: Roger C. Cohen, Esq

Each such notice, request or communication shall be effective (A) if delivered
by hand or by nationally recognized courier service, when delivered at the
address specified in this Section 8.2 (or in accordance with the latest
unrevoked written direction from such party), (B) if given by fax, when such fax
is transmitted to the fax number specified in this Section 8.2 (or in accordance
with the latest unrevoked written direction from such party), and the
appropriate confirmation is received or (c) if by certified mail, upon mailing.

            SECTION 8.3. Interpretation. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "included,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."

            SECTION 8.4. Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
parties shall negotiate in good faith with a view to the substitution therefor
of a suitable and equitable solution in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid provision;
provided, however, that the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be in any way impaired thereby, it being intended that all of
the rights and privileges of the parties hereto shall be enforceable to the
fullest extent permitted by law.

            SECTION 8.5. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original and all of which
shall, taken together, be considered one and the same agreement, it being
understood that both parties need not sign the same counterpart.

                                       22
<PAGE>

            SECTION 8.6. Entire Agreement; No Third Party Beneficiaries. This
Agreement together with the Acquisition Agreement and the LLC Agreement (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and (b) is not intended to confer upon any Person, other
than the parties hereto, any rights or remedies hereunder.

            SECTION 8.7. Further Assurances. Each party shall execute, deliver,
acknowledge and file such other documents and take such further actions as may
be reasonably requested from time to time by the other party hereto to give
effect to and carry out the transactions contemplated herein.

            SECTION 8.8. Governing Law; Equitable Remedies. This Agreement shall
be governed by and construed in accordance with the laws of the State of
Delaware, regardless of the laws that might otherwise govern under applicable
principles of conflicts of law. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties hereto shall be entitled to equitable
relief, including in the form of injunctions, in order to enforce specifically
the provisions of this Agreement, in addition to any other remedy to which they
are entitled at law or in equity.

            SECTION 8.9. Amendments; Waivers.

            (a) No provision of this Agreement may be amended or waived unless
such amendment or waiver is in writing and signed, in the case of an amendment,
by the parties hereto, or in the case of a waiver, by the party against whom the
waiver is to be effective; provided, however that Wilson's consent is required
only with respect to an amendment of Section 5.1, Article VI, Section 7.l(b),
this Section 8.9 and the definitions relating thereto. Notwithstanding any
provision herein to the contrary, if a majority of the directors of UPC
determine in good faith to do so, such directors may seek to enforce, in the
name and on behalf of UPC, the terms of this Agreement against the Holders.

            (b) No failure or delay by any party in exercising any right, power
or privilege hereunder shall operate as waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein

                                       23
<PAGE>

provided shall be cumulative and not exclusive of any rights or remedies
provided by law.

            SECTION 8.10. Assignment.

            (a) Except as provided in subsections (b) and (c) of this Section
8.10, neither this Agreement nor any of the rights or obligations hereunder
shall be assigned by either of the parties hereto without the prior written
consent of the other party, except that either party may assign all its rights
and obligations to the assignee of all or substantially all of the assets of
such party including an acquisition through merger, provided that such party
shall in no event be released from its obligations hereunder without the prior
written consent of the other party. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns. Any attempted
assignment in contravention hereof shall be null and void.

            (b) Chelsea may assign its rights pursuant to Section 6.1 hereof to
no more than two Persons so long as such Persons shall have directly purchased
UPC Common Stock from Chelsea. Upon the second such assignment, Chelsea shall no
longer be entitled to rights under Section 6.2 hereof. If (i) the number of
shares a direct transferee of UPC Common Stock from Chelsea holds would have
entitled Chelsea to a Chelsea Designee on the UPC Board pursuant to Section 2.1
hereof or (ii) such transferee is entitled to Future LLC Distributions of
US$2,000,000 or more, such transferee shall be entitled to the rights to which
Chelsea would be entitled pursuant to Section 2.2 hereof. Following a transfer
by Chelsea which entitles the transferee to such rights under Section 2.2,
Chelsea shall no longer be entitled to rights under Section 2.2 hereof.

            (c) RHSI may assign its rights pursuant to Section 6.1 hereof to no
more than one Person who has directly purchased UPC Common Stock from RHSI. Upon
such assignment, RHSI shall no longer be entitled to rights under Section 6.2
hereof.

                                       24
<PAGE>

            IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed and delivered, all as of the date first set forth above.

                                        URAL PETROLEUM CORPORATION

                                        By: /s/ John B. Fitzgibbons
                                           -------------------------------------
                                           Name:  John B. Fitzgibbons
                                           Title: Chief Executive Officer

                                        CHELSEA CORPORATION

                                        By: /s/ Mark H. Hellerstein
                                           -------------------------------------
                                           Name:  Mark H. Hellerstein
                                           Title: President

                                        R.H. SMITH INTERNATIONAL
                                         CORPORATION

                                        By: /s/ Ralph H. Smith
                                           -------------------------------------
                                           Name:  Ralph H. Smith
                                           Title: President

                                        J. THOMAS WILSON

                                        /s/ J. Thomas Wilson
                                        ----------------------------------------
<PAGE>

                                                                     Exhibit 5.1
<PAGE>

<TABLE>
<CAPTION>

                                                   Ural Petroleum Corporation
                                               January 31, 1997 Capital Structure

                                                                                      COMMON STOCK

                                                                                                           % Fully
              Shareholder                                Voting    Non-Voting        Total   % Issued      Diluted      % Voting
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>         <C>             <C>          <C>           <C>
Issued Shares
         Brunswick Fitzgibbons Trust Company          50,000.00          0.00    50,000.00      42.44%       23.20%        52.97%
         Sands Petroleum AB(6)                         9,000.09     23,400.00    32,400.09      27.30%       15.04%         9.53%
         Deltoc Asset Management Corporation           7,500.08          0.00     7,500.08       6.37%        3.48%         7.94%
         Van Eck Global                                6,000.06          0.00     6,000.06       5.09%        2.78%         6.36%
         J. T. Wilson                                  6,000.06          0.00     6,000.06       5.09%        2.78%         6.36%
         Chelsea Corporation                           5,608.47          0.00     5,608.47       4.76%        2.60%         5.94%
         [Sands Management TBD]                        2,550.03          0.00     2,550.03       2.16%        1.18%         2.70%
         *Aegis Energy Advisors Corp.                  2,400.02          0.00     2,400.02       2.04%        1.11%         2.54%
         777 Capital, LLC                              1,500.02          0.00     1,500.02       1.27%        0.70%         1.59%
         [Peman TBD]                                   1,500.02          0.00     1,500.02       1.27%        0.70%         1.59%
         H.H. Munchmeyer                               1,500.02          0.00     1,500.02       1.27%        0.70%         1.59%
         R.H. Smith International Corporation            391.59          0.00       391.59       0.33%        0.18%         0.41%
         G.A. Kellner                                    300.00          0.00       300.00       0.25%        0.14%         0.32%
         P.B. Kellner                                    150.00          0.00       150.00       0.13%        0.07%         0.16%
         ------------------------------------------------------------------------------------------------------------------------
         Issued Subtotal                              94,400.44     23,400.00   117,800.44        100%          55%          100%
---------------------------------------------------------------------------------------------------------------------------------
Authorized but not issued
         Unallocated Management Options (1)           32,320.67          0.00    32,320.67        N/A        15.00%
         Chelsea/Smith Option (2)                     30,000.00          0.00    30,000.00        N/A        13.92%
         Tranche Two Equity Placement (3)             30,000.00          0.00    30,000.00        N/A        13.92%
         Director Options (4)                          4,600.00          0.00     4,600.00        N/A         2.13%
         Allocated Management Options (5)                750.00          0.00       750.00        N/A         0.35%
         ------------------------------------------------------------------------------------------------------------------------
         Subtotal                                     97,670.67          0.00    97,670.67                      45%
---------------------------------------------------------------------------------------------------------------------------------
Fully Diluted Total                                  192,071.11     23,400.00   215,471.11

Total Authorized                                     225,000.00     25,000.00   250,000.00

<CAPTION>

                                                                 PREFERRED STOCK

                                                       Series A   Blank Check        Total
------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>        <C>
Issued Shares
         Brunswick Fitzgibbons Trust Company             280.00          0.00       280.00
         Sands Petroleum AB(6)                             0.00          0.00         0.00
         Deltoc Asset Management Corporation               0.00          0.00         0.00
         Van Eck Global                                    0.00          0.00         0.00
         J. T. Wilson                                      0.00          0.00         0.00
         Chelsea Corporation                               0.00          0.00         0.00
         [Sands Management TBD]                            0.00          0.00         0.00
         *Aegis Energy Advisors Corp.                      0.00          0.00         0.00
         777 Capital, LLC                                  0.00          0.00         0.00
         [Peman TBD]                                       0.00          0.00         0.00
         H.H. Munchmeyer                                   0.00          0.00         0.00
         R.H. Smith International Corporation              0.00          0.00         0.00
         G.A. Kellner                                      0.00          0.00         0.00
         P.B. Kellner                                      0.00          0.00         0.00
         ---------------------------------------------------------------------------------
         Issued Subtotal                                 280.00          0.00       280.00
------------------------------------------------------------------------------------------
Authorized but not issued
         Unallocated Management Options (1)
         Chelsea/Smith Option (2)
         Tranche Two Equity Placement (3)
         Director Options (4)
         Allocated Management Options (5)
         ---------------------------------------------------------------------------------
         Subtotal
------------------------------------------------------------------------------------------
Fully Diluted Total                                      280.00          0.00       280.00

Total Authorized                                         300.00      4,700.00     5,000.00
</TABLE>

Notes:

(1)   Incentive options to be issued at or below market value
(2)   Note conversion assuming $12MM remaining value @ $400/share
(3)   Additional common stock issued at $333/share with no preemption
(4)   Assigned 8/96
(5)   Assigned 12/96
(6)   The Sands Petroleum Non-Voting Common Stock will be issued following the
      transaction in a UPVL consolidation.
*     These shares will be in the form of options, rather than shares of stock.<PAGE>

                                                                   Exhibit 10.17

================================================================================

                         KHANTY MANSIYSK OIL CORPORATION

                       NOTE AND WARRANT PURCHASE AGREEMENT

                                October 10, 1997

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                                TABLE OF CONTENTS

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                                    ARTICLE I

                                PURCHASE AND SALE

SECTION 1.1. Purchase and Sale of Notes ................................   1
SECTION 1.2. Purchase and Sale of Warrants .............................   2
SECTION 1.3. Consideration .............................................   2
SECTION 1.4. Closing ...................................................   2
SECTION 1.5. Warrant Adjustments .......................................   2

                                   ARTICLE II

                             TERMS OF THE SECURITIES

SECTION 2.1.  Interest on Notes ........................................   3
SECTION 2.2.  Payments and Computation .................................   3
SECTION 2.3.  Redemption of Notes ......................................   4
SECTION 2.4.  Registration, Exchange and Replacement of Securities .....   5
SECTION 2.5.  Restrictions on Payment of Dividends .....................   6

                                   ARTICLE III

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

SECTION 3.1.  Corporate Organization ...................................   6
SECTION 3.2.  Capital Stock ............................................   7
SECTION 3.3.  Issuance of Securities ...................................   8
SECTION 3.4.  Authorization, Etc. ......................................   8
SECTION 3.5.  Financial Statements .....................................   8
SECTION 3.6.  Absence of Undisclosed Liabilities .......................   9
SECTION 3.7.  No Approvals or Conflicts ................................  10
SECTION 3.8.  Compliance with Law; Governmental Authorizations .........  10
SECTION 3.9.  Reserve Summary ..........................................  10
SECTION 3.10. Title ....................................................  11
SECTION 3.11. Litigation or Other Proceedings ..........................  11
SECTION 3.12. Taxes ....................................................  12
SECTION 3.13. Labor Relations ..........................................  12
SECTION 3.14. Patents, Trademarks, Trade Names, Etc ....................  13

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SECTION 3.15. Environmental Matters ....................................  13
SECTION 3.16. Insurance ................................................  13
SECTION 3.17. Contracts, Agreements, Commitments and Other Matters .....  14
SECTION 3.18. No Affiliate Ownership ...................................  16
SECTION 3.19. No Prepayments Made or Refunds Owed ......................  16
SECTION 3.20. Absence of Certain Changes or Events .....................  17
SECTION 3.21. Drilling Obligations .....................................  19
SECTION 3.22. Development Operations ...................................  19
SECTION 3.23. Accounts Payable .........................................  19
SECTION 3.24. No Brokers' or Other Fees ................................  19
SECTION 3.25. Regulatory Authority .....................................  19
SECTION 3.26. Full Disclosure ..........................................  19
SECTION 3.27. Foreign Corrupt Practices Act ............................  19
SECTION 3.28. Employee Benefit Matters .................................  20
SECTION 3.29. Investment Agreement .....................................  20

                                   ARTICLE IV

                   REPRESENTATIONS AND WARRANTIES OF PURCHASER

SECTION 4.1.  Information Received .....................................  21
SECTION 4.2.  Investment Experience ....................................  21
SECTION 4.3.  Nondistributive Intent ...................................  21
SECTION 4.4.  Securities not Registered ................................  21
SECTION 4.5.  Accredited Investor ......................................  21
SECTION 4.6.  Legend on Securities .....................................  22
SECTION 4.7.  Acknowledgment of Risk ...................................  22
SECTION 4.8.  Organization .............................................  22
SECTION 4.9.  Authorization ............................................  22
SECTION 4.10. Brokers' Fees ............................................  22

                                    ARTICLE V

                              CONDITIONS TO CLOSING

SECTION 5.1. Conditions to Obligations of Purchasers ...................  23
SECTION 5.2. Conditions to Obligations of Company ......................  24
SECTION 5.3. Waiver ....................................................  25

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                                   ARTICLE VI

                               CLOSING DELIVERIES

SECTION 6.1. By the Company ............................................  25
SECTION 6.2. By the Purchaser ..........................................  26

                                   ARTICLE VII

                            COVENANTS OF THE PARTIES

SECTION 7.1.  Negative Covenants .......................................  27
SECTION 7.2.  Affirmative Covenants ....................................  29
SECTION 7.3.  Financial Information ....................................  31
SECTION 7.4.  Use of Proceeds ..........................................  31
SECTION 7.5.  Access to Books and Records; Cooperation .................  31
SECTION 7.6.  Publicity ................................................  32
SECTION 7.7.  Filings and Consents .....................................  32
SECTION 7.8.  Conduct of Business ......................................  32
SECTION 7.9.  Covenant to Satisfy Conditions ...........................  32
SECTION 7.10. Due Diligence ............................................  32
SECTION 7.11. Withholding Taxes ........................................  33
SECTION 7.12. Other Investors ..........................................  33
SECTION 7.13. Other Agreements .........................................  33

                                  ARTICLE VIII

                               REGISTRATION RIGHTS

SECTION 8.1.  Registration Rights Agreement ............................  33

                                   ARTICLE IX

                                    TRANSFER

SECTION 9.1.  Transfer .................................................  33
SECTION 9.2.  Right of First Offer .....................................  33
SECTION 9.3.  Non-Transferability of Negative Covenants ................  34
SECTION 9.4.  Restrictions on Transfers; Certain Permitted Transfers ...  35

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                                    ARTICLE X

                                 INDEMNIFICATION

SECTION 10.1. Indemnity ................................................  36

                                   ARTICLE XI

                                EVENTS OF DEFAULT

SECTION 11.1. Events of Default ........................................  38
SECTION 11.2. Optional Acceleration of Maturity ........................  39
SECTION 11.3. Automatic Acceleration ...................................  40

                                   ARTICLE XII

                                   TERMINATION

SECTION 12.1. Termination ..............................................  40
SECTION 12.2. Effect of Termination ....................................  41
SECTION 12.3. Procedure and Effect of Termination ......................  41

                                  ARTICLE XIII

                                  MISCELLANEOUS

SECTION 13.1. Waivers and Amendments ...................................  42
SECTION 13.2. Governing Law ............................................  42
SECTION 13.3. Survival .................................................  42
SECTION 13.4. Successors and Assigns ...................................  42
SECTION 13.5. Entire Agreement .........................................  43
SECTION 13.6. Notices ..................................................  43
SECTION 13.7. Expenses; Reports ........................................  44
SECTION 13.8. Attorneys' Fees ..........................................  44
SECTION 13.9. Severability .............................................  44
SECTION 13.10. Captions ................................................  44
SECTION 13.11. Counterparts ............................................  44
SECTION 13.12. Knowledge ...............................................  45

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                                TABLE OF CONTENTS

EXHIBITS
--------

Exhibit A   -     Form of Note
Exhibit B   -     Form of Warrant Certificate
Exhibit C   -     Other Investors
Exhibit D   -     Financial Statements
Exhibit E   -     Ryder Scott Reserve Summary
Exhibit F   -     Risk Factors Memorandum
Exhibit G   -     Opinion of Company Counsel
Exhibit H   -     Opinion of Salans, Hertzfeld & Heilbronn
Exhibit I   -     Opinion of King & Spalding
Exhibit J   -     Shareholder Agreement
Exhibit K   -     Registration Rights Agreement
Exhibit L   -     Voting and Transfer Agreement
Exhibit M   -     Disclosure Schedule

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                             TABLE OF DEFINED TERMS

Defined Term                             Section

Adjusted Equity Value                    1.5
Adjusted Exercise Price                  1.5
Adjustment Cut-Off Date                  1.5
Adjustment Notice                        1.5
Assets                                   3.10(c)
Business Day                             2.2(c)
C1 Default                               7.2(a)
Chernogorskoye                           3.5(b)
Chernogorskoye Financial Statements      3.5(b)
Closing Date                             1.4
Closing                                  1.4
Common Stock                             First Recital
Company                                  Preamble
Competing Transaction                    12.1(d)
Contract                                 3.3
Cut-Off Date                             7.9
Determination Date                       7.2(a)
Disclosure Schedule                      1.5
Disputed Amount                          1.5(c)
Encumbrances                             3.2
Environmental Laws                       3.15
ERISA                                    3.13
Evaluated Properties                     3.9
Event of Default                         11.1
Excess Liabilities                       1.5
Expense Reimbursement Amount             12.2(a)
FCPA                                     3.27
Financial Statement                      3.5
Financing                                Second Recital
FMV                                      7.2(a)
Indebtedness                             7.1(k)
Initial Equity Value                     1.5
Initial Value                            7.2(a)
Intellectual Property                    3.15
Investment Agreement                     3.29
IPO                                      2.3(a)
June Unaudited Balance Sheet             3.5
KMNGG                                    3.29
Liability                                3.6
Majority Note Holders                    2.3(a)
Majority Subsidiaries                    3.1

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                             TABLE OF DEFINED TERMS

Defined Term                             Section

Material Adverse Effect                  3.1
Material Contracts                       3.17(a)
Minority Subsidiaries                    3.1
Multiemployer Plan                       3.28(b)
Multiple Employer Plan                   3.28(b)
Notes                                    First Recital
Offer                                    9.2(a)
Offered Securities                       9.2(a)
Other Agreements                         7.13
Other Investors                          Second Recital
Permitted Transferee                     9.4(a)
person                                   3.2
Plans                                    3.28(a)
Public Disclosures                       7.6
Purchaser                                Preamble
Redemption Price                         2.3(a)
Related Agreements                       3.4
Registration Rights Agreement            6.1(d)
Reserve Summary                          3.9
Reserves                                 7.2(a)
Ryder Scott                              3.9
Securities                               First Recital
Securities Act                           4.4
Shareholder Agreement                    6.1(c)
Stock-Related Instruments                3.2
Stockholders                             3.2
Subsidiaries                             3.1
Tax Return                               3.12(c)
Taxes                                    3.12(b)
Termination Fee                          12.2(b)
Valuation Event                          1.5(b)
Voting Agreement                         6.1(e)
Waldo                                    3.29
Warrants                                 First Recital

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                       NOTE AND WARRANT PURCHASE AGREEMENT

      This Note and Warrant Purchase Agreement (the "Agreement") is made as of
the 10th day of October, 1997, by and between Khanty Mansiysk Oil Corporation, a
Delaware corporation (the "Company"), and Khanty Holdings LLC, a Delaware
limited liability company (the "Purchaser").

                                    RECITALS

      WHEREAS, the Company wishes to sell to the Purchaser (i) one or more notes
of the Company, substantially in the form of Exhibit A hereto (individually, a
"Note" and, collectively, the "Note"), in the aggregate principal amount of
$30,000,000 and (ii) warrants to acquire 66,667 shares of common stock, no par
value per share (the "Common Stock"), of the Company at an exercise price of
$450 per share, substantially in the form of Exhibit B hereto (the "Warrants"
and, together with the Notes, the "Securities");

      WHEREAS, the proceeds of the sale of the Securities to the Purchaser shall
constitute only a portion of the $55,000,000 financing presently being conducted
by the Company (the "Financing") and pursuant to which the investors listed on
Exhibit C (the "Other Investors") shall be entitled to participate, in an
aggregate amount not to exceed $25,000,000, by purchasing notes and warrants
substantially similar to the Securities;

      WHEREAS, the proceeds of the financing will be used in part to finance the
Company's acquisition of KMNGG (as defined herein) and related matters; and

      WHEREAS, the Purchaser wishes to purchase the Securities from the Company;

      NOW, THEREFORE, in consideration of the premises and of the mutual
promises, representations, warranties, covenants, conditions and agreements
contained herein, the parties hereto, intending to be legally bound by the terms
hereof, agree as follows:

                                    AGREEMENT

                                    ARTICLE I

                                PURCHASE AND SALE

      SECTION 1.1. Purchase and Sale of Notes. Upon the terms and subject to the
conditions set forth in this Agreement, the Company agrees to issue and sell to
Purchaser, and Purchaser agrees to purchase from the Company, one or more Notes
in the aggregate principal amount of $30,000,000. Each Note shall be
substantially in the form of Exhibit A, and shall be dated the Closing Date (as
defined below).

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      SECTION 1.2. Purchase and Sale of Warrants. Upon the terms and subject to
the conditions set forth in this Agreement, the Company agrees to issue and sell
to Purchaser, and Purchaser agrees to purchase from the Company, Warrants to
purchase 66,667 shares of Common Stock at an exercise price of $450 per share,
subject to adjustment as provided below in Section 1.5.

      SECTION 1.3. Consideration. Upon the terms and subject to the conditions
set forth in this Agreement, and in consideration of the sale and delivery of
the Securities, on the Closing Date Purchaser shall pay to the Company cash in
the amount equal to Thirty Million Dollars ($30,000,000) by wire transfer of
immediately available funds to an account designated by the Company.

      SECTION 1.4. Closing. The consummation of the purchase and sale of the
Securities (the "Closing") shall occur, subject to the satisfaction or waiver of
the conditions set forth in Article V, at the offices of Skadden, Arps, Slate,
Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022 on October 15,
1997, at 9:00 a.m. local time, or otherwise as the parties may agree (the
"Closing Date"). At the Closing, the parties shall make the deliveries and take
the other actions contemplated by Sections 6 and 13.7.

      SECTION 1.5. Warrant Adjustments. (a) Prior to March 31, 1998 ("Adjustment
Cut-Off Date"), the Company shall have prepared and delivered to the Purchaser
audited financial statements of the Company for the quarter ended September 30,
1997, which shall include an audit of the estimated liabilities set forth in
Section 1.5 of the Disclosure Schedule attached hereto as Exhibit M (the
"Disclosure Schedule"), audited by one of the accounting firms listed in Section
1.5 of the Disclosure Schedule. If the actual liabilities of the Company as of
the Closing Date based on such audited financial statements (immediately prior
to the acquisition of KMNGG and excluding the liabilities of KMNGG and excluding
any fees and expenses incurred by the Company in connection with the
consummation of the transactions contemplated by this Agreement as listed in
Section 1.5(a) of the Disclosure Schedule) exceeded the estimated liabilities by
an amount greater than $500,000 (such excess liabilities referred to herein as
the "Excess Liabilities"), then the exercise price of the Warrants and the total
number of shares of Common Stock purchasable under the Warrants shall be
adjusted such that (i) the exercise price of the Warrants immediately prior to
the Adjustment Cut-Off Date shall be reduced proportionately with the amount of
the decrease in equity value of the Company from the Initial Equity Value to the
Adjusted Equity Value (the "Adjusted Exercise Price"), and (ii) the number of
shares of Common Stock purchasable pursuant to the Warrants immediately prior to
the Adjustment Cut-Off Date shall be adjusted such that the Warrant holder may
receive upon the exercise of the Warrants a number of shares of Common Stock
equal to the aggregate exercise price of the Warrants prior to the Adjustment
Cut-Off Date divided by the per share Adjusted Exercise Price. For purposes of
this Section 1.5, "Initial Equity Value" shall be $103,860,378, and the
"Adjusted Equity Value" of the Company shall be determined by subtracting from
the Initial Equity Value the amount of the Excess Liabilities. The Company shall
deliver, along with the audited financial statements under this Section 1.5(a),
a notice to the Warrant holder as to the amount, if any, of

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the Excess Liabilities and the amount, if any, of the Warrant Adjustment (the
"Adjustment Notice").

      (b) If the Company fails to increase its economic interest in KMNGG to at
least 89% prior to the occurrence of any event or transaction that involves a
sale, issuance or exchange of the Common Stock, a sale or exchange of a
substantial portion of the assets of the Company, a distribution of the Common
Stock or any other commercial transaction on account of which a market value of
the Company is determinable (a "Valuation Event"), then the exercise price of
the Warrants and the total number of shares of Common Stock purchasable under
the Warrants shall be adjusted such that (i) the exercise price of the Warrants
immediately prior to the Valuation Event shall be reduced by the percentage
equal to 90% of the percentage difference between 89% and the Company's actual
economic interest in KMNGG immediately prior to the Valuation Event, and (ii)
the number of shares of Common Stock purchasable pursuant to the Warrants
immediately prior to the Valuation Event shall be adjusted such that the Warrant
holder may receive upon the exercise of the Warrants a number of shares of
Common Stock equal to the aggregate exercise price of the Warrants immediately
prior to the Valuation Event divided by the per share adjusted exercise price
under clause (i) above. If the cost to the Company of increasing its economic
interest in KMNGG exceeds $1 million, then the adjustments under this Section
1.5(b) shall be made as if the Company's actual economic interest in KMNGG
immediately prior to the Valuation Event is 85%; provided, however, any amounts
paid for the purchase of KMNGG capital stock issued to KMOC directly from KMNGG
shall be excluded from the calculation of such $1 million.

                                   ARTICLE II

                             TERMS OF THE SECURITIES

      SECTION 2.1. Interest on Notes. The Company shall pay interest on the
unpaid principal amount of the Notes from the date of the Notes until such
principal amount shall be paid in full, at a rate equal to 10% per annum.
Accrued interest on the Notes shall be payable quarterly on September 30,
December 31, March 31 and June 30 of each year until such Notes are paid in full
with the first such payment due on December 31, 1997. Accrued interest shall be
payable, at the Company's option, in either cash or Common Stock or a
combination thereof. If all or any portion of such interest is paid in Common
Stock, each share of Common Stock shall be valued for this purpose as being
equal to the exercise price of the Warrants at the time of such payment.

      SECTION 2.2. Payments and Computation. (a) The Company shall make each
payment of interest in respect of the Notes not later than 12:00 noon, New York
City time, on the day when due by wire transfer in immediately available funds
to the account specified by the holder of record of the Notes or by delivery of
stock certificates representing shares of Common Stock to the holder of record
of the Notes, as the case may be.

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      (b) All computations of interest shall be made on the basis of a year of
365 or 366 days, as the case may be, in each case for the actual number of days
(including the first day but excluding the last day) elapsed.

      (c) Whenever any payment under this Agreement or under the Notes shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest. "Business Day" means
a day other than a Saturday, Sunday, legal holiday or other day on which banks
in New York, New York are required or authorized by law to be closed for
business.

      SECTION 2.3. Redemption of Notes. (a) The Company shall redeem all of the
Notes in accordance with this Section 2.3 in cash at a price (the "Redemption
Price") equal to the principal amount of the Notes plus all accrued and unpaid
interest thereon, if any, to the date fixed for such redemption either (i) upon
the occurrence of an initial public offering of the Company's Common Stock (an
"IPO"), or (ii) upon the request of the holders of a majority of the notes (in
principal amount) issued pursuant to the Financing (the "Majority Note Holders")
at any time after the fifth anniversary of the Closing Date, or (iii) prior to
or in connection with a registered public offering of the Company's Common Stock
that is initiated by Brunswick Fitzgibbons Trust Company LLC pursuant to the
exercise of its demand registration rights; provided, however, in the case of an
IPO the Company shall redeem as great a principal amount of Notes on a pro rata
basis among the note holders as the net proceeds from the IPO shall permit.

      (b) The Company shall give notice of the redemption to the holders of the
Notes by mailing notice of such redemption by first class mail, postage prepaid,
at least 15 days and not more than 30 days prior to the date fixed for
redemption. The date fixed for redemption shall be, in the case of an IPO, 15
days following the date of the closing of the IPO, and in the case of a
redemption requested by the Majority Note Holders subsequent to the fifth
anniversary of the Closing Date, within 70 days of receipt by the Company of
such request. The notice of redemption to each such holder shall specify (i) the
principal amount of the Notes held by such holder to be redeemed, (ii) the date
fixed for redemption, (iii) the redemption price, (iv) the place or places of
payment (at least one of which must be New York City), (v) that payment will be
made upon presentation and surrender of such Notes and (vi) that interest, if
any, accrued to the date fixed for redemption will be paid as specified in such
notice.

      (c) If notice of redemption has been given as provided in (b) above, the
Notes specified in such notice shall become due and payable on the date and at
the place or places stated in such notice at the Redemption Price, and on and
after said date (unless the Company shall default in the payment of such Notes
at the Redemption Price) interest, if any, on the Notes so called for redemption
shall cease to accrue, and the holders of the Notes shall have no right in
respect of such Notes except the right to receive the Redemption Price thereof.
On presentation and surrender of such Notes at a place of payment specified in
the notice, such Notes shall be paid and redeemed by the Company at the
Redemption Price.

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      (d) If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the Redemption Price shall, until paid or duly provided
for, bear interest (i) for a period of 45 days subsequent to the date fixed for
redemption at an annual rate of 12% and (ii) following such 45 day period at an
annual rate of 18%.

      (e) The rights and priorities of the holders of the notes issued pursuant
to the Financing with respect to payment of interest and principal shall be pari
passu with the rights and priorities of all other holders of notes issued
pursuant to the Financing, except with respect to rights granted to Purchaser in
the Warrant to apply principal of the notes of the Company held by Purchaser
towards the exercise price of warrants of the Company held by Purchaser when
converting such warrants into common stock of the Company pursuant to the
exercise of its tag along rights under the Voting Agreement.

      SECTION 2.4. Registration, Exchange and Replacement of Securities.

      (a) Registration of Notes; Registration of Transfer and Exchange of Notes.

            (i) All Notes issued from time to time under this Agreement shall be
      registered as provided in this Agreement. The Company will keep at its
      office appropriate books for the registration and registration of transfer
      and exchange of Notes. The Company will register the Notes and transfers
      and exchanges of the Notes under the provisions of this Agreement at such
      office, but only if such transfers are in compliance with Article IX
      hereof.

            (ii) Whenever any Note or Notes shall be presented at such office
      for exchange or registration of transfer, subject to compliance with
      Article IX hereof, the Company at its expense shall execute and, in
      exchange and upon cancellation of the Note, shall deliver a new Note or
      Notes, registered in such name or names and in such denominations of
      $1,000 or any integral multiple thereof as may be requested, in the same
      aggregate principal amount and dated the date to which interest has been
      paid on the Note or Notes so surrendered, or, if no interest has yet been
      so paid, then dated the date of the Note or Notes so surrendered;
      provided, however, that no transfer of any Note shall be registered unless
      the transfer is evidenced by a written instrument of transfer, in form
      reasonably satisfactory to the Company, executed by the registered owner
      of such Note or by his authorized attorney. All Notes issued upon any
      exchange of Notes shall be the valid obligations of the Company,
      evidencing the same debt, and entitled to the same benefits under this
      Agreement, as the Notes surrendered upon such exchange.

      (b) Replacement of Security. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
any Security and of indemnity and security or bond satisfactory to it, the
Company at its expense will execute and deliver in replacement of such Security
a new Security of like tenor, registered in the same manner and in the same
amount as the Security being replaced and with respect to any Note, in the
unpaid

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                                                                               6

principal amount, dated the date to which interest has been paid on such Note,
or, if no interest has yet been so paid, then dated the date of such Note.

      SECTION 2.5. Restrictions on Payment of Dividends. The Company shall not
pay, declare or set aside any sums for the payment of, any dividends, or make
any distributions on any shares of its capital stock or other equity securities
of the Company unless the Company has paid interest on the Notes pursuant to
Section 2.1 in cash for the twelve month period preceding such dividend or
distribution.

                                   ARTICLE III

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

      The Company hereby represents and warrants to the Purchaser as follows:

      SECTION 3.1. Corporate Organization. Each of the Company and each
Subsidiary (as defined below) is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of organization. Each of
the Company and each Subsidiary has full corporate power and authority to own
its properties and assets and to carry on its business as now being conducted
and is duly qualified or licensed to do business as a foreign corporation in
good standing in the jurisdictions in which the ownership of its property or the
conduct of its business requires such qualification, all of which jurisdictions
are listed in Section 3.1 of the Disclosure Schedule, except jurisdictions in
which the failure to be so qualified or licensed (i) would not have a material
adverse effect on the business, operations or financial condition of the Company
and the Subsidiaries, taken as a whole, or (ii) based upon information available
to the Company, would not reasonably be expected to have a material adverse
effect on the prospects of the Company and the Subsidiaries, taken as a whole
(other than an effect that would arise from general industry, political or
economic conditions or government policies), (hereinafter referred to as a
"Material Adverse Effect"). The Company has delivered to the Purchaser true,
correct and complete copies of the Certificate of Incorporation and Bylaws, or
similar corporate governance documents, of the Company and of each Subsidiary as
presently in effect. Section 3.1 of the Disclosure Schedule contains a true and
correct list of (i) those entities in which the Company has a 50% or greater
equity interest (the "Majority Subsidiaries") and (ii) those entities in which
the Company has an equity interest less than 50% (the "Minority Subsidiaries"
and, collectively with the Majority Subsidiaries, the "Subsidiaries"). Other
than as disclosed in Section 3.1 of the Disclosure Schedule, the Company does
not own, directly or indirectly, any capital stock or other equity securities of
any corporation or have any direct or indirect equity or ownership interest in
any partnership, joint venture or other business. In light of the condition
contained in Section 5.1(h) that the Company shall have consummated the Final
Closing (as defined in the Investment Agreement) pursuant to the Investment
Agreement prior to or simultaneously with the Closing under this Agreement, for
purposes of this Agreement, neither KMNGG nor any of the subsidiaries of KMNGG
acquired by the Company subsequent to the date

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                                                                               7

of the Final Closing pursuant to the Investment Agreement shall be deemed a
Subsidiary for purposes of this Agreement.

      SECTION 3.2. Capital Stock. Section 3.2 of the Disclosure Schedule
contains a true, correct and complete description of the authorized, issued and
outstanding capital stock of the Company as of the date hereof and as of the
Closing Date (including any capital stock issued on the Closing Date). The
record holders (the "Stockholders") of the issued and outstanding shares of
capital stock of the Company are the persons (for the purposes of this
Agreement, "person" shall mean any individual, corporation, partnership,
joint-stock company, limited liability company, trust, unincorporated
organization or government or other agency or political subdivision thereof)
listed in Section 3.2 of the Disclosure Schedule and the amount of shares of
capital stock held by each Stockholder is set forth opposite the respective
Stockholder's name in Section 3.2 of the Disclosure Schedule. To the knowledge
of the Company, the shares of capital stock listed in Section 3.2 of the
Disclosure Schedule are, and will be on the Closing Date, held by the respective
Stockholder free and clear of all options, pledges, security interests, voting
trust or similar arrangements, liens, claims, charges or other legal or
equitable rights or encumbrances or restrictions on voting or transfer
(collectively, the "Encumbrances"), except as set forth in Section 3.2 of the
Disclosure Schedule, and, other than as set forth in Section 3.2 of the
Disclosure Schedule, no other shares of any other class or series of capital
stock are, or will be on the Closing Date, issued and outstanding. All of the
outstanding shares of capital stock of the Subsidiaries owned by the Company are
owned by the Company, free and clear of all Encumbrances. Except as set forth in
Section 3.2 of the Disclosure Schedule, there are no subscriptions, options,
warrants, calls, rights, contracts, commitments, understandings, restrictions or
arrangements to which the Company is a party relating to the issuance, sale,
transfer or voting of any shares of capital stock of the Company or any of the
Subsidiaries, including any rights of conversion or exchange under any
outstanding securities or other instruments ("Stock-Related Instruments"),
existing as of the date hereof and as of the Closing Date (including any Stock
Related Instruments issued on the Closing Date). The Company has made available
to the Purchaser true, correct and complete copies of all written Stock-Related
Instruments and has provided accurate descriptions of all oral Stock-Related
Instruments, if any. Except as set forth in Section 3.2 of the Disclosure
Schedule, all outstanding shares of capital stock of the Company, each Majority
Subsidiary and, to the best knowledge of the Company, each Minority Subsidiary,
as of the date hereof and as of the Closing Date (a) have been duly authorized,
validly issued and are fully paid and nonassessable, (b) are and have been free
of any preemptive rights, (c) were not issued in violation of the terms of any
contract, agreement, lease, plan, instrument or other document binding on the
Company or any Subsidiary, and (d) were issued in compliance with all applicable
charter documents of the Company and the Subsidiaries and all applicable
federal, state and foreign securities or "blue sky" laws, statutes, ordinances,
rules and regulations.

      SECTION 3.3. Issuance of Securities. Upon the consummation of the
transactions contemplated hereby, the Securities will constitute valid and
binding obligations of the Company, enforceable in accordance with their terms,
subject to applicable bankruptcy, insolvency and other

<PAGE>
                                                                               8

laws generally applicable to creditors' rights and to general principles of
equity, and the issuance of the Securities will not violate or contravene the
terms of any contract, agreement, note, bond, mortgage, indenture, deed of
trust, license, franchise, permit, lease, plan, instrument or other document
("Contract") binding on the Company. The issuance of the Securities has been
duly authorized by all necessary corporate action of the Company.

      SECTION 3.4. Authorization, Etc. The Company has full corporate power and
authority to execute and deliver this Agreement, the Securities and the
Registration Rights Agreement, the Shareholder Agreement and the Voting and
Transfer Agreement (collectively, the "Related Agreements") and to carry out the
transactions contemplated hereby and thereby. The Board of Directors of the
Company has duly approved and authorized the execution and delivery by the
Company of this Agreement and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby, and no other corporate proceedings
on the part of the Company are necessary to approve and authorize the execution
and delivery by the Company of this Agreement and the Related Agreements and the
consummation by the Company of the transactions contemplated hereby and thereby,
except that the approval of the Company's stockholders may be required in
respect of additional Warrants issuable pursuant to any Related Agreement
depending on the magnitude of the adjustment referred to therein. This Agreement
and, as of the Closing Date, the Related Agreements have been duly and validly
executed on behalf of the Company and constitute valid and binding agreements of
the Company enforceable against the Company in accordance with their respective
terms, subject to applicable bankruptcy, insolvency and other laws generally
applicable to creditors' rights and to general principles of equity and except
that the rights to indemnity and contribution contained in this Agreement and
the Registration Rights Agreement may be unenforceable.

      SECTION 3.5. Financial Statements.

      (a) The Company's Financial Statements.

      The Company has previously delivered to the Purchaser (a) the Company's
unaudited consolidated balance sheets at December 31, 1996, (b) the Company's
unaudited consolidated statements of income, financial condition and equity for
the fiscal year ended December 31, 1996, (c) the Company's unaudited
consolidated balance sheet at March 30, 1997, (d) the Company's unaudited
consolidated statement of income, financial condition and equity for the three
months ended March 30, 1997, (e) the Company's unaudited consolidated balance
sheet at June 30, 1997 (the "June Unaudited Balance Sheet"), (f) the Company's
unaudited consolidated statement of income, financial condition and equity for
the six months ended June 30, 1997, and (g) all related notes and schedules.
Attached hereto as Exhibit D is a copy of the financial statements referred to
in (a) through (f) above, together with the related notes and schedules thereto
referred to in (g) above, which are sometimes collectively referred to herein as
the "Financial Statements".

      The Financial Statements (a) fairly present in accordance with U.S.
generally accepted accounting principles the assets, liabilities and financial
condition of the Company and the

<PAGE>
                                                                               9

Subsidiaries as of the dates thereof and the results of operations of the
Company and the Subsidiaries for the respective periods ended on such dates, (b)
have been prepared from the books and records of the Company and the
Subsidiaries and (c) except as otherwise set forth in the notes thereto, (i)
have been prepared in accordance with United States generally accepted
accounting principles consistently applied and (ii) include all adjustments that
are necessary for a fair presentation of the information shown and do not
contain any items of a special or non recurring nature (subject, in the case of
reports other than annual year-end reports, to normal year-end audit
adjustments).

      (b) Chernogonkoye's Financial Statements.

      The Company has previously delivered to the Purchaser (a) the audited
consolidated balance sheets at December 31, 1996 of Anderman/Smith International
Chernogorskoye ("Chernogorskoye"), (b) Chernogorskoye's audited consolidated
statements of income, financial condition and equity for the fiscal year ended
December 31, 1996, (c) Chernogorskoye's unaudited consolidated balance sheet at
June 30,1997, (d) Chernogorskoye's unaudited consolidated statement of income,
financial condition and equity for the six months ended June 30, 1997, and (e)
all related notes and schedules. Attached hereto as Exhibit D is a copy or the
financial statements referred to in (a) through (d) above, together with the
related notes and schedules thereto referred to in (e) above, which are
sometimes collectively referred to herein as the "Chernogorskoye Financial
Statements".

      To the knowledge of the Company, the Chernogorskoye Financial Statements
(a) fairly present in accordance with U.S. generally accepted accounting
principles the assets, liabilities and financial condition of Chernogorskoye as
of the dates thereof and the results of operations of Chernogorskoye for the
respective periods ended on such dates, (b) have been prepared from the books
and records of Chernogorskoye and (c) except as otherwise set forth in the notes
thereto, (i) have been prepared in accordance with United States generally
accepted accounting principles consistently applied and (ii) include all
adjustments that are necessary for a fair presentation of the information shown
and do not contain any items of a special or non recurring nature (subject, in
the case of reports other than annual year-end reports, to normal year-end audit
adjustments).

      SECTION 3.6. Absence of Undisclosed Liabilities. To the best knowledge of
the Company, neither the Company nor any of the consolidated Subsidiaries has
any material direct or indirect liability, indebtedness, obligation, expense,
claim, deficiency, guaranty or endorsement of or by any person (other than
endorsements of notes, bills and checks presented to banks for collection
deposit in the ordinary course of business) of any type, whether accrued,
absolute, contingent, matured, unmatured or otherwise ("Liability"), other than
Liabilities (a) that are reflected, accrued or reserved for in the June
Unaudited Balance Sheet, or (b) arising in the ordinary course of the Company's
business consistent with past practice which would not result in a Material
Adverse Effect or (c) otherwise disclosed in Section 3.6 of the Disclosure
Schedule.

<PAGE>
                                                                              10

      SECTION 3.7. No Approvals or Conflicts. The execution and delivery by the
Company of this Agreement and the Related Agreements and the consummation by the
Company of the transactions contemplated hereby and thereby will not (i)
violate, conflict with or result in a breach of any provision of the Certificate
of Incorporation or Bylaws of the Company, (ii) violate, conflict with or result
in a breach of any provision of, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties of the Company or the Subsidiaries under, any
Contract to which the Company or any Subsidiary is a party or by which the
Company, any Subsidiary, or any of their respective properties may be bound,
(iii) violate any order, injunction, judgment, ruling, law or regulation of any
court or governmental authority applicable to the Company, any Subsidiary or any
of their respective properties or (iv) require any order, license, consent,
approval, waiver, permit or authorization of, or notice to, or declaration,
filing or registration with, or the granting of any exemption by, or the taking
of any other action in respect of, any governmental or regulatory authority or
other person not a party to this Agreement except the orders, filings,
registrations or other actions contemplated by the Registration Rights
Agreement, except where the occurrence of any of the events in clauses (ii),
(iii) or (iv) above would not result in a Material Adverse Effect.

      SECTION 3.8. Compliance with Law; Governmental Authorizations. To the best
knowledge of the Company, the Company and the Subsidiaries are not in violation
of any order, injunction, judgment, ruling, law or regulation of any court or
governmental authority applicable to the property or business of the Company or
the Subsidiaries which violation or violations in the aggregate would have a
Material Adverse Effect. The licenses, permits and other governmental
authorizations held by the Company and the Subsidiaries are valid and sufficient
for the conduct of the Company's and the Subsidiaries' business as currently
conducted, except where the failure to hold such licenses, permits and other
governmental authorizations would not have a Material Adverse Effect.

      SECTION 3.9. Reserve Summary. The Company has made available to the
Purchaser the results of the preliminary reserve summary (the "Reserve Summary")
prepared by the independent petroleum engineering firm of Ryder Scott Company
("Ryder Scott") on the Russian oil fields listed on the attachment thereto (the
"Evaluated Properties") in which the Company will have interests subsequent to
the Closing Date. The Reserve Summary, which is attached hereto as Exhibit E, is
the latest reserve summary available to the Company relating to the Evaluated
Properties. The Company has provided no materially false or misleading
information to and has not withheld from Ryder Scott any material information
with respect to the preparation of the Reserve Summary. The Company is not aware
of any facts or circumstances that should reasonably cause the Company to
conclude that (i) any of the information that was supplied by the Company to
Ryder Scott in connection with its preparation of the Reserve Summary is not
currently correct in all material respects (other than normal depletion by
production in the ordinary course) or (ii) the Reserve Summary is incorrect in
any material respect.

<PAGE>
                                                                              11

      SECTION 3.10. Title. (a) To the knowledge of the Company, except as set
forth in Section 3.10 of the Disclosure Schedule, Chernogorskoye and KMNGG, as
the case may be, each have a valid licensed interest (either directly or through
one or more subsidiaries or affiliates) in the development of the Evaluated
Properties free and clear of all material encumbrances except for (i)
encumbrances specifically described in Section 3.10 of the Disclosure Schedule,
(ii) statutory liens not delinquent, (iii) encumbrances that are not material in
character, amount or extent and do not materially detract from the value, or
interfere with the use of, the interest affected thereby or otherwise materially
impair the business or (iv) contracts and agreements for the sale and
transportation of oil and gas entered into in the ordinary course of business.
The Company's net licensed interest in the Evaluated Properties is set forth in
Section 3.10 of the Disclosure Schedule subject to the restrictions and
limitations set forth therein.

      (b) To the best knowledge of the Company, except as set forth in Section
3.10 and in Section 3.11 of the Disclosure Schedule, the Company and the
Subsidiaries have good and valid title to all the properties and assets of every
kind, character and description (real, personal or mixed, tangible and
intangible), including, without limitation, all parcels of real property,
pipelines, rights-of-way and easements and other incidental rights and permits,
but excluding the Evaluated Properties, reflected on the June Unaudited Balance
Sheet or which would have been reflected on the June Unaudited Balance Sheet if
acquired prior to June 30, 1997, (the "Assets") free and clear of all
encumbrances of any nature except for (i) the encumbrances and title defects
specifically described in Section 3.10 of the Disclosure Schedule; (ii)
mortgages and encumbrances which secure indebtedness or obligations which are
properly reflected on the Financial Statements and, if such indebtedness exceeds
$1,000,000, listed in Section 3.10 of the Disclosure Schedule; (iii) liens for
Taxes (as defined in Section 3.12) not yet payable or any Taxes being contested
in good faith; (iv) liens arising as a matter of law in the ordinary course of
business, provided that the obligations secured by such liens are not delinquent
or are being contested in good faith; and (v) such imperfections of title and
encumbrances, if any, as do not materially interfere with the present use of any
of the Assets subject thereto. To the best knowledge of the Company, the Company
and the Subsidiaries have valid leasehold interests in all leases reflected as
capital leases on the June Unaudited Balance Sheet and generally have the right
to use all other property and assets as to which they do not have title but
which are currently being used in the conduct of the Company's business, except
any rights of use the loss of which would not materially adversely affect the
Company's business as currently being conducted with such assets.

      SECTION 3.11. Litigation or Other Proceedings. Except as set forth in
Section 3.11 of the Disclosure Schedule, there are no claims, actions,
proceedings (including, but not limited to, any condemnation or eminent domain
proceedings) or investigations pending against the Company or, to the best
knowledge of the Company, (i) pending against the Subsidiaries, (ii) threatened
against the Company or the Subsidiaries, or (iii) affecting the Assets, the
Evaluated Properties or the transactions contemplated by this Agreement, before
any court or governmental or regulatory authority or body which singly or in the
aggregate would have a Material Adverse Effect.

<PAGE>
                                                                              12

      SECTION 3.12. Taxes.

      (a) The Company and, to the best knowledge of the Company, each Subsidiary
has (i) duly filed with the appropriate Federal, state, local and foreign taxing
authorities all Tax Returns (as defined below) required to be filed by or with
respect to the Company and the Subsidiaries as of the date of this Agreement,
and such Tax Returns are true, correct and complete in all material respects and
(ii) paid or made provision for in the Financial Statements all Taxes (as
defined below) of the Company and the Subsidiaries shown to be due on such Tax
Returns. To the best knowledge of the Company, there are no tax liens on any of
the Assets other than liens for current real estate taxes not yet due or Taxes
being contested in good faith by appropriate proceedings and disclosed in
Section 3.12 of the Disclosure Schedule. Except as set forth in Section 3.12 of
the Disclosure Schedule, the Company has not received any written notice of
deficiency, assessment or proposed assessment from any Federal, state, local or
foreign taxing authority with respect to liabilities for Taxes of the Company or
the Subsidiaries which have not been paid or finally settled, and, to the best
knowledge of the Company, there is no pending tax examination of or tax claim
assessed against the Company, any Subsidiary or any of the Assets, and any such
deficiency, assessment, proposed assessment or tax claim disclosed in Section
3.12 of the Disclosure Schedule is being contested in good faith through
appropriate proceedings.

      (b) For purposes of this Agreement, "Taxes" shall mean all taxes, charges,
fees, levies, penalties or other assessments imposed by any United States
Federal, state, local or foreign taxing authority, including, but not limited
to, income, service, leasing, occupation, excise, property, sales and use,
transfer, franchise, payroll, withholding, social security or other taxes,
including any interest, penalties or additions attributable thereto.

      (c) For purposes of this Agreement, "Tax Return" shall mean any return,
report, information return or other document (including any related or
supporting information) filed or required to be filed with any taxing authority
with respect to Taxes.

      SECTION 3.13. Labor Relations. Neither the Company nor any Subsidiary is a
party to any collective bargaining agreement applicable to employees of the
Company or the Subsidiaries. The Company and the Subsidiaries are in compliance
in all material respects with all applicable laws, ordinances, regulations,
statutes, rules and restrictions relating to (a) employment, (b) hiring,
promotion, employment and pay practices, (c) terms and conditions of employment
and (d) federal and state wages and hours laws; and neither the Company nor any
Subsidiary is engaged in any unfair labor practice which has had or is
reasonably likely to have a Material Adverse Effect. No strike, slowdown,
picketing or work stoppage by any union or other group of employees against the
Company, any Subsidiary or any of their properties wherever located, and no
secondary boycott with respect to their products, lockout by them of any of
their employees or any other labor trouble or other occurrence, event or
condition of a similar character, has occurred or, to the best knowledge of the
Company, been threatened.

<PAGE>
                                                                              13

      SECTION 3.14. Patents, Trademarks, Trade Names, Etc. Neither the Company
nor the Subsidiaries own, license or use any patents, trademarks, tradenames and
copyrights which are material to the business of the Company or the
Subsidiaries.

      SECTION 3.15. Environmental Matters. (a) To the best knowledge of the
Company, neither the Company nor any of the Subsidiaries has violated or
received any notice alleging any past or present violation of, any applicable
Federal, state, local or foreign laws, statutes, ordinances, rules, regulations,
orders or determinations of any governmental authority applicable to the Company
or the applicable Subsidiary, as the case may be, in its respective jurisdiction
of operation which are in effect and duly enforced relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), to the extent that
any such violation, or such violations in the aggregate, would have a Material
Adverse Effect.

      (b) To the best knowledge of the Company, the Company and the Subsidiaries
have obtained and are in compliance with all required governmental permits and
similar authorizations with respect to the ownership, leasing and operation of
their properties and the conduct of the business of the Company and the
Subsidiaries as currently conducted except, in each case, where such failure to
be in compliance would not have a Material Adverse Effect. To the best knowledge
of the Company, no hazardous waste, substance or material has been stored,
treated or disposed of by the Company or the Subsidiaries or by any person on
any real estate owned by the Company or the Subsidiaries, respectively, except
in compliance with applicable Environmental Laws; and the Company and the
Subsidiaries have lawfully disposed of their hazardous waste products with
respect to the operations of their businesses except, in each case, where such
failure to be in compliance or to obtain, store, treat or dispose of such waste
products would not have a Material Adverse Effect.

      (c) The Company is not aware of any facts or circumstances that could
reasonably lead the Company or such Subsidiary to conclude that the costs and
liabilities, other than the currently budgeted capital expenditures, associated
with the effect of Environmental Laws on the business, operations and properties
of the Company and the Subsidiaries (including, without limitation, any capital
or operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties) would, singly or in the aggregate, have a Material Adverse
Effect.

      SECTION 3.16. Insurance. Section 3.16 of the Disclosure Schedule lists all
material insurance policies covering the Assets, employees and operations of the
Company and the Subsidiaries and the Evaluated Properties of Chernogorskoye.
Such policies are in full force and effect, there are no defaults thereunder,
and, to the best knowledge of the Company, and the Subsidiaries there is no
basis for any action or claim nor any facts which could be anticipated to give
rise to such action or claim. To the best knowledge of the Company and the
Subsidiaries, there does not exist any event that, with the giving of notice or
the lapse of time or both, would

<PAGE>
                                                                              14

constitute such a default. The Company and the Subsidiaries are not co-insurers
under any such policies of insurance except to the extent of the amount of the
deductible, self-retention or similar amounts applicable to such policies.

      SECTION 3.17. Contracts, Agreements, Commitments and Other Masters.

      (a) Section 3.17 of the Disclosure Schedule is a true, correct and
complete list and description of all of the following (whether written or oral),
including all amendments thereto, to which the Company or to the best of the
Company's knowledge any of the Majority Subsidiaries is a party or by which any
of the Assets (excluding Chernogorskoye) is materially affected ("Material
Contracts"):

            (i) any note, agreement, mortgage, indenture, security agreement and
      other instruments relating to the borrowing of money or evidence of credit
      for the deferred purchase price of property, or the direct or indirect
      guarantee by the Company or any Majority Subsidiary of any such
      indebtedness or deferred purchase price in excess of $100,000;

            (ii) any lease of real property and material personal property
      providing for annual payments under any such lease or group of related
      leases in excess of $100,000;

            (iii) any partnership or joint venture agreement providing for any
      capital contribution or expenditure at an annual rate in excess of
      $100,000;

            (iv) any management, employment and consulting agreement or other
      contract for personal services that is not terminable by the Company or
      any Majority Subsidiary party thereto on not more than three month's
      notice without penalty;

            (v) any agreement providing for liability for severance pay,
      collective bargaining agreements, labor contracts, or labor or personnel
      policies in excess of $100,000;

            (vi) any surety, performance and maintenance bond in excess of
      $100,000;

            (vii) any agreement or commitment for capital expenditures in excess
      of $100,000, for any single project (it being represented and warranted
      that the liability under all undisclosed agreements and commitments for
      capital expenditures does not exceed $100,000 in the aggregate for all
      projects);

            (viii) any plan, contract or arrangement providing for bonuses,
      pensions, deferred compensation, retirement plan payments, profit sharing,
      incentive pay, or for any other employee benefit plan;

<PAGE>
                                                                              15

            (ix) any brokerage or finder's agreement involving consideration in
      excess of $100,000;

            (x) any agreement that restricts the right of the Company or any
      Subsidiary to engage in any place in any line of business;

            (xi) any contract, commitment or agreement that involves the
      disposition of any assets of the Company or any Majority Subsidiary not in
      the ordinary course of business consistent with past practice;

            (xii) any contract, commitment or agreement between the Company and
      any Majority Subsidiary, on the one hand, and any affiliate of the
      Company, on the other hand, involving consideration in excess of $100,000;

            (xiii) any contract (A) for the sale of oil or other liquid
      hydrocarbons or minerals produced or to be produced from the Assets that
      is not terminable by the Company or the Majority Subsidiary party thereto
      or their respective successors without penalty on no more than 90 days'
      notice or (B) for the sale of gas produced or to be produced from the
      Assets that has a term exceeding one year, warrants the amount of gas to
      be delivered or has a pricing provision not based on current market value;

            (xiv) any advance payment agreement or any oil and gas balancing
      agreement, or any group of related agreements of such type, under which
      the Company or any Majority Subsidiary has a net obligation, as of the
      most recent date available, which shall be no more than 90 days prior to
      the date hereof, in excess of $100,000 in cash or market value in oil or
      gas;

            (xv) any contract or agreement relating to the Assets under which
      the Company or any Majority Subsidiary has outstanding indebtedness,
      obligations or liability for borrowed money, or liability for the deferred
      purchase price of property, excluding normal trade payables due in less
      than 90 days, or has the obligation to incur any such indebtedness,
      obligation or liability, in each case in excess of $100,000;

            (xvi) any contract, commitment or agreement that involves commodity
      or interest rate swaps, floors, caps, collars, futures, options or other
      similar transactions in excess of S100,000;

            (xvii) any other agreement, contract or commitment that involves
      payments or receipts, individually or in the aggregate over a twelve month
      period, of more than $250,000.

      (b) The Company has made available to the Purchaser true, correct and
complete copies of all written Material Contracts and has provided accurate
descriptions of all oral Material

<PAGE>
                                                                              16

Contracts. Except as set forth in Sections 3.11 and 3.17 of the Disclosure
Schedule, each of the Material Contracts has been fully executed by the parties
thereto, is in full force and effect and is enforceable against the Company or a
Majority Subsidiary, as applicable, in accordance with its terms (except that
(i) the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought), has not been amended or modified in any way
(whether in writing or orally). Except as set forth in Section 3.17 of the
Disclosure Schedule, neither the Company, any Majority Subsidiary nor, to the
best knowledge of the Company, any other party to any Material Contract is in or
alleged to be in material breach of any Material Contract, or has failed to
perform any material obligation required to be performed by them, and, to the
best knowledge of the Company, there does not exist under any provision thereof
any event that, with the giving of notice or the lapse of time or both, would
constitute such a breach or default, except for such breaches, defaults and
events as to which requisite waivers or consents have been obtained or which, in
the aggregate, would not have a Material Adverse Effect. Except as set forth in
Sections 3.11 and 3.17 of the Disclosure Schedule, neither the Company nor any
Majority Subsidiary is participating in any discussions or negotiations
regarding modification of or amendment to any Material Contract or entry into
any new Material Contract.

      (c) Except with respect to past due accounts payable or outstanding
indebtedness to suppliers disclosed in Sections 3.11 and 3.17 of the Disclosure
Schedule, to the best knowledge of the Company, the Company's and the Majority
Subsidiaries' relationships with their respective suppliers are generally
satisfactory.

      (d) To the Company's knowledge, other than as set forth in Section 3.17 of
the Disclosure Schedule, the Company and the Majority Subsidiaries do not have
outstanding any powers of attorney, including, but not limited to, powers of
attorney with respect to representation before governmental agencies, customs
agents and brokers or given in connection with qualification to conduct business
in any other jurisdiction.

      SECTION 3.18. No Affiliate Ownership. To the Company's knowledge, no
person controlled by, controlling or under common control with the Company
(other than the Subsidiaries) owns any interest in any of the Assets or the
Evaluated Properties.

      SECTION 3.19. No Prepayments Made or Refunds Owed. Except as set forth in
Section 3.19 of the Disclosure Schedule, the Company and the Majority
Subsidiaries have not received any prepayment, advance payment, deposits or
similar payments, and have no refund obligation, other than obligations of less
than 5% of monthly sales volume for the Company incurred in the ordinary course
of business, with respect to any oil, gas or products purchased, sold, gathered,
processed or marketed through their plants. The Company and the Majority
Subsidiaries have not received any compensation for gathering or processing
services relating to the plants which would be subject to any refund or create
any repayment obligation, other than

<PAGE>
                                                                              17

obligations of less than $25,000 incurred in the ordinary course of business,
either by or to the Company and the Majority Subsidiaries, and the Company is
not aware of any basis for a claim that such a refund is due.

      SECTION 3.20. Absence of Certain Changes or Events. Except for events
contemplated by this Agreement or disclosed in Section 3.20 of the Disclosure
Schedule, since June 30, 1997:

      (a) the Company and the Subsidiaries have used all reasonable efforts to
preserve and retain the business, employees, properties, suppliers and goodwill
of the Company and the Subsidiaries and have operated their respective
processing operations and conducted business generally only in the ordinary and
usual course consistent with past practice;

      (b) there has been no direct or indirect redemption, purchase or other
acquisition by the Company of any shares of its capital stock, or any
declaration, setting aside payment of any dividend or other distribution by the
Company;

      (c) the Company and the Majority Subsidiaries have not, other than in the
ordinary course of their business, (i) entered into or amended any material
employment, compensation or severance agreements, (ii) changed any current
bonuses or established any new bonuses, (iii) increased the level of
compensation or benefits of any executive officer or director, or (iv)
established, entered into or amended in any material respect any pension,
employee benefit or health plans or any other plans, policies, programs,
practices or arrangements relating to employee benefits or compensation other
than to maintain compliance with any applicable law or regulation; and

      (d) to the knowledge of the Company, no event has occurred with respect to
the Company or the Subsidiaries, or the condition of the Evaluated Properties or
the Assets, that results in or is reasonably likely to result in a Material
Adverse Effect, including, but not limited to, any Material Adverse Effect
resulting from any of the following occurrences:

            (i) any damage, destructions or loss to any of the Evaluated
      Properties or the Assets, whether or not covered by insurance;

            (ii) any business interruption in the Company's or the Subsidiaries'
      use or operation of any of their plants;

            (iii) any sale, lease, assignment, transfer, movement, relocation,
      termination, release or assignment of any of the Evaluated Properties or
      the Assets having a value in excess of $50,000 per item, other than sales
      of inventory in the ordinary course of business;

            (iv) any waiver or release of any rights of either the Company or
      any Subsidiary under any Material Contracts;

<PAGE>
                                                                              18

            (v) any change in any accounting practice or procedure;

            (vi) any capital expenditure or commitment in excess of $50,000,
      individually, or $50,000, in the aggregate, for additions to property,
      plant or equipment;

            (vii) any change in maintenance practices with respect to any of the
      Evaluated Properties or the Assets;

            (viii) any change in credit policy;

            (ix) any change in purchasing or sale practices with respect to
      natural gas or liquids;

            (x) any change in inventory, equipment spare parts, materials or
      liquid levels inconsistent with historical levels maintained in the
      ordinary course;

            (xi) any other occurrence, circumstance or combination thereof,
      except for any occurrence or circumstance generally applicable to the oil
      and gas industry;

            (xii) any assumption, guarantee, endorsement or other assumption of
      responsibility by the Company or any Subsidiary for the material liability
      or obligation of any other person (whether absolute, accrued, contingent
      or otherwise);

            (xiii) any discharge or satisfaction of any lien or other
      encumbrance on any of the Assets or the Evaluated Properties or the
      payment of any liability or obligation (whether absolute, accrued,
      contingent or otherwise) of the Company or any Subsidiary, other than in
      the ordinary course of business and consistent with past practice;

            (xiv) any cancellation, modification or settlement for less than the
      full amount thereof of any material debt or claim by or owing to the
      Company or any Subsidiary;

            (xv) any transfer or grant by the Company or any Subsidiary of any
      right under any contracts and other agreements, patents, patent licenses,
      inventions, trade names, trademarks, service marks or copyrights, or
      registrations or licenses thereof or applications therefor, or with
      respect to any know-how or other proprietary or trade rights;

            (xvi) any termination, discontinuance, closing or disposal of any of
      the Evaluated Properties or Assets; or

            (xvii) any transaction, contract or commitment entered into by the
      Company or any Subsidiary which is not in the ordinary course of business
      and consistent with past practice.

<PAGE>
                                                                              19

      SECTION 3.21. Drilling Obligations. Other than as set forth in Section
3.21 of the Disclosure Schedule, the Company and the Subsidiaries do not have
any material drilling obligations or other development commitments that are not
terminable at will by the Company or the Subsidiary party thereto without
penalty, other than commitments and obligations that arose in the ordinary
course of business where the sole consequence to the Company or the Subsidiary
party thereto for a failure to participate is to suffer a "non-consent" penalty
or forfeit an interest in the undeveloped lands subject to the commitment or
obligation.

      SECTION 3.22. Development Operations. Other than as set forth in Section
3.22 of the Disclosure Schedule, to the best knowledge of the Company, there are
in existence no facts or circumstances that should reasonably cause the Company
to conclude that any development operations on the Evaluated Properties or the
Assets that are contemplated by the Reserve Summary will not be permitted under
applicable laws and governmental rules and regulations or that any third party
may have a reasonable basis to cause any court or governmental agency with
jurisdiction over such operations to cause the suspension or termination of such
operations.

      SECTION 3.23. Accounts Payable. Other than as set forth in Section 3.23 of
the Disclosure Schedule, the Company has no accounts payable in an amount (or in
an aggregate amount) greater than $100,000 which have been outstanding in excess
of ninety (90) days.

      SECT1ON 3.24. No Brokers' or Other Fees. Except as set forth in Section
3.24 of the Disclosure Schedule, no broker, finder or investment banker is
entitled to any fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of the Company.

      SECTION 3.25. Regulatory Authority. To the best knowledge of the Company,
none of the Company, the Subsidiaries, the Evaluated Properties or the Assets is
subject to regulation as (a) a "holding company, an "affiliate" of a "holding
company" or a "subsidiary company" of a "holding company" or a "public utility,"
as each of such terms is defined in the Public Utility Holding Company Act of
1935, as amended, and the rules and regulations thereunder or (b) an "investment
company," or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.

      SECTION 3.26. Full Disclosure. The Company has disclosed to the Purchaser
all material facts pertaining particularly to the Evaluated Properties or the
Assets (as opposed to public information concerning general industry, political
or economic conditions or governmental policies) known to the Company which, in
the reasonable business judgement of the Company, has a Material Adverse Effect
on, or in the future would be reasonably expected to have a Material Adverse
Effect on the Evaluated Properties or the Assets or the ownership, operation or
maintenance of any of the Evaluated Properties or the Assets.

      SECTION 3.27. Foreign Corrupt Practices Act. The Company has not taken any
actions which violate the Foreign Corrupt Practices Act (the "FCPA") and is not
aware of any actions

<PAGE>
                                                                              20

taken by foreign Subsidiaries or local partners which if taken by a U.S. company
would constitute a violation of the FCPA.

      SECTION 3.28. Employee Benefit Matters. (a) Section 3.28 of the Disclosure
Schedule contains a true and complete list of all employee benefit plans (within
the meaning of Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) and all material bonus, stock option, stock
purchase, incentive, deferred compensation, retiree medical or life insurance,
supplemental retirement, severance or other employee benefit plans, programs or
arrangements, and all material employment or compensation agreements, in each
case for the benefit of, or relating to, current employees and former employees
of the Company (collectively, the "Plans").

      (b) Except as disclosed in Section 3.28 of the Disclosure Schedule, none
of the Plans (i) is a multiemployer plan, within the meaning of Section 3(37) or
4001(a)(3) of ERISA (a "Multiemployer Plan") or a single employer pension plan,
within the meaning of Section 4001(a)(15) of ERISA, for which the Company could
incur liability under Section 4063 or 4064 of ERISA (a "Multiple Employer Plan")
or (ii) provides or promises to provide retiree medical or life insurance
benefits.

      (c) To the knowledge of the Company, all Plans are in compliance in all
material respects with the requirements prescribed by applicable statutes,
orders or governmental rules or regulations currently in effect with respect
thereto, and the Company has performed all material obligations required to be
performed by it under, and is not in any material respect in default under or in
violation of, any of the Plans.

      (d) The Company has no Plans that are required to be qualified under
Section 401(a) or 501(a) of the Internal Revenue Code.

      (e) To the knowledge of the Company, the Company has not incurred any
material liability to the Pension Benefit Guaranty Corporation or any
"withdrawal liability" within the meaning of Section 4201 of ERISA, in either
case relating to any Plan or any pension plan maintained by any company which
would be treated as a single employer with the Company, under Section 4001 of
ERISA.

      (f) The Company has made available to the Purchaser full and complete
copies of all Plans and, where applicable, summary plan descriptions as filed
pursuant to ERISA with respect to the Plans.

      SECTION 3.29. Investment Agreement. The Investment Agreement dated August
7, 1997, among Ural Petroleum Corporation, Waldo Securities S.A. (" Waldo"),
Khantimansiiskneftegazgeologia ("KMNGG"), Benz Investments GmbH, Aozi
Iuridicheskala Kompaniia "Graf I Sinovia", OOO "Tagaso", and TOO "Orlis" (the
"Investment Agreement") was duly authorized, executed and delivered by the
Company, and said Investment Agreement,

<PAGE>
                                                                              21

assuming due execution and delivery by the other parties thereto, is a valid and
binding agreement, enforceable in accordance with its terms against the Company
and, to the knowledge of the Company, each of the other parties thereto. To the
knowledge of the Company, all of the representations and warranties made by
KMNGG and Waldo in the Investment Agreement are or will be true and correct in
all material respects as of the date made or to be made, except where the
failure to be true and correct would not have a Material Adverse Effect and
except as set forth in Section 3.29 of the Disclosure Schedule or disclosed to
the Purchaser in some other section of the Disclosure Schedule.

                                   ARTICLE IV

                   REPRESENTATIONS AND WARRANTIES OF PURCHASER

      The Purchaser represents and warrants to the Company as follows:

      SECTION 4.1. Information Received. The Purchaser and its representatives
have had the opportunity to ask questions of and receive answers from
representatives of the Company concerning an investment in the Securities, and
all questions asked by the Purchaser and its representatives have been
adequately answered to the satisfaction of the Purchaser. The Purchaser has
received or has had access to all additional information concerning the Company
and the transactions contemplated hereby that it has requested.

      SECTION 4.2. Investment Experience. The Purchaser has such knowledge and
experience in financial and business matters, including investing in securities
of new and speculative companies, as to be able to evaluate the merits and risks
of an investment in the Securities.

      SECTION 4.3. Nondistributive Intent. The Purchaser is acquiring the
Securities for its own account, for investment and with no view to the
distribution thereof.

      SECTION 4.4. Securities not Registered. The Purchaser acknowledges that
the Securities have not been registered under the Securities Act of 1933, as
amended (the "Securities Act") or the securities laws of any state of the United
States or any other jurisdiction and may not be offered or sold by the Purchaser
unless subsequently registered under the Securities Act (if applicable to the
transaction) and any other applicable securities laws or unless exemptions from
the registration or other requirements thereof are available for the
transaction, which exemptions shall be established to the reasonable
satisfaction of the Company, by opinion of counsel or otherwise.

      SECTION 4.5. Accredited Investor. The Purchaser represents that it is an
accredited investor within the meaning of Rule 501 of Regulation D as
promulgated under the Securities Act, as presently in effect.

<PAGE>
                                                                              22

      SECTION 4.6. Legend on Securities. The Purchaser acknowledges that the
certificates representing the Securities will contain legends reflecting the
restrictions on transfer imposed by the U.S. securities laws and that such
restrictions will be noted on the Company's transfer records.

      SECTION 4.7. Acknowledgment of Risk. The Purchaser acknowledges that an
investment in the Securities involves a high degree of risk and represents that
it understands the economic risks of such investment and can bear the risk of
such investment for an indefinite period. In connection with evaluating such
risks, Purchaser has visited the principal sites of the Company's current and
future operations in Russia to conduct due diligence and has hired engineers,
consultants, accountants and legal counsel in furtherance thereof. Purchaser
acknowledges receipt from the company of a copy of the "Risk Factors Memo" which
is attached hereto as Exhibit F and has read and fully understands the potential
effect of such risks on the Securities.

      SECTION 4.8. Organization. The Purchaser is duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization.

      SECTION 4.9. Authorization. The Purchaser has all requisite power and
authority to enter into this Agreement and to carry out and perform its
obligations under the terms of this Agreement. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary action
of the Purchaser. This Agreement has been duly and validly executed and
delivered on behalf of the Purchaser and, assuming the due execution of this
Agreement by the Company, constitutes a valid and binding agreement of the
Purchaser enforceable against the Purchaser in accordance with its terms,
subject to applicable bankruptcy, insolvency and other laws generally applicable
to creditors' rights and to general principles of equity and except to the
extent that the rights to indemnity and contribution contained in this Agreement
and the Registration Rights Agreement may be unenforceable.

      SECTION 4.10. Brokers' Fees. The Purchaser has no liability or obligation
to pay any fees or commissions to any broker, finder, or agent with respect to
the transactions contemplated by this Agreement.

      SECTION 4.11. No Approvals or Conflicts. The execution and delivery by
Purchaser of this Agreement and the consummation by Purchaser of the
transactions contemplated hereby will not (i) violate or conflict with or result
in a breach of any provision of the organizational documents of the Purchaser,
(ii) violate or conflict with or result in a breach of any provision of, or
constitute a default, (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the creation of a lien, security
interest, charge or encumbrance upon any of the properties of the Purchaser
under, any contract to which the Purchaser is a party or by which the Purchaser
or any of its property is bound, (iii) violate any order, injunction, judgment,
ruling, law or regulation of any court or governmental authority, applicable to
Purchaser or any of its properties or (iv) require any order, license, consent,
approval, waiver, permit or

<PAGE>
                                                                              23

authorization of, or notice to, or declaration, filing or registration with, or
the granting of any exemption by, or the taking of any other action in respect
of, any governmental or regulatory authority or other person not a party to this
Agreement except where the occurrence of any of the events in clauses (ii),
(iii) or (iv) above would not have a material adverse effect on Purchaser.

      SECTION 4.12. No Public Market. Purchaser understands that no public
market now exists for the Securities and that the Company has made no assurances
with respect to any secondary market for the Securities.

      SECTION 4.13. Reliance By The Company. Purchaser understands and
acknowledges that the Company will be relying upon Purchaser's representations
and warranties set forth herein in offering and selling the Securities to the
Purchaser.

      SECTION 4.14. No Public Solicitation. The offering of the Securities to
the Purchaser was made only through direct, personal communication between
Purchaser and a representative of the Company and not through public
solicitation or advertising.

      SECTION 4.15. Availability of Funds. The Purchaser has sufficient finances
available to pay $30,000,000 to the Company in exchange for the Securities on
the Closing Date.

                                    ARTICLE V

                              CONDITIONS TO CLOSING

      SECTION 5.1. Conditions to Obligations of Purchasers. The obligation of
the Purchaser to purchase the Notes and the Warrants at the Closing is subject
to the fulfillment (or waiver) on or prior to the Closing Date of the following
conditions:

            (a) Representations and Warranties. All of the representations and
      warranties made by the Company in this Agreement shall be true and correct
      in all material respects as of the date hereof and on the Closing Date as
      though made on and as of the Closing Date (except in the case where
      another date is specified in a representation and warranty contained
      herein, such representation and warranty shall be true and correct as of
      such date); provided, however that no such failure of a representation or
      warranty of the Company shall be deemed a failure of this closing
      condition unless such failure results in, or would be reasonably likely to
      result in, a Material Adverse Effect; and provided further that in such
      event, the Company shall have 15 days to cure such failure and a new
      Closing Date shall be set by the parties accordingly. In addition, the
      Company is entitled to make supplemental disclosure with respect to events
      occurring subsequent to the execution of this Agreement and prior to the
      Closing Date, which disclosure shall be taken into account in determining
      whether the representations and warranties of the Company are true and
      correct as of the Closing Date for all purposes, including for purposes of
      Section 11.1(c), other than for purposes of satisfying the condition set
      forth in this Section 5.1(a).

<PAGE>
                                                                              24

            (b) Performance. The Company shall have performed in all material
      respects all obligations to be performed or observed by it hereunder on or
      prior to the Closing Date, including delivery of the agreements,
      certificates and other documents required by Section 6.1.

            (c) Warrants. The Company shall have duly authorized and received
      the necessary number of shares of Common Stock initially issuable upon
      exercise of the Warrants.

            (d) Opinion of Company Counsel. The Purchaser shall have received an
      opinion, dated the Closing Date, of counsel for the Company, in the form
      attached hereto as Exhibit G.

            (e) Opinion of Salans, Hertzfeld & Heilbronn. The Purchaser shall
      have received an opinion, dated the Closing Date, of Salans, Hertzfeld &
      Heilbronn in the form attached hereto as Exhibit H.

            (f) Consents. Any governmental and third party consents necessary to
      effect the Closing shall have been obtained.

            (g) Injunctions. On the Closing Date there shall be no injunction,
      writ, preliminary restraining order or other order in effect of any nature
      issued by a court or governmental agency of competent jurisdiction
      directing that the transactions provided for herein not be consummated as
      provided herein

            (h) KMNGG Acquisition. All of the conditions set forth in the
      Investment Agreement have been satisfied prior to the Closing Date, except
      for the receipt of the proceeds from the Financing, except where the
      failure to satisfy a condition would not have a Material Adverse Effect
      and except as set forth in Section 5.1(h) of the Disclosure Schedule or
      disclosed to the Purchaser in some other section of the Disclosure
      Schedule. In addition, the Company shall have consummated the Final
      Closing (as defined in the Investment Agreement) pursuant to the
      Investment Agreement prior to or simultaneously with the Closing under
      this Agreement.

            (i) Financing Conditions. All of the conditions to the receipt of at
      least $15 million in proceeds from the Other Investors in connection with
      the Financing, including the receipt of $5 million from The Millennium
      Fund, have been satisfied or waived (other than the obligation to fund)
      prior to the Closing Date, other than any conditions dependent on the
      closing of the transactions contemplated by this Agreement.

      SECTION 5.2. Conditions to Obligations of Company. The Company's
obligation to sell the Notes and the Warrants to the Purchaser at the Closing is
subject to the fulfillment (or waiver) on or prior to the Closing Date of the
following conditions:

<PAGE>
                                                                              25

            (a) Representations and Warranties. All of the representations and
      warranties made by the Purchaser in this Agreement shall be true and
      correct in all material respects as of the date hereof and on the Closing
      Date as though made on and as of the Closing Date (except in the case
      where another date is specified in a representation in a representation
      and warranty contained herein, such representation and warranty shall be
      true and correct as of such date).

            (b) Performance. The Purchaser shall have performed in all material
      respects all obligations to be performed or observed by it hereunder on or
      prior to the Closing Date, including delivery of the agreements,
      certificates and other documents required by Section 6.2.

            (c) Opinion of Counsel. The Company shall have received an opinion,
      dated the Closing Date, of King & Spalding, counsel for the Purchaser, in
      the form attached hereto as Exhibit I.

            (d) Injunctions. On the Closing Date there shall be no injunction,
      writ, preliminary restraining order or other order in effect of any nature
      issued by a court or governmental agency of competent jurisdiction
      directing that the transactions provided for herein not be consummated as
      provided herein.

            (e) KMNGG Acquisition. All of the conditions set forth in the
      Investment Agreement have been satisfied prior to the Closing Date, except
      for the receipt of the proceeds from the Financing, except where the
      failure to satisfy a condition would not have a Material Adverse Effect
      and except as set forth in Section 5.1(h) of the Disclosure Schedule or
      disclosed to the Purchaser in some other section of the Disclosure
      Schedule.

      SECTION 5.3. Waiver. Any condition established in this Section may be
waived by the party for whose benefit it is created.

                                   ARTICLE VI

                               CLOSING DELIVERIES

      SECTION 6.1. By the Company. At or prior to the Closing, the Company shall
deliver or cause to be delivered to the Purchaser:

            (a) the Notes, duly executed on behalf of the Company and dated the
      Closing Date;

            (b) the Warrants, duly executed on behalf of the Company and dated
      the Closing Date;

<PAGE>
                                                                              26

            (c) an executed copy of the Shareholder Agreement among the Company
      and the Purchaser, dated as of the Closing Date, in substantially the form
      of Exhibit J hereto (the "Shareholder Agreement");

            (d) an executed copy of the Registration Rights Agreement between
      the Company and the Purchaser, dated as of the Closing Date, in
      substantially the form of Exhibit K hereto (the "Registration Rights
      Agreement");

            (e) an executed copy of the Voting and Transfer Agreement between
      the Company, the Purchaser, Brunswick Fitzgibbons Trust Company LLC and
      Waldo Securities, S.A., dated as of the Closing Date, in substantially the
      form of Exhibit L hereto (the "Voting Agreement");

            (f) a certified copy of the amended certificate of incorporation of
      the Company as certified by the Secretary of State of the State of
      Delaware;

            (g) a certificate of the chief executive officer of the Company
      dated as of the Closing Date to the effect that all of the conditions to
      the Purchaser's obligations hereunder have been fulfilled; and

            (h) such other certificates, agreements or documents as the
      Purchaser may reasonably request to evidence or effect the Company's
      compliance with this Agreement or the consummation of the transactions
      contemplated hereby.

      SECTION 6.2. By the Purchaser. At or prior to the Closing, the Purchaser
shall deliver or cause to be delivered to the Company the following:

            (a) cash in the amount of Thirty Million Dollars ($30,000,000) by
      wire transfer of immediately available funds to an account designated by
      the Company;

            (b) an executed copy of the Shareholder Agreement.

            (c) an executed copy of the Registration Rights Agreement;

            (d) an executed copy of the Voting Agreement;

            (e) a certificate, dated the Closing Date and executed on behalf of
      the Purchaser, to the effect that all of the conditions to the Company's
      obligations hereunder have been fulfilled; and

            (f) such other certificates, agreements or documents as the Company
      may reasonably request to evidence or effect the Purchaser's compliance
      with this Agreement or the consummation of the transactions contemplated
      hereby.

<PAGE>
                                                                              27

                                   ARTICLE VII

                            COVENANTS OF THE PARTIES

      SECTION 7.1. Negative Covenants. Prior to an IPO in which all of the Notes
are redeemed pursuant to Section 2.3 hereof and for so long as the Purchaser
owns either (i) Notes representing at least 33% of the notes (in principal
amount) issued pursuant to the Financing or (ii) shares of Common Stock
representing at least 33% of the shares of Common Stock underlying the Warrants
issued pursuant to the Financing (for the purposes hereof, ownership of the
Warrants shall be deemed to be ownership of the Common Stock underlying such
Warrants), the Company will not take any of the following actions without the
consent of Purchaser, which consent shall not be unreasonably withheld:

            (a) Consolidate or merge with or into any person or enter into any
      similar business combination transaction (including a sale of all or
      substantially all of its assets) or effect any transaction or series of
      transactions in which more than thirty three and one third percent (33
      1/3%) of its voting securities are transferred to another person, except
      any such transaction or series of transactions, as the case may be,
      involving only wholly-owned Subsidiaries of the Company, except in
      connection with the acquisition of the outstanding capital stock of KMNGG.

            (b) Amend or repeal any provision of, or add any provision to, the
      Certificate of Incorporation or Bylaws of the Company or otherwise alter
      or change the preferences, rights, privileges or powers of the Notes so as
      to adversely affect the Notes.

            (c) Except in connection with any existing commitments, obligations
      or agreements in respect of options, conversion rights or warrants
      relating to any class of securities of the Company, create or designate,
      authorize the issuance of, or issue or sell any new series or class of
      securities or increase the authorized number of, authorize the issuance
      of, or issue, any additional shares of Common Stock or the Notes;
      provided, however, that no such consent shall be required in connection
      with issuances (i) in furtherance of the acquisition of the outstanding
      capital stock of KMNGG or an IPO in which all of the Notes are redeemed,
      (ii) pursuant to employee stock option plans or (iii) for the purpose of
      satisfying obligations in connection with the notes and warrants issued
      pursuant to the Financing.

            (d) Increase the number of authorized directors of the Company's
      Board of Directors above eleven (11).

            (e) Voluntarily liquidate, dissolve or wind up the Company.

<PAGE>
                                                                              28

            (f) Pay, declare or set aside any sums for the payment of, any
      dividends, or make any distributions on, any shares of its capital stock
      or other equity securities except as permitted by the terms of the Notes.

            (g) Redeem, purchase or otherwise acquire, any of its capital stock
      or other equity securities (including, without limitation, warrants,
      options and other rights to acquire any of its capital stock or other
      equity securities directly or indirectly) or redeem, purchase or make any
      payments with respect to any stock appreciation rights, phantom stock
      plans or similar rights or plans relating to the Company or its
      Subsidiaries, except for redemptions or repurchases of the Notes permitted
      under the terms of the Notes and except for the repurchase or redemption
      of employee stock options, restricted stock or similar securities in
      connection with terminations of employment of employees of the Company.

            (h) Except in connection with the acquisition of capital stock in
      KMNGG, purchase, acquire or obtain any capital stock or other proprietary
      interest, directly or indirectly, in any other entity or all or
      substantially all of the business or assets of another person for
      consideration (including assumed liabilities) in excess of $1,500,000.

            (i) Enter into or commit to enter into any joint ventures or any
      partnerships or establish any non wholly-owned subsidiaries, in each case,
      where the contributions or investment by the Company is in excess of
      $1,500,000 in cash or assets.

            (j) Sell, lease, transfer or otherwise dispose of any asset or group
      of assets, in an aggregate amount (as to the Company and all of its
      Subsidiaries), for consideration in excess of $1,500,000 unless such sale,
      lease, transfer or disposition is in the ordinary course of business.

            (k) Create, incur, assume or suffer to exist any indebtedness of the
      Company or any of its Subsidiaries (which shall include for purposes
      hereof capitalized lease obligations and guarantees or other contingent
      obligations for indebtedness for borrowed money) ("Indebtedness") in an
      aggregate amount (as to the Company and all of its Subsidiaries) in excess
      of $1,500,000 at any one time outstanding, excluding such indebtedness
      that exists as of the date hereof.

            (l) Mortgage, encumber, create, incur or suffer to exist, liens on
      its assets, in an aggregate amount (as to the Company and all of its
      Subsidiaries) in excess of $1,500,000 at any one time outstanding,
      excluding liens on assets that exist as of the date hereof or liens for
      Taxes not yet payable or any Taxes being contested in good faith.

                  (m) Amend, modify or grant any waiver under any material
      provisions of any employment or non-competition agreement to which the
      Company, any of its affiliates, or

<PAGE>
                                                                              29

      any professional corporations or professional associations with which the
      Company has a contractual relationship, is a party or is bound.

            (n) Approve the annual budget or business plan of the Company.

            (o) Fail to use best efforts to enforce, or agree to any amendment
      to the Investment Agreement that has the effect of not enforcing, any of
      its rights under the Investment Agreement, except where the failure to
      enforce any right would not have a Material Adverse Effect and except as
      set forth in Section 7.1(o) of the Disclosure Schedule or disclosed to
      the Purchaser in some other section of the Disclosure Schedule.

            (p) Fail to notify Purchaser of the failure of any other party to
      the Investment Agreement to perform such party's obligations thereunder as
      promptly as practicable after the Company becomes aware of such party's
      failure to perform, except where such failure to perform would not have a
      Material Adverse Effect.

      SECTION 7.2. Affirmative Covenants. Prior to an IPO in which all of the
Notes are redeemed pursuant to Section 2.3 hereof and for so long as the
Purchaser owns either (i) Notes representing at least 33% of the notes (in
principal amount) issued pursuant to the Financing or (ii) shares of Common
Stock representing at least 33% of the shares of Common Stock underlying the
Warrants issued pursuant to the Financing (for the purposes hereof, ownership of
the Warrants shall be deemed to be ownership of the Common Stock underlying such
Warrants), the Company will comply with each of the following covenants;
provided, however, if Purchaser's ownership of the Notes falls below 33 % of the
notes (in principal amount) issued pursuant to the Financing as a result of a
redemption of the Notes upon a C1 Default, then the provisions of Section 7.2(a)
shall remain applicable as long as any Notes remain outstanding:

            (a) (i) In the event that the Company receives written notice of the
            revocation of a production license held by the Company pursuant to a
            license agreement and such revocation was due to a "default by the
            Company" (as defined below) under such license agreement, the
            Company shall take such action as shall be necessary, including,
            without limitation, appealing such revocation to the appropriate
            governmental agency, to cause such revoked license to be reinstated
            on or before the date (the "Determination Date") which is eight (8)
            months from the date of receipt by the Company of such written
            notice of revocation; provided, however, that in the event that the
            revoked license has not been reinstated on or before the
            Determination Date, the Company shall not have breached its
            obligations pursuant to this Section 7.2(a)(i) (a "C1 Default")
            unless (x) the Company's net interest in the aggregate "C1" reserves
            listed in the Reserve Summary attached hereto as Exhibit E (the
            "Reserves") shall have fallen below 265,000,000 barrels, as of the
            Determination Date, as a result of the revocation of such license,
            (y) an "Independent Appraiser" (as defined below) shall have been
            engaged by the Company prior to the expiration of seven (7) months
            from the date

<PAGE>
                                                                              30

            of receipt of the notice of revocation and shall have determined the
            fair market value (the "FMV") of the Company, as of the
            Determination Date, to be below the outstanding principal amount, as
            of the Determination Date, of all notes issued pursuant to the
            Financing (the "Initial Value") and (z) holders of more than 75% of
            the notes (in principal amount) issued pursuant to the Financing
            shall have elected for the accelerated redemption of the notes as
            provided in this Section 7.2(a)(i) within 10 days after reasonably
            prompt notification by the Company of the occurrence of the
            conditions set forth in clauses (x) and (y) above. The Company
            shall use commercially reasonable efforts to ensure that the
            Independent Appraiser's determination is made prior to the
            expiration of 30 days from its engagement, and if such determination
            is not made prior to the expiration of 60 days from its engagement,
            the FMV shall be calculated by multiplying the number of barrels
            representing the Company's net interest in the "C1" reserves by
            $.19). In the event of a C1 Default, the Company shall, within 30
            days after receipt of notification of the election described in
            clause (z) of the preceding sentence, redeem such number of notes
            (in a principal amount of $1,000 each) equal in principal amount to
            the difference between the Initial Value and the FMV. For purposes
            of this Section 7.2(a)(i), "Independent Appraiser" shall mean any
            internationally recognized investment banking firm with experience
            in both the Former Soviet Union and energy that is appointed in good
            faith by mutual agreement of the Company and the holders of a
            majority of the notes (in principal amount) issued pursuant to the
            Financing. For purposes of this Section 7.2(a)(i), "default by the
            Company" shall mean any action or inaction by the Company resulting
            in the revocation of a license related to (i) failure by the Company
            to use the relevant rights in the license, (ii) a threat to the life
            or health of the persons who work or live in the area as a result of
            the gross negligence or willful misconduct of the Company, (iii)
            violation of the rules of the license by the Company, (iv) multiple
            violation of the rules of use of the sub-soil and the land by the
            Company, (v) failure by the Company to begin using the sub-soil
            within the term and volume prescribed by the license, (vi) the
            initiative of the Company to terminate its rights to use the
            sub-soil, (vii) protection of the environment, including but not
            limited to the preservation and conservation of enterprises, as a
            result of the gross negligence or willful misconduct of the Company
            or (viii) the KMNGG Reorganization (as defined in the Investment
            Agreement).

                  (ii) After the initial C1 Default occurs, the Company shall
            continue to be bound by the provisions of clause (i) above, provided
            that a new C1 Default shall only occur if the Reserves shall have
            been reduced by 10% below the level of the Reserves on the
            Determination Date for the previous C1 Default and the other
            provisions of subclauses (y) and (z) also shall have occurred.

                  (iii) The Company shall notify Purchaser promptly upon receipt
            by the Company of any notice of the revocation of a production
            license held by the

<PAGE>
                                                                              31

            Company and upon the occurrence of the Reserves falling below
            265,000,000 barrels as a result of a revoked license.

                  (b) Complete the KMNGG Reorganization (as defined in the
            Investment Agreement) on or before March 31, 1998 and use best
            efforts to complete the sale of the Divisions (as defined in the
            Investment Agreement) within nine (9) months after the Closing Date
            and in any event complete the sale of the Divisions within 12 months
            after the Closing Date.

      SECTION 7.3. Financial Information. For as long as any Security shall be
outstanding, the Company will furnish to the Purchaser the following
information:

            (a) Annual Reports. As soon as practicable, and in any event within
      90 days, after the end of each fiscal year of the Company, balance sheets
      of the Company as at the end of such year and the prior year, and
      statements of profit and loss and cash flow for such year and the prior
      year, prepared in accordance with U.S. generally accepted accounting
      principles, audited by independent certified public accountants of
      recognized standing selected by the Company, and promptly after the
      Company's receipt thereof, a copy of any letter to Company management from
      such accountants commenting on the Company's accounting systems and
      controls in connection with that year's audit.

            (b) Interim Financial Reports. The Company will provide Purchaser
      copies of any monthly financial reports prepared by the Company's
      management and provided to the Board of Directors of the Company.

      SECTION 7.4. Use of Proceeds. The Company shall use the proceeds from the
sale of the Securities hereunder as set forth in Section 7.4 of the Disclosure
Schedule.

      SECT1ON 7.5. Access to Books and Records; Cooperation. Subject to the
Confidentiality provisions contained in the amendment, dated August 15, 1997, to
the Letter of Intent between the parties dated June 18, 1997, from the date
hereof and until the earlier of the Closing or the termination of this
Agreement, the Company shall afford, during normal business hours, to the
Purchaser, its officers, attorneys, accountants and other authorized
representatives reasonable access to the offices, properties, books, records,
contracts, reports, financial forecasts, documents, geological and geophysical
data and all other information relating to the Company and the Subsidiaries
(including, but not limited to, information and documentation related to the
Company's and the Subsidiaries' reserves, title to the Evaluated Properties and
Assets, production and sales of oil and gas, and compliance with Environmental
Laws) that is necessary or helpful to the Purchaser's evaluation of the Company
and the Subsidiaries, whether or not such information is generally available to
the public. The Company (a) will grant to the Purchaser and its representatives
reasonable access to personnel of the Company and the Subsidiaries at reasonable
times that do not interfere with the orderly conduct of the Company's and the
Subsidiaries' business and (b) if reasonably requested from time to time by the
Purchaser, shall

<PAGE>
                                                                              32

cause its officers, counsel, accountants and the officers of the Subsidiaries to
furnish to the Purchaser such additional financial and operating data and other
information so requested.

      SECTION 7.6. Publicity. Neither the Purchaser nor the Company or any
Subsidiary shall make, and each of the Company, the Subsidiaries and the
Purchaser shall cause its partners, officers, employees, representatives and
agents not to make, any statement or public announcement, or make any release to
trade publications or the press, or make any statement to any competitor,
customer or any other person not a party to this Agreement with respect to the
participation of Purchaser in the investment in the Company pursuant to by this
Agreement or the evaluation thereof contemplated hereunder ("Public
Disclosures"), except for disclosures to affiliates or related companies or,
with the prior consent of the parties hereto, representatives, agents or
consultants of the parties hereto, in each case, that agree to be bound by the
obligations of this Agreement, and except for such disclosures as may be
necessary, in the opinion of counsel to the Purchaser or the Company, to comply
with the requirements of any law, governmental order or regulation. The Company
and the Purchaser shall agree upon the form and content of all Public
Disclosures, as well as of the appropriate disclosure to employees of the
Company and its Subsidiaries. Neither party shall make use of the other party's
name in any manner whatsoever without the prior consent of the other party,
except to the extent required in the opinion of counsel to such party, by law,
governmental order or regulation.

      SECTION 7.7. Filings and Consents. Each of the Company and the Purchaser
shall use all reasonable efforts to obtain and to cooperate in obtaining any
order, license, consent, approval, waiver, permit or authorization of, or notice
to, or declaration, filing or registration with, preparing applications to,
conducting negotiations with, and the taking of any other action in respect of,
any governmental agency or body or other person not a party to this Agreement
required in connection with the execution, delivery or performance of this
Agreement. The Company and the Purchaser will furnish to one another such
necessary information and reasonable assistance as may be requested in
connection with obtaining any necessary consent, approval, authorization or
order.

      SECTION 7.8. Conduct of Business. The Company shall notify Purchaser prior
to Closing of the occurrence or likely occurrence of any event or action listed
in Section 7.1.

      SECTION 7.9. Covenant to Satisfy Conditions. Each party agrees to use all
reasonable efforts to insure that the conditions set forth in Sections 5.1 and
5.2 hereof are satisfied prior to 12 noon on October 15, 1997 (the "Cut-Off
Date"), insofar as such matters are within the control of such party.

      SECTION 7.10. Due Diligence. Purchaser shall periodically report to the
Company about the results of its due diligence and its intention with respect to
proceeding with the transactions contemplated by this Agreement.

<PAGE>
                                                                              33

      SECTION 7.11. Withholding Taxes. Interest, principal or other payments due
under the Securities shall be net of withholding tax, if any, required by law,
governmental order or regulation. The Company shall not be required to indemnify
the Purchaser or its permitted successors or assignees with respect to any
withholding taxes.

      SECTION 7.12. Other Investors. Notwithstanding anything in this Agreement
to the contrary, this Agreement shall not be violated by and nothing in this
Agreement shall prevent, or in any way restrict, the sale and issuance to the
Other Investors of notes and warrants pursuant to the Financing.

      SECTION 7.13. Other Agreements. The Company shall not agree to amend
provisions contained in any other Note and Warrant Purchase Agreement entered
into in connection with the Financing (collectively, the "Other Agreements")
which are substantially similar to provisions contained in this Agreement if
such amendment would grant rights or benefits to one or more parties to any
Other Agreement which such party or parties do not have on the date hereof
unless this Agreement is also simultaneously amended to include in respect of
the parties hereto such additional rights, benefits or obligations.

                                  ARTICLE VIII

                               REGISTRATION RIGHTS

      SECTION 8.1. Registration Rights Agreement. The Company and the Purchaser
shall enter into a Registration Rights Agreement, substantially in the form of
Exhibit K hereto, providing the Purchaser with certain registration rights with
respect to the shares of Common Stock issuable upon exercise of its Warrants or
issuable as payment of interest on the Notes.

                                   ARTICLE IX

                                    TRANSFER

      SECTION 9.1. Transfer. Subject to Sections 9.2. 9.3 and 9.4, the Purchaser
shall be entitled, directly or indirectly, to sell, assign, transfer, pledge,
hypothecate, encumber or otherwise dispose of (each, a "Transfer") all or any
portion of the Purchaser's Securities at any time.

      SECTION 9.2. Right of First Offer. Prior to the consummation of the
Company's IPO, the Purchaser may not Transfer all or any part of the Purchaser's
Securities except after full compliance with the right of first offer procedures
set forth below:

            (a) The Purchaser must first offer to sell the Securities it desires
      to sell (the "Offered Securities") to the Company at a price and on terms
      and conditions determined by the Purchaser and specified in the written
      notice in which the offer is made (the

<PAGE>
                                                                              34

      "Offer"). The Company shall have a period of 30 days after the Offer is
      made to accept the Offer by written notice to the Purchaser.

            (b) If the Company elects to purchase (on its behalf or on behalf of
      others) all of the Offered Securities, the closing of the sale of the
      Offered Securities will be held at the Company's principal office in New
      York on a date to be specified by the Company in it acceptance of the
      Offer which is not less than 10 days nor more than 60 days after the end
      of the 30-day period in which the Offer could be accepted. At the closing,
      the Company will deliver the consideration in accordance with the terms of
      the Offer, and the Purchaser will deliver the Securities purchased to the
      Company, duly indorsed for transfer, free and clear of all liens, claims
      and encumbrances.

            (c) If the Company does not elect to purchase all of the Offered
      Securities, the Purchaser will be free for a period of 90 days after the
      last day for such acceptance to sell, assign or transfer all, but not less
      than all, of the Offered Securities to a third party for a price and on
      terms no more favorable to the third party than those contained in the
      Offer. If the Offered Securities are not so sold within that 90-day
      period, all rights to sell the Offered Securities to a third party
      (without making another offer to the Company pursuant to this Section 9.2)
      will terminate and the provisions of this Section 9.2 will continue to
      apply to any proposed future transfer.

            (d) Notwithstanding the foregoing, in the event that the Company
      fails to close the purchase of the Offered Securities on the date
      specified in its acceptance of the Offer, the Purchaser shall be entitled,
      for a period of 120 days from the closing date originally set by the
      Company in its acceptance of the Offer, to sell, assign or transfer the
      Offered Securities at any reasonably negotiated price to any third party
      without having to further comply with the provisions of this Section 9.2;
      provided, however, that in the event that the Company's failure to close
      the purchase is due to an order, injunction or other similar mandate from
      a regulatory body of competent jurisdiction and the Company is using its
      best efforts to cause such order, injunction or mandate, as the case may
      be, to not apply to the purchase of the Offered Securities, then the
      Company shall have until the earlier of (i) the expiration of 30 days from
      the closing date originally set by the Company in its acceptance of the
      Offer or (ii) such time as the order, injunction or mandate becomes final
      and non-appealable in which to close the purchase of the Offered
      Securities before the provisions of this clause (d) become applicable.

      SECTION 9.3. Non-Transferability of Negative Covenants. Without limiting
the generality of Section 13.4, in the event the Purchaser Transfers all or any
portion of the Purchaser's Securities, the Negative Covenants set forth in
Section 7.1 shall not be transferred and the transferee of the Securities shall
have no rights to enforce such Negative Covenants against the Company.

<PAGE>
                                                                              35

      SECTION 9.4. Restrictions on Transfers; Certain Permitted Transfers.

      (a) Purchaser agrees that it will not Transfer any of the Securities
(whether before or after an IPO and whether or not Section 9.2 shall have been
applicable), except:

            (i) a Transfer made in compliance with the federal and all
      applicable state securities laws to a trust, the beneficiaries of which,
      or to a corporation, partnership or limited liability company, the
      stockholders, limited or general partners or equity owners of which,
      include only the Purchaser or its "affiliates" (within the meaning of the
      Securities Act); provided that no Transfer pursuant to subsection (a)(i)
      of this Section 9.4 shall be given effect on the books of the Company
      unless and until the transferee shall agree in writing, in form and
      substance satisfactory to the Company, to become, and becomes, bound by
      substantially similar representations and warranties and restrictions on
      Transfer applicable to the Purchaser contained in this Agreement. Each
      person to whom the Securities may be Transferred pursuant to this Section
      9.4(a)(i) is hereinafter sometimes referred to as "Permitted Transferee";

            (ii) a Transfer to a person other than a Permitted Transferee
      provided that (A) such Transfer is exempt from the registration
      requirements of the Securities Act and any applicable state securities
      laws, (B) if the Company so requests, the Company receives from the
      transferor an opinion of counsel that such Transfer may be effected
      without registration under the Securities Act and any applicable state
      securities laws, and (C) the transferee shall agree in writing, in form
      and substance satisfactory to the Company, to become, and becomes, bound
      by substantially similar representations and warranties and restrictions
      on Transfer applicable to the Purchaser contained in this Agreement; or

            (iii) a Transfer to the Company.

      (b) Each certificate evidencing Notes issued to the Purchaser or to a
subsequent transferee shall include a legend in substantially the following form
(in addition to any other statements or legends required by law):

      THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES
      LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
      SUBJECT TO THE CONDITIONS SPECIFIED IN A NOTE AND WARRANT PURCHASE
      AGREEMENT DATED OCTOBER 10, 1997. A COPY OF SUCH CONDITIONS WILL BE
      FURNISHED BY THE CORPORATION TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND
      WITHOUT CHARGE. THESE SECURITIES MAY NOT BE RESOLD OR TRANSFERRED UNLESS

<PAGE>
                                                                              36

      SUCH CONDITIONS ARE COMPLIED WITH AND UNLESS REGISTERED OR EXEMPT FROM
      REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE
      SECURITIES LAWS.

      (c) Each Certificate evidencing Warrants issued to the Purchaser or to a
subsequent transferee shall include a legend in substantially the following form
(in addition to any other statements or legends required by law):

      THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES
      LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS,
      AND ANY SHARES OF COMMON STOCK ISSUED UPON THE EXERCISE THEREOF WILL BE,
      SUBJECT TO THE CONDITIONS SPECIFIED IN (I) A NOTE AND WARRANT PURCHASE
      AGREEMENT DATED OCTOBER 10, 1997, (II) A SHAREHOLDER AGREEMENT DATED
      OCTOBER --, 1997 AND (III) A VOTING AND TRANSFER AGREEMENT DATED OCTOBER
      --, 1997. A COPY OF SUCH CONDITIONS WILL BE FURNISHED BY THE CORPORATION
      TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE. THESE
      SECURITIES MAY NOT BE RESOLD OR TRANSFERRED UNLESS SUCH CONDITIONS ARE
      COMPLIED WITH AND UNLESS REGISTERED OR EXEMPT FROM REGISTRATION UNDER THE
      SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS.

      (d) Any purported Transfer in violation of this Section 9.4 shall be null
and void and of no force or effect.

                                    ARTICLE X

                                 INDEMNIFICATION

SECTION 10.1. Indemnity.

            (a) The Company agrees to indemnify, defend and hold Purchaser and
      its Affiliates harmless from and against any and all loss, liability,
      damage, judgment, claim, deficiency or expense (including interest,
      penalties, reasonable attorneys' fees and amounts paid in settlement) to
      which Purchaser or its Affiliates may become subject insofar as such loss,
      liability, damage, claim, judgment, deficiency or expense arises out of or
      is based upon a suit or proceedings brought by a third party or threatened
      by a third party (i) arising out of or based upon any breach of any
      representation or warranty of the Company contained in this Agreement or
      the Securities or (ii) arising out of, related to or based upon any

<PAGE>
                                                                              37

      breach or default in the performance by the Company of any covenant or
      agreement of the Company contained in this Agreement or the Securities.

            (b) The Company shall not be liable for any settlement of any such
      action or proceeding effected without its written consent (which consent
      shall not be unreasonably withheld), but if settled with its written
      consent or if there be a final judgment for the plaintiff in any such
      action or proceeding, subject to the provisions hereof, the Company agrees
      to indemnify and hold harmless the Purchaser and its Affiliates, to the
      extent provided in the preceding paragraph, from and against any loss,
      liability, damage or expense incurred by reason of such settlement or
      judgement.

            (c) Anything herein contained to the contrary notwithstanding, (i)
      the indemnification herein contained shall not extend to any losses,
      claims, damages, liabilities and expenses incurred by the Purchaser and
      its Affiliates to the extent such losses, claims, damages, liabilities and
      expenses arise out of a violation by the Purchaser or its Affiliates in
      connection with the transactions contemplated hereby of any of its
      representations, warrants or agreements set forth in this Agreement or any
      Security or any laws, rules, regulations or orders applicable to it in its
      capacity as a regulated institution of any type whatsoever, (ii) neither
      the Purchaser nor its Affiliates may assert any claims under this Section
      10 unless and until the cumulative total of all such claims by such
      indemnitee exceeds an aggregate of $750,000 and (iii) the Company shall
      not be liable for any indemnification amounts under this Section 10.1 in
      excess of $10,000,000.

            (d) Promptly after receipt by any indemnified party under this
      Section 10 of notice of the commencement of any action or proceeding, such
      indemnified party shall, if a claim in respect thereof is to be made
      against the indemnifying party hereunder, notify in writing the
      indemnifying party of the commencement thereof; but the delay or omission
      so to notify the indemnifying party shall not relieve it from any
      liability which it may have to any indemnified party except to the extent
      that such indemnifying party is actually prejudiced by such delay or
      failure to give notice. In case any such action or proceeding shall be
      brought against any indemnified party, and it shall notify the
      indemnifying party of the commencement thereof, the indemnifying party
      shall be entitled to participate therein and assume the defense thereof,
      including the employment of counsel reasonably satisfactory to the
      indemnified party and the payment of all expenses. The indemnified party
      shall have the right to employ separate counsel in any such action and to
      participate in the defense thereof, but the fees and expenses of such
      counsel shall be at the expense of such indemnified party unless (a) the
      indemnifying party has agreed to pay such fees and expenses or (b) the
      indemnifying party shall have failed to assume the defense of such action
      or proceeding and to employ counsel reasonably satisfactory to the
      indemnified party in any such action or proceeding or (c) the named
      parties to any such action or proceeding (including any impleaded parties)
      include both the indemnified party and the indemnifying party and the
      indemnified party shall have been advised by counsel that there may be one
      or more legal defenses available to the indemnified party which are
      different

<PAGE>
                                                                              38

      from or additional to those available to the indemnifying party and
      supplied a copy of such opinion to the indemnifying party (in which case,
      if the indemnified party notifies the indemnifying party in writing that
      the indemnified party elects to employ separate counsel at the expense of
      the indemnifying party, the indemnifying party shall not have the right to
      assume the defense of such action or proceeding on behalf of the
      indemnified party).

            (e) Notwithstanding the foregoing, this Section 10.1 shall not
      restrict in any manner Purchaser's ability to collect the principal amount
      and interest due on the Notes.

                                   ARTICLE XI

                                EVENTS OF DEFAULT

      SECTION 11.1. Events of Default. The occurrence of one or more of the
following events shall constitute an event of default ("Event of Default") under
this Agreement:

            (a) Any principal amount due under the Notes shall not be paid when
      due;

            (b) Interest accrued and payable on the Notes or any fee due under
      this Agreement shall not be paid within 30 days after such interest or fee
      shall become due;

            (c) Any representation or warranty contained in this Agreement or
      any Related Agreement or any certificate, written statement, or other
      document furnished by the Company in connection with the negotiation of
      this Agreement or the sale of the Notes shall prove to have been untrue in
      any material respect when made which directly results in the occurrence of
      a Material Adverse Effect;

            (d) The Company shall default in the performance or observance of
      any term, covenant, or agreement on its part to be performed or observed
      under this Agreement or any Related Agreement and such default shall
      continue unremedied for a period of 60 days after written notice of such
      default from the Purchaser is delivered to the Company;

            (e) The Company shall (i) fail to pay any Indebtedness, or any
      interest or premium thereon, when due (or, if permitted by the terms of
      the relevant document, within any applicable grace period), whether such
      Indebtedness shall become due by scheduled maturity, by required
      prepayment, by demand or otherwise; or (ii) fail to perform any term,
      covenant or condition on its part to be performed under any agreement or
      instrument evidencing, securing or relating to any such Indebtedness, when
      required to be performed, and in the case of (ii), such failure shall
      continue after the applicable grace period, if any, specified in the
      agreement or instrument relating to such Indebtedness, if the effect of
      such failure is to accelerate, or to permit the holder or holders of such
      Indebtedness to accelerate, the maturity of such Indebtedness;

<PAGE>
                                                                              39

            (f) Either the Company or any of its Significant Subsidiaries (as
      defined in Regulation S-X under the Securities Act) shall become insolvent
      or generally fail to pay, or admit in writing its inability to pay, its
      debts as they become due, or shall voluntarily commence any proceeding or
      file any petition under any bankruptcy, insolvency or similar law or
      seeking dissolution or reorganization or the appointment of a receiver,
      trustee, custodian or liquidator for itself or a substantial portion of
      its property, assets or business or to effect a plan or other arrangement
      with its creditors, or shall file any answer admitting the jurisdiction of
      the court and the material allegations of an involuntary petition filed
      against it in any bankruptcy, insolvency or similar proceeding, or benefit
      of creditors or shall consent to or acquiesce in the appointment of a
      receiver, trustee, custodian or liquidator for itself or a substantial
      portion of its property, assets or business;

            (g) Involuntary proceedings or an involuntary petition shall be
      commenced or filed against the Company or any of its Significant
      Subsidiaries under any bankruptcy, insolvency or similar law or seeking
      the dissolution or reorganization of the Company or any such Subsidiary or
      the appointment of a receiver, trustee, custodian or liquidator for the
      Company or any of its Significant Subsidiaries or a substantial part of
      the property, assets or business of the Company or any of its Significant
      Subsidiaries, or any writ, order, judgment, warrant of attachment,
      execution or similar process shall be issued or levied against a
      substantial part of the property, assets or business of the Company or any
      of its Significant Subsidiaries, and such proceeding or petition shall not
      be stayed, released, vacated or fully bonded within 60 days after
      commencement, filing or levy, as the case may be;

            (h) A final judgment or judgments not covered by insurance for the
      payment of money aggregating in excess of $100,000 is entered against the
      Company or any Significant Subsidiary and any one of such judgments
      remains undischarged and unstayed for a period of 60 days from the date of
      its entry; or

            (i) An "event of default" under an instrument evidencing any
      Indebtedness in a principal amount in excess of $100,000 shall occur and
      be continuing for a period of 30 days and such Indebtedness shall be
      declared immediately due and payable as a result thereof.

      SECTION 11.2. Optional Acceleration of Maturity. Upon the occurrence and
during the continuation of an Event of Default other than an Event of Default
with respect to the Company under subsections (f) and (g) of Section 11.1, the
Majority Note Holders may declare by written notice (the "Acceleration Notice")
to the Company the then outstanding principal amount of and the accrued and
unpaid interest on the Notes to be forthwith due and payable, whereupon such
principal and interest shall, if not cured within 30 days from the date of the
Acceleration Notice, be and become immediately due and payable, without
presentment, demand, protest, notice of intent to accelerate, or other notices
or formalities of any kind, except the Acceleration Notice, all of which are
hereby expressly waived by the Company.

<PAGE>
                                                                              40

      SECTION 11.3. Automatic Acceleration. In the case of the occurrence of an
Event of Default with respect to the Company referred to in subsection (f) and
(g) of Section 11.1, the then outstanding principal amount of and the accrued
and unpaid interest on the Notes, any fees and all other amounts payable by the
Company under this Agreement and under the Notes shall be and become
automatically and immediately due and payable, without presentment, demand,
protest, notice of intent to accelerate, notice of acceleration or other notices
or formalities of any kind, all of which are hereby expressly waived by the
Company.

                                   ARTICLE XII

                                   TERMINATION

      SECTION 12.1. Termination. This Agreement may be terminated and abandoned
at any time prior to the Closing:

      (a) by the mutual consent of the Company and the Purchaser;

      (b) by the Purchaser in the event the Closing has not occurred on or
before the Cut-Off Date by reason of the failure of any condition under Section
5.1 hereof, unless the failure of such consummation shall be due to the bad
faith failure of the Purchaser to comply in all material respects with the
agreements or covenants contained herein to be performed by the Purchaser on or
before the Cut-Off Date;

      (c) by the Company in the event the Closing has not occurred on or before
the Cut-Off Date by reason of the failure of any condition under Section 5.2
hereof, unless the failure of such consummation shall be due to the bad faith
failure of the Company to comply in all material respects with the agreements or
covenants contained herein to be performed by such party on or before the
Cut-Off Date;

      (d) by the Purchaser if the Company has consummated a Competing
Transaction prior to June 18, 1998 with a person other than the Purchaser,
including a transaction with the persons identified on Section 12.1 of the
Disclosure Schedule. A "Competing Transaction" shall mean a transaction that has
as its principal purpose the raising of capital by the Company in order to
pursue an acquisition of KMNGG, or any affiliate thereof, or to pursue a joint
venture or similar transaction designed to achieve an acquisition of KMNGG;
provided, however, that the participation by Other Investors with Beacon in the
Financing in an aggregate amount not exceeding $20,000,000 shall not be deemed a
Competing Transaction; or

      (e) by either the Company or the Purchaser in the event any court or
governmental agency of competent jurisdiction shall have issued an order, decree
or ruling or taken any other action restraining, enjoining or otherwise
prohibiting the transactions contemplated hereby and such order, decree or
ruling or other action shall have become final and nonappealable.

<PAGE>
                                                                              41

      (f) by the Purchaser by written notice to the Company in accordance with
Section 12.3 hereof prior to the Final Closing (as defined in the Investment
Agreement) if an event has occurred between the date hereof and the Final
Closing (i) which would constitute a breach of the representations and
warranties contained in Section 3.29 hereof if the exceptions to such
representations and warranties set forth in those items of Section 3.29 of the
Disclosure Schedule that make specific reference to Attachment I to the
Disclosure Schedule were not applicable and (ii) which would directly result in
a Material Adverse Effect.

      SECTION 12.2. Effect of Termination.

      (a) If this Agreement is terminated pursuant to Section 12.1(b) or (f),
then in addition to, and in no way limiting, all other remedies available to the
Purchaser, the Company shall be obligated to pay the Purchaser, in cash or
Common Stock valued at $330 per share, as adjusted for any stock split, stock
dividend, share distribution or similar transaction after the date hereof, at
the option of the Company, an amount equal to all expenses, including reasonable
fees and expenses of Purchaser's legal counsel, accountants and consultants,
reasonably incurred by Purchaser in connection with the negotiation and
preparation of this Agreement, including the Purchaser's due diligence
examination of the Company, and the consummation of the transactions
contemplated hereby, not to exceed $600,000 (the "Expense Reimbursement
Amount"); and provided that Purchaser shall, subject to its fiduciary
responsibility to its investors, use commercially reasonable efforts to keep
such expenses below $400,000.

      (b) If this Agreement is terminated pursuant to Section 12.1(d), the
Company shall be obligated to pay, in addition to the amounts provided in (a)
above, a fee of $1,285,715 (the "Termination Fee"), payable in cash or Common
Stock valued at $330 per share, as adjusted for any stock split, stock dividend,
share distribution or similar transaction after the date hereof, at the option
of the Purchaser; provided, the Company shall not be obligated to pay the
Termination Fee if (i) this Agreement has not been signed by 5:00 p.m., New York
City time, on September 24, 1997 because the Company has chosen not to pursue
the transactions contemplated hereby or the Company cannot fulfill the
conditions to Closing as set forth in Section 5.1 hereof, in each case solely as
a result of actions taken in bad faith by the Purchaser, (ii) the Purchaser, at
the time of the agreement, arrangement or understanding which results in the
consummation of the Competing Transaction, is not in good faith willing to
proceed with the transactions contemplated hereby on the terms contemplated
herein, or (iii) the Purchaser has notified the Company that it no longer
intends to pursue the transactions contemplated by this Agreement.

      (c) The provisions contained in this Section 12.2 shall survive the
termination of the Agreement.

      SECTION 12.3. Procedure and Effect of Termination. In the event of the
termination and abandonment of this Agreement by the Company or the Purchaser
pursuant to Section 12.1 hereof, written notice thereof shall forthwith be
given to the other party. If the transactions contemplated by this Agreement are
terminated as provided herein:

<PAGE>
                                                                              42

            (a) Each party will redeliver all documents, work paper and other
      material of the other party relating to the transactions contemplated
      hereby, whether so obtained before or after the execution hereof, to the
      party furnishing the same;

            (b) The Purchaser shall hold in strict confidence all information
      obtained from the Company or any of the Subsidiaries pursuant to Section
      7.5 of this Agreement or otherwise in connection with the transactions
      contemplated hereunder (other than information and data that is or becomes
      generally available to the public other than through disclosure by the
      Purchaser or its partners, officers, employees, representatives or
      agents), and, without the prior written consent of the Company, the
      Purchaser shall not disclose any such information to anyone other than to
      its partners, officers, employees and representatives, except to the
      extent the Purchaser becomes legally compelled (including, without
      limitation, by oral questions, interrogatories, requests for information
      or documents, subpoena, civil investigative demand or similar process) to
      disclose such information, in which case the Purchaser will provide the
      Company with prompt written notice so that the Company may seek a
      protective order or other appropriate remedy and/or waive compliance with
      the provisions of this Section 12.3(b). In the event that such protective
      order or other remedy is not obtained or the Company waives compliance
      with the provisions of this Section 12.3(b), the Purchaser will furnish
      only the specific information it is legally required to disclose; and

            (c) No party to this Agreement will have any liability under this
      Agreement to the other except (i) as stated in Section 12.2 of this
      Agreement, in subparagraphs (a), (b) and (c) of this Section 12.3 or in
      Section 10.1 of this Agreement and (ii) for any willful breach of any
      provision of this Agreement.

                                  ARTICLE XIII

                                  MISCELLANEOUS

      SECTION 13.1. Waivers and Amendments. This Agreement may be amended only
in a writing signed by both parties. and any waiver of any provision hereof
shall be effective only if set forth in a writing signed by the party charged
with the waiver. No failure to enforce any provision of this Agreement shall be
deemed to or shall constitute a waiver of such provision and no waiver of any of
the provisions of this Agreement shall be deemed to or shall constitute a waiver
of any other provision hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver.

      SECTION 13.2. Governing Law. This Agreement shall be governed by the laws
of the State of New York without regard to the conflicts of laws provisions
thereof.

      SECTION 13.3. Survival. The representations, warranties, covenants and
agreements made herein shall survive the Closing, regardless of any
investigation made by or on behalf of any

<PAGE>
                                                                              43

party or its representatives. All statements as to factual matters contained in
any certificate or other instrument delivered by or on behalf of the Company
pursuant hereto or in connection with the transactions contemplated hereby shall
be deemed to be representations and warranties by the Company hereunder as of
the date of such certificate or instrument.

      SECTION 13.4. Successors and Assigns.

            (a) Except as provided in Article IX hereof, neither this Agreement
      nor any of the rights or obligations hereunder shall be assigned by either
      of the parties hereto without the prior written consent of the other
      party, except that either party may assign all its rights and obligations
      to the assignee of all or substantially all of the assets of such party
      including an acquisition through merger, provided that such party shall in
      no event be released from its obligations hereunder without the prior
      written consent of the other party.

            (b) Notwithstanding the provisions of Section 13.4(a), all
      transferees of Securities shall be subject to the restrictions on transfer
      set forth in Article IX hereof and, for so long as such transferee holds
      Securities, shall be deemed party to this Agreement for purposes of
      Article IX only.

            (c) Subject to the foregoing, this Agreement will be binding upon,
      inure to the benefit of and be enforceable by the parties and their
      respective successors and assigns. Any attempted assignment in
      contravention hereof shall be null and void.

      SECTION 13.5. Entire Agreement. This Agreement and the Exhibits hereto (a)
constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and (b) are not intended to confer upon any Person, other
than the parties hereto, any rights or remedies hereunder.

      SECTION 13.6. Notices. All notices that are required or may be given
hereunder shall be in writing and may be given by personal delivery or by
facsimile transmission or mail. The person sending any notice shall prepay all
transmission charges. Any notice personally delivered or given by mail shall be
deemed effective upon receipt. Transmission by a recognized courier service
shall be deemed personal delivery and any notice so delivered shall be deemed
received at the time of delivery confirmed by the courier service. Any notice
sent by facsimile transmission shall be deemed received upon confirmation of
transmission by the sender's facsimile machine. The following address and FAX
number may be used for delivery of notices until another address or FAX number
is specified by the Company or the Purchaser in a written notice to the other
(provided, however, that the Company agrees to maintain an office in New York
City as long as any Notes are outstanding):

<PAGE>
                                                                              44

      If to the Company:

            Khanty Mansiysk Oil Corporation
            125 Park Avenue, Suite 800
            New York, New York 10017-5699
            Attn.: John B. Fitzgibbons
            Fax: (212) 479-2505

      If to the Purchaser:

            Khanty Holdings LLC
            c/o The Beacon Group
            399 Park Avenue, 17th Floor
            New York, New York 10022
            Attention: John J. MacWilliams
            Fax:(212) 339-9109

      SECTION 13.7. Expenses; Reports. (a) The Company shall, at the Closing,
reimburse the Purchaser for all expenses, including reasonable fees and expenses
of Purchaser's legal counsel, accountants and consultants, reasonably incurred
by Purchaser in connection with the negotiation and preparation of this
Agreement, including the Purchaser's due diligence examination of the Company,
and the consummation of the transactions contemplated hereby, not to exceed
$600,000. Purchaser shall, subject to its fiduciary responsibility to its
investors, use commercially reasonable efforts to keep such expenses below
$400,000. The Company shall also pay all sales, transfer or other similar taxes
which may be payable in connection with the transactions contemplated by this
Agreement.

      (b) Within 30 days following the date on which the Company has reimbursed
the expenses of the Purchaser pursuant to Section 13.7(a), Purchaser shall
deliver to the Company a copy of all reports, or portions thereof, prepared for
the Purchaser by its legal and financial representatives in connection with the
Purchaser's due diligence examination of the Company and the transactions
contemplated hereby which Purchaser, in its sole discretion, determines to be
beneficial to the Company and not otherwise detrimental to Purchaser.

      SECTION 13.8. Attorneys' Fees. In the event of any litigation between the
parties with respect to this Agreement, the prevailing party shall be entitled
to recover, in addition to any other relief awarded by the court, its reasonable
attorneys' fees and other costs of preparing for and participating in the
litigation.

      SECT1ON 13.9. Severability. If any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not be affected or impaired thereby.

<PAGE>
                                                                              45

      SECTION 13.10. Captions. The captions of the sections and subsections of
this Agreement and the Disclosure Schedule are for convenience of reference
only, and are not to be considered in construing this Agreement and the
Disclosure Schedule.

      SECT1ON 13.11. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, no one of which need be
signed by both parties, and both of which together shall constitute one
instrument.

      SECTION 13.12. Knowledge. As used herein, the term "knowledge of the
Company" shall mean the actual knowledge of Tom Wilson and the Chief Executive
Officer of the Company after due inquiry of Gerard De Geer and the officers and
senior employees of the Company.

<PAGE>
                                                                              46

      IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.

                                        KHANTY MANSIYSK OIL CORPORATION

                                        By:  /s/ John B. Fitzgibbons
                                           -------------------------------------
                                           Name:
                                           Title:

                                        KHANTY HOLDINGS LLC

                                        By: The Beacon Group Energy Investment
                                            Fund, L.P.

                                        By: Beacon Energy Investors, L.L.C., its
                                            General Partner

                                        By: Energy Fund GP, Inc., a member

                                        By:  /s/ Robert F. Semmens
                                           -------------------------------------
                                           Name:  Robert F. Semmens
                                           Title: Managing Director

<PAGE>

      THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES
      LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
      SUBJECT TO THE CONDITIONS SPECIFIED IN A NOTE AND WARRANT PURCHASE
      AGREEMENT DATED OCTOBER 10, 1997. A COPY OF SUCH CONDITIONS WILL BE
      FURNISHED BY THE CORPORATION TO THE HOLDER HEREOF UPON WRITTEN REQUEST
      AND WITHOUT CHARGE. THESE SECURITIES MAY NOT BE RESOLD OR TRANSFERRED
      UNLESS SUCH CONDITIONS ARE COMPLIED WITH AND UNLESS REGISTERED OR EXEMPT
      FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE
      SECURITIES LAWS.

      THIS NOTE IS ISSUED ON OCTOBER 15, 1997 WITH AN ISSUE PRICE OF $27,768,379
      AND ORIGINAL ISSUE DISCOUNT OF $2,231,621 (BASED UPON A YIELD TO MATURITY
      OF 12.00%).

                         KHANTY MANSIYSK OIL CORPORATION

                                 PROMISSORY NOTE

US$30,000,000                                                   October 15, 1997

      FOR VALUE RECEIVED, Khanty Mansiysk Oil Corporation, a Delaware
corporation (the "Company"), hereby promises to pay to the order of Khanty
Holdings LLC, a Delaware limited liability company ("Lender"), the principal sum
of Thirty Million Dollars (US$30,000,000), with interest on the outstanding
balance thereof at the rate of 10% per annum from the date hereof until paid in
full.

      This Note (the "Note") is issued pursuant to and is entitled to the
benefits of, and is otherwise subject to the provisions of, the Note and Warrant
Purchase Agreement dated October 10, 1997, among the Company and Lender (as
amended or otherwise supplemented from time to time, the "Note Purchase
Agreement"). The Note Purchase Agreement, among other things, contains
provisions for (i) mandatory and optional redemption, (ii) restrictions on
transfer

<PAGE>
                                                                               2

of the Note, (iii) events of default and (iv) exchange of Notes in denominations
of $1,000 or integral multiples thereof.

      Capitalized terms used but not defined herein shall have the meanings
assigned to such terms in the Note Purchase Agreement.

      This Note is also subject to the following terms and conditions:

      1. Computation and Payment of Interest. The Company shall pay interest on
the unpaid principal amount of the Note from the date of the Note until such
principal amount shall be paid in full, at a rate equal to 10% per annum.
Accrued interest on the unpaid principal amount of the Note shall be payable
quarterly on September 30, December 31, March 31 and June 30 of each year until
the Note is paid in full with the first such payment due on December 31, 1997.
The Company shall make each payment under the Note not later than 12:00 noon,
New York City Time, on the day when due. All computations of interest shall be
made on the basis of a year of 365 or 366 days, as the case may be, in each case
for the actual number of days (including the first day but excluding the last
day) elapsed. Whenever any payment under the Note shall be stated to be due on a
the other than a Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of payment of interest.

      2. Payment of Principal. Unless sooner declared due hereunder, the
principal amount of this Note shall be paid on the date fixed for such payment
pursuant to Section 2.3 of the Note Purchase Agreement; provided, however, that
upon the occurrence of an Event of Default, at the option of Lender or
automatically, as the case may be, the then outstanding principal amount of the
Note, together with all interest accrued and unpaid thereon, may become
immediately due and payable in the manner, upon the conditions and with the
effect set forth in the Note Purchase Agreement, and the rights and remedies
provided in the Note Purchase Agreement shall apply.

      3. Method of Payment. Accrued interest shall be payable, at the Company's
option, in either United States dollars or Common Stock or a combination
thereof. If all or any portion of such interest is paid in Common Stock, each
share of Common Stock shall be valued for this purpose as being equal to the
exercise price of the Warrants at the time of such payment. The Company will pay
principal in United States dollars, except as provided in Section 2 of the
Warrants whereby payment of the Exercise Price (as defined in the Warrants) may
be made by delivery of this Note in such principal amount equal to the Exercise
Price. Payments of principal and interest shall be made in United States dollars
by wire transfer in immediately available funds to the account specified by the
Lender or other holder of this Note (the "Holder") or by delivery of stock
certificates representing shares of Common Stock to the Holder, as the case may
be. Principal and interest shall be paid at such place as the Holder may
designate in writing to the Company. The Holder must surrender this Note to the
Company at the time of final payment of principal.

<PAGE>
                                                                               3

      4. Prepayment. The Company shall have no right to prepay this Note, except
as expressly permitted or required under the Note Purchase Agreement, without
the consent of the Holder.

      5. Application of Payments. All payments received on this Note shall be
applied first to the payment of accrued interest and then to the reduction of
principal.

      6. Waivers. The Company, for itself and its successors and assigns and any
endorsers of this Note from time to time hereby waive presentment for payment,
demand, notice of dishonor, protest, notice of protest and any other notice not
provided for in the Note Purchase Agreement that the Company may lawfully waive.
No delay in exercising any right under this Note shall operate as a waiver of
such right or any other right under this Note, nor shall any omission in
exercising any right on the part of Lender under this Note operate as a waiver
of any other rights. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law.

      7. Attorneys' Fees. If this Note or interest thereon is not paid when due,
or suit is brought to enforce any right hereunder, the Company and each
successor, assignee and endorser of this Note agrees to pay all reasonable costs
of collection and enforcement, including reasonable attorneys' fees. In the
event of any bankruptcy or insolvency proceedings involving the Company, costs
of collection shall include all costs and attorneys' fees incurred in connection
with such proceedings, including the fees of counsel for attendance at meetings
of creditors.

      8. Interest After Due Date. If the principal of or any accrued interest on
this Note is not paid when due, as a result of acceleration or otherwise, the
overdue amount shall bear interest (v) for a period of 45 days subsequent to the
date fixed for redemption at an annual rate of 12% and (vi) following such 45
day period at an annual rate of 18%.

      9. Interest Savings Clause. Notwithstanding any other provision hereof,
the interest payable hereunder shall be limited to the maximum amount permitted
under applicable law. If any amount is paid hereunder which would be usurious
under applicable law, it shall be deemed a prepayment of principal or shall be
promptly refunded to the Company as necessary to avoid violation of any
applicable usury statute.

      10. Rights and Priorities. The rights and priorities of the holders of
this Note with respect to payment of interest and principal shall be pari passu
with the rights and priorities of all other holders of notes issued pursuant to
the Financing, except with respect to rights granted to Lender in the Warrant
Certificate, dated as of October 15, 1997, from the Company to Lender, to apply
principal of the notes of the Company held by Lender towards the exercise price
of warrants of the Company held by Lender when converting such warrants into
common stock of the Company pursuant to the exercise of its tag along rights
under the Voting and Transfer Agreement, dated as of October 15, 1997, by and
among the Company, Lender, Waldo Securities, S.A. and the Brunswick Fitzgibbons
Trust Company LLC.

<PAGE>
                                                                               4

      11. Notices. Any notice, request, demand, consent, approval or other
communication which the Company or Lender are obligated or may elect to give
hereunder shall be given in the form and in the manner set forth in the Note
Purchase Agreement for the giving of notices thereunder and shall be deemed
given for the purposes hereof at such time as the same, if given under the Note
Purchase Agreement, would be deemed given.

      12. Severability. If any provision of this Note or the application thereof
to any party or circumstances is held invalid or unenforceable, the remainder of
this Note and the application of such provision to other parties or
circumstances will not be affected thereby and the provisions of this Note shall
be several in any such instance.

      13. Governing Law. This Note shall be governed by and interpreted in
accordance with the laws of the State of New York applicable to agreements made
and to be performed within such State.

                                        KHANTY MANSIYSK OIL CORPORATION

                                        By:  /s/ John B. Fitzgibbons
                                           -------------------------------------
                                           Name:
                                           Title:

<PAGE>

                         KHANTY MANSIYSK OIL CORPORATION

                        RESTRICTIONS ON TRANSFER OF SECURITIES: THE SECURITIES
                  REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
                  THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE
                  SECURITIES LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY
                  THIS CERTIFICATE IS, AND ANY SHARES OF COMMON STOCK ISSUED
                  UPON THE EXERCISE HEREOF WILL BE, SUBJECT TO THE CONDITIONS
                  SPECIFIED IN (I) A NOTE AND WARRANT PURCHASE AGREEMENT DATED
                  OCTOBER 10, 1997, (II) A SHAREHOLDER AGREEMENT DATED OCTOBER
                  15, 1997 AND (III) A VOTING AND TRANSFER AGREEMENT DATED
                  OCTOBER 15, 1997. A COPY OF SUCH CONDITIONS WILL BE FURNISHED
                  BY THE CORPORATION TO THE HOLDER HEREOF UPON WRITTEN REQUEST
                  AND WITHOUT CHARGE. THESE SECURITIES MAY NOT BE RESOLD OR
                  TRANSFERRED UNLESS SUCH CONDITIONS ARE COMPLIED WITH AND
                  UNLESS REGISTERED OR EXEMPT FROM REGISTRATION UNDER THE
                  SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS.

                               WARRANT CERTIFICATE

      THIS WARRANT dated as of October 15, 1997 (hereinafter, this "Warrant") is
from Khanty Mansiysk Oil Corporation, a Delaware corporation (the "Company") to
Khanty Holdings LLC, a Delaware limited liability company ("Warrantholder").

      SECTION 1. Grant of Warrant. For value received, the Company hereby grants
to Warrantholder or its assigns the right to purchase from the Company 66,667
shares of the Company's common stock, no par value per share ("Common Stock")
(or such larger or smaller number of shares as shall become subject to this
Warrant pursuant to Section 3 hereof) at an exercise price of $450.00 per share
(the "Exercise Price") (or such adjusted price pursuant to Section 3 hereof) or
in a cashless exchange for a reduced number of shares (the "Net Issuable
Exchange") as determined by the exchange formula pursuant to Section 10 below.
The amount and kind of securities purchasable pursuant to the rights granted
hereunder are subject to adjustment pursuant to the provisions contained in this
Warrant.

      SECTION 2. Duration and Exercise of Warrant. Except as otherwise set forth
in Section 4 hereof, this Warrant shall become exercisable on and after October
15, 1997 (the "Exercise Date") and shall expire at 5:00 p.m., New York, New York
time, on October 15, 2002, or if said date shall in the State of New York be a
holiday or a day on which banks are

<PAGE>
                                                                               2

authorized to close, the next following date which in the State of New York is
neither a holiday nor a day on which banks are authorized to close (the
"Expiration Date").

      In order to exercise the right to purchase Common Stock granted herein,
the Warrantholder shall surrender this Warrant and shall tender the Exercise
Price. The Warrantholder may purchase all or any number of the shares of Common
Stock subject to this Warrant, but in no event shall fractional shares of Common
Stock be issued with regard to such exercise. In the event that less than all of
the shares of Common Stock subject to this Warrant are purchased at any time
prior to 5:00 p.m., New York, New York time on the Expiration Date, a new
Warrant shall be issued for the remaining number of shares of Common Stock which
the Warrantholder was at the time entitled to purchase hereunder. All Warrants
not exercised prior to 5:00 p.m., New York, New York time on the Expiration Date
shall cease to be exercisable and shall expire and become void, and all rights
hereunder shall cease.

      Payment of the Exercise Price shall be made in cash, by wire transfer or
certified or official bank check; provided, however, that in the event the
Warrantholder exercises its Tag Along Rights under Article VII of the Voting
and Transfer Agreement, dated as of October 15, 1997, among the Company, the
Warrantholder, Brunswick Fitzgibbons Trust Company LLC ("BFTC") and Waldo
Securities S.A. ("Waldo"), in connection with a sale of Common Stock by BFTC,
then payment of the Exercise Price for the shares of Common Stock to be sold may
be made by delivery of notes of the Company held by the Warrantholder that have
a principal amount equal to the aggregate Exercise Price (a "Note Delivery
Exercise"); provided, further, that in the event Waldo is the Selling Holder (as
defined in the Voting and Transfer Agreement), then the percentage of shares of
Common Stock underlying this Warrant that may be issued upon a Note Delivery
Exercise shall not exceed the percentage that the shares of Common Stock being
sold by BFTC represent of the total number of outstanding shares of Common Stock
held by BFTC.

      Upon surrender of this Warrant and payment of the Exercise Price, the
Company shall issue or cause to be issued with all reasonable dispatch to or
upon the written order of the Warrantholder and in such name or names as the
Warrantholder may designate, a certificate or certificates for the number of
full shares of Common Stock issuable upon the exercise of such Warrant. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become a holder of
record of such shares of Common Stock as of the date of the surrender of this
Warrant and payment of the Exercise Price.

      SECTION 3. Adjustment of Number of Shares Purchasable and Exercise Price.
The total number of shares of Common Stock purchasable hereunder and Exercise
Price shall be subject to adjustment from time to time as follows:

            (a) Adjustment for Change in Capital Stock. If the Company:

<PAGE>
                                                                               3

                  (1) pays a dividend or makes a distribution on its Common
            Stock in shares of its Common Stock;

                  (2) subdivides its outstanding shares of Common Stock into a
            greater number of shares;

                  (3) combines its outstanding shares of Common Stock into a
            smaller number of shares;

                  (4) makes a distribution on its Common Stock in shares of its
            capital stock other than Common Stock; or

                  (5) issues by reclassification of its Common Stock any shares
            of its capital stock;

      then the number of shares of Common Stock purchasable pursuant to this
      Warrant immediately prior to such action shall be adjusted so that the
      Warrantholder may receive upon the exercise of this Warrant without
      payment of any additional consideration the number of shares of capital
      stock of the Company which it would have owned immediately following such
      action if it had exercised such Warrant in full immediately prior to such
      action. In the case of an adjustment to the number of shares of Common
      Stock purchasable upon exercise of this Warrant pursuant to clause (1),
      (2) or (3) above, the Exercise Price shall be proportionately reduced (in
      the case of clauses (1) and (2)) or proportionately increased (in the case
      of clause (3)), as the case may be. In the event of an adjustment under
      clause (4) or (5) above, the aggregate Exercise Price shall be equitably
      allocated to each share of capital stock for which this Warrant will then
      be exercisable, as determined by the Company whose determination shall be
      conclusive absent manifest error.

            The adjustment pursuant to this Section 3(a) shall become effective
      on the effective date of such event, retroactive to the record date, if
      any, for such event.

            (b) Adjustment for Common Stock Issue. If the Company issues or
      sells any Common Stock or any security that is convertible into or
      exchangeable for Common Stock for consideration that represents as of the
      date of such issuance or sale a price per share of Common Stock that is
      less than the then Exercise Price, then upon such issuance or sale, (i)
      the Exercise Price shall be adjusted to equal the per share price of the
      Common Stock in such issuance or sale, and (ii) the number of shares of
      Common Stock purchasable pursuant to this Warrant shall be increased so
      that the Warrantholder may receive upon the exercise of this Warrant at
      the adjusted Exercise Price, the number of shares of capital stock of the
      Company that has a cost basis immediately following such action equal to
      the cost basis of the shares of Common Stock that the Warrantholder

<PAGE>
                                                                               4

      would have owned if it had exercised such Warrant in full immediately
      prior to such action.

            Notwithstanding the foregoing, no adjustment shall occur pursuant to
      this Section 3(b) in the case of issuances or sales of Common Stock or
      securities convertible into or exchangeable for Common Stock if such
      issuance or sale is made pursuant to (i) agreements, obligations,
      arrangements or commitments existing prior to the date hereof or (ii)
      employee or executive stock option plans.

            The adjustment pursuant to this Section 3(b) shall become effective
      on the date of such issuance or sale.

            (c) Adjustment for Rights Issue or Other Distributions. If the
      Company fixes a record date for the issuance to all holders of its Common
      Stock any rights or warrants (or any similar securities) to purchase any
      securities of the Company or any assets in liquidation of the Company, the
      Company shall distribute to the Warrantholder such rights or warrants or
      assets that the Warrantholder would have received if it had exercised its
      Warrant in full immediately prior to such record date.

            The adjustment shall be made successively whenever any such
      distribution is made and shall become effective retroactive to the record
      date for the determination of shareholders entitled to receive the
      distribution.

            (d) Reorganization of Company. If the Company is a party to a
      transaction in which the Company consolidates or merges with or into, or
      transfers or leases all or substantially all of its assets to, any person,
      or a merger which reclassifies or changes its outstanding Common Stock,
      upon consummation of such transaction this Warrant shall either (i) be
      exchanged for a warrant to purchase the kind and amount of capital stock
      of the resulting entity which the Warrantholder would have received if it
      had exercised this Warrant immediately before the effective date of the
      transaction, if the Company concludes in good faith that it is able to do
      so without in any way adversely affecting such transaction or its
      consummation or (ii) become exercisable for the kind and amount of
      securities, cash or other assets distributed to shareholders of the
      Company in connection with such transaction equivalent in value to the
      fair market value of this Warrant determined by a mutually agreed upon
      internationally recognized independent investment banking firm with
      experience in both the Former Soviet Union and energy using the
      Black-Scholes model for valuing warrants (the fees and expenses of such
      investment banking firm engaged pursuant to this Section 3(d) to be paid
      by the Company).

            If this subsection (d) applies, Sections 3(a), 3(b) and 3(c) hereof
      shall not apply to such transaction.

<PAGE>
                                                                               5

            (e)   Notice of Certain Transactions. If:

                  (1) the Company takes any action that would require any
            adjustment in the number of shares of Common Stock subject to this
            Warrant or the number of warrants or rights or other securities to
            which the Warrantholder is entitled pursuant to Sections 3(a), 3(b),
            3(c) or 3(d); or

                  (2) there is a liquidation or dissolution of the Company;

      the Company shall mail to the Warrantholder a notice stating the proposed
      record date for an issuance, dividend or distribution or the proposed
      effective date of a subdivision, combination, reclassification,
      consolidation, merger, transfer, lease, liquidation or dissolution or
      other action contemplated by (1) or (2) above. The Company shall mail the
      notice at least 15 days before such record date or effective date.

            (f) Issuance of New Warrant. In the event of any adjustment or
      change in the number of shares of Common Stock actually purchasable under
      this Warrant, if requested in writing by any Warrantholder, the Company
      will issue and deliver a new Warrant certificate evidencing such
      adjustment or change to the Warrantholder as soon as practicable after
      such adjustment or change.

      SECTION 4. Company Right to Force Warrant Exercise. The Company shall have
the option to require the exercise of this Warrant with respect to up to 50% of
the shares of Common Stock subject to this Warrant (as the same may be adjusted
from time to time) (i) upon a Qualifying IPO (as defined below) or (ii) at any
time subsequent to a Qualifying IPO, if the average of the daily Closing Price
(as defined below) per share of Common Stock for 20 consecutive business days is
greater than or equal to the Qualifying Price (as defined below) on the date of
determination.

      In the event the Company elects to require exercise of any portion of this
Warrant, the Company shall notify (the "Call Notice") the Warrantholder. The
Call Notice shall establish a date (the "Call Date") not less than 30 and not
more than 45 days after the date the Call Notice is given on which such portion
of this Warrant must be exercised. From and after the Call Date, this Warrant
shall cease to be exercisable and shall expire and become void and the Company
shall issue and deliver to the Warrantholder a new Warrant certificate
evidencing the right to receive upon exercise shares of Common Stock underlying
the portion of this Warrant that was either not exercised or not required to be
exercised pursuant to this Section 4.

      "Qualifying IPO" means an Initial Public Offering with net proceeds of at
least $80 million and an offering price per share equal to the Qualifying Price
as of the closing date of the Initial Public Offering.

<PAGE>
                                                                               6

      "Qualifying Price" means a price per share of Common Stock that represents
at least a 35% annual appreciation in the value of the equity underlying this
Warrant on an as-exercised-basis from the date of issuance of this Warrant
through the date of determination. For purposes of this definition, the base
equity value per share of Common Stock from which the appreciation shall be
calculated is $450 (as the same may be adjusted pursuant to the first paragraph
of this Section 4).

      "Initial Public Offering" means the first underwritten offering after the
date hereof of Common Stock which is registered pursuant to an effective
registration statement filed by the Company under the Securities Act of 1933, as
amended (the "Act") (other than a registration statement filed on Form S-4 or
S-8 or any other forms prescribed for the same or similar purposes).

      "Closing Price" means if the Common Stock is traded on a securities
exchange or on the Nasdaq National Market or Nasdaq SmallCap Market, the
reported closing sale price of the Common Stock on such exchange or on the
Nasdaq National Market or Nasdaq SmallCap Market or, if the Common Stock is
otherwise traded in the over-the-counter market, the reported closing bid price.

      SECTION 5. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any exercise or exchange of a Warrant. Cash payments
shall be made in lieu of fractional shares of Common Stock otherwise issuable
upon such exercise or exchange.

      SECTION 6. Reservation of Shares. The Company has reserved and covenants
that until the Expiration Date it will at all times keep reserved out of its
authorized Common Stock a sufficient number of shares to provide for the
issuance of Common Stock upon exercise of this Warrant free from preemptive
rights. The Company will not change the par value of the Common Stock as long as
this Warrant is outstanding. The Company will take all such actions as may be
necessary to insure that all shares of capital stock delivered upon exercise of
this Warrant will be duly and validly authorized and issued and fully paid and
nonassessable and free from preemptive rights with respect to the issue thereof.

      SECTION 7. Payment of Taxes. The Company will pay all documentary stamp
taxes, if any, attributable to the initial issuance of shares of Common Stock
upon the exercise of this Warrant.

      SECTION 8. Governmental Approvals; Suspension of Warrant Exercises;
Required Extension of Exercise Period. The Company, at its sole expense, shall
make all filings with, and obtain and keep effective all orders, permits,
consents and approvals of, governmental agencies and authorities which may be or
become required of the Company under applicable federal and state securities
laws in connection with the issuance, sale and delivery by the Company of this
Warrant and the exercise of this Warrant. The Company may suspend the exercise
of this Warrant during such period as may be necessary to obtain or keep
effective all such required

<PAGE>
                                                                               7

orders, permits, consents and approvals of governmental agencies and
authorities. In the event of any such suspension, the Expiration Date shall be
extended for the number of days that such suspension was in effect.

      SECTION 9. Warrant Transferable. Subject to the provisions of Section 1
hereof and Article IX of the Note and Warrant Purchase Agreement, dated October
10, 1997, among the Company and the Warrantholder (as amended or otherwise
supplemented from time to time, the "Note and Warrant Purchase Agreement"), this
Warrant and all rights hereunder are transferable by the Warrantholder in whole
or in part, without charge to the Warrantholder, upon surrender of this Warrant
with a properly executed assignment at the principal office of the Company.

      SECTION 10. The Net Issuable Exchange.

      (a) In addition to and without limiting the rights of the Warrantholder
under the terms of this Warrant, the Warrantholder shall have the right (the
"Conversion Right") to convert this Warrant into shares of Common Stock as
provided in this Section 10 at any time or from time to time prior to the
Expiration Date. Upon exercise of the Conversion Right with respect to a
particular number of shares subject to this Warrant (the "Converted Warrant
Shares"), the Company shall deliver to the Warrantholder, without payment by the
Warrantholder of any exercise price or any cash or other consideration, a number
of shares of Common Stock determined by multiplying the number of Converted
Warrant Shares by the following:

                               FMV - Exercise Price
                            -------------------------
                                       FMV

      FMV ("fair market value" as defined below) and Exercise Price shall be
determined as of the close of business on the Conversion Date (as defined
below).

      For purposes of this Warrant Certificate, the "fair market value" of a
share of the Common Stock as of a particular date shall mean, if the Common
Stock is traded on a securities exchange or on the Nasdaq National Market or
Nasdaq SmallCap Market, the average of the closing prices of the Common Stock on
such exchange or on the Nasdaq National Market or Nasdaq SmallCap Market on the
20 trading days ending on the trading day prior to the date of determination,
or, if the Common Stock is otherwise traded in the over-the-counter market, the
average of the closing bid prices on the 20 trading days ending on the trading
day prior to the date of determination. If at any time the Common Stock is not
traded on an exchange or on the Nasdaq National Market or Nasdaq SmallCap Market
or otherwise traded in the over-the-counter market, the Market Price shall be
deemed to be the higher of (i) the book value thereof as determined by any firm
of independent public accountants of recognized standing selected by the Board
of Directors of the Company as of a date that is within 20 days of the date as
of which the determination is to be made, or (ii) the average of the fair market
values thereof determined in good faith by (a) any firm of independent public
accountants or an internationally recognized independent investment banking firm
with experience in both the Former Soviet Union and energy selected by the Board
of Directors of the

<PAGE>
                                                                               8

Company and (b) any firm of independent public accountants or an internationally
recognized independent investment banking firm with experience in both the
Former Soviet Union and energy selected by Beacon, each as of a date that is
within 20 days of the date as of which the determination is to be made (the fees
and expenses of any such independent public accountants or internationally
recognized independent investment banking firm engaged pursuant to this
definition to be paid by the Company).

      (b) The Conversion Right may be exercised by the Warrantholder by
surrendering this Warrant Certificate at the principal office of the Company
together with a written statement specifying that the Warrantholder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to this Warrant which are being surrendered (referred to in subsection
(a) above as the "Convened Warrant Shares") in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of this Warrant
Certificate together with the aforesaid written statement or on such later date
as is specified therein (the "Conversion Date"), but not later than the
Expiration Date. Certificates for the shares of Common Stock issuable upon
exercise of the Conversion Right and, in the case of a partial exercise, a new
warrant certificate evidencing the shares remaining subject to this Warrant
shall be issued as of the Conversion Date and shall be delivered to the
Warrantholder within 15 days following the Conversion Date.

      SECTION 11. Stock Purchase Warrant Exchangeable for Different
Denominations. This Warrant is exchangeable, upon the surrender hereof by the
Warrantholder at the principal office of the Company, for new Warrants of like
tenor representing in the aggregate the purchase rights hereunder, and each of
such new Warrants shall represent such portion of such rights as is designated
by the Warrantholder at the time of such surrender. The date the Company
initially issued the predecessor of this Warrant shall be deemed to be the "Date
of Issuance" hereof regardless of the number of times new certificates
representing the unexpired and unexercised rights formerly represented by this
Warrant shall be issued. All Warrants representing portions of the rights
hereunder are referred to herein as the "Warrants".

      SECTION 12. Securities Law Restrictions; Legend. This Warrant, any new
Warrant issued to evidence any rights hereunder and any shares of Common Stock
issued upon the exercise hereof and thereof may not be sold, transferred,
assigned or otherwise disposed of unless such sale, transfer, assignment or
disposition is made pursuant to an effective registration statement under the
Act and is qualified or registered under all applicable state securities laws,
or the Company receives from the transferror an opinion of counsel, reasonably
satisfactory to the Company, stating that such sale, transfer, assignment or
disposition is exempt from the registration, qualification and prospectus
delivery requirements of the Act and the applicable state securities laws and,
in each case, in compliance with Article IX of the Note and Warrant Purchase
Agreement.

      This Warrant and any new Warrant issued to evidence rights hereunder shall
have imposed thereon the following legend:

<PAGE>
                                                                               9

                  RESTRICTIONS ON TRANSFER OF SECURITIES: THE SECURITIES
            REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
            SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES LAWS.
            THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS,
            AND ANY SHARES OF COMMON STOCK ISSUED UPON THE EXERCISE THEREOF WILL
            BE, SUBJECT TO THE CONDITIONS SPECIFIED IN (I) A NOTE AND WARRANT
            PURCHASE AGREEMENT DATED OCTOBER 10, 1997, (II) A SHAREHOLDER
            AGREEMENT DATED OCTOBER 15, 1997 AND (III) A VOTING AND TRANSFER
            AGREEMENT DATED OCTOBER 15, 1997. A COPY OF SUCH CONDITIONS WILL BE
            FURNISHED BY THE CORPORATION TO THE HOLDER HEREOF UPON WRITTEN
            REQUEST AND WITHOUT CHARGE. THESE SECURITIES MAY NOT BE RESOLD OR
            TRANSFERRED UNLESS SUCH CONDITIONS ARE COMPLIED WITH AND UNLESS
            REGISTERED OR EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF
            1933 AND APPLICABLE STATE SECURITIES LAWS.

      Each certificate representing shares of Common Stock issued upon the
exercise hereof or upon the exercise of any new Warrant issued to evidence
rights hereunder shall bear a legend to the following effect unless the Company
shall have received from the Warrantholder an opinion of its counsel, reasonably
satisfactory to the Company, to the effect that such legend is unnecessary under
the Act:

                  RESTRICTIONS ON TRANSFER OF SECURITIES: THE SECURITIES
            REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
            SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES LAWS.
            THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
            SUBJECT TO THE CONDITIONS SPECIFIED IN (I) A SHAREHOLDER AGREEMENT
            DATED OCTOBER 15, 1997 AND (II) A VOTING AND TRANSFER AGREEMENT
            DATED OCTOBER 15, 1997. A COPY OF SUCH CONDITIONS WILL BE FURNISHED
            BY THE CORPORATION TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND
            WITHOUT CHARGE. THESE SECURITIES MAY NOT BE RESOLD OR TRANSFERRED
            UNLESS SUCH CONDITIONS ARE COMPLIED WITH AND UNLESS REGISTERED OR
            EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND
            APPLICABLE STATE SECURITIES LAWS.

      SECTION 13. No Stock Rights. The Warrantholder shall not be entitled to
vote nor shall be deemed the holder of Common Stock or any other securities of
the Company which may at any time be issuable on the exercise hereof, nor shall
anything contained herein be construed to confer

<PAGE>
                                                                              10

upon the holder of this Warrant, as such, the rights of a stockholder of the
Company or the right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or give or withhold consent to
any corporate action or to receive notice of meetings or other actions affecting
stockholders (except as provided herein), or to receive dividends or
subscription rights or otherwise, until the date of exercise of this Warrant.

      SECTION 14. Replacement. Upon receipt of evidence reasonably satisfactory
to the Company (an affidavit of the Warrantholder being satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing this Warrant, and in the case of any such loss, theft or destruction,
upon receipt of indemnity or security reasonably satisfactory to the Company,
or, in the case of any such mutilation upon surrender of such certificate, the
Company shall (at its expense) execute and deliver in lieu of such certificate a
new certificate of like kind representing the same rights represented by such
lost, stolen, destroyed or mutilated certificate.

      SECTION 15. Notices to Warrant holder. Whenever the number of shares of
Common Stock subject to this Warrant or the number of rights or warrants to
which the Warrantholder is entitled is adjusted as provided in Section 3 hereof,
the Company will promptly compute such adjustment and prepare and furnish a
certificate setting forth the number of shares of Common Stock purchasable upon
exercise of this Warrant as so adjusted or the number of rights or warrants to
which the Warrantholder is entitled and a brief statement of the facts
accounting for such adjustment, and will mail a brief summary thereof to the
Warrantholder at his last address as it appears on this Warrant transfer records
of the Company

      SECTION 16. Notices to Company and Warrantholder. All notices, requests,
consents and other communications hereunder shall be in writing and shall be
delivered either personally or by mail, by telegram, telex, telecopy or similar
facsimile means, or by express courier or delivery service, addressed as
follows:

            (i) if to the Warrantholder, at 399 Park Avenue, 17th Floor, New
      York, New York 10022, Attention: John J. MacWilliams, or at such other
      address as may have been furnished to the Company in writing by the
      Warrantholder;

            (ii) if to the Company, at 125 Park Avenue, Suite 800, New York, New
      York 10017, Attention: John B. Fitzgibbons, or at such other address as
      may have been furnished to the Warrantholder in writing by the Company.

      Notices shall be deemed given when received, if sent by telegram, telex,
telecopy or similar facsimile means (confirmation of such receipt by confirmed
facsimile transmission being deemed receipt of communications sent by telex,
telecopy or other facsimile means); when delivered and receipted for (or upon
the date of attempted delivery where delivery is refused), if hand-delivered,
sent by express courier or delivery service, or sent by mail.

<PAGE>
                                                                              11

      SECTION 17. Governing Law. THIS WARRANT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, REGARDLESS OF THE LAWS
THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAW.

      SECTION 18. Benefits of This Agreement. Nothing in this Warrant shall be
construed to give to any person or company other than the Company and the
Warrantholder, any legal or equitable right, remedy or claim under this Warrant;
and this Warrant shall be for the sole and exclusive benefit of the Company and
the Warrantholder.

<PAGE>
                                                                              12

      IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, as of the day and year first above written.

                                        KNANTY MANSIYSK OIL CORPORATION

                                        By: /s/ John B. Fitzgibbons
                                           -------------------------------------
                                           Name: John B. Fitzgibbons
                                           Title:

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