Document:

Exhibit
10.15

WELL
SERVICES AGREEMENT

(NRC-ASHER WELLS)

THIS WELL SERVICES AGREEMENT (the “Agreement”),
effective as of January 5, 2007, by and between VINLAND ENERGY OPERATIONS, LLC, a Delaware limited liability
company with an address of 104 Nami Plaza, Suite 1, London, Kentucky 40741 (“Operator”)
and NAMI RESOURCES L.L.C., with an address of 104 Nami Plaza,
Suite 1, London, Kentucky 40741 (“Owner”).

WITNESSETH:

WHEREAS,
Owner owns and has the right to operate certain oil and gas wells, and the
reserves and equipment associated therewith, located in Kentucky, which are
identified on Exhibit A
attached hereto (the “Wells”);

WHEREAS,
Operator is in the business of, among other things, operating, maintaining and
developing wells and providing other oil field services on a contract basis for
owners of wells;

WHEREAS,
Owner desires to contract for the services of Operator for the purposes of
operating and maintaining the Wells for the production of oil and/or gas and
for the other services set out herein; and

WHEREAS,
Operator is willing to operate and maintain the Wells and to provide the other
services, all as set out herein, as an independent contractor, and upon the
terms and conditions hereinafter set forth.

NOW,
THEREFORE, in consideration of the mutual covenants and
representations hereinafter set forth, the receipt and sufficiency of which is
hereby acknowledge, the parties hereto agree as follows:

1.                                      OPERATOR’S
RESPONSIBILITIES:  Vinland Energy
Operations, LLC is hereby designated as the Operator of the Wells, and shall
conduct and direct and have full control of all operations with regard to the
Wells as permitted and required by, and within the limits of this
Agreement.  In its performance of
services hereunder for the Owner, Operator shall be an independent contractor
not subject to the control or direction of the Owner except as to the type of
operation to be undertaken in accordance with the terms of this Agreement.  It is expressly understood and agreed that Operator
may contract with third parties to conduct or provide any of the services
described herein, provided any such third parties are approved by Owner, such
approval not to be unreasonably withheld. Operator shall not be deemed, or hold
itself out as, the agent of the Owner, with authority to bind Owner to any
obligation or liability assumed or incurred by Operator as to any third
party.  Operator shall conduct its
activities (including the procurement of third party goods and services) under
this Agreement as a reasonable prudent operator, in a good and workmanlike
manner, with due diligence and dispatch, in accordance with good oilfield
practice, and in compliance with applicable law and regulation.  The Owner hereby engages the Operator as an
independent contractor to operate and maintain the Wells, which shall include
the following responsibilities:

a.                                       Register
as the operator of the Wells with all relevant governmental agencies;

b.                                      Flow
or pump the Wells as required;

c.                                       Operate
and maintain wellhead compressors, tank batteries, meters, pump jacks or other
facilities associated with production of oil and/or gas from the Wells;

d.                                      Operate
and maintain all pipelines and flow lines associated with production of oil
and/or gas from the Wells;

e.                                       Change
all meter charts on a monthly basis and arrange for the integration of same;

f.                                         Perform
all general maintenance and repairs on the Wells;

g.                                      Visually
inspect every Well and associated pipeline and tank battery on a regular
schedule agreed to by Owner, but in any event no less than every ninety (90) days;

h.                                      Promptly
report and repair equipment failures and malfunctions;

i.                                          Maintain
complete records and files on the Wells and all work performed under the terms
of this Agreement;

j.                                          Collect
all production and pressure data requested by Owner and submit reports of such
data to Owner monthly or at such other intervals as Owner may request;

k.                                       Perform
any and all other duties, customarily performed in the usual course of
producing oil and/or gas from the Wells which are necessary for proper
operation of the Wells, and related pipelines and facilities covered hereunder;

l.                                          Provide
Owner services regarding recompletion, reworking or other operations on the
Wells;

m.                                    Provide
Owner with analyses of the production and pressure data collected and provide
consulting services to Owner regarding the improvement of safety, environmental
compliance and production efficiency; and

n.                                      Provide
roustabout labor, equipment and engineering services as needed for the
operation and maintenance of the Wells and related facilities.

o.                                      Promptly
prepare and report any accident reports and supply Owner with a copy thereof.

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2.                                      PROTECTION
FROM LIENS:  Operator shall pay,
or cause to be paid, as and when they become due and payable all accounts of
contractors and suppliers and wages and salaries for services rendered or
performed, and for materials supplied on, to or in respect of the Wells or any
operations relating to the Wells, and shall keep the Wells free from liens and
encumbrances resulting therefrom, except for those resulting from a bona fide
dispute pursuant to appropriate proceedings as to services rendered or
materials supplied.

3.                                      ACCESS
TO CONTRACT AREA AND RECORDS: 
Operator shall, except as otherwise provided herein, permit the Owner or
its duly authorized representative, at the Owner’s sole risk and cost, full and
free access at all reasonable times to all operations of every kind and
character being conducted with regard to the Wells and to the records of
operations conducted with regard thereto or production therefrom, including
Operator’s books and records relating thereto. 
Such access rights shall not be exercised in a manner which would
interfere with Operator’s conduct of an operation hereunder.  Operator will furnish to Owner copies of any
and all reports and information obtained by Operator in connection with the
production of oil and/or gas from Owner’s Wells and any related items,
including, without limitation, meter and chart reports, production purchaser
statements, run tickets and monthly gauge reports.  Any audit of Operator’s records relating to
amounts expended and the appropriateness of such expenditures shall be
conducted in accordance with the audit protocol specified in the Management
Services Agreement.

4.                                      FILING
AND FURNISHING GOVERNMENTAL REPORTS:  Operator will file, and promptly furnish
copies to Owner all operational notices, reports or applications required to be
filed by local, state or federal agencies or authorities having jurisdiction
over operations hereunder.  Upon request
by Operator, the Owner shall provide Operator all information necessary to
Operator to make such filings.

5.                                      INSURANCE:  At all times while operations are conducted
hereunder, Operator shall comply with the workers compensation law of the state
where the operations are being conducted; provided, however, that Operator may
be a self-insurer for liability under said compensation laws, in which event
the only charge that shall be made to Owner shall be as provided in Exhibit B.  Operator shall also carry or provide
insurance for the benefit of Owner as outlined in Exhibit C attached hereto and made a part hereof.  Operator shall require all contractors
engaged in work on the Wells or related facilities to comply with the workers
compensation laws of the state where the operations are being conducted and to
maintain such other insurance as Operator may require.  In the event automobile liability insurance
is specified in said Exhibit C,
or subsequently receives the approval of the parties, no direct charge shall be
made by Operator for premiums paid for such insurance for Operator’s automotive
equipment.

6.                                      COMPENSATION:

a.                                       Amount
of Compenation.

[1]                                  On or before the 30th day following each month during the term of
this Agreement, Operator shall provide Owner with an invoice for the aggregate
expenses incurred by Operator as provided in the Accounting Procedures attached
hereto as Exhibit D,
including all direct well expenses, relating to the previous calendar month

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(“Owner Expenses”).  Operator’s
invoice shall provide reasonably detailed documentation supporting the Owner
Expenses.  Any such invoices will detail
the Services provided by the Operator hereunder during the subject calendar
month, all costs associated with providing such Services, as well as any costs
of Services or goods purchased from Third Parties in performance of their
Services.  If Operator has not received
payment from the Owner of the monthly invoice for the Owner Expenses within fifteen
(15) days following the receipt of the invoice by the Owner, any unpaid  amounts shall bear interest at a rate equal
to the prime rate designated as such from time to time by Citibank, NA, plus five
percent (5%), on the unpaid balance.

[2]                                  The Owner shall also pay to Manager $60.00
per well per month for each of the Wells with is producing oil and/or gas during
the month or any part thereof (the “Overhead Payment”). Beginning
on  January 1, 2011, the Overhead Payment
shall be increased by eleven percent (11%) and shall be adjusted annually
thereafter upon the wage index adjustment published by COPAS.

The Owner
shall pay the Owner Expenses and the Overhead Payment  in the manner provided in Section 6 b. below.

b.                                      Manner
of Payment.  All payments required
under this Section 6 shall be made by wire of immediately available funds or
check as follows:

If by Wire:  Account
information to be provided by Operator.

If by Check:  Payee
information to be provided by Operator.

c.                                       Taxes.
The Owner shall be responsible for all applicable taxes levied on items, goods
or services that are sold, purchased or obtained pursuant to this Agreement.

d.                                      Disputed
Charges. The Owner may, within thrity (30) days after receipt of a charge
from Operator, take written exception to such charge on the ground that such
charge was not in accordance with the terms of this Agreement.  In such event, the Owner shall nonetheless
pay such amount to Operator as to which such written exception is taken, or any
part thereof, and if such change is ultimately determined not to be in accordance
with the terms of this Agreement, such amount or portion thereof (as the case
may be) shall be repaid by the Operator together with any interest thereon at a
rate equal to the prime rate per annum established by Citibank, N.A. as in
effect on the date of this Agreement. It is expressly understood that the
Parties will use their best efforts to resolve any and all Disputed Charges
between the Owner and the Operator within twelve (12) months after the initial
written exception to the charge has been made.

7.                                      LIABILITIES
AND INDEMNIFICATION:  Operator
shall be liable for and to indemnify the Owner for all claims relating  to injury to Operator’s employees and/or
contractors

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except to the extent such injuries are caused by the gross negligence
or willful misconduct  of Owner.  Operator shall be liable for and agrees to
promptly pay for all labor performed or furnished for the Operator in
performance of the work provided for herein. Operator further agrees to
indemnify, hold harmless and defend Owner from and against any and all claims
or causes of action arising from or related to Operator’s operations hereunder
except to the extent such claim, injury, death, damage or loss are caused by
the gross negligence or willful misconduct of the Owner.  The insurance coverages required pursuant to
Section 5 above are in addition to, and not in lieu of, the indemnity
obligations of Operator pursuant to this Section.

8.                                      INDEPENDENT
CONTRACTOR:  Operator shall
perform its duties and all work hereunder without supervision by the Owner and
shall in all things act as an independent contractor.  All work by the Operator shall be performed
in accordance with good oilfield practice and in a good and workmanlike manner.

It is specifically
recognized that Operator may act as a contract operator for any affiliates of Operator,
and Operator shall have the freedom to continue such activities or to initiate
such other activities as it chooses.

9.                                      TAXES:
 The Operator agrees to pay and be
responsible for all federal, state and local taxes of whatsoever kind and
description covering the work to be performed by Operator pursuant to this
Agreement. This responsibility shall include all payroll taxes (including
Social Security taxes) for all employees of the Operator.

10.                               WELL
RECORDS AND PRODUCTION DATA:   Operator shall maintain complete records for
each Well, and shall make any copies of such records available to Owner in the
offices of Operator and any other person designated by the Owner from time to
time.  It is further understood that any
and all lease maps, well logs, well production records and all other records
relating to the Wells are the sole property of the Owner, and Owner shall be
entitled to the return of the originals of such items upon request.

11.                               TERM:  Except as otherwise provided herein, the term
of this Agreement shall be for the productive life of the Wells, provided that
the Gathering and Compression Agreement, as it pertains to any of the
Wells,  is still in force and effect
between the Owner and the Operator’s affiliate, Vinland Energy Gathering,
LLC.  Notwithstanding anything herein to
the contrary, Operator may resign and thereby terminate this Agreement upon
twelve (12) months advance written notice.

12.                               DEFAULT
AND REMEDIES.  The following
shall be Events of Default under the terms of this Agreement and the terms “Events
of Default” or “Default” shall mean, whenever they are used in this Agreement,
any one or more of the following events:

a.                                       If Owner shall
fail to pay or cause to be paid any sums due to the Operator for a period of
five (5) business days after Operator has given Owner written notice thereof;

b.                                      If either party
shall file a voluntary petition for bankruptcy or shall be adjudicated bankrupt
or insolvent, or shall file any petition or any answer seeking or acquiescing
in any reorganization, arrangement, composition,

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adjustment, liquidation, dissolution, or similar relief for itself
under any then current federal, state or other statute, law, or regulation, or
shall seek, consent to, or acquiesce in the appointment of any trustee,
receiver, or liquidator of such party, or shall make any general assignment for
the benefit of creditors, or shall admit in writing its inability to pay its
debts generally as they become due;

c.                                       If either party
shall materially fail to perform or observe any covenant, provision, term,
restriction, or condition required to be performed or observed by such party
under the terms of this Agreement (other than the obligation to pay money
referenced in subsection (a) above) which continues for more than ninety (90)
days after such party has received written notice thereof; provided that if
such failure cannot be cured within such ninety (90) day period, no default
shall occur if the relevant party has begun good faith efforts to cure the
failure within such ninety (90) days.  In
the event of a dispute between the parties whether a material failure to
perform has occurred, no termination of this Agreement shall occur until the
defaulting party has the opportunity to cure provided by this section, after
the existence of such failure has been determined in accordance with this
Agreement.

If any of the
Events of Default enumerated in this Section 12 occurs, then in such event and
as often as the same occurs without cure, the non-defaulting party may, at its
option terminate this Agreement by providing ninety (90) days written notice.

Exercise of the
foregoing remedies shall not preclude the parties from exercising every other
remedy provided herein or at law, it being the intention of the parties that
parties’ remedies shall be cumulative and shall survive termination of this
Agreement.

13.                               ASSIGNMENT:  The Operator shall not assign its rights or
obligations pursuant to this Agreement without first receiving the written
consent of the Owner to such assignment.

14.                               NOTICES:  Any notice required to be given hereunder
shall be in writing and shall be deemed to be delivered when properly addressed
and posted by certified mail, postage prepaid, return receipt requested, to any
party hereto at the address shown on the first page hereof, or at such other
address as either party shall designate to the other by do notice.

15.                               GOVERNING
LAW:  This Agreement shall be
constructed in accordance with, and governed in all respects by, the laws of
the Commonwealth of Kentucky, without regard to its conflicts of laws
principles.

16.                               BINDING
AGREEMENT:   This Agreement shall
be binding upon the  successors and
permitted assigns of the parties hereto.

17.                               FORCE
MAJEURE:   In the event
performance of services hereunder is prevented by labor disputes; by law,
regulations, or statues enforced by any governmental agency; or by other
extraordinary causes beyond the reasonable control of Operator, the

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obligations of Operator under this Agreement shall be suspended, and
during such suspension Owner shall be relieved of the obligation to make any
payments to Operator as provided for herein. 
Operator shall give Owner prompt notice of any claimed force majeure event and shall use its best efforts to
eliminate or mitigate any such event.

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

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

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

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

19.                               COMPLETE
AGREEMENT:  This Agreement and
the exhibits hereto embody the complete understanding between the parties with
respect to the subject-matter hereof, and no oral agreement amending, revising,
or supplementing this Agreement shall be binding on either party unless reduced to writing and executed by both parties.

 

[END OF  TEXT.
SIGNATURES ON FOLLOWING PAGE]

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IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by their duly authorized officers and
representatives as of the date first above written.

	
  

  	
  NAMI RESOURCE COMPANY L.L.C

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Nami Service Company, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Majeed S. Nami

  	
   

  
	
   

  	
   

  	
  Majeed S. Nami

  
	
   

  	
   

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  VINLAND ENERGY OPERATIONS, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Majeed S. Nami

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Its:

  	
  Manager

  

 

EXHIBIT A

Oil
and Gas Leases subject to the Revenue Payment Agreement:

1.               Oil and Gas Lease dated July 18, 1929 from Asher Coal
Mining Company, as Lessor, to J.A. Henninger, as Lessee, covering 1770 acres
and as recorded in Lease Book 9, Page 242 of the records of Bell County,
Kentucky.

2.               Oil and Gas Lease dated December 16, 1952 from Asher
Coal Mining Company, as Lessor, to North American Petroleum Company, as Lessee,
covering 460 acres and as recorded in Lease Book 16, Page 14 of the records of
Bell County, Kentucky.

3.               Oil and Gas Lease dated March 9, 1953 from Asher Coal
Mining Company, as Lessor, to North American Petroleum Company, as Lessee,
covering 2500 acres and as recorded in Lease Book 16, Page 197 of the records
of Bell County, Kentucky.

Wells
Subject to the Revenue Payment Agreement:

Well Name

Asher 1

Asher 2

Asher 11

Asher 12, 14B, 15, 20,
24, 25, 26, 27

28,29,30,31,32,33,34,35,36,37

Asher 22

Taylor Harris #3Exhibit
10.16

OPERATING AGREEMENT

(Tennessee Operations)

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

WITNESSETH

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

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

WHEREAS, this Agreement is attached to and made a part
of the Participation Agreement.

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

ARTICLE
I

DEFINITIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

U.                                    The
term “TEC PUD Interests” shall mean the 40% interest in the TEC PUD Properties
held by TEC.

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

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

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

ARTICLE II

EXHIBITS

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

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

(1)                                  Description
of lands subject to this Agreement,

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

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

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

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

(6)                                  Burdens
on production other than landowner royalties,

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

B.                                     Exhibit
“B,” Participation Agreement,

C.                                     Exhibit
“C,” Accounting Procedure,

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D.                                    Exhibit
“D,” Insurance,

E.                                      Exhibit
“E,” TEC PUD Assignment.

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

ARTICLE III

INTERESTS OF PARTIES

A.                                    Interests of
Parties in Costs and Production:

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

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

B.                                    Subsequently
Created Interests:

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

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

 4
 

Created Interest, and the
Burdened Party shall indemnify, defend and hold harmless said other party, or
parties, from any and all claims and demands for payment asserted by owners of
the Subsequently Created Interest.

ARTICLE IV

TITLES

A.                                    Title Examination:

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

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

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

B.                                    Losses:

All losses of Oil and Gas
Interests committed to this Agreement, , shall be joint losses and shall be
borne by all parties in proportion to their interests shown on Exhibit “A.”  This shall include but not be limited to the
loss of any Oil and Gas Interest through failure to develop or because express
or implied covenants  have not been
performed (other than performance which requires only the payment of money),
and the loss of any Oil and Gas Interest by expiration at the

 5
 

end of its primary term if it is not renewed or
extended.  There shall be no readjustment
of interests in the remaining portion of the Contract Area on account of any
joint loss.

ARTICLE
V

OPERATOR

A.                                    Designation
and Responsibilities of Operator:

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

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

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

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

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

 6
 

transfer of Operator’s interest to any single
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator.

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

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

C.                                    Employees
and Contractors:

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

D.                                    Rights
and Duties of Operator:

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

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

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

 7
 

or any operations for the joint account thereof, and
shall keep the Contract Area free from liens and encumbrances resulting
therefrom except for those resulting from a bona fide dispute as to services
rendered or materials supplied.

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

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

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

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

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

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

 8
 

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

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

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

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

ARTICLE VI

DRILLING AND DEVELOPMENT

A.                                    Procedures
for Drilling Wells in the AMI:

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

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

(a)          If any party hereto
should desire to drill a well in the Contract Area, the party desiring to drill
such a well shall give written notice of the proposed operation to the other
parties, specifying the work to be performed, the location, proposed depth,
objective Zone and the estimated cost of the operation.  The parties to whom such a notice is
delivered shall have fifteen (15) days after receipt of the notice within which
to notify the proposing party proposing whether they elect to participate in
the cost of the proposed operation. Failure of a party to whom such notice is
delivered to reply within the period above fixed shall constitute an election
by that party not to participate in the proposed well.  In such case the non-participating party:  (i) thereby forfeits any interest it might
otherwise have in and to the proposed well and the Oil and Gas produced
thereby, and (ii) will promptly transfer any interest it may have in and to the
applicable lease to the extent of the well and the producing Zones of such well
and to the extent of the well unit as prescribed by the relevant regulatory
authority. Any proposal by a party to conduct an operation conflicting with the
operation

 9
 

initially proposed shall be delivered to all parties
within the time and in the manner provided in Article VI.B.6.

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

B.                                    Subsequent
Operations:

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

If all parties to whom such notice is delivered elect
to participate in such a proposed operation, the parties shall be contractually
committed to participate therein provided such operations are commenced within
the time period hereafter set forth, and Operator shall, no later than ninety
(90) days after expiration of the notice period of thirty (30) days (or as
promptly as practicable after the expiration of the forty-eight (48) hour
period when a drilling rig is on location, as the case may be), actually
commence the proposed operation and thereafter complete it with due diligence
at the risk and expense of the parties participating therein; provided,
however, said commencement date may be extended upon written notice of same by
Operator to the other parties, for a period of up to thirty (30) additional
days if, in the sole opinion of the Operator, such

 10
 

additional time is reasonably necessary to obtain
permits from governmental authorities, surface rights (including rights-of-way)
or appropriate drilling equipment, or to complete title examination or curative
matter required for title approval or acceptance.  If the actual operation has not been
commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior proposal had been made.

2.                                       Operations
by Less Than All Parties:

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

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

 11
 

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

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

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

 12
 

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

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

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

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

Within ninety (90) days after the completion of any
operation under this Article, the party conducting the operations for the
Consenting Parties shall furnish each Non-Consenting Party with an inventory of
the equipment in and connected to the well, and an itemized statement of the
cost of

 13
 

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

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

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

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

 14
 

time to respond on a day-to-day basis in the
proportion each electing party’s interest as shown on Exhibit “A” bears to the
total interest as shown on Exhibit “A” of all the electing parties.

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

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

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

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

6.                                       Order
of Preference of Operations.  Except
as otherwise specifically provided in this Agreement, if any party desires to
propose the conduct of an operation that conflicts with a proposal that has
been made by a party under this Article VI, such party shall have fifteen (15)
days from delivery of the initial proposal, in the case of a proposal to
perform an operation on a well where no drilling rig is on location, or
twenty-four (24) hours, exclusive of Saturday, Sunday and legal holidays, from
delivery of the initial proposal, if a drilling rig is on location for the well
on which such operation is to be conducted, to deliver to all parties entitled
to participate in the proposed operation such party’s alternative proposal,
such alternate proposal to contain the same information required to be included
in the initial proposal.  Each party
receiving such proposals shall elect by delivery of notice to Operator within
five (5) days after expiration of the proposal period, or within twenty-four
(24) hours (exclusive of Saturday, Sunday and legal holidays) if a drilling rig
is on location for the well that is the subject of the proposals, to
participate in one of the competing proposals. 
Any party not electing within the time required shall be deemed not to
have voted.  The proposal receiving the
vote of parties owning the largest aggregate percentage interest of the parties
voting shall have priority over all other competing proposals; in the case of a
tie vote, the initial proposal shall prevail. 
Operator shall deliver notice of such result to all parties entitled to
participate in the operation within five (5) days after expiration of the
election period (or within twenty-four (24) hours, exclusive of Saturday,
Sunday and legal holidays, if a drilling rig is on location).  Each party shall then have two (2) days (or
twenty-four (24) hours if a rig is on location)

 15

from receipt of such notice to elect by delivery of
notice to Operator to participate in such operation or to relinquish interest
in the affected well pursuant to the provisions of Article VI.B.2.; failure by
a party to deliver notice within such period shall be deemed an election not to
participate in the prevailing proposal.

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

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

C.                                 Completion
of Wells; Reworking and Plugging Back:

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

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

D.                                 Other
Operations:

Operator shall not undertake any single project
reasonably estimated to require an expenditure in excess of Fifteen Thousand
Dollars ($15,000.00) except in connection with the Sidetracking, Reworking,
Deepening, Completing, Recompleting or Plugging Back of a well that has been
previously authorized by or pursuant to this Agreement; provided, however,
that, in case of explosion, fire, flood or other sudden emergency, whether of
the same of different nature, Operator may take such steps and incur such
expenses as in its opinion are required to deal with the emergency to safeguard
life and property but Operator, as promptly as possible, shall report the
emergency to the other parties.  If
Operator prepares an AFE for its own use, Operator shall furnish the
Non-Operators an information copy thereof for any single project costing in
excess of Fifteen Thousand Dollars ($15,000.00).  Any party who has not relinquished its
interest in a well shall have the right to propose that Operator perform repair
work or undertake the installation of artificial lift equipment or ancillary
production facilities such as salt water disposal wells or to conduct
additional work with respect to a well drilled hereunder or other similar
project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. which shall be

 16
 

governed exclusively by that Articles).  Operator shall deliver such proposal to all
parties entitled to participate therein. 
If within thirty (30) days thereof Operator secures the written consent
of any party or parties owning at least 100% of the interests of the parties
entitled to participate in such operation, each party having the right to
participate in such project shall be bound by the terms of such proposal and
shall be obligated to pay its proportionate share of the costs of the proposed
project as if it had consented to such project pursuant to the terms of the
proposal.

E.                                   Abandonment
of Wells:

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

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

 17
 

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

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

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

F.                                   Termination
of Operations:

Upon the commencement of an operation for the
drilling, Reworking, Sidetracking, Plugging Back, Deepening, testing,
Completion or plugging of a well such operation shall not be terminated without
consent of parties bearing one-hundred percent (100 %) of the costs of such
operation; provided, however, that in the event granite other practically
impenetrable substance or

 18
 

condition in the hole is encountered which renders
further operations impractical, Operator may discontinue operations and give
notice of such condition in the manner provided in Article VI.B.1, and the
provisions of Article VI.B or VI.E. shall thereafter apply to such operation,
as appropriate.

G.                                 Taking
Production in Kind:

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

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

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

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

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

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

 19
 

ARTICLE
VII

EXPENDITURES
AND LIABILITY OF PARTIES

A.                                 Liability
of Parties:

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

B.                                 Liens
and Security Interests:

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

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

 20
 

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

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

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

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

Each party agrees that the other parties shall be
entitled to utilized the provisions of Oil and Gas lien law or other lien law
of any state in which the Contract Area is situated to enforce the obligations
of each party hereunder.  Without
limiting the generality of the foregoing, to the extent

 21
 

permitted by applicable law, Non-Operators agree that
Operator may invoke or utilize the mechanics’ or materialman’s lien law of the
state in which the Contract Area is situated in order to secure the payment to
Operator of any sum due hereunder for services performed or materials supplied
by Operator.

C.                                 Advances:

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

D.                                 Defaults
and Remedies:

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

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

 22
 

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

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

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

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

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

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

Rentals, shut-in payments and minimum royalties which
may be required under the terms of any lease shall be paid by Operator, and
said expenses shall be born by the parties in proportion to their respective
working interests.  Any party may
request, and shall be entitled to receive, proper

 23
 

evidence of all such payments.  In the event of failure to make proper
payment of any rental, shut-in well payment or minimum royalty through mistake
or oversight where such payment is required to continue the lease in force, any
loss which results from such non-payment shall be borne in accordance with the
provisions of Article IV.B.2.

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

F.                                   Taxes:

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

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

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

 24
 

ARTICLE
VIII.

ACQUISITION,
MAINTENANCE OR TRANSFER OF INTEREST

A.                                    Surrender
of Leases:

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

D.                                    Assignment:

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

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

D.                                    Waiver
of Rights to Partition:

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

ARTICLE
IX

[INTENTIONALLY
OMITTED]

ARTICLE
X

CLAIMS
AND LAWSUITS

Operator may settle any single uninsured third party
damage claim or suit arising from operations hereunder if the expenditure does
not exceed Fifteen Thousand Dollars ($15,000.00) and if the payment is in
complete settlement of such claim or suit. 
If the amount required for settlement exceeds the above amount, the
parties hereto shall assume and take over the further handling of the claim or
suit, unless such authority is delegated to Operator.  All costs and expenses of handling, settling,
or otherwise discharging such claim or suit shall be at the joint expense of
the parties

 25
 

participating in the operation from which the claim or
suit arises.  If a claim is made against
any party or if any party is used on account of any matter arising from
operations hereunder over which such individual has no control because of the
rights given Operator by this Agreement, such party shall immediately notify
all other parties,  and the claim or suit
shall be treated as any other claim or suit involving operations hereunder.

ARTICLE
XI

FORCE
MAJEURE

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

 26
 

ARTICLE
XII

NOTICES

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

ARTICLE
XIII

TERM
OF AGREEMENT

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

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

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

 27
 

ARTICLE
XIV

COMPLIANCE
WITH LAWS AND REGULATIONS

A.                                    Laws, Regulations
and Orders:

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

B.                                    Governing Law:

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

C.                                    Arbitration:

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

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

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

 28
 

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

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

D.                                    Regulatory
Agencies:

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

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

ARTICLE
XV

MISCELLANEOUS

A.                                    Execution:

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

B.                                    Successors
and Assigns; Counterparts:

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

 29
 

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

D.                                    Severability:

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

[End of Text.  Signatures on Following Page]

 30
 

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

	
   

  	
  OPERATOR:

  
	
   

  	
   

  
	
   

  	
  VINLAND
  ENERGY OPERATIONS, LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Majeed S.
  Nami

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  NON-OPERATORS:

  
	
   

  	
   

  
	
   

  	
  ARIANA
  ENERGY, LLC

  
	
   

  	
  By:

  	
  Vanguard Natural
  Gas, LLC

  	
   

  
	
   

  	
  Its:

  	
  Sole Member

  
	
   

  	
  By:

  	
  /s/ Scott W.
  Smith

  	
   

  
	
   

  	
   

  
	
   

  	
  Its: Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  VINLAND
  ENERGY EASTERN LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Majeed S.
  Nami

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
						

 

 31

EXHIBIT A

to the Operating Agreement (Tennessee)

INFORMATION FORM

Intentionally
Omitted

EXHIBIT
A-1

to the Operating Agreement (Tennessee)

AMI Map

Intentionally
Omitted

EXHIBIT
A-2

to the Operating Agreement (Tennessee)

AMI Map

Intentionally
Omitted

EXHIBIT
A-3

to the Operating Agreement (Tennessee)

AMI Map

Intentionally
Omitted

EXHIBIT
A-4

to the Operating Agreement (Tennessee)

AMI Map

Intentionally
Omitted

EXHIBIT
A-5

to the Operating Agreement (Tennessee)

AMI Map

Intentionally
Omitted

EXHIBIT B

PARTICIPATION AGREEMENT

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

RECITALS:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION I.

DEFINITIONS AND REFERENCES

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

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

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

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

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

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

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

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

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

 2
 

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

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

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

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

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

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

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

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

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

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

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

SECTION II.

LEASES AND TERM

2.1          Ownership
of Interests; Treatment of New Leases.

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

 3
 

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

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

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

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

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

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

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

 4
 

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

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

SECTION III.

PROCEDURES FOR DRILLING WELLS IN THE AMI

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

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

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

 5
 

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

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

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

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

 6
 

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

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

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

3.4          Undrilled
Wells.

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

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

 7
 

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

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

SECTION IV.

OPERATING 
AGREEMENTS

4.1          Operating
Agreements.

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

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

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

SECTION V.

TRANSFERS

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

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

SECTION VI.

NOTICES

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

 8
 

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

For Vinland:   Vinland
Energy Eastern, LLC

104 Nami Plaza, Suite 1

London, Kentucky 40741

Attention: 
Thomas H. Blake, President

For Vanguard:  c/o
Vanguard Natural Gas, LLC

7700 San Felipe, Suite
485

Houston, Texas 77063

Attention: 
Scott W. Smith, President

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

SECTION VII.

REPRESENTATIONS
AND WARRANTIES

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

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

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

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

 9
 

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

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

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

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

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

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

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

 10
 

SECTION VIII.

MISCELLANEOUS

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

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

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

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

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

 11
 

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

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

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

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

 12
 

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

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

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

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

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

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

 13
 

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

 14
 

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

	
  

  	
  (“VINLAND”)

  
	
   

  	
  VINLAND ENERGY EASTERN, LLC

  
	
   

  	
  By:

  	
  /s/ Majeed S. Nami

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  (“VANGUARD”)

  
	
   

  	
  VANGUARD NATURAL GAS, LLC

  
	
   

  	
  By:

  	
  /s/ Majeed S. Nami

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ARIANA ENERGY, LLC

  
	
   

  	
  By:

  	
  Vanguard Natural Gas, LLC

  	
   

  
	
   

  	
  Its:

  	
  Sole Member

  
	
   

  	
  By:

  	
  /s/ Majeed S. Nami

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TRUST ENERGY COMPANY, LLC

  
	
   

  	
  By:

  	
  Vanguard Natural Gas, LLC

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
	
   

  	
  By:

  	
  /s/ Majeed S. Nami

  	
   

  
	
   

  	
  Its:

  	
  Manager

  
						

 

 15

EXHIBIT C

ACCOUNTING PROCEDURE

JOINT OPERATIONS

(Tennessee)

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

I. GENERAL PROVISIONS

1.                                      DEFINITIONS

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

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

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

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

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

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

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

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

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

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

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

·                                          Coordination
of job priorities and approval of work procedures

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

·                                          Responsibility
for meeting production and field operating expense targets

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

·                                          Responsibility
for all emergency responses with field staff

·                                          Responsibility
for implementing safety and environmental practices

·                                          Responsibility
for field adherence to company policy

·                                          Responsibility
for employment decisions and performance appraisals for field personnel

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

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

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

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

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

 2
 

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

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

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

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

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

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

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

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

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

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

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

2.                                      STATEMENTS AND BILLINGS

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

 3
 

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

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

3.                                      ADVANCES AND PAYMENTS BY THE
PARTIES

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

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

 4
 

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

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

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

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

4.                                      ADJUSTMENTS

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

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

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

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

(3)                                  a
government/regulatory audit, or

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

 5
 

5.                                      EXPENDITURE AUDITS

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

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

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

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

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

 6
 

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

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

6.                                      APPROVAL BY PARTIES

A.                                   GENERAL MATTERS

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

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

 7
 

B.                                     AMENDMENTS

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

C.                                     AFFILIATES

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

II. DIRECT CHARGES

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

1.                                      RENTALS AND ROYALTIES

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

2.                                      LABOR

A.                                   Salaries and wages
for:

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

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

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

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

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

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

 8
 

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

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

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

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

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

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

3.                                      MATERIAL

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

4.                                      TRANSPORTATION

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

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

 9
 

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

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

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

5.                                      SERVICES

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

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

 10
 

6.                                      EQUIPMENT AND FACILITIES
FURNISHED BY OPERATOR

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

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

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

7.                                      AFFILIATES

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

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

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

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

 11
 

8.                                      DAMAGES AND LOSSES TO JOINT
PROPERTY

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

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

9.                                      LEGAL EXPENSE

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

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

10.                               TAXES AND PERMITS

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

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

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

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

 12
 

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

11.                               INSURANCE

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

12.                               COMMUNICATIONS

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

13.                               ECOLOGICAL, ENVIRONMENTAL,
AND SAFETY.

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

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

14.                               ABANDONMENT AND RECLAMATION

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

 13

15.                               OTHER EXPENDITURES

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

III. OVERHEAD

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

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

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

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

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

·                                          procurement

·                                          administration

·                                          accounting
and auditing

·                                          gas
dispatching

·                                          human
resources

·                                          management

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

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

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

 14
 

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

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

1.                                      OVERHEAD - DRILLING AND
PRODUCING OPERATIONS

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

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

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

A.                                   TECHNICAL SERVICES

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

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

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

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

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

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

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

 15
 

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

B.                                     OVERHEAD - FIXED
RATE BASIS

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

Producing Well Rate per
month $60.00.

Drilling Well Rate
$15,000.

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

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

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

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

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

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

 16
 

C.                                     OVERHEAD-PERCENTAGE
BASIS

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

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

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

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

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

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

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

[iii]                               preliminary expenditures
necessary in preparation for drilling

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

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

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

2.                                      OVERHEAD - MAJOR
CONSTRUCTION AND CATASTROPHE

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

 17
 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 18
 

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

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

3.                                      AMENDMENT OF OVERHEAD RATES

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

IV. MATERIAL PURCHASES,
TRANSFERS, AND DISPOSITIONS

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

1.                                      DIRECT PURCHASES

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

2.                                      TRANSFERS

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

 19
 

A.                                   PRICING

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

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

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

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

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

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

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

B.                                     FREIGHT

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

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

 20
 

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

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

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

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

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

C.                                     TAXES

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

D.                                    CONDITION

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

 21
 

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

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

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

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

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

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

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

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

 22
 

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

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

E.                                      OTHER PRICING
PROVISIONS

(1)                                  Preparation Costs

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

(2)                                  Loading and Unloading
Costs

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

3.                                      DISPOSITION OF SURPLUS

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

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

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

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

 23
 

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

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

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

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

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

4.                                      SPECIAL PRICING PROVISIONS

A.                                   PREMIUM PRICING

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

B.                                     SHOP-MADE ITEMS

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

C.                                     MILL REJECTS

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

 24
 

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

V.  INVENTORIES OF CONTROLLABLE MATERIAL

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

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

1.                                      DIRECTED INVENTORIES

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

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

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

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

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

2.                                      NON-DIRECTED INVENTORIES

A.                                   OPERATOR INVENTORIES

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

 25
 

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

B.                                     NON-OPERATOR
INVENTORIES

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

C.                                     SPECIAL
INVENTORIES

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

 26

EXHIBIT D

to the Operating Agreement (Tennessee)

INSURANCE

Insurance
Coverages

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

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

	
  Employer’s Liability

  	
   

  	
  $

  	
  1,000,000

  	
   

  

 

B.                                     Comprehensive
General Liability Insurance including:

	
  General Aggregate Limit
  (Other than Prod-Comp Operations)

  	
   

  	
  $

  	
  2,000,000

  	
   

  
	
  Products-Completed
  Operations Aggregate Limit

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
  Personal &
  Advertising Injury Limit

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
  Each Occurrence
  Limit

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
  Fire Damage
  Limit (Any One Fire)

  	
   

  	
  $

  	
  100,000

  	
   

  
	
  Medical Expense Limit
  (Any One Person)

  	
   

  	
  $

  	
  5,000

  	
   

  

 

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

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

E.                                      Commercial
Umbrella Liability Policy including:

	
  Each Occurrence Limit

  	
   

  	
  $

  	
  9,000,000

  	
   

  
	
  General
  Aggregate

  	
   

  	
  $

  	
  9,000,000

  	
   

  
	
  Products-Completed
  Operations Aggregate

  	
   

  	
  $

  	
  9,000,000

  	
   

  
	
  Crisis Response
  Sublimit of Insurance

  	
   

  	
  $

  	
  250,000

  	
   

  
	
  Excess Casualty Crisis
  Fund Limit of Insurance

  	
   

  	
  $

  	
  50,000

  	
   

  

 

F.                                      Additional
Insureds:

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

EXHIBIT E

AE PUD ASSIGNMENT

Intentionally
Omitted

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