Document:

Exhibit
      4.3

     

    SECURITY
      AGREEMENT

    (All
      Personal Property)

     

    THIS
      SECURITY AGREEMENT is made and entered into as of ___________, 2008,
      by
KY
      USA ENERGY, INC., a
      Kentucky corporation, with an address at 321 Somerset Road, London, Kentucky
      40741 (“Debtor”),
      in
      favor of NSES
      12, LLC,
      a
      Delaware limited liability company, with an address at 38 Grove Street, Building
      C, Ridgefield, Connecticut 06877 (“Secured
      Party”).

     

    Background:

     

    1. On
      even
      date herewith, Debtor, as Borrower and Secured Party, as Lender, executed that
      certain Senior Secured Credit Agreement (as amended, supplemented or modified
      from time to time, the “Credit
      Agreement”)
      pursuant to which, Secured Party agreed to make loans to Debtor from time to
      time on the conditions set forth in the Credit Agreement; and

     

    2. Secured
      Party has conditioned its obligations under the Credit Agreement upon, among
      other things, the execution and delivery by Debtor of this Security Agreement,
      and Debtor has agreed to enter into this Security Agreement.

     

    Agreements:

     

    In
      order
      to comply with the terms and conditions of the Credit Agreement and for and
      in
      consideration of the premises and the agreements herein contained and other
      good
      and valuable consideration, the receipt and sufficiency of which are hereby
      acknowledged, Debtor hereby agrees with Secured Party as follows:

     

    ARTICLE
      I

    DEFINITIONS

     

    Section
      1.1 Terms
      Defined Above.
      As used
      in this Security Agreement, the terms “Debtor,”
      “Secured
      Party,”
and
      “Credit
      Agreement”
shall
      have the meanings indicated above.

     

    Section
      1.2 Definitions
      Contained in the Credit Agreement.
      Unless
      otherwise defined herein or the context otherwise requires, all capitalized
      terms used but not defined in this Security Agreement have the meanings given
      to
      those terms in the Credit Agreement.

     

    Section
      1.3 Certain
      Definitions.
      As used
      in this Security Agreement, the following terms shall have the following
      meanings, unless the context otherwise requires:

     

    “Accounts”
has
      the
      meaning indicated in subsection
      2.1(a)
      hereof.

     

    “Code”
means
      the Uniform Commercial Code as presently in effect in the State of New York,
      and
      as amended from time to time.

     

    “Collateral”
means
      all property, including without limitation cash or other proceeds, in which
      Secured Party shall have a security interest pursuant to Section
      2.1
      of this
      Security Agreement.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Default”
means
      the occurrence of any of the events specified in Section
      5.3
      hereof,
      whether or not any requirement for notice or lapse of time or other condition
      precedent has been satisfied.

     

    “Equipment”
has
      the
      meaning indicated in subsection
      2.1(b)
      hereof.

     

    “Event
      of Default”
means
      the occurrence of any of the events specified in Section 5.3
      hereof;
provided
      that any
      requirement for notice or lapse of time or other condition precedent has been
      satisfied.

     

    “General
      Intangibles”
has
      the
      meaning indicated in subsection
      2.1(c)
      hereof.

     

    “Inventory”
has
      the
      meaning indicated in subsection
      2.1(d)
      hereof.

     

    “Other
      Liable Party”
means
      any person, other than Debtor, who is or becomes primarily or secondarily liable
      for any of the Secured Obligations or who grants Secured Party a lien on any
      property as security for the Secured Obligations.

     

    “Related
      Rights”
means
      all chattel papers, electronic chattel papers, payment intangibles, promissory
      notes, letter of credit rights, supporting obligations, documents and
      instruments relating to the Accounts or the General Intangibles and all rights
      now or hereafter existing in and to all security agreements, leases, and other
      contracts securing or otherwise relating to any Accounts or General Intangibles
      or any such chattel papers, electronic chattel papers, payment intangibles,
      promissory notes, letter of credit rights, documents and
      instruments.

     

    “Secured
      Obligations”
has
      the
      meaning indicated in Section
      2.2
      hereof.

     

    “Security
      Agreement”
means
      this Security Agreement, as the same may from time to time be amended or
      supplemented.

     

    “Security
      Documents”
means
      this Security Agreement together with all financing statements filed in
      connection with this Security Agreement.

     

    Section
      1.4 Terms
      Defined in Code.
      Unless
      otherwise defined herein, all terms used herein which are defined in the Code
      shall have the same meaning herein.

     

    ARTICLE
      II

    SECURITY
      INTEREST

     

    Section
      2.1 Grant
      of Security Interest.
      As
      collateral security for all of the Secured Obligations, Debtor hereby grants
      to
      Secured Party a security interest in, a general lien upon, and a right of
      set-off against all of Debtor’s right, title and interest in its assets,
      tangible or intangible, including but not limited to the following and whether
      now owned or later acquired:

     

    (a) all
      of
      Debtor’s accounts (as is defined in the Code) of any kind (the “Accounts”);
      all
      chattel papers, electronic chattel papers, payment intangibles, promissory
      notes, letter of credit rights, documents and instruments relating to the
      Accounts; and all rights in and to all security agreements, leases, and other
      contracts securing or otherwise relating to any Accounts or any such chattel
      papers, documents and instruments; and

     

    
      
        
        

      

      
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    (b) all
      of
      Debtor’s equipment (as defined in the Code) in all of its forms, and wherever
      located, together with all parts thereof and all accessions or additions
      thereto, (collectively, the “Equipment”);
      and

     

    (c) all
      of
      Debtor’s general intangibles (as defined in the Code) of any kind (the
“General
      Intangibles”);
      all
      chattel papers, electronic chattel papers, payment intangibles, promissory
      notes, letter of credit rights, documents and instruments relating to the
      General Intangibles; and all rights in and to all security agreements, leases,
      and other contracts securing or otherwise relating to any General Intangibles
      or
      any such chattel papers, documents and instruments; and

     

    (d) all
      of
      Debtor’s inventory (as defined in the Code) in all of its forms, and wherever
      located, together with all accessions or additions thereto and products thereof
      (collectively the “Inventory”);
      and

     

    (e) all
      of
      Debtor’s investment property (as defined in the Code) wherever
      located;

     

    (f) all
      of
      Debtor’s deposit accounts (as defined in the Code) wherever
      located;

     

    (g) any
      additional tangible or intangible property from time to time delivered to or
      deposited with Secured Party as security for the Secured Obligations or
      otherwise pursuant to the terms of this Security Agreement; and

     

    (h) the
      proceeds, products, supporting obligations, Related Rights, additions to,
      substitutions for and accessions of any and all Collateral described in
      subparagraphs (a)–(g) in this Section
      2.1.

     

    Section
      2.2 Secured
      Obligations.
      The
      security interest in, general lien upon, and right of set-off against the
      Collateral is granted to secure the following (collectively, the “Secured
      Obligations”):

     

    (a) the
      payment of all the Obligations (as defined in the Credit Agreement) of Debtor
      to
      Secured Party now or hereafter existing including, without limitation, the
      Indebtedness of Debtor under the Note, and any and all renewals, extensions
      for
      any period or rearrangement of the Obligations; and

     

    (b) the
      performance of all obligations of Debtor under this Security Agreement, the
      Permitted Swap Agreements and the other Loan Documents. 

     

    Section
      2.3 Ordinary
      Course of Business.
      Secured
      Party hereby authorizes and permits Debtor to hold, process, sell, or otherwise
      dispose of Inventory for fair consideration, all in the ordinary course of
      Debtor’s business.

     

    
      
        
        

      

      
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    ARTICLE
      III

    REPRESENTATIONS
      AND WARRANTIES

     

    In
      order
      to induce Secured Party to accept this Security Agreement, Debtor represents
      and
      warrants to Secured Party (which representations and warranties will survive
      the
      creation of any Secured Obligations and the extension of any credit under the
      Credit Agreement) that:

     

    Section
      3.1 Ownership
      and Liens.
      Except
      for the security interest of Secured Party granted in this Security Agreement
      and except for liens, security interests and other encumbrances permitted under
      the Credit Agreement (“Permitted
      Encumbrances”),
      Debtor owns good and valid title to the Collateral free and clear of any other
      liens, adverse claims or options other than Permitted Encumbrances. Debtor
      has
      rights in or the right, power and authority to grant a security interest in
      the
      Collateral to Secured Party in the manner provided herein, free and clear of
      any
      other liens, adverse claims and options other than Permitted Encumbrances.
      No
      other lien, adverse claim or option has been created by Debtor or is known
      by
      Debtor to exist with respect to any Collateral other than Permitted
      Encumbrances. No financing statement or other security instrument is on file
      in
      any jurisdiction covering any part of the Collateral other than those in favor
      of Secured Party other than Permitted Encumbrances. At the time the security
      interest in favor of Secured Party attaches, good and valid title to all
      after-acquired property included within the Collateral, free and clear of any
      other Liens, adverse claims or options (other than those permitted by the first
      sentence of this Section 3.1)
      will be
      vested in Debtor.

     

    Section
      3.2 Status
      of Accounts.
      Each
      Account hereafter arising will represent and to the best knowledge of Debtor,
      each Account now existing represents, the valid and legally enforceable
      obligations of a bona fide account debtor and is not and will not be subject
      to
      contra accounts, set-offs, defenses or counterclaims by or available to account
      debtors obligated on the Accounts except as disclosed to Secured Party in
      writing; and the amount shown as to each Account on Debtor’s books will be the
      true and undisputed amount owing and unpaid thereon, subject to any discounts,
      allowances, rebates, credits and adjustments to which the account debtor has
      a
      right and which have arisen in Debtor’s ordinary course of business or which
      have otherwise been disclosed to Secured Party in writing.

     

    Section
      3.3 Status
      of Related Rights.
      All
      Related Rights are, and those hereafter arising will be, valid and
      genuine.

     

    Section
      3.4 Inventory
      Not Covered by Other Documents.
      None of
      the Inventory is, and at the time the security interest in favor of Secured
      Party attaches none of the Inventory hereafter acquired will be, covered by
      any
      document (as defined in the Code).

     

    Section
      3.5 Name;
      Organization; Authority.
      The
      exact legal name of Debtor is set forth in the opening paragraph of this
      Security Agreement. Debtor is a corporation, duly organized, validly existing,
      and in good standing under the laws of the Commonwealth of Kentucky. Debtor
      is
      qualified to do business and in good standing in each other state in which
      the
      nature of its business requires it to be so qualified, except where the failure
      to so qualify could not reasonably be expected to cause a Material Adverse
      Effect on the Collateral or Debtor’s ability to satisfy its obligations under
      the Credit Agreement or the legality, validity or enforceability of this
      Security Agreement. The execution, delivery and performance of this Security
      Agreement has been duly authorized by all corporate action, and this Security
      Agreement constitutes the valid and binding obligation of Debtor, enforceable
      against Debtor in accordance with its terms, except as the enforceability
      thereof may be limited or affected by bankruptcy, insolvency, reorganization,
      moratorium or similar laws affecting the enforcement of creditors rights
      generally and by general equitable principles.

     

    
      
        
        

      

      
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    Section
      3.6 Location.
      Debtor’s chief executive office and chief place of business is located at the
      address set forth in the opening paragraph of this Security Agreement. The
      office where Debtor keeps its records concerning the Accounts and the General
      Intangibles and the original of all the Related Rights has the same address
      as
      Debtor’s chief executive office and chief place of business. Debtor’s Inventory
      and Equipment (other than mobile goods) is located in the Commonwealth of
      Kentucky and such other states as Debtor shall have from time to time given
      notice of to Secured Party.

     

    Section
      3.7 Secured
      Party’s Security Interest.
      This
      Security Agreement creates a valid and binding security interest in the
      Collateral securing the Secured Obligations. Upon filing the financing
      statements described in Section 4.10 of this Security Agreement covering the
      Collateral in the Office of the Secretary of State for the Commonwealth of
      Kentucky, Secured Party will have a fully perfected security interest in that
      Collateral in which a security interest may be perfected by filing, subject
      only
      to Permitted Encumbrances. No further or subsequent filing, recording,
      registration or other public notice of such security interest is necessary
      in
      any office or jurisdiction in order to perfect such security interest or to
      continue, preserve or protect such security interest except for continuation
      statements or for filings upon the occurrence of any of the events stated in
      Section 4.10
      of this
      Security Agreement. Such perfected security interest in the Collateral
      constitutes a first-priority security interest under the Code, subject only
      to
      Permitted Encumbrances.

     

    ARTICLE
      IV

    COVENANTS
      AND AGREEMENTS

     

    A
      deviation from the provisions of this Article
      IV
      shall
      not constitute a Default under this Security Agreement if such deviation is
      consented to in writing (in the manner provided in the Credit Agreement) in
      advance by Secured Party. Without the prior written consent of Secured Party,
      Debtor will at all times comply with the covenants contained in this
Article
      IV,
      from
      the date hereof and for so long as any part of the Secured Obligations (other
      than indemnity obligations and similar obligations that survive the termination
      of the Loan Documents for which no notice of a claim has been received by
      Debtor) or the commitment of Secured Party to make loans under the Credit
      Agreement is outstanding.

     

    Section
      4.1 Title;
      Prohibited Liens and Filings.
      Debtor
      agrees to protect the title to the Collateral. Debtor will not pledge, mortgage,
      otherwise encumber, create or suffer a lien to exist on any of the Collateral
      (other than in favor of Secured Party or as permitted by the Credit Agreement)
      or sell, assign or otherwise transfer any of the Collateral (other than as
      permitted by the Credit Agreement) to or in favor of any person other than
      Secured Party. Debtor will not file or, to the extent it is able, permit to
      be
      filed or recorded any financing statement or other security instrument with
      respect to the Collateral other than in favor of Secured Party or as permitted
      by the Credit Agreement.

     

    
      
        
        

      

      
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    Section
      4.2 Taxes,
      Etc.
      Debtor
      agrees to pay prior to delinquency all taxes, charges, liens and assessments
      against the Collateral which, if unpaid, might result in the imposition of
      a
      lien on the Collateral; provided,
      however,
      Debtor
      shall not be required to pay any tax, charge, lien or assessment that is not
      yet
      past due or is being contested in good faith by appropriate proceedings
      diligently conducted by or on behalf of Debtor and if Debtor shall have set
      up
      reserves therefor adequate under generally accepted accounting
      principles.

     

    Section
      4.3 Possession
      of Collateral.
      Secured
      Party shall be deemed to have possession of any of the Collateral in transit
      to
      it or set apart for it. Otherwise, the Collateral shall remain in Debtor’s
      possession or control at all times (except (i) where Secured Party chooses
      to
      perfect its security interest by possession in addition to the filing of a
      financing statement and (ii) with respect to Inventory that Debtor may sell
      in
      the ordinary course of its business) at Debtor’s risk of loss and shall (except
      for temporary removal consistent with its normal use) be kept at locations
      owned
      or leased by Borrowers.

     

    Section
      4.4 Inspection
      of Collateral.
      Upon
      reasonable notice, Secured Party may from time to time during normal business
      hours, inspect Debtor’s records concerning the Accounts and the General
      Intangibles, the originals of the Related Rights, the Equipment, the Inventory
      and other Collateral but not as to unreasonably interfere with the business
      of
      Debtor.

     

    Section
      4.5 Further
      Assurances.
      Debtor
      will from time to time sign, execute, deliver and file, alone or with Secured
      Party, upon reasonable request, any financing statements, security agreements
      or
      other documents necessary or convenient to perfect or continue in favor of
      Secured Party a first-priority security interest in the Collateral; procure
      any
      necessary instruments or documents as may be reasonably requested by Secured
      Party; and take all further action that may be necessary or desirable, or that
      Secured Party may reasonably request, to confirm, perfect, preserve and protect
      the security interests intended to be granted hereby. Notwithstanding the
      previous sentence, however, Debtor hereby authorizes Secured Party to execute
      and deliver on behalf of Debtor and to file such financing statements, security
      agreements and other documents without the signature of Debtor either in Secured
      Party’s name or in the name of Debtor and as attorney-in-fact for Debtor. Debtor
      shall do all such additional and further acts or things, give such assurances
      and execute such documents or instruments as Secured Party reasonably requires
      to vest more completely in and assure to Secured Party its rights under this
      Security Agreement, including, without limiting the generality of the foregoing,
      (a) marking conspicuously each chattel paper or electronic chattel paper
      included in the Collateral and, at the request of Secured Party, each of
      Debtor’s records pertaining to the Collateral with a legend, in form and
      substance satisfactory to Secured Party, indicating that such chattel paper
      or
      Collateral is subject to the security interest granted by this Security
      Agreement and (b) if any Account, General Intangible or Related Right is
      evidenced by a promissory note, chattel paper, electronic chattel paper or
      other
      instrument, transferring, delivering, assigning to Secured Party such promissory
      note, chattel paper, electronic chattel paper or other instrument duly endorsed
      and authenticated and accompanied by duly executed instruments of transfer
      and
      assignment, all in form and substance reasonably satisfactory to Secured Party,
      to be held by Secured Party as Collateral under this Security
      Agreement.

     

    
      
        
        

      

      
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    Section
      4.6 Filing
      Reproductions.
      At the
      option of Secured Party, a photographic or other reproduction of this Security
      Agreement or of a financing statement covering the Collateral shall be
      sufficient as a financing statement and may be filed as a financing
      statement.

     

    Section
      4.7 Delivery
      of Information.
      Debtor
      will transmit promptly to Secured Party all information that Debtor may have
      or
      receive with respect to (a) the Collateral or (b) account debtors or obligors
      in
      respect of the Accounts, the General Intangibles and the Related Rights, in
      each
      case which could reasonably be expected to materially and adversely affect
      the
      aggregate value of the Collateral or Secured Party’s rights or remedies with
      respect thereto.

     

    Section
      4.8 Compromise
      of Collateral.
      Debtor
      will not adjust, settle or compromise any of the Accounts, the General
      Intangibles or the Related Rights without the prior written consent of Secured
      Party, other than in a manner that does not materially affect the aggregate
      value of the Collateral and is in the ordinary course of business.

     

    Section
      4.9 Expenses.
      Debtor
      agrees to pay to Secured Party at Secured Party’s offices, all advances,
      charges, costs and expenses (including reasonable attorneys’ fees and legal
      expenses) incurred by Secured Party in connection with the transaction which
      gives rise to this Security Agreement, in connection with confirming, perfecting
      and preserving the security interest created under this Security Agreement,
      in
      connection with protecting Secured Party against the claims or interests of
      any
      Person against the Collateral, and in exercising any right, power or remedy
      conferred by this Security Agreement or by law or in equity (including, but
      not
      limited to, reasonable attorneys’ fees and legal expenses incurred by Secured
      Party in the collection of instruments deposited with or purchased by Secured
      Party and amounts incurred in connection with the operation, maintenance or
      foreclosure of any or all of the Collateral). The amount of all such advances,
      charges, costs and expenses shall be due and payable by Debtor to Secured Party
      upon ten (10) days after invoice or demand by Secured Party together with
      interest thereon from the due date at the Default Rate as provided in the Credit
      Agreement.

     

    Section
      4.10 Financing
      Statement Filings; Notifications.
      Debtor
      recognizes that financing statements pertaining to the Collateral will be filed
      with the Office of the Secretary of State for the Commonwealth of Kentucky.
      Debtor will promptly notify Secured Party of any condition or event that may
      change the proper location for the filing of any financing statements or other
      public notice or recordings for the purpose of perfecting a security interest
      in
      the Collateral. Without limiting the generality of the foregoing, Debtor will
      (a) promptly notify Secured Party of any change to a jurisdiction other than
      as
      represented in Section
      3.5
      or
Section 3.6
      (i)
      in the
      location of Debtor’s chief executive office or chief place of business;
      (ii)
      in the
      location of the Inventory (other than Inventory sold or leased in the ordinary
      course of business); (iii)
      in the
      location of the Equipment (other than Equipment removed in the ordinary course
      of business for not more than thirty (30) days) or disposed of as permitted
      by
      the Credit Agreement; (iv)
      in the
      location of the office where Debtor keeps its records concerning the Accounts;
      or (v)
      in the
“location” of Debtor within the meaning of the Code; (b) prior to any of the
      Collateral becoming so related to any particular real estate so as to become
      a
      fixture on such real estate, notify Secured Party of the description of such
      real estate and the name of the record owner thereof; and (c) promptly notify
      Secured Party of any change in Debtor’s name, identity or limited liability
      company structure. In any notice furnished pursuant to this section, Debtor
      will
      expressly state that the notice is required by this Security Agreement and
      contains facts that will or may require additional filings of financing
      statements or other notices for the purpose of continuing perfection of Secured
      Party’s security interest in the Collateral.

     

    
      
        
        

      

      
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    Section
      4.11 Maintenance
      of Collateral Generally.
      Except
      as otherwise provided in the Credit Agreement, (A) Debtor will maintain all
      the Collateral in good condition, repair, and working order (ordinary wear
      and
      tear excepted), and substantially in accordance with any manufacturer’s manual
      if applicable; (B) Debtor will not misuse, abuse, waste, destroy, endanger
      or allow the Collateral to deteriorate, except, with respect to the Equipment
      only, for ordinary wear and tear from its intended use; (C) Debtor will
      promptly, or in the case of any loss or damage to any goods included in the
      Collateral as soon as practicable, make or cause to be made all repairs,
      replacements or other improvements to the Collateral as are necessary or
      desirable to accomplish the foregoing; and (D) Debtor will not use any
      Collateral in violation of any law, statute, ordinance or regulation or allow
      it
      to be so used.

     

    Section
      4.12 Account
      Obligations.
      The
      Debtor will duly perform or cause to be performed all obligations of Debtor
      with
      respect to the goods or services, the sale or lease or rendition of which gave
      rise or will give rise to each Account relating thereto.

     

    Section
      4.13 Use
      of
      Inventory.
      If an
      Event of Default has occurred and is continuing, Debtor may use its Inventory
      in
      any lawful manner not inconsistent with this Security Agreement and with the
      terms of insurance thereon and may sell, lease or otherwise dispose of its
      Inventory in the ordinary course of business. Debtor will not and shall not
      be
      permitted to use any item of Inventory in a manner inconsistent with the holding
      thereof for sale, lease or disposition in the ordinary course of business or
      in
      contravention of the terms of any agreement. A sale, lease or disposition in
      the
      ordinary course of business does not include the exchange of items of Inventory
      for goods in kind or otherwise or transfers of items of Inventory made in
      satisfaction of present or future Secured Obligations.

     

    Section
      4.14 Proceeds.
      Upon
      the terms and conditions set forth in the Credit Agreement and at the request
      of
      Secured Party, Debtor will deliver to Secured Party promptly upon receipt,
      all
      proceeds received by Debtor from the sale or disposition of the Collateral
      in
      the exact form in which they are received. To evidence Secured Party’s rights in
      this regard, Debtor will assign or endorse proceeds to Secured Party as Secured
      Party reasonably requests. Secured Party may, from time to time, in its
      discretion, hold non-cash proceeds as part of the Collateral or apply cash
      proceeds received by Secured Party in the manner set forth in Section
      5.2
      of this
      Security Agreement. Upon the terms and conditions set forth in the Credit
      Agreement and at the request of Secured Party, Debtor will notify obligors
      on
      all of the Collateral to make payments directly to Secured Party, and thereafter
      Secured Party may endorse as Debtor’s agent any checks, instruments, chattel
      paper or other documents connected with the Collateral, take control of proceeds
      of the Collateral and may hold the non-cash proceeds as part of the Collateral
      and may apply cash proceeds received by Secured Party in the manner set forth
      in
Section
      5.2
      of this
      Security Agreement and may take any action necessary to obtain, preserve and
      enforce the liens granted hereunder and maintain and preserve the
      Collateral.

     

    
      
        
        

      

      
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    Section
      4.15 Insurance.
      Debtor
      shall have and maintain, with financially sound and reputable insurers,
      insurance (subject to customary deductible and retention) satisfactory in all
      respects to Secured Party covering the goods included in the Collateral against
      such liabilities, risks and contingencies, by such methods and in such amounts
      as provided in the Credit Agreement. Policies evidencing any such property
      insurance will name Secured Party as an additional insured and loss payee and
      provide for a minimum of thirty (30) days prior written notice to Secured Party
      of any cancellation. Debtor shall furnish Secured Party with certificates or
      other evidence of compliance with the foregoing insurance provisions as provided
      in the Credit Agreement. Secured Party may act as attorney-in-fact for Debtor
      and Debtor hereby irrevocably appoints Secured Party as Debtor’s true and lawful
      attorney-in-fact, with full power of substitution, in Secured Party’s name or
      Debtor’s name or otherwise, but at Debtor’s cost and expense and without notice
      to Debtor upon the occurrence and during the continuance of an Event of Default,
      to obtain, adjust, sell and cancel such insurance and endorse any draft drawn
      by
      insurers of the goods included in the Collateral. If any insurance policy
      covering the goods included in the Collateral expires or is canceled before
      the
      Secured Obligations are paid in full or before the termination of the Secured
      Party’s commitment to make loans as provided in the Credit Agreement, at Secured
      Party’s option, Secured Party may, at Debtor’s expense, obtain replacement
      insurance which may, but need not, be single interest insurance in favor of
      Secured Party.

     

    Section
      4.16 Collateral
      not to be Fixture or Accession.
      Debtor
      will not permit any Collateral to become so related to any particular real
      estate so as to become a fixture on such real estate or to be installed in
      or
      affixed to other goods so as to become an accession to such other goods unless
      such other goods are included in the Collateral; in the event that any
      Collateral is to become so related to any particular real estate or so installed
      or affixed to other goods, prior thereto Debtor will (i)
      notify
      Secured Party of such fact and (ii)
      upon
      demand of Secured Party furnish written consents to Secured Party’s security
      interest and disclaimers of any interest in such Collateral signed by any Person
      having an interest in such real estate or such other goods, if
      applicable.

     

    Section
      4.17 Delivery
      of Certificate of Title to Equipment.
      In the
      case of Equipment now owned constituting goods in which a security interest
      is
      perfected by a notation on the certificate of title or similar evidence of
      the
      ownership of such goods, Debtor shall, as soon as practicable after a request
      by
      Secured Party, deliver to Secured Party any and all certificates of title,
      applications for title or similar evidence of ownership of such Equipment and
      shall cause Secured Party to be named as lienholder on any such certificate
      of
      title or other evidence of ownership. In the case of such Equipment hereafter
      acquired, other than Equipment with respect to which purchase money liens are
      required and allowed as Permitted Encumbrances, Debtor shall provide evidence
      of
      ownership within ten (10) days of its acquisition of such Equipment. Debtor
      shall provide notice to Secured Party of any material loss or damage to any
      Equipment and shall not permit any such Equipment to become a fixture to real
      estate or an accession to other personal property other than as permitted in
      the
      Credit Agreement.

     

    Section
      4.18 Third-Party
      Acknowledgments; Control Agreements.
      If any
      of the Collateral is in the possession of a third-party, Debtor will join with
      Secured Party in notifying the third-party of Secured Party’s security interest
      and obtaining an acknowledgment in form and substance reasonably satisfactory
      to
      Secured Party from such third-party that it is holding the Collateral for the
      benefit of the Secured Party. Debtor will fully cooperate with Secured Party
      in
      obtaining a control agreement in form and substance reasonably satisfactory
      to
      Secured Party with respect to any Collateral consisting of deposit accounts,
      investment property, electronic chattel paper or letter of credit
      rights.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      V

    RIGHTS,
      REMEDIES AND DEFAULT

     

    Section
      5.1 With
      Respect to Collateral.
      Secured
      Party is hereby fully authorized and empowered (without the necessity of any
      further consent or authorization from Debtor) and the right is expressly granted
      to Secured Party, and Debtor hereby constitutes, appoints and makes Secured
      Party as Debtor’s true and lawful attorney-in-fact and agent for Debtor and in
      Debtor’s name, place and stead with full power of substitution, in Secured
      Party’s name or Debtor’s name or otherwise, for Secured Party’s sole use and
      benefit, but at Debtor’s cost and expense, to exercise, without notice, all or
      any of the following powers at any time following the occurrence and during
      the
      continuation of an Event of Default hereunder with respect to all or any of
      the
      Collateral:

     

    (a) notify
      account debtors or the obligors on the Accounts, the General Intangibles and
      the
      Related Rights to make and deliver payment to Secured Party;

     

    (b) to
      demand, sue for, collect, receive and give acquittance for any and all monies
      due or to become due by virtue thereof and otherwise deal with
      proceeds;

     

    (c) to
      receive, take, endorse, assign and deliver any and all checks, notes, drafts,
      documents and other negotiable and non-negotiable instruments and chattel paper
      taken or received by Secured Party in connection therewith;

     

    (d) to
      settle, compromise, compound, prosecute or defend any action or proceeding
      with
      respect thereto;

     

    (e) to
      sell,
      transfer, assign or otherwise deal in or with the same or the proceeds or avails
      thereof or the relative goods, as fully and effectively as if Secured Party
      were
      the absolute owner thereof; and

     

    (f) to
      extend
      the time of payment of any or all thereof and to grant waivers and make any
      allowance or other adjustment with reference thereto;

     

    provided,
      however,
      Secured
      Party shall be under no obligation or duty to exercise any of the powers hereby
      conferred upon it and shall be without liability for any act or failure to
      act
      in connection with the collection of, or the preservation of any rights under,
      any Collateral.

     

    Section
      5.2 Application
      of Cash Sums.
      All
      cash sums paid to and received by Secured Party on account of the Collateral
      will be (a) released to Debtor for use in Debtor’s business or, at the
      option of Secured Party pursuant to the terms and conditions of the Credit
      Agreement, (b) applied by Secured Party on the Secured Obligations whether
      or not such Secured Obligations shall have by its terms matured, in accordance
      with the Credit Agreement; provided,
      however,
      Secured
      Party need not apply or give credit for any item included in such sums until
      Secured Party has received final payment thereof at its banking quarters or
      solvent credits accepted as such by Secured Party; and provided further
      that
      Secured Party’s failure to so apply any such sums shall not be a waiver of
      Secured Party’s right to so apply such sums or any other sums at any
      time.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    Section
      5.3 Events
      of Default.
      An
“Event
      of Default”
under
      this Security Agreement shall occur upon the occurrence of an “Event of Default”
under the Credit Agreement.

     

    Section
      5.4 Default
      Remedies.
      Upon
      the occurrence and during the continuation of any Event of Default, Secured
      Party may then, or at any time thereafter and from time to time after giving
      any
      notice required under the Credit Agreement, if any notice is required with
      respect to such Event of Default, apply, set-off, collect, sell in one or more
      sales, lease, or otherwise dispose of, any or all of the Collateral, in its
      then
      condition or, at Secured Party’s option, following any commercially reasonable
      preparation or processing, in such order as Secured Party may elect, and any
      such sale may be made either at public or private sale at its place of business
      or elsewhere, or at any brokers’ board or securities exchange, either for cash
      or upon credit or for future delivery, and Secured Party may be the purchaser
      of
      any or all Collateral so sold and may hold the same thereafter in its own right
      free from any claim of Debtor or right of redemption. No such purchase or
      holding by Secured Party shall be deemed a retention by Secured Party in
      satisfaction of the Secured Obligations. All demands, notices and
      advertisements, and the presentment of property at sale are hereby waived except
      to the extent reasonably necessary to conduct a commercially reasonable sale.
      If, notwithstanding the foregoing provisions, any applicable provision of the
      Code or other law requires Secured Party to give reasonable notice of any such
      sale or disposition or other action, Debtor hereby agrees ten (10) days prior
      written notice shall constitute reasonable notice. Secured Party may require
      Debtor to assemble the Collateral and make it available to Secured Party at
      a
      place designated by Secured Party which is reasonably convenient to Secured
      Party and Debtor. Any sale hereunder may be conducted by an auctioneer or any
      officer or agent of Secured Party.

     

    Section
      5.5 Proceeds.
      Upon
      the occurrence of any Event of Default, the proceeds of any sale or other
      disposition of the Collateral and all sums received or collected by Secured
      Party from or on account of the Collateral shall be applied by Secured Party
      in
      the manner set forth in the Code.

     

    Section
      5.6 Deficiency.
      Debtor
      shall remain liable to Secured Party for any unpaid Secured Obligations,
      advances, costs, charges and expenses, together with interest thereon and shall
      pay the same immediately to Secured Party as set forth in the Credit
      Agreement.

     

    Section
      5.7 Secured
      Party’s Duties.
      The
      powers conferred upon Secured Party by this Security Agreement are solely to
      protect the interest of Secured Party in the Collateral and shall not impose
      any
      duty upon Secured Party to exercise any such powers. Secured Party shall be
      under no duty whatsoever to make or give any presentment, demand for
      performance, notice of nonperformance, protest, notice of protest, notice of
      dishonor, or other notice or demand in connection with any Collateral or the
      Secured Obligations, or to take any steps necessary to preserve any rights
      against prior parties. Secured Party shall not be liable for failure to collect
      or realize upon any or all of the Secured Obligations or Collateral, or for
      any
      delay in so doing, nor shall Secured Party be under any duty to take any action
      whatsoever with regard thereto. Secured Party shall use reasonable care in
      the
      custody and preservation of any Collateral in its possession but need not take
      any steps to keep the Collateral identifiable. Secured Party shall have no
      duty
      to comply with any recording, filing, or other legal requirements necessary
      to
      establish or maintain the validity, priority or enforceability of, or Secured
      Party’s rights in or to, any of the Collateral.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    Section
      5.8 Secured
      Party’s Actions.
      Debtor
      waives any right to require Secured Party to proceed against any Person, exhaust
      any Collateral, or have any Other Liable Party joined with Debtor in any suit
      arising out of the Secured Obligations or this Security Agreement or pursue
      any
      other remedy in Secured Party’s power; waives any and all notice of acceptance
      of this Security Agreement or of creation, modification, rearrangement, renewal
      or extension for any period of any of the Secured Obligations from time to
      time;
      and waives any defense arising by reason of any disability or other defense
      of
      any Other Liable Party, or by reason of the cessation from any cause whatsoever
      of the liability of any Other Liable Party. All dealings between Debtor and
      Secured Party, whether or not resulting in the creation of the Secured
      Obligations, shall conclusively be presumed to have been had or consummated
      in
      reliance upon this Security Agreement. Until all the Secured Obligations shall
      have been paid in full (other than indemnity obligations and similar obligations
      that survive the termination of the Loan Documents for which no notice of a
      claim has been received by Debtor), Debtor shall have no right to subrogation,
      and Debtor waives until all the Secured Obligations shall have been paid in
      full
      (other than indemnity obligations and similar obligations that survive the
      termination of the Loan Documents for which no notice of a claim has been
      received by Debtor) any right to enforce any remedy which Secured Party now
      has
      or may hereafter have against Other Liable Party and waives any benefit of
      and
      any right to participate in any Collateral or security whatsoever now or
      hereafter held by Secured Party. Debtor authorizes Secured Party, without notice
      or demand and without any reservation of rights against Debtor and without
      affecting Debtor’s liability hereunder or on the Secured Obligations, from time
      to time to (a) take and hold any other property as collateral, other than the
      Collateral, for the payment of any or all of the Secured Obligations, and
      exchange, enforce, waive and release any or all of the Collateral or such other
      property; (b) apply the Collateral or such other property and direct the order
      or manner of sale thereof as Secured Party in its discretion may determine;
      (c)
      renew, extend for any period, accelerate, modify, compromise, settle or release
      the obligation of any Other Liable Party with respect to any or all of the
      Secured Obligations or Collateral; (d) waive, enforce, modify, amend or
      supplement any of the provisions of any of the Security Documents, the Credit
      Agreement or the Note or any other promissory note or document evidencing any
      of
      the Secured Obligations (except for an amendment or supplement to any of the
      foregoing to which Debtor is a party to the extent such amendment or supplement
      requires the consent of Debtor); and (e) release or substitute any Other Liable
      Party.

     

    Section
      5.9 Transfer
      of Secured Obligations and Collateral.
      Secured
      Party may transfer any or all of Secured Party’s interest in the Secured
      Obligations, and upon any such transfer Secured Party may transfer its security
      interest in any or all of the Collateral and shall be fully discharged
      thereafter from all liability with respect to the Collateral transferred, and
      the transferee shall be vested with all rights, powers and remedies of Secured
      Party hereunder with respect to Collateral so transferred; provided,
      however,
      with
      respect to any security interest in the Collateral not so transferred, Secured
      Party shall retain all rights, powers and remedies provided under this Security
      Agreement. Secured Party may at any time deliver any or all of the Collateral
      to
      Debtor whose receipt shall be a complete and full acquittance for the Collateral
      so delivered, and Secured Party shall thereafter be discharged from any
      liability therefor.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    Section
      5.10 Cumulative
      Security.
      The
      execution and delivery of this Security Agreement in no manner shall impair
      or
      affect any other security (by endorsement or otherwise) for the Secured
      Obligations. No security taken hereafter as security for the Secured Obligations
      shall impair in any manner or affect this Security Agreement. All such present
      and future additional security is to be considered as cumulative
      security.

     

    Section
      5.11 Continuing
      Agreement.
      This is
      a continuing Security Agreement and the grant of a security interest hereunder
      shall remain in full force and effect and all the rights, powers and remedies
      of
      Secured Party hereunder shall continue to exist until (a) the Secured
      Obligations are paid in full (other than indemnity obligations and similar
      obligations that survive the termination of the Loan Documents for which no
      notice of a claim has been received by Debtor), (b) Secured Party has no
      further obligation to advance monies to Debtor under the Credit Agreement and
      (c) Secured Party, upon written request of Debtor, has executed a written
      termination statement, reassigned to Debtor, without recourse, the Collateral
      and all rights conveyed hereby and returned possession of the Collateral to
      Debtor. Furthermore, it is contemplated by the parties hereto that there may
      be
      times when no Secured Obligations are owing; notwithstanding such occurrences,
      however, this Security Agreement shall remain valid and shall be in full force
      and effect as to subsequent Secured Obligations provided Secured Party has
      not
      executed a written termination statement and returned possession of the
      Collateral to Debtor. Otherwise this Security Agreement shall continue
      irrespective of the fact that the liability of any Other Liable Party may have
      ceased, or irrespective of the validity or enforceability of the Note or any
      of
      the Security Documents, including the Credit Agreement, to which any Other
      Liable Party may be a party, and notwithstanding the reorganization, death,
      incapacity or bankruptcy of any Other Liable Party, and notwithstanding the
      reorganization or bankruptcy of Debtor, or any other event or proceeding
      affecting Debtor or any Other Liable Party.

     

    Section
      5.12 Cumulative
      Rights.
      The
      rights, powers and remedies of Secured Party hereunder shall be in addition
      to
      all rights, powers and remedies given by statute or rule of law and are
      cumulative. The exercise of any one or more of the rights, powers and remedies
      provided herein shall not be construed as a waiver of any other rights, powers
      and remedies of Secured Party. Furthermore, regardless of whether or not the
      Uniform Commercial Code is in effect in the jurisdiction where such rights,
      powers and remedies are asserted, Secured Party shall have the rights, powers
      and remedies of a secured party under the Code. Secured Party may exercise
      its
      bankers’ lien or right of set-off with respect to the Secured Obligations in the
      same manner as if the Secured Obligations were unsecured.

     

    Section
      5.13 Exercise
      of Rights, Etc.
      Time
      shall be of the essence for the performance of any act under this Security
      Agreement or the Secured Obligations by Debtor or Other Liable Party, but
      neither Secured Party’s acceptance of partial or delinquent payments nor any
      forbearance, failure or delay by Secured Party in exercising any right, power
      or
      remedy shall be deemed a waiver of any obligation of Debtor or of Other Liable
      Party or of any right, power or remedy of Secured Party or preclude any other
      or
      further exercise thereof; and no single or partial exercise of any right, power
      or remedy shall preclude any other or further exercise thereof, or the exercise
      of any other right, power or remedy.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    Section
      5.14 Remedy
      and Waiver.
      Secured
      Party may remedy any Default or Event of Default without waiving the Default
      or
      Event of Default or waiving any prior or subsequent Default or Event of
      Default.

     

    Section
      5.15 Non-Judicial
      Remedies.
      Secured
      Party may enforce its rights hereunder without prior judicial process or
      judicial hearing, and Debtor expressly waives, renounces and knowingly
      relinquishes any and all legal rights which might otherwise require Secured
      Party to enforce its rights by judicial process. In so providing for
      non-judicial remedies, Debtor recognizes and concedes that such remedies are
      consistent with the usage of the trade, are responsive to commercial necessity,
      and are the result of bargain at arm’s length. Nothing herein is intended to
      prevent Secured Party or Debtor from resorting to judicial process at any
      party’s option.

     

    Section
      5.16 Compliance
      with Other Laws.
      Secured
      Party may comply with the requirements of any applicable state or federal law
      in
      connection with the disposition of all or any part of the Collateral, and
      compliance with such laws will not be considered to adversely affect the
      commercial reasonableness of any sale of all or any part of the
      Collateral.

     

    Section
      5.17 Disclaimer
      of Warranties.
      Secured
      Party may sell the Collateral without giving any warranties as to the
      Collateral. Secured Party may specifically disclaim any warranties of title
      or
      similar warranties. The disclaimer of any such warranties will not be considered
      to adversely affect the commercial reasonableness of any sale of all or any
      part
      of the Collateral.

     

    Section
      5.18 Sales
      on Credit.
      If
      Secured Party sells all or any part of the Collateral upon credit, Debtor will
      be credited only with payments actually made by the purchaser, received by
      the
      Secured Party and applied against the Secured Obligations. In the event the
      purchaser fails to pay for the Collateral, Secured Party may resell the
      Collateral and Debtor shall be credited with the proceeds of such
      sale.

     

    ARTICLE
      VI

    MISCELLANEOUS

     

    Section
      6.1 Preservation
      of Liability.
      Neither
      this Security Agreement nor the exercise by Secured Party of (or the failure
      to
      so exercise) any right, power or remedy conferred herein or by law shall be
      construed as relieving any Person liable on the Secured Obligations from
      liability on the Secured Obligations and for any deficiency
      thereon.

     

    Section
      6.2 Notices.
      Any
      record, notice, demand or document which either party is required or may desire
      to give hereunder shall be given as provided in the Credit Agreement.

     

    Section
      6.3 Choice
      of Law.
      THIS
      SECURITY AGREEMENT HAS BEEN MADE IN AND THE SECURITY INTEREST GRANTED HEREBY
      IS
      GRANTED IN AND EACH SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK
      (EXCEPT TO THE EXTENT THAT THE LAWS OF ANY OTHER JURISDICTION GOVERN THE
      PERFECTION AND PRIORITY OF THE SECURITY INTEREST GRANTED HEREBY) WITHOUT REGARD
      TO ITS CONFLICTS OF LAWS PRINCIPLES.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    Section
      6.4 Amendment
      and Waiver.
      This
      Security Agreement may not be amended (nor may any of its terms be waived)
      except in the manner provided in the Credit Agreement.

     

    Section
      6.5 Severability.
      If any
      provision of this Security Agreement is rendered or declared invalid, illegal
      or
      unenforceable by reason of any existing or subsequently enacted legislation
      or
      by a judicial decision which shall have become final, Debtor and Secured Party
      shall promptly meet and discuss substitute provisions for those rendered
      invalid, illegal or unenforceable, but all of the remaining provisions shall
      remain in full force and effect

     

    Section
      6.6 Survival
      of Agreements.
      All
      representations and warranties of Debtor herein, and all covenants and
      agreements herein not fully performed before the effective date of this Security
      Agreement, shall survive such date.

     

    Section
      6.7 Counterparts.
      This
      Agreement may be executed in two or more counterparts, and it shall not be
      necessary that the signatures of all parties hereto be contained on any one
      counterpart hereof. Each counterpart shall be deemed an original, but all such
      counterparts taken together shall constitute one and the same instrument.

     

    Section
      6.8 Successors
      and Assigns.
      The
      covenants and agreements herein contained by or on behalf of Debtor shall bind
      Debtor, Debtor’s legal representatives, successors and assigns and all persons
      who become bound as a debtor to this Security Agreement and shall inure to
      the
      benefit of Secured Party, its successors and permitted assigns under the Credit
      Agreement.

     

    Section
      6.9 Titles
      of Articles, Sections and Subsections.
      All
      titles or headings to articles, sections, subsections or other divisions of
      this
      Security Agreement are only for the convenience of the parties and shall not
      be
      construed to have any effect or meaning with respect to the other content of
      such articles, sections, subsections or other divisions, such other content
      being controlling as to the agreement between the parties hereto.

     

    Section
      6.10 WAIVER
      OF JURY TRIAL.
      TO THE
      MAXIMUM EXTENT NOT PROHIBITED BY LAW, EACH OF THE UNDERSIGNED HEREBY KNOWINGLY,
      VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT WHICH IT MAY HAVE TO A TRIAL
      BY
      JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING
      OUT
      OF, UNDER OR IN CONNECTION WITH THE NOTE, THIS AGREEMENT OR THE OTHER SECURITY
      DOCUMENTS, OR ANY TRANSACTION CONTEMPLATED THEREBY, BEFORE OR AFTER
      MATURITY.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    Section
      6.11 Interest.
      It is
      the intention of the parties hereto to comply strictly to usury laws applicable
      to the Secured Party. Interest on the indebtedness is expressly limited so
      that
      in no contingency or event whatsoever, whether by acceleration of the maturity
      of the Note or otherwise, shall the interest taken, reserved, contracted for,
      charged or received by the Secured Party exceed the maximum amount permissible
      under applicable law. If from any circumstances whatsoever fulfillment of any
      provisions of the Credit Agreement, this Agreement, any of the other Security
      Documents or of any other document evidencing, securing or pertaining to the
      indebtedness evidenced by the Note, at the time performance of such provision
      shall be due, would be usurious under applicable law, then, ipso facto, the
      obligation to be fulfilled shall be reduced to the limit of such validity so
      that the aggregate consideration which constitutes interest that is contracted
      for, taken, reserved, charged for, or received shall not exceed the maximum
      amount allowed by applicable law and such amount that would otherwise be
      excessive interest shall be applied to the reduction of the principal amount
      owing under the Note or on account of any other indebtedness of the Debtor
      to
      the Secured Party, or if principal of the Note and such other indebtedness
      has
      been paid in full, refunded to the Debtor. In determining whether or not the
      interest paid or agreed to be paid for the use, forbearance, or detention of
      sums hereunder exceeds the highest lawful rate, the Debtor and the Secured
      Party
      shall, to the maximum extent permitted by applicable law, (a) characterize
      any
      non-principal payment as an expense, fee or premium rather than as interest,
      (b)
      exclude voluntary prepayments and the effects thereof, (c) amortize, prorate,
      allocate and spread the total amount of interest throughout the full term of
      such indebtedness so that the actual rate of interest on account of such
      indebtedness does not exceed the highest lawful rate, and/or (d) allocate
      interest between portions of such indebtedness, to the end that no such portion
      shall bear interest at a rate greater than that permitted by applicable
      law.

     

    THIS
      SECURITY AGREEMENT, THE CREDIT AGREEMENT, THE NOTE AND THE SECURITY DOCUMENTS
      REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE MATTERS
      ADDRESSED HEREIN AND THEREIN AND WILL NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
      CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
      UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

     

    [Signatures
      On The Following Page]

    

    
      
        
          
          

        

        
          16

          
            

          

        

        
          
          

        

      

    

     

    IN
      WITNESS WHEREOF, the Debtor and Secured Party have caused this instrument to
      be
      executed as of __________ ,
      2008.

    

      
        	
                
                  
                    
                      Debtor:

                    

                  

                

              
	 
	
                KY
                  USA ENERGY, INC.,

              
	
                a
                  Kentucky corporation

              
	 
	
                By:

              	 
	
                Name:  

              	 
	
                Title:

              	 
	 
	
                
                  
                    
                      
                        Secured
                          Party:

                      

                    

                  

                

              
	 
	
                NSES
                  12, LLC,

              
	
                a
                  Delaware limited liability company

              
	 
	
                By:

              	 
	
                Name:  

              	 
	
                Title:Exhibit
        4.4

    

    
      

      LEASEHOLD
        MORTGAGE, ASSIGNMENT OF PRODUCTION,

      SECURITY
        AGREEMENT AND FINANCING STATEMENT

       

    

    from

    KY
      USA
      ENERGY, INC.

    (Federal
      Income Tax Identification No. [________])

    (Grantor
      and Debtor)

     

    to
      

    

    NSES
      12,
      LLC

    (Federal
      Income Tax Identification No. [_____________])

    (Lender/Mortgagee
      and Secured Party)

     

    A
      CARBON,
      PHOTOGRAPHIC OR OTHER REPRODUCTION OF THIS INSTRUMENT IS SUFFICIENT AS A
      FINANCING STATEMENT. FOR PURPOSES OF FILING THIS INSTRUMENT AS A FINANCING
      STATEMENT, THE ADDRESS OF THE GRANTOR AND DEBTOR IS 321 SOMEREST RD., LONDON,
      KENTUCKY 40741, AND THE ADDRESS OF THE LENDER AND SECURED PARTY IS 38 GROVE
      STREET, BUILDING C, RIDGEFIELD, CONNECTICUT 06877.

     

    THIS
      INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.

     

    THIS
      INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES.

     

    THIS
      INSTRUMENT COVERS PROCEEDS OF COLLATERAL.

     

    THIS
      INSTRUMENT COVERS PRODUCTS OF COLLATERAL.

     

    THIS
      INSTRUMENT COVERS FIXTURES.

     

    THIS
      INSTRUMENT COVERS MINERALS, AS-EXTRACTED COLLATERAL AND OTHER SUBSTANCES OF
      VALUE WHICH MAY BE EXTRACTED FROM THE EARTH (INCLUDING, WITHOUT LIMITATION,
      OIL
      AND GAS). THIS FINANCING STATEMENT IS TO BE FILED FOR RECORD, AMONG OTHER
      PLACES, IN THE REAL ESTATE RECORDS OF THE COUNTY RECORDERS OF THE COUNTIES
      LISTED ON EXHIBIT
      A
      HERETO.
      THE GRANTOR HAS AN INTEREST OF RECORD IN THE REAL ESTATE CONCERNED, WHICH
      INTEREST IS DESCRIBED IN EXHIBIT
      A
      ATTACHED
      HERETO.

     

    THIS
      INSTRUMENT WAS PREPARED BY AND WHEN RECORDED OR FILED SHOULD BE RETURNED
      TO:

     

    Douglas
      C. Atnipp

    Greenberg
      Traurig LLP

    1000
      Louisiana, Suite 1700

    Houston,
      Texas 77002

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
       

      LEASEHOLD
        MORTGAGE, ASSIGNMENT OF PRODUCTION,

    

    SECURITY
      AGREEMENT AND FINANCING STATEMENT

     

    KY
      USA
      ENERGY, INC., a Kentucky corporation, with an office at 321 Somerset Road,
      London, Kentucky 40741 (hereinafter referred to as “Grantor”),
      for
      and in consideration of the sum of TEN DOLLARS ($10.00) to Grantor in hand
      paid
      by NSES 12, LLC, a Delaware limited liability company, with an office at 38
      Grove Street, Building C, Ridgefield, Connecticut 06877 (“Lender”),
      to
      extend credit to Grantor, as evidenced by that certain Senior Secured Credit
      Agreement (such agreement, as modified, amended, or supplemented hereinafter
      called the “Credit
      Agreement”)
      dated
      as of [_____________, 2008], by and among Grantor and Lender, and by the
      promissory notes hereinafter described, and of the loans as hereinafter recited,
      and in order to secure the payment of the indebtedness hereinafter referred
      to
      and the performance of the obligations, covenants, agreements and undertakings
      of Grantor hereinafter described, does hereby GRANT, BARGAIN, SELL, CONVEY,
      MORTGAGE, PLEDGE, TRANSFER, ASSIGN and SET OVER to the Lender all of Lender’s
      leasehold interest in the following property:

     

    (a) All
      of
      Grantor’s rights, titles, interests and estates whether now owned or hereafter
      acquired, in and to the Hydrocarbons (defined in paragraph (c) below)
      attributable to the leases which are described on Exhibit
      A
      attached
      hereto (all references herein to such Exhibit
      A
      shall
      include the introductory and explanatory comments thereto contained in the
      preamble to Exhibit A),
      including, without limitation, overriding royalty interests, production
      payments, net profits interests or other interests irrespective of whether
      such
      interests are cost bearing and of whatsoever nature or kind and however
      characterized, together with any and all mineral interests, royalty interests,
      fee interests or other interests derived from a landowner or landowners of
      the
      lands described on the attached Exhibit A
      or in
      the documents described on Exhibit A,
      all of
      which such rights, titles, interests and estates of Grantor and howsoever
      characterized being hereinafter collectively called the “Leases”;

     

    (b) All
      rights, titles, interests and estates now owned or hereafter acquired by Grantor
      in and to (i)
      the
      properties now or hereafter pooled or unitized with any of the Leases;
      (ii)
      all
      presently existing or future unitization, communitization, pooling agreements
      and declarations of pooled units and the units created thereby (including,
      without limitation, all units created under orders, regulations, rules or other
      official acts of any Federal, State or other governmental body or agency having
      jurisdiction and so called “working
      interest units”
created
      under operating agreements or otherwise) which may affect all or any portion
      of
      the Leases including, without limitation, those units which may be described
      on
Exhibit
      A;
      (iii)
      all
      operating agreements, contracts, farm out agreements, farm in agreements, area
      of mutual interest agreements, equipment leases and other agreements which
      relate to any of the Leases or interests in the Leases described or referred
      to
      herein on Exhibit
      A
      or to
      the production, sale, purchase, exchange, processing, transporting or marketing
      of the Hydrocarbons (hereinafter defined) from or attributable to such Leases
      or
      interests; and (iv) the
      Leases described on Exhibit
      A
      and
      covered by this Mortgage (hereinafter defined) even though Grantor’s interest
      therein be incorrectly described or a description of a part or all of such
      Leases or Grantor’s interest therein be omitted; it being intended by Grantor,
      the Lender and the Noteholder (hereinafter defined) herein to cover and affect
      hereby all interests which Grantor may now own or may hereafter acquire in
      and
      to the Leases and lands described on Exhibit
      A
      notwithstanding that the interests as specified on Exhibit
      A
      be
      limited to particular lands, specified depths or particular types of property
      interests;

     

    
      
        
        

      

      
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    (c) All
      rights, titles, interests and estates now owned or hereafter acquired by Grantor
      in and to all oil, gas, casinghead gas, condensate, distillate, liquid
      hydrocarbons, gaseous hydrocarbons and all products refined therefrom and all
      other minerals (collectively called the “Hydrocarbons”)
      in and
      under which may be produced and saved from or attributable to the Leases, the
      lands covered thereby and Grantor’s interests therein, including all oil in
      tanks and all rents, issues, profits, proceeds, products, revenues and other
      income from or attributable to the Leases, the lands covered thereby, and
      Grantor’s interests therein which are subjected or required to be subjected to
      the liens and security interests of this Mortgage; and further including any
      and
      all liens and security interests in the Hydrocarbons and the proceeds therefrom
      securing payment of proceeds from the sale of Hydrocarbons;

     

    (d) All
      tenements, hereditaments, appurtenances and properties in anywise appertaining,
      belonging, affixed or incidental to the Leases, properties, rights, titles,
      interests and estates described or referred to in subparagraphs (a) and (b)
      above, which are now owned or which may hereafter be acquired by Grantor,
      including, without limitation, any and all property, real or personal, now
      owned
      or hereafter acquired and situated upon, used, held for use, or useful in
      connection with the operating, working or development of any of such Leases
      or
      properties (excluding drilling rigs, trucks, automotive equipment or other
      personal property which may be taken to the premises for the purpose of drilling
      a well or for other similar temporary uses) and including any and all oil wells,
      gas wells, injection wells or other wells, buildings, structures, field
      separators, liquid extraction plants, plant compressors, pumps, pumping units,
      wellhead valves, field gathering systems, pipelines, salt water disposal
      facilities, tanks and tank batteries, fixtures, valves, fittings, machinery
      and
      parts, engines, boilers, meters, apparatus, equipment, appliances, tools,
      implements, cables, wires, towers, casing, tubing and rods, power, telephone
      and
      telegraph lines, surface leases, rights-of-way, easements, servitudes, licenses
      and other surface rights together with all additions, substitutions,
      replacements, accessions and attachments to any and all of the foregoing
      properties;

     

    (e) Any
      property that may from time to time hereafter, by writing of any kind, be
      subjected to the lien and security interest hereof by Grantor or by anyone
      on
      Grantor’s behalf; and the Mortgagee is hereby authorized to receive the same at
      any time as additional security hereunder;

     

    (f) All
      of
      the rights, titles and interests of every nature whatsoever now owned or
      hereafter acquired by Grantor in and to the Leases, as the same may be enlarged
      by the discharge of any payments out of production or by the removal of any
      charges or Encumbrances (hereinafter defined) to which any Leases, properties,
      rights, titles, interests or estates are subject, or otherwise; together with
      any and all renewals and extensions of any of the Leases, properties, rights,
      titles, interests or estates; all contracts and agreements supplemental to
      or
      amendatory of or in substitution for the contracts and agreements described
      or
      mentioned above; and any and all additional interests of any kind hereafter
      acquired by Grantor in and to the Leases, properties, rights, titles, interests
      or estates;

     

    
      
        
        

      

      
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    (g) All
      accounts, goods that are, or are to become, fixtures, equipment, as-extracted
      collateral, inventory and contract rights and other general intangibles as
      such
      terms are defined in Article 9 of the Uniform Commercial Code from time to
      time
      in effect in the Commonwealth of Kentucky (including, without limitation, all
      seismic data, geological data, geophysical data and interpretations of any
      of
      the foregoing to the extent a security interest therein may be granted)
      constituting a part of, relating to, or arising out of the property and
      collateral described or mentioned in paragraphs (a) through (f) above, and
      all
      proceeds and products of the property and collateral described or mentioned
      in
      this and said preceding paragraphs; and

     

    (h) All
      of
      Grantor’s rights, now owned or hereafter acquired, in and to all lease records,
      well records and production records which relate to any of the foregoing
      property;

     

    provided,
      however,
      the
      foregoing is made subject to the overriding royalties, unit declarations,
      operating agreements, contracts, encumbrances, agreements, exceptions,
      limitations and other matters, if any, described or referred to in Exhibit
      A
      (all of
      the properties, interests and rights, subject as aforesaid, being hereinafter
      sometimes referred to as the “Mortgaged
      Properties”).

     

    Any
      fractions or percentages specified on Exhibit
      A
      referring to Grantor’s interest (whether working interest, net revenue interest
      or otherwise) are contained thereon solely for the purpose of the warranties
      made by Grantor under Article
      II
      hereof
      and shall not limit the quantum of interest granted hereunder with respect
      to
      any unit or well. If any Lease or unit described on Exhibit
      A
      respecting any well mentioned herein is incorrectly described, nevertheless
      this
      Mortgage shall cover all Grantor’s interest in the Leases allocable to and the
      unit for such well. If any of the lands covered by the Lease or other instrument
      mentioned on Exhibit
      A
      are
      incorrectly described, then nevertheless this Mortgage shall cover all Grantor’s
      interest in such Lease or other instrument as to all of the lands covered
      thereby, unless limited by express words to the contrary on Exhibit
      A.

     

    TO
      HAVE
      AND TO HOLD the Mortgaged Properties, together with all and singular the rights,
      estates, hereditaments, powers and privileges appurtenant or incident thereto,
      unto the Mortgagee and its successors and assigns, forever.

     

    BUT
      IN
      TRUST, NEVERTHELESS, for the benefit and security of the holders of the
      indebtedness secured hereby and upon the trusts and subject to the terms and
      provisions herein set forth.

     

    ARTICLE
      I.

     

    Secured
      Indebtedness

     

    1.1 This
      Mortgage is made to secure and enforce the payment of the
      following:

     

    (a) the
      Credit Agreement and the other Loan Documents to which the Mortgagor is a party,
      including that certain term promissory note up to the principal amount of TEN
      MILLION and No/100 Dollars ($10,000,000) executed by the MORTGAGOR and payable
      to the order of the Mortgagee on or before [____________, 2011], and all other
      notes given in substitution for the foregoing promissory notes, or in
      modification, renewal or extension thereof, in whole or in part (such promissory
      notes, as from time to time supplemented, amended or modified and all other
      notes given in substitution therefor or in modification, renewal or extension
      thereof, in whole or in part, being hereafter collectively called the
“Notes”);

     

    
      
        
        

      

      
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    (b) any
      agreement with respect to any Swap Agreements and any swap, forward, future
      or
      derivative transaction or option or similar agreement, whether exchange traded,
      “over-the-counter” or otherwise, involving, or settled by reference to, one or
      more rates, currencies, commodities, equity or debt instruments or securities,
      or economic, financial or pricing indices or measures of economic, financial
      or
      pricing risk or value or any similar transaction or any combination of these
      transactions entered into between the Mortgagor and the Mortgagee, including
      any
      amounts payable in respect of an early termination under any such agreements
      described in this Section 1.1(b);

     

    (c) any
      sums
      which may be advanced or paid by the Mortgagee or the Lenders under the terms
      hereof or of the Credit Agreement or other Loan Documents on account of the
      failure of the Mortgagor to comply with the covenants of the Mortgagor contained
      herein, or the failure of the Mortgagor to comply with the covenants of the
      Mortgagor or any other obligor contained in the Credit Agreement; and all other
      indebtedness of the Mortgagor arising pursuant to the provisions of this
      Mortgage, including penalties, indemnities, legal and other fees, charges and
      expenses, and amounts advanced by and expenses incurred in order to preserve
      any
      collateral or security interest, whether due after acceleration or
      otherwise;

     

    (d) all
      interest (including, without limitation, interest accruing at any post-default
      rate and interest accruing after the filing of any petition in bankruptcy,
      or
      the commencement of any insolvency, reorganization or like proceeding, whether
      or not a claim for post-filing or post-petition interest is allowed in such
      proceeding) in respect of all of the obligations described in this Section 1.1
      and all
      costs of collection and attorneys’ fees, all as provided herein and
      therein;

     

    (e) any
      additional loans or advances made by the Mortgagee to or for the benefit of
      the
      Mortgagor pursuant to the Credit Agreement or any other Loan Document (it being
      contemplated that the Mortgagee may lend additional sums to the Mortgagor
      pursuant to the Credit Agreement from time to time, but shall not be obligated
      to do so, and the Mortgagor agrees that the payment of any such additional
      loans
      shall be secured by this Mortgage); and

     

    (f) punctual
      performance when due of all obligations of the Mortgagor under any Loan Document
      or Swap Agreement to the Mortgagor, the Mortgagee; and

     

    (g) all
      renewals, extensions, amendments and changes of, or substitutions or
      replacements for, all or any part of the Secured Indebtedness described in
      clauses (a) through (f).

     

    1.2 The
      indebtedness referred to in clauses (a) through (f) of Section 1.1
      and all
      renewals, extensions and rearrangements thereof are hereinafter sometimes
      referred to as the “Secured
      Indebtedness.”

     

    
      
        
        

      

      
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    1.3 This
      Mortgage is executed and granted for the benefit and security of the Mortgagee,
      any Person secured hereby and any and all future holders of an interest in
      the
      Secured Indebtedness and the interest thereon for so long as same remains unpaid
      and thereafter for so long as the Mortgagee or any Person secured hereby (or
      any
      Affiliate) has any obligations under the Credit Agreement to lend money or
      has
      any obligations under any Swap Agreements (including those described in
Section
      1.1)
      or
      until the Liens hereby created are released by the Mortgagee or such Person;
      it
      being understood and agreed that possession of any Note at any time by the
      Mortgagor shall not in any manner extinguish the Secured Indebtedness, such
      Notes or this Mortgage securing payment thereof, and the Mortgagor shall have
      the right to issue and reissue any of the Notes from time to time as its
      interest or as convenience may require, without in any manner extinguishing
      or
      affecting the Secured Indebtedness, the obligations under any of the Notes,
      or
      the security of this Mortgage.

     

    1.4 Each
      capitalized term used in this Mortgage and not defined in this Mortgage shall
      have the meaning assigned such term in the Credit Agreement, and if not therein
      defined, such capitalized term shall have the meaning assigned such term in
      the
      Uniform Commercial Code. Uncapitalized terms used herein that are defined in
      the
      Uniform Commercial Code shall have the same meaning in this Mortgage. As used
      herein, “Uniform
      Commercial Code”
means
      the Uniform Commercial Code presently in effect in the Commonwealth of Kentucky
      as the same may be amended from time to time, and any successor statute thereto,
      except to the extent that the Uniform Commercial Code of some other jurisdiction
      applies mandatorily.

     

    ARTICLE
      II.

     

    Representations,
      Warranties and Covenants

     

    2.1 Grantor
      represents, warrants and covenants to the Lender and the Noteholder that Grantor
      is the lawful owner of the Mortgaged Properties and has good right and authority
      to grant, bargain, sell, transfer, assign and mortgage the same; that Grantor’s
      interests in each identified Mortgaged Property is no less than that Net Revenue
      Interest and no greater than the Working Interest set forth on Exhibit A;
      that
      all oil, gas and/or mineral lease and leasehold estates, gas purchase and sales
      contracts, pipeline easements and rights-of-way, processing contracts,
      franchises, licenses and other agreements comprising or relating to the
      Mortgaged Properties or any portion thereof are valid and subsisting and are
      in
      full force and effect; that such leases are subject to no overriding royalties
      or other burdens or charges, except as reflected herein or in the Exhibit
      annexed hereto and that all rents, royalties and other payments due and payable
      by Grantor under each of the Mortgaged Properties have been properly and timely
      paid and all ad valorem, property, oil and gas production, excise and severance
      taxes payable by Grantor have been duly paid; that the Mortgaged Properties
      are
      free and clear from all liens and encumbrances except the lien evidenced by
      this
      Mortgage and except for the Permitted Encumbrances described herein or shown
      in
Exhibit
      A;
      that
      all producing wells located on the Mortgaged Properties or properties unitized
      therewith have been legally drilled and are not deviated from the vertical
      more
      than the maximum permitted by applicable laws, rules and regulations, and that
      such wells are in fact bottomed under and are producing from lands described
      in
      said Exhibit
      A
      or lands
      unitized therewith; and Grantor does hereby bind itself, its heirs, legal
      representatives, successors and assigns to forever warrant and defend the title
      to the Mortgaged Properties unto the Lender, its successors and assigns, against
      the claims of all persons whomsoever claiming or to claim the same or any part
      thereof. Any additional rights, title, or interest which Grantor may hereafter
      acquire or become entitled to in the properties aforesaid or in the oil, gas
      or
      other minerals in and under or produced therefrom shall inure to the benefit
      of
      this trust, the same as if expressly described and conveyed herein.

     

    
      
        
        

      

      
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    2.2 So
      long
      as the Secured Indebtedness or any part thereof remains unpaid, Grantor
      covenants and agrees with the Noteholder as follows:

     

    (a) That
      Grantor will make prompt payment of the Note and of all installments of
      principal and interest thereon as the same become due, and also of all other
      Secured Indebtedness.

     

    (b) That
      Grantor will continuously maintain Grantor’s existence as a Kentucky corporation
      with full power to own and operate the Mortgaged Properties and, if required
      by
      law, Grantor’s right to do business in each State where any part of the
      Mortgaged Properties is situated, and that Grantor will promptly pay, if
      applicable, all income, franchise and other taxes owing by Grantor and any
      stamp, documentary or recording taxes which may be required to be paid with
      respect to this Mortgage or any other instrument evidencing or securing any
      of
      the Secured Indebtedness.

     

    (c) That
      Grantor will cause its interests in the Hydrocarbons leases included in or
      relating to the Mortgaged Properties (herein called “Subject
      Leases”)
      to be
      maintained and operated for the production of Hydrocarbons in a good and
      workmanlike manner and in accordance with sound field practices and all
      applicable federal, state and local laws, rules and regulations and will not
      allow any of Subject Leases to be surrendered, abandoned, or terminated or
      impaired in any manner.

     

    (d) That
      Grantor will cause all debts and liabilities of any character incurred in the
      operation, maintenance or development of the Mortgaged Properties (including,
      without limitation, all costs of the administration and development of each
      Subject Lease, and all leasehold costs attributable thereto, including, but
      not
      by way of limitation, all costs of completing, processing, storing, transporting
      and marketing Hydrocarbons which are allocated as leasehold expenses by
      customary industry account) to be paid punctually when due.

     

    (e) That
      Grantor will use reasonable commercial efforts to cause the Mortgaged Properties
      and all related machinery, pipelines, equipment, improvements and personal
      property of any kind now or hereafter used or obtained in connection with the
      operation thereof to be kept in safe, good and effective operating condition
      and
      all necessary repairs, replacements, additions and improvements thereto to
      be
      made.

     

    (f) That
      Grantor will observe and comply with all of the terms and provisions, express
      or
      implied, of the Subject Leases and assignments constituting a part of the
      Mortgaged Properties in order to keep the same in full force and effect. Grantor
      will also protect the Subject Leases against drainage of Hydrocarbons thereunder
      by reason of production on other properties.

     

    
      
        
        

      

      
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    (g) That
      Grantor will observe and comply with all of the terms and provisions of all
      easements, licenses, franchises, permits and contracts (both existing and
      future) which are part of the Mortgaged Properties or which are incident to
      the
      operation of any of the Mortgaged Properties. Without limiting the foregoing,
      Grantor agrees to fully comply with all covenants and make timely payments
      of
      all amounts payable under Hydrocarbons purchase and processing contracts held
      by
      Grantor and also to fully perform all obligations and covenants of the seller
      under all Hydrocarbons sales and processing contracts held by
      Grantor.

     

    (h) That
      if
      the validity or priority of this Mortgage or of any right, titles, liens or
      interests created or evidenced hereby with respect to the Mortgaged Properties
      or any part thereof shall be endangered or questioned or shall be attacked
      directly or indirectly or if any legal proceedings are instituted against
      Grantor with respect thereto, Grantor will give written notice thereof to the
      Noteholder promptly and, at Grantor’s own cost and expense, Grantor will
      diligently endeavor to cure any defect that may be developed or claimed, and
      will take all necessary and proper steps for the defense of such legal
      proceedings, including, but not limited to, the employment of counsel agreeable
      to the Noteholder, the prosecution or defense of litigation and the release
      or
      discharge of all adverse claims. If Grantor fails or refuses to take such
      action, the Lender and the Noteholder, or any of them (whether or not named
      as
      parties to legal proceedings with respect thereto), are hereby authorized and
      empowered to take such additional steps as in their judgment and discretion
      may
      be necessary or proper for the defense of any such legal proceedings, including,
      but not limited to, the employment of independent counsel, the prosecution
      or
      defense of litigation, and the compromise or discharge of any adverse claims
      made with respect to the Mortgaged Properties, and all expenses so incurred
      of
      every kind and character shall be a demand obligation owing by Grantor and
      shall
      bear interest at the Interest Rate (as defined in the Credit Agreement) from
      the
      date of expenditure until paid and shall be secured by the lien evidenced by
      this Mortgage and the party incurring such expenses shall be subrogated to
      all
      rights of the person receiving such payment.

     

    (i) That
      Grantor will not, without the prior written consent of the Noteholder, suffer
      or
      permit any lien other than Permitted Encumbrances (as defined herein or
      described in Exhibit
      A
      hereto)
      to be hereafter claimed or created on any of the Mortgaged Properties, and
      should a lien other than Permitted Encumbrances become attached hereafter in
      any
      manner to any part of the Mortgaged Properties without the prior written consent
      of the Noteholder, Grantor will cause such lien to be promptly
      discharged.

     

    (j) That
      Grantor will pay all taxes and assessments of every kind and character charged,
      levied or assessed against the Mortgaged Properties, or any part thereof, and
      all franchise taxes, production, severance or other similar taxes or charges,
      before any such taxes and assessments shall become delinquent; but Grantor
      shall
      have the right to contest any such tax in good faith, and while any such contest
      is pending shall not be in default hereunder; and, in the event Grantor should
      fail or refuse to pay or discharge the same, the holder of said indebtedness
      hereunder shall have the right, but shall not be obligated, to pay off said
      charges against said property and shall be subrogated to the rights, liens
      and
      equities thereof, and the amount so paid, together with interest at the same
      rate as is provided in the Note for interest on past due principal from the
      date
      of payment, shall be added to said indebtedness and shall be part of the Secured
      Indebtedness.

     

    
      
        
        

      

      
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    (k) That
      none
      of the buildings, improvements and personal property constituting portions
      of
      the Mortgaged Properties will be removed or destroyed if to do so would have
      a
      Material Adverse Effect.

     

    (l) That
      Grantor will keep accurate books and records in which full, true and correct
      entries shall be promptly made as to all operations on the Mortgaged Properties,
      and all such books and records shall at all times during reasonable business
      hours be subject to inspection by the Noteholder and its duly accredited
      representatives, and if, and as often as, reasonably requested by the
      Noteholder, Grantor shall make reports of such income in such form as the
      Noteholder prescribes setting out full data as to production and revenues from
      the Mortgaged Properties.

     

    (m) That
      Grantor will, on request of the Noteholder, promptly correct any defect, error
      or omission which may be discovered in the contents of this Mortgage, the Note,
      or other documents executed in connection herewith or in the execution or
      acknowledgment of any thereof, and will execute and deliver any and all
      additional instruments as may be requested by the Noteholder to correct such
      defect, error or omission or to identify any additional properties which are
      or
      become subject to this Mortgage and will execute, acknowledge and deliver such
      further assurances and instruments as shall be, in the opinion of the
      Noteholder, necessary or proper to convey and assign to the Lender all of the
      Mortgaged Properties herein conveyed or assigned, or intended so to
      be.

     

    (n) That
      Grantor will indemnify and hold harmless the Lender and the Noteholder from
      and
      against all claims, demands, liabilities and causes of action on account of
      any
      act performed or omitted to be performed hereunder or on account of any
      transaction arising out of or in any way connected with the Mortgaged Properties
      or with this Mortgage or any of the Secured Indebtedness, save and except for
      their gross negligence, willful misconduct or breach by Lender or Noteholder
      of
      the Security Documents or any document or instruments executed in connection
      with the Security Documents.

     

    (o) That
      Grantor will proceed with reasonable diligence to correct any material defect
      in
      title to the Mortgaged Properties which, in the opinion of Lender or Noteholder,
      constitutes a material defect that is found to exist after the execution and
      delivery of this instrument; and in this connection, should it be found after
      the execution and delivery of this instrument that there exists upon the
      Mortgaged Properties any lien or encumbrance, equal or superior in rank to
      the
      lien created by this instrument, or should any such hereafter arise, Grantor
      will promptly discharge and remove any such lien or encumbrance from said
      property.

     

    (p) That
      Grantor will keep such part of the Mortgaged Properties as is of an insurable
      nature and of a character usually insured by persons operating similar
      properties insured with companies of recognized responsibility satisfactory
      to
      the Noteholder against loss or damage by fire and against other hazards
      customarily insured against and in such amounts as provided in and as otherwise
      required under the Credit Agreement.

     

    
      
        
        

      

      
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    (q) That
      Grantor will promptly pay its share of all costs and expenses incurred under
      any
      joint operating agreement affecting the Mortgaged Properties or any portion
      thereof and will furnish the Noteholder as and when requested full information
      as to the status of any joint account maintained with others under any such
      operating agreement.

     

    (r) That
      Grantor will permit the Noteholder and its accredited agents, representatives
      and employees at all times to go upon, examine, inspect and remain on the
      Mortgaged Properties, and to go upon the derrick floor of any well at any time
      drilled or being drilled thereon, provided that such examination or inspection
      shall be at the risk of the Noteholder and its agents, representatives and
      employees and shall not unreasonably interfere with the business of Grantor
      or
      any operator or the operations on the Mortgaged Properties, and will furnish
      to
      the Noteholder on request all pertinent information in regard to the development
      and operation of the Mortgaged Properties or any part thereof.

     

    (s) That
      the
      Noteholder at all times shall have the right to release any part of the property
      now or hereafter subject to the lien hereof or any part of the proceeds of
      production or other income herein or hereafter assigned or pledged or any other
      security it now has or may hereafter have securing said indebtedness, without
      releasing any other part of said property, proceeds or income, and without
      affecting the lien hereof as to the part or parts thereof not so released,
      or
      the right to receive future proceeds and income.

     

    (t) That,
      promptly upon receipt of any written request from the Noteholder, Grantor will
      furnish and deliver, pursuant to such request, all title materials in the
      possession of Grantor or to which Grantor has access, including all title
      opinions and abstracts of title prepared by competent abstractors and covering
      title to the real property hereby mortgaged. Should Grantor fail to furnish
      such
      title opinions and abstracts upon such request, the Noteholder may proceed
      to
      obtain such title materials, and any and all costs so incurred shall be added
      to
      and included in the indebtedness secured hereby and shall be payable by Grantor
      upon demand, the obligation for such payment being secured by all liens and
      remedies granted in this Mortgage. Any abstracts furnished by Grantor or so
      acquired by the Noteholder shall be and constitute a part of the Mortgaged
      Properties, as above defined.

     

    (u) That
      Grantor will, if requested by the Noteholder, furnish the Noteholder any
      information or data possessed by Grantor with respect to the Mortgaged
      Properties, and in the case of the Subject Leases full information, including
      independent engineering reports and seismic data and interpretation, shall
      be
      furnished with regard to the wells drilled or reworked or drilling or reworking
      operations being conducted thereon, including, without limitation, electrical
      logs, core analyses and well pressure reports; provided, that Grantor shall
      not
      be obligated to disclose information subject to a valid and binding
      confidentiality agreement with a third party without first obtaining the consent
      of such third party, and Grantor, to the extent requested by the Noteholder,
      will use its reasonable efforts to obtain such consent.

     

    
      
        
        

      

      
        Page
          9

        
          

        

      

      
        
        

      

    

     

    (v) That
      Grantor shall make available to the Noteholder, or its engineers, attorneys
      or
      representatives, at any time requested, its complete files and contracts on
      the
      properties included in this instrument and the wells, pipelines and other
      property located thereon, or regarding the operations of (or the production
      from) the Mortgaged Properties, and in the event the Noteholder or the Lender
      should take possession of the Mortgaged Properties under this Mortgage, the
      Noteholder shall be entitled to possession of all such files and contracts
      including seismic data and interpretation. Should this Mortgage be foreclosed
      (howsoever such foreclosure may be effected), the purchaser at the foreclosure
      sale shall be entitled to all such files.

     

    (w) That
      Grantor will not enter into any new operating agreement or any material
      amendment of any existing operating agreement affecting the Mortgaged Properties
      without the prior written consent of the Noteholder.

     

    (x) That
      Grantor will, promptly upon demand by the Noteholder, pay all costs and expenses
      heretofore or hereafter incurred by the Noteholder for legal, engineering or
      geological services rendered to it in connection with the making of the initial
      or any future loan to Grantor secured in whole or in part by the lien hereof
      and/or in the enforcement of any of its rights hereunder.

     

    (y) That
      Grantor will use reasonable commercial efforts to continuously maintain in
      good
      condition and operate, or cause to be maintained and operated, in a good and
      workmanlike manner any pipelines and pipeline systems owned by Grantor and
      included in the Mortgaged Properties in accordance with the valid rules and
      regulations of duly constituted authorities.

     

    2.3 Grantor
      agrees to take all such reasonable action and to exercise all rights and
      remedies as are reasonably available to Grantor to cause the owner or owners
      of
      the working interest in the Mortgaged Properties to comply with the covenants
      and agreements contained herein. With respect to those Subject Leases which
      are
      being operated by operators other than Grantor, Grantor shall not be obligated
      itself to perform any undertakings contemplated by the covenants and agreements
      contained herein which are performable only by such operators and are beyond
      the
      control of Grantor; provided, however, Grantor agrees to promptly take all
      reasonable actions available to Grantor under any operating agreement or
      otherwise to bring about the performance of any such undertakings required
      to be
      performed by such operators.

     

    2.4 Grantor
      agrees that, if Grantor fails to perform any act or to take any action which
      hereunder Grantor is required to perform or take or to pay any money which
      hereunder Grantor is required to pay, the Noteholder, in Grantor’s name or its
      own name, may (but shall not be obligated to) perform or cause to be performed
      such act or take such action or pay such money, and any expenses so incurred
      by
      the Noteholder and any money so paid by the Noteholder shall be a part of the
      Obligations under the Credit Agreement owing by Grantor and shall bear interest
      from the date of making such payment until paid at the Interest Rate (as defined
      in the Credit Agreement) and shall be a part of the Secured Indebtedness and
      shall be secured by the lien evidenced by this Mortgage and by any other
      instrument securing the Secured Indebtedness, and the Noteholder, upon making
      such payment, shall be subrogated to all of the rights of the person,
      corporation or body politic receiving such payment.

     

    
      
        
        

      

      
        Page
          10

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      III

     

    Assignment
      of Production, Accounts,

    Contract
      Rights and Proceeds

     

    3.1 To
      facilitate the discharge of all such indebtedness and as cumulative of any
      and
      all rights and remedies herein provided for, Grantor hereby BARGAINS, SELLS,
      TRANSFERS, ASSIGNS, SETS OVER and DELIVERS to the Noteholder, its successors
      and
      assigns, all of the following which shall be applied by Noteholder as provided
      herein and in the Credit Agreement:

     

    (a) All
      Hydrocarbons, and the proceeds therefrom, produced and to be produced from
      the
      interests of Grantor in the Subject Leases, properties, processing plants and
      interests now or hereafter constituting a part of the Mortgaged Properties
      from
      and after the Effective Date (as hereafter defined), and Grantor hereby
      authorizes and empowers said Noteholder to demand, collect and receive said
      Hydrocarbons, and the proceeds therefrom, produced and to be produced from
      the
      interests of Grantor in said Mortgaged Properties, and to execute any release,
      receipt, division order, transfer order and relinquishment or other instrument
      that may be required or necessary to collect and receive such production or
      the
      proceeds therefrom and Grantor hereby authorizes and directs all pipeline
      companies, gathering companies and others purchasing Hydrocarbon production
      from
      said properties or having in their possession any production from said
      properties or the proceeds therefrom, to pay and deliver to the Noteholder
      all
      such production or proceeds therefrom accruing. Grantor agrees that all division
      orders, transfer orders, receipts and other instruments which the Noteholder
      may
      from time to time execute and deliver for the purpose of collecting or
      receipting for such production or the proceeds therefrom may be relied upon
      in
      all respects, and that the same shall be binding upon Grantor, and Grantor’s
      successors and assigns. Grantor agrees to execute and deliver all necessary
      and
      appropriate instruments, including transfer and division orders, which may
      be
      required by the Noteholder in connection with the receipt by the Noteholder
      of
      such production or the proceeds therefrom and to indemnify and keep and hold
      the
      Noteholder free and harmless from all parties whomsoever having or claiming
      an
      adverse interest in said leases, properties and interests and the production
      and
      proceeds therefrom, and in this respect agrees to pay all expenses, costs,
      charges and reasonable attorneys’ fees that may be incurred by the Noteholder as
      to any of said matters.

     

    (b) All
      amounts or proceeds hereafter payable to, or to become payable to, Grantor
      or to
      which Grantor is entitled under all Hydrocarbon sales contracts, all Hydrocarbon
      transportation contracts, and all Hydrocarbon treating and processing contracts
      relating to or now or hereafter to become a part of the Mortgaged
      Properties.

     

    (c) All
      amounts, sums, revenues and income which become payable to Grantor from any
      of
      the Mortgaged Properties (including after-acquired properties) or under any
      contract, present or future, relating to any Hydrocarbon pipeline system and
      processing plant or unit now or hereafter constituting a part of the Mortgaged
      Properties.

     

    
      
        
        

      

      
        Page
          11

        
          

        

      

      
        
        

      

    

     

    Grantor
      hereby authorizes and directs that all such pipeline companies, purchasers,
      transporters and other parties owing monies to Grantor under contracts herein
      assigned, pay such amounts direct to the Noteholder as follows:

     

    
      	
              If
                by wire transfer:

            	 
	 	 	 
	 	
              Account:
                

            	
              22466266

            
	 	
              Bank:
                

            	
              Citibank,
                F.S.B.

            
	 	 	
              621
                Main Street

            
	 	 	
              Ridgefield,
                CT 06877

            
	 	
              ABA
                #:

            	
              221172610

            
	 	
              Reference:

            	
              New
                Stream Secured Capital, LP

            
	 	 	 
	
              If
                by check:

            
	 	 
	 	
              NSES
                12, LLC

            
	 	
              Attention:
                Roger Eustance

            
	 	
              38
                Grove Street, Building C

            
	 	
              Ridgefield,
                Connecticut 06877

            

    

    

    and
      such
      authorization shall continue until this Mortgage is released. The Noteholder
      is
      authorized to collect, receive and receipt for all such amounts and no party
      making payment shall have any responsibility to see to the application of any
      funds paid to the Noteholder, but shall be fully protected in making such
      payment to the Noteholder under the assignments herein contained. Should the
      Noteholder bring suit against any third party for collection of any amounts
      or
      sums included within this assignment (and the Noteholder shall have the right
      to
      bring any such suit) it may sue either in its own name or in the name of
      Grantor.

     

    The
      office where the records of Grantor with respect to the accounts and contract
      rights concerning the Mortgaged Properties are kept is located at the address
      shown opposite the signature of Grantor to this Mortgage, and Grantor agrees
      that the place at which such records are kept will not be changed without the
      prior written consent of the Noteholder, which consent shall not be unreasonably
      withheld.

     

    3.2 Independent
      of the foregoing provisions and authorities herein granted, Grantor agrees
      to
      execute and deliver any and all transfer orders, payment orders, division orders
      and other instruments that may be requested by the Noteholder or that may be
      required by any purchaser of the production from any of the Mortgaged Properties
      for the purpose of effectuating payment to the Noteholder of the proceeds of
      Hydrocarbon sales to the Noteholder. If under any existing sales agreements,
      other than division orders or transfer orders, any proceeds of Hydrocarbon
      sales
      are required to be paid by the purchaser to Grantor so that under such existing
      agreement payment of such proceeds of Hydrocarbon sales cannot be made to the
      Noteholder, Grantor’s interest in all proceeds of Hydrocarbon sales under such
      sales agreements and in all other proceeds of Hydrocarbon sales which for any
      reason may be paid to Grantor shall, when received by Grantor, constitute trust
      funds in Grantor’s hands and shall be immediately paid over to the
      Noteholder.

     

    
      
        
        

      

      
        Page
          12

        
          

        

      

      
        
        

      

    

     

    3.3 Grantor
      authorizes and empowers the Noteholder to receive, hold and collect all sums
      of
      money paid to the Noteholder in accordance with this assignment and to apply
      the
      same as is hereinafter provided, all without any liability or responsibility
      on
      the part of the Noteholder, save as to good faith in so receiving and applying
      said sums. All payments provided for in this assignment shall be paid promptly
      to the Noteholder, and applied pursuant to the terms of the Credit Agreement.
      It
      is understood and agreed that should said payments provided for by this
      assignment be less than the sum or sums then due on said indebtedness, such
      sum
      or sums then due shall nevertheless be payable by Grantor in accordance with
      the
      provisions of the note or notes or other instrument or instruments evidencing
      said indebtedness and neither this assignment nor any provision herein contained
      shall in any manner be construed to affect the terms and provisions of said
      note
      or notes or other instrument or instruments. Likewise, neither this assignment
      nor any provision herein contained shall in any manner be construed to affect
      the lien, rights and remedies herein granted securing said indebtedness, nor
      Grantor’s liability therefor. The rights under this assignment are cumulative of
      the other rights, remedies and powers granted under this Mortgage and are
      cumulative of any other security which the Noteholder now holds or may hereafter
      hold to secure the payment of said indebtedness.

     

    3.4 If
      a
      default under Section 6.1
      has
      occurred and is continuing, should any person now or hereafter purchasing or
      taking Hydrocarbons attributed to the Mortgaged Properties fail to make payment
      promptly to the Noteholder of the hereby assigned proceeds of Hydrocarbon sales,
      the Noteholder shall have the right to make, or to require Grantor to make,
      a
      change of connection and the right to designate or approve the purchaser with
      whose facilities a new connection shall be made, without liability or
      responsibility in connection therewith, so long as ordinary care is used in
      making such designation, and Grantor agrees to pay to the Noteholder the amount
      of any proceeds of Hydrocarbon sales not promptly paid to the Noteholder by
      any
      person having responsibility for payment thereof; provided,
      however,
      Noteholder shall only require the change of purchaser if such change would
      not
      cause a breach of Grantor’s obligation to an existing purchaser.

     

    3.5 The
      Lender and Noteholder and their successors and assigns are hereby absolved
      from
      all liability for failure to enforce collection of the proceeds of Hydrocarbon
      sales and from all other responsibility in connection therewith, except the
      responsibility to account to Grantor for funds actually received. Grantor agrees
      to indemnify and hold harmless the Lender and Noteholder against any and all
      liabilities, actions, claims, judgments, costs, charges and attorneys’ fees by
      reason of the assertion that Lender or Noteholder received with respect to
      the
      Mortgaged Properties or for Grantor’s account either before or after payment in
      full of the Secured Indebtedness funds from the production of Hydrocarbons
      claimed by third persons, and if Grantor fails to do so, the Lender and
      Noteholder shall each have the right to defend against any such claims or
      actions, employing attorneys of their own selection, and if not furnished with
      indemnity satisfactory to them, they shall have the right to compromise and
      adjust any such claims, actions and judgments, and in addition to the rights
      to
      be indemnified as herein provided, all amounts paid by the Lender or Noteholder
      in compromise, satisfaction or discharge of any such claim, action or judgment,
      and all court costs, attorneys’ fees and other expenses of every character
      incurred by the Lender or the Noteholder pursuant to the provisions of this
      section shall be part of the Obligations under the Credit Agreement owing by
      Grantor, shall bear interest from date of expenditure until paid at the Interest
      Rate (as defined in the Credit Agreement), and shall be a part of the Secured
      Indebtedness. Notwithstanding the foregoing, nothing contained herein shall
      be
      deemed to require Grantor to indemnify Lender or Noteholder for its willful
      misconduct or gross negligence or material breach by Lender or Noteholder of
      the
      provisions of the Security Documents or any documents or instruments executed
      in
      connection with the Security Documents.

     

    
      
        
        

      

      
        Page
          13

        
          

        

      

      
        
        

      

    

     

    3.6 Nothing
      herein contained shall detract from or limit the absolute obligation of Grantor
      to make prompt payment of the Note, of all amounts owing thereon, and of all
      amounts owing hereunder at the time and in the manner provided in the Note,
      the
      Credit Agreement or provided herein, regardless of whether the proceeds herein
      assigned are sufficient to pay the same, and the rights under this assignment
      shall be cumulative of all other security of any and every character now or
      hereafter existing to secure the payment of the Note and all other Secured
      Indebtedness.

     

    ARTICLE
      IV

     

    Waiver
      and Partial Release

     

    4.1 The
      Noteholder may at any time and from time to time in writing:

     

    (a) Waive
      compliance by Grantor with any covenant herein made by Grantor to the extent
      and
      in the manner specified in such writing;

     

    (b) Consent
      to Grantor’s doing any act which hereunder Grantor is prohibited from doing, or
      to Grantor’s failing to do any act which hereunder Grantor is required to do, to
      the extent and in the manner specified in writing; or

     

    (c) Release
      any part of the Mortgaged Properties, or any interest therein, or any proceeds
      of Hydrocarbon sales from the lien of this Mortgage, without the joinder of
      the
      Mortgagee.

     

    No
      such
      act by Noteholder shall in any way impair the rights of the Noteholder hereunder
      except to the extent specifically agreed to by the Noteholder in such
      writing.

     

    4.2 The
      lien
      and other security rights of the Noteholder hereunder shall not be impaired
      by
      any indulgence, including but not limited to:

     

    (a) Any
      forbearance, renewal, extension or modification (whether one or more) which
      the
      Noteholder may grant with respect to any Secured Indebtedness; or

     

    (b) Any
      surrender, compromise, release, renewal, extension, exchange or substitution
      which the Noteholder may grant in respect of any item of the Mortgaged
      Properties or any part thereof or any interest therein, or any of the proceeds
      of Hydrocarbon sales; or

     

    
      
        
        

      

      
        Page
          14

        
          

        

      

      
        
        

      

    

     

    (c) Any
      release or indulgence granted to any endorser, guarantor or surety of any
      Secured Indebtedness.

     

    ARTICLE
      V

     

    Possession
      Until Default; Defeasance

     

    5.1 Unless
      a
      default specified in Section
      6.1
      hereof
      shall occur and be continuing, Grantor shall retain full right to the Mortgaged
      Properties (except the proceeds of Hydrocarbon sales assigned under Section
      3.1
      hereof),
      subject, however, to all of the terms and provisions of this
      Mortgage.

     

    5.2 If
      all of
      the Secured Indebtedness is paid as the same becomes due and payable and if
      the
      covenants, warranties, undertakings and agreements made in this Mortgage are
      kept and performed, then, and in that event only all rights under this Mortgage
      shall terminate and the properties hereby conveyed shall become wholly clear
      of
      the liens, conveyances and assignments evidenced hereby, and such liens shall
      be
      released by the Noteholder in due form at Grantor’s cost.

     

    ARTICLE
      VI

     

    Remedies
      in Event of Default

     

    6.1 The
      term
“default” as used in this Mortgage shall mean the occurrence of an Event of
      Default under the Credit Agreement.

     

    6.2 Following
      and during the continuation of a default by Grantor under this Mortgage, the
      provisions of this Section
      6.2
      (and no
      other provision of this Mortgage) shall specify the effects of any such default,
      the remedies available to Noteholder following any such default.

     

    (a) Upon
      the
      occurrence of a default, all Secured Indebtedness in its entirety shall, at
      the
      option of the Noteholder and following two (2) business days prior written
      notice by Noteholder (except in the event of bankruptcy, insolvency of Grantor,
      appointment of a receiver for Grantor, and similar defaults in which event
      no
      prior written notice by Noteholder is required), become immediately due and
      payable without notice, presentation or demand of any kind including, without
      limitation, notice of intent to accelerate and notice of acceleration, all
      of
      which are hereby waived, and the liens evidenced hereby shall be subject to
      foreclosure in any manner provided for herein or provided for by law as the
      Noteholder may elect.

     

    (b) Noteholder
      may exercise all rights under the Credit Agreement.

     

    (c) Noteholder
      may institute proceedings to enforce the lien of this Mortgage.

     

    (d) Noteholder
      may take such steps to protect and enforce its rights whether by action, suit
      or
      proceeding in equity or at law for the specific performance of any covenant,
      condition or agreement in the Note or in this Mortgage, or in aid of the
      execution of any power herein granted, or for the enforcement of any other
      appropriate legal or equitable remedy or otherwise as Noteholder shall elect,
      including appointment of a receiver for the Mortgaged Properties.

     

    
      
        
        

      

      
        Page
          15

        
          

        

      

      
        
        

      

    

     

    (e) Upon
      any
      default by Grantor in payment of the indebtedness hereby secured or any part
      thereof, or in the event of Grantor's breach of any covenant or agreement
      contained in this Mortgage, including, but not limited to, the covenants to
      pay
      when due or within any applicable grace period any sums secured by this
      Mortgage, Noteholder, its successors and assigns, is hereby authorized and
      empowered to grant, bargain and sell, release and convey the Mortgaged
      Properties at public venue, and to execute and deliver to the purchasers at
      such
      sale good and sufficient deeds of conveyances in law, pursuant to the statute
      in
      such case made and provided, rendering any surplus monies after payment of
      the
      monies due hereon, the attorney's fee provided by law, and the cost and charges
      of such venue and sale, to Grantor, its successors and assigns. 

     

    (f) In
      the
      event of any foreclosure sale of the Mortgaged Property, the same may be sold
      in
      one or more parcels. 

     

    (g) In
      any
      suit to foreclose the lien hereof, or enforce any other remedy, or protect
      any
      right of Noteholder under this Mortgage, the Credit Agreement or the Note,
      there
      shall be allowed and included as additional indebtedness in the decree for
      sale
      or other judgment or decree to the extent allowed by law all reasonable
      expenditures and expenses which may be paid or incurred by or on behalf of
      Noteholder for attorneys' fees, appraisers' fees, outlays for documentary and
      expert evidence, stenographers' charges, publication costs and costs (which
      may
      be estimated as to items to be expended after entry of the decree) of procuring
      all such abstracts of title, title searches and examinations, title insurance
      policies, and similar data and assurances with respect to title as Noteholder
      may deem reasonably necessary either to prosecute such suit or to evidence
      to
      bidders at any sale which may be had pursuant to such decree the true condition
      of the title to or the value of the Mortgaged Properties. All expenditures
      and
      expenses of the nature in this paragraph mentioned, and such expenses and fees
      as may be incurred in the protection of the Mortgaged Properties and the
      maintenance of the lien of this Mortgage, including the reasonable fees of
      any
      attorney employed by Noteholder in any litigation or proceeding affecting this
      Mortgage, the Note or the Mortgaged Properties, including bankruptcy
      proceedings, or in preparation for the commencement or defense of any
      proceeding, shall be immediately due and payable by Grantor, with interest
      thereon at the Default Rate specified in the Note and shall be secured by this
      Mortgage.

     

    (h) The
      proceeds of any foreclosure sale of the Mortgaged Properties shall be
      distributed and applied in the following order of priority: 

     

    FIRST,
      to the
      payment of all costs and expenses including without limitation, all costs and
      expenses incident to the foreclosure proceedings (including all such allowable
      items as are mentioned in the preceding paragraph hereof);

     

    
      
        
        

      

      
        Page
          16

        
          

        

      

      
        
        

      

    

     

    SECOND,
      to the
      payment of the Secured Indebtedness in such order as the Noteholder may elect;
      and

     

    THIRD,
      the
      remainder, if any there shall be, shall be paid to Grantor or to Grantor’s
      representative, successors or assigns.

     

    (i) No
      remedy
      herein conferred upon or reserved to Noteholder is intended to be exclusive
      of
      any other remedy or remedies, and each and every such remedy shall be
      cumulative, and shall be in addition to every other remedy given hereunder
      or
      under any other document securing payment of the Note or now or hereafter
      existing at law or in equity or by statute. No delay or omission of Noteholder
      to exercise any right or power accruing upon any Event of Default shall impair
      any such right or power, or shall be construed to be a waiver of any such Event
      of Default or an acquiescence therein; and every power and remedy given by
      this
      Mortgage to Noteholder may be exercised from time to time as often as may be
      deemed expedient by Noteholder. Nothing in this Mortgage or in the Note shall
      affect the obligation of Grantor to pay the principal of, interest on, and
      any
      other charges related to, the Note in the manner and at the time and place
      therein respectively expressed.

     

    (j) Grantor
      hereby grants unto the Noteholder the powers of attorney to act for and on
      behalf of Grantor in all transactions of Grantor with any federal or state
      agency relating to any of the Mortgaged Properties. Without limiting the
      foregoing, this power of attorney specifically authorizes Mortgagee to execute
      any documents required by the Minerals Management Service (MMS) in connection
      with the foreclosure and subsequent transfer to the Mortgagee of the Mortgaged
      Properties. The foregoing power of attorney shall only be exercised upon the
      occurrence of a default.

     

    (k) Upon
      the
      occurrence of a default, the Noteholder, on its own accord and/or through the
      appointment of a receiver are authorized prior or subsequent to the institution
      of any foreclosure proceedings to enter upon the Mortgaged Properties, or any
      part thereof, and to exercise without interference from Grantor any and all
      rights which Grantor has with respect to the management, possession and
      operation of the Mortgaged Properties. All costs, expenses and liabilities
      of
      every character (including costs of unsuccessful workover operations or
      additional wells or dry holes) incurred by the Noteholder in managing, operating
      and maintaining such Mortgaged Properties, including, without limitation, costs
      of additional drilling and reworking, whether successful or unsuccessful, shall
      constitute a demand obligation owing by Grantor and shall draw interest at
      the
      Interest Rate (as defined in the Credit Agreement), all of which shall
      constitute a portion of the Secured Indebtedness.

     

    (l) Upon
      the
      occurrence of a default, if Grantor should fail to comply with any of the
      covenants or obligations of Grantor hereunder, then the Noteholder may perform
      the same for the account and at the expense of Grantor but shall not be
      obligated so to do, and any and all expenses incurred or paid in so doing shall
      be payable by Grantor to the Noteholder with interest at the Interest Rate
      (as
      defined in the Credit Agreement), and the amount thereof shall be payable on
      demand, and shall be secured by and under this Mortgage, and the amount and
      nature of such expense and the time when paid shall be fully established by
      the
      affidavit of the Noteholder or any officer or agent thereof; provided,
      however,
      that
      the exercise of the privileges granted in this paragraph shall in no way be
      considered or constitute a waiver of the right of the Noteholder upon the
      happening of a default hereunder to declare the Secured Indebtedness to be
      at
      once due and payable but is cumulative of such right and all other rights herein
      given.

     

    
      
        
        

      

      
        Page
          17

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      VII

     

    Security
      Agreement

     

    7.1 Without
      limiting any of the provisions of this instrument, Grantor (referred to in
      this
      Article as “Debtor”,
      whether one or more), expressly GRANTS unto the Noteholder (referred to in
      this
      Article as “Secured
      Party”,
      whether one or more), a security interest in all the Mortgaged Properties
      hereinabove described (including both those now and those hereafter existing)
      to
      the full extent that such properties may be subject to the Uniform Commercial
      Code of the state or states where such properties are situated. The security
      interest granted hereby also covers and includes all contract rights, equipment,
      inventory, general intangibles and accounts with respect to said properties
      and
      all products and proceeds of said properties (said properties, contract rights,
      equipment, inventory, general intangibles, accounts, products and proceeds
      thereof being hereinafter collectively referred to as the “Collateral”
for
      the
      purposes of this paragraph). Debtor covenants and with Secured Party
      that:

     

    (a) In
      addition to and cumulative of any other remedies granted in this instrument
      to
      Secured Party, Secured Party may, in event of default, proceed under said
      Uniform Commercial Code as to all or any part of the Collateral and shall have
      and may exercise with respect to the Collateral all the rights, remedies and
      powers of a secured party after default under said Uniform Commercial Code,
      including, without limitation, the right and power to sell, at public or private
      sale or sales, or otherwise dispose of, lease or utilize the Collateral and
      any
      part or parts thereof in any manner authorized or permitted under said Uniform
      Commercial Code after default by a debtor, and to apply the proceeds thereof
      toward payment of any costs and expenses and attorneys’ fees and legal expenses
      thereby incurred by Secured Party, and toward payment of the Secured
      Indebtedness in such order or manner as Secured Party may elect.

     

    (b) Upon
      a
      default, Secured Party shall have the right (without limitation) to take
      possession of the Collateral and to enter upon any premises where same may
      be
      situated for such purpose without being deemed guilty of trespass or otherwise
      incurring any liability for its entry upon those premises and to take any action
      deemed necessary or appropriate or desirable by Secured Party, at its option
      and
      in its discretion, to repair, refurbish or otherwise prepare the Collateral
      for
      sale, lease or other use or disposition as herein authorized.

     

    (c) To
      the
      extent permitted by law, Debtor expressly waives any notice of sale or other
      disposition of the Collateral and any other right or remedies of a debtor or
      formalities prescribed by law relative to sale or disposition of the Collateral
      or exercise of any other right or remedy of Secured Party existing after default
      hereunder; and to the extent any such notice is required and cannot be waived,
      Debtor agrees that if such notice is mailed, postage prepaid, to Debtor at
      the
      address shown with debtor’s signature hereinbelow at least ten days before the
      time of the sale or disposition, such notice shall be deemed reasonable and
      shall fully satisfy any requirement for giving of said notice.

     

    
      
        
        

      

      
        Page
          18

        
          

        

      

      
        
        

      

    

     

    (d) Secured
      Party is expressly granted the right, at its option, to transfer at any time
      to
      itself or to its nominee the Collateral, or any part thereof, and to receive
      the
      monies, income, proceeds or benefits attributable or accruing thereto and to
      hold the same as security for the Secured Indebtedness or to apply it on the
      principal and interest or other amounts owing on any of the Secured
      Indebtedness, whether or not then due, in such order or manner as Secured Party
      may elect. All rights to marshaling of assets of Debtor, including any such
      right with respect to the Collateral, are hereby waived.

     

    (e) All
      recitals in any instrument of assignment or any other instrument executed by
      Secured Party incident to sale, transfer, assignment, lease or other disposition
      or utilization of the Collateral or any part thereof hereunder shall be prima
      facie evidence of the matter stated therein, no other proof shall be required
      to
      establish full legal propriety of the sale or other action or of any fact,
      condition or thing incident thereto, and all prerequisites of such sale or
      other
      action and of any fact, condition or thing incident thereto shall be presumed
      to
      have been performed or to have occurred.

     

    (f) Secured
      Party may require Debtor to assemble the Collateral and make it available to
      Secured Party at a place to be designated by Secured Party that is reasonably
      convenient to both parties. All expenses of retaking, holding, preparing for
      sale, lease or other use or disposition, selling, leasing or otherwise using
      or
      disposing of the Collateral and the like which are incurred or paid by Secured
      Party as authorized or permitted hereunder, including also all attorneys’ fees,
      legal expenses and costs, shall be added to the indebtedness secured by this
      instrument, and Debtor shall be liable therefor.

     

    (g) Should
      Secured Party elect to exercise its right under said Uniform Commercial Code
      as
      to part of the personal property and fixtures described herein, this election
      shall not preclude Secured Party from exercising the rights and remedies granted
      by the preceding paragraphs of this instrument as to the remaining personal
      property and fixtures.

     

    (h) Any
      copy
      of this instrument may also serve as a financing statement under said Uniform
      Commercial Code between the Debtor, whose address is designated with its
      signature, and the SECURED
      PARTY, WHOSE ADDRESS IS 38 GROVE STREET, BUILDING C, RIDGEFIELD, CONNECTICUT
      06877.

     

    (i) So
      long
      as any amount remains unpaid on the Secured Indebtedness, Debtor will not
      authorize for filing in any public office any financing statement or statements
      affecting the Collateral other than financing statements in favor of Secured
      Party hereunder, unless the prior written specific consent and approval of
      Secured Party shall have first been obtained.

     

    
      
        
        

      

      
        Page
          19

        
          

        

      

      
        
        

      

    

     

    (j) Secured
      Party is authorized to file, in any jurisdiction where Secured Party deems
      it
      necessary, one or more financing statements pursuant to the Uniform Commercial
      Code in form satisfactory to Secured Party, and Debtor will pay the cost of
      filing or recording those financing statements or this instrument as a financing
      statement in all public offices at any time and from time to time whenever
      filing or recording of any financing statement or of this instrument is deemed
      by Secured Party to be necessary or desirable.

     

    (k) The
      office where the records of Debtor with respect to the Collateral and the
      Mortgaged Properties are kept is located at the address shown opposite the
      signature of Debtor to this Mortgage, and Debtor agrees that the place at which
      such records are kept will not be changed without the prior written consent
      of
      the Noteholder, which consent shall not be unreasonably withheld.

     

    Debtor
      further warrants and represents to Secured Party that, except for the security
      interest granted hereby in the Collateral and other claims previously disclosed
      in writing to Secured Party, Debtor is the owner and holder of the Collateral,
      free of any adverse claim, security interest or encumbrance, and Debtor agrees
      to defend the Collateral against all claims and demands of any person at any
      time claiming the same or any interest therein. Debtor further warrants and
      represents that it has not heretofore signed any financing statement and no
      financing statement signed by Debtor is now on file in any public office except
      those statements true and correct copies of which have been delivered to Secured
      Party.

     

    ARTICLE
      VIII

     

    Miscellaneous

     

    8.1 This
      instrument is a leasehold mortgage of both real and personal property, a
      security agreement, a financing statement and an assignment, and also covers
      proceeds and fixtures.

     

    8.2 Notwithstanding
      the existence of any other security interests in the Mortgaged Properties held
      by the Noteholder or by any other person or entity, Noteholder shall have the
      right to determine the order in which any or all of the Mortgaged Properties
      shall be subjected to the remedies provided herein, and the order in which
      any
      or all portions of the obligations owed pursuant to the terms of the Credit
      Agreement and Loan Documents secured hereby are satisfied from the proceeds
      realized upon the exercise of any remedies provided herein. Grantor and any
      other person or entity now or hereafter acquiring a security interest in the
      Mortgaged Properties and having actual or constructive notice of this Mortgage,
      waives any and all right to require the marshalling of assets in connection
      with
      the exercise of any of the remedies permitted by applicable law or in equity
      or
      provided in this Mortgage. 

     

    8.3 All
      options and rights of election herein provided for the benefit of the Noteholder
      are continuing, and the failure to exercise any such option or right of election
      upon a particular default or breach or upon any subsequent default or breach
      shall not be construed as waiving the right to exercise such option or election
      at any later date. By the acceptance of payment of any indebtedness secured
      hereby after its due date, the Noteholder does not waive the right either to
      require prompt payment when due of all other sums so secured or to regard as
      a
      default failure to pay any other sums due which are secured hereby. No exercise
      of the rights and powers herein granted and no delay or omission in the exercise
      of such rights and powers shall be held to exhaust the same or be construed
      as a
      waiver thereof, and every such right and power may be exercised at any time
      and
      from time to time.

     

    
      
        
        

      

      
        Page
          20

        
          

        

      

      
        
        

      

    

     

    8.4 No
      release of any part of the Mortgaged Properties shall in any way alter, vary
      or
      diminish the force, effect or lien of this instrument on the balance of
      Mortgaged Properties.

     

    8.5 Any
      provision contained herein or in the Note or in any other instrument evidencing
      or relating to any Secured Indebtedness to the contrary notwithstanding, neither
      Lender nor any Noteholder nor the holder of any other Secured Indebtedness
      shall
      be entitled to receive or collect, nor shall Grantor be obligated to pay,
      interest on any of the Secured Indebtedness in excess of the maximum rate of
      interest permitted by applicable law, and if any provision of the Note or of
      any
      other such instrument shall ever be construed or held to permit the collection
      or to require the payment of any amount of interest in excess of that permitted
      by applicable law, the provisions of this section shall control and shall
      override any contrary or inconsistent provision of the Note or other
      instrument.

     

    8.6 Any
      notice, request, demand or other instrument which may be required or permitted
      to be given or furnished to or served upon Grantor shall be addressed to it
      at
      its address set forth below, or such other address as Grantor may furnish to
      the
      Noteholder in writing. Notices to the Noteholder shall be deemed to have been
      properly given if delivered in like fashion to them at 38 Grove Street, Building
      C, Ridgefield, Connecticut 06877, with a copy to the Noteholder’s counsel at
      Greenberg Traurig LLP, 1000 Louisiana Street, Suite 1700, Houston, Texas 77002,
      Attn: Doug Atnipp, or at such other address as the Noteholder may furnish to
      Grantor in writing.

     

    8.7 Renewals
      and extensions of the Secured Indebtedness may be given at any time and
      amendments may be made to this Mortgage and other agreements relating to any
      of
      the Secured Indebtedness or the Mortgaged Properties and/or such properties
      may
      at any time be released or partially released and/or the Noteholder may take
      or
      hold other security for the Secured Indebtedness without notice to or joinder
      or
      consent of any persons hereafter acquiring any interest in the Mortgaged
      Properties. The Noteholder may resort first to such other security or any part
      thereof or first to the security herein given or any part thereof, or from
      time
      to time to either or both, even to the partial or complete abandonment of either
      security, and such action shall not be a waiver of any rights conferred by
      this
      instrument, which shall continue as a first lien upon all of the Mortgaged
      Properties not expressly released until the Secured Indebtedness is fully
      paid.

     

    8.8 If
      any
      provision hereof or of the Credit Agreement or the Note is invalid or
      unenforceable in any jurisdiction, the other provisions hereof or of the Note
      shall remain in full force and effect in such jurisdiction, and the remaining
      provisions hereof shall be liberally construed in favor of the Lender and the
      Noteholder in order to effectuate the provisions hereof, and the invalidity
      or
      unenforceability of any provision hereof in any jurisdiction shall not affect
      the validity or enforceability of any such provision in any other
      jurisdiction.

     

    
      
        
        

      

      
        Page
          21

        
          

        

      

      
        
        

      

    

     

    8.9 All
      of
      the terms, provisions, covenants and conditions hereof shall be binding upon
      Grantor, and the successors and assigns of Grantor and the Noteholder and
      successors and assigns of Noteholder, and shall inure to the benefit of the
      Noteholder and their respective successors and assigns and Grantor’s covenants
      shall constitute covenants running with the lands covered by the Mortgaged
      Properties, but this provision shall not be construed to authorize any sale
      or
      other disposition of the Mortgaged Properties contrary to any other provisions
      hereof.

     

    8.10 The
      Mortgage may be executed in multiple counterparts, each of which is deemed
      to be
      an original for all purposes although all such executed copies shall evidence
      and constitute one and the same Mortgage; provided
      that it
      shall never be necessary for Noteholder to produce more than one fully executed
      counterpart with all divisions to prove the existence of all such counterparts.
      The counterpart recorded in a particular jurisdiction may have attached to
      it
      only the division or subdivisions of the exhibit that contain descriptions
      of
      Mortgaged Properties located in such jurisdiction. Whenever a recorded
      counterpart of the Mortgage contains less than all of the divisions, the
      descriptions contained in the omitted divisions are hereby incorporated into
      said recorded counterpart by reference.

     

    8.11 The
      term
“Grantor”
herein
      used shall mean and include the limited liability company executing this
      instrument, and its successor in interest in the Mortgaged Properties. The
      number and gender of pronouns used in referring to Grantor shall be construed
      to
      mean and correspond with the number and gender of the individuals and/or
      entities executing this instrument as Grantor, and, further, the term “Grantor”
herein used shall mean and include both all of the parties executing this
      instrument as Grantor as well as any single one or more of them.

     

    8.12 With
      reference to KRS 382.520, it is acknowledged and agreed that this Mortgage
      secures not only the obligations evidenced by the Note and Credit Agreement,
      but
      also all future advances and all other additional indebtedness, whether direct,
      indirect, future, contingent or otherwise in an amount of not greater than
      $10,000,000.

     

    8.13 The
      “Effective
      Date”
of
      this
      instrument is 7:00 a.m. local time on [__________, 2008] at the location of
      the
      Mortgaged Properties, respectively.

     

    8.14 This
      Mortgage shall be governed by and construed and interpreted under the laws
      of
      the State of New York (without giving effect to conflicts of laws principles),
      except to the extent that the laws of the State where the Mortgaged Properties
      are located shall be mandatorily applicable. 

     

    8.15 TO
      THE
      MAXIMUM EXTENT NOT PROHIBITED BY LAW, EACH OF THE UNDERSIGNED HEREBY KNOWINGLY,
      VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT WHICH IT MAY HAVE TO A TRIAL
      BY
      JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING
      OUT
      OF, UNDER OR IN CONNECTION WITH THE TERM NOTE, THIS AGREEMENT OR THE OTHER
      SECURITY DOCUMENTS, OR ANY TRANSACTION CONTEMPLATED THEREBY, BEFORE OR AFTER
      MATURITY.

     

    THIS
      WRITTEN AGREEMENT AND THE OTHER SECURITY DOCUMENTS DESCRIBED IN THE CREDIT
      AGREEMENT REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
      CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
      OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
      PARTIES.

     

    
      
        
        

      

      
        Page
          22

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF, the undersigned have caused this instrument to be executed
      by
      their duly authorized undersigned officers effective as of [___________,
      2008].

     

    
      	 	 	“GRANTOR”
	 	 	 
	
              ADDRESS
                OF GRANTOR:

            	 	KY
              USA ENERGY, INC.
	 	 	a
              Kentucky corporation
	 	 	  
	
              KY
                USA Energy, Inc.

            	 	 	 
	
              321
                Somerset Road

            	 	
              By:

            	
               

            
	
              London,
                KY 40741

            	 	
              Name:

            	
               

            
	
              Telephone:
                (606) 877-8533

            	 	
              Title:

            	
               

            
	
              Telecopy:
                [______________]

            	 	 	 

    

     

     

    ACKNOWLEDGMENTS

     

    
      	
              STATE
                OF [_________]

            	
              §

            
	 	
              §

            
	
              COUNTY OF [___________]         

            	
              §

            

    

     

    The
      foregoing instrument was acknowledged before me on this ___ day of __________,
      2008, by _______________, _____________ of KY USA Energy, Inc., a Kentucky
      corporation.

     

    
      	 
	
              NOTARY PUBLIC, STATE OF [_____________]

            

    

    

    
      	
              Prepared
                by:

            
	 
	
              Douglas
                C. Atnipp

            
	
              Greenberg
                Traurig

            
	
              1000
                Louisiana, Suite 1700

            
	
              Houston,
                Tx 77002

            
	
              (713)
                374-3500

            

    

    

    THIS
      IS A SIGNATURE AND ACKNOWLEDGMENT PAGE TO THE 

    LEASEHOLD
      MORTGAGE, ASSIGNMENT OF PRODUCTION, 

    SECURITY
      AGREEMENT AND FINANCING STATEMENT

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
      A

     

    ATTACHED
      TO AND FORMING A PART OF THE

    MORTGAGE,
      ASSIGNMENT OF PRODUCTION,

    SECURITY
      AGREEMENT AND FINANCING STATEMENT

    DATED
      AS
      OF [________________, 2008]

     

    FROM

     

    KY
      USA
      ENERGY, INC.

     

    TO

     

    NSES
      12,
      LLC

     

    PREAMBLE

     

    This
      Exhibit
      A
      contains
      this Preamble and the specific description of the “Leases”
      comprising a portion of the “Mortgaged
      Properties”,
      as
      those terms are defined in the Mortgage, Assignment of Production, Security
      Agreement and Financing Statement (the “Mortgage”)
      to
      which this Exhibit
      A
      is
      attached.

     

    Divisions.
      This
Exhibit
      A
      may be
      composed of several divisions and subdivisions--at least one for each state
      and
      county in each state in which any part of the Mortgaged Properties is located
      in
      more than one county, the division hereof containing the description of such
      Hydrocarbon (as defined in the Mortgage) lease will generally include the
      relevant portion of each of the counties in which any part of such oil, gas
      and
      mineral lease is located. Counties containing portions of such multi-county
      leases may therefore be covered by more than one division of this Exhibit
      A.
      Each
      subdivision is in turn composed of further subdivisions—each one covering one or
      more of the oil, gas and mineral leases included among the Mortgaged
      Properties.

     

    Counterparts.
      The
      Mortgage may be executed in multiple counterparts, each of which is deemed
      to be
      an original for all purposes although all such executed copies shall evidence
      and constitute one and the same Mortgage; provided
      that it
      shall never be necessary for Noteholder to produce more than one fully executed
      counterpart with all divisions to prove the existence of all such counterparts.
      The counterpart recorded in a particular county may have attached to it only
      the
      division or subdivisions of this exhibit that contain descriptions of Mortgaged
      Properties located in such county or parish. Whenever a recorded counterpart
      of
      the Mortgage contains less than all of the divisions, the descriptions contained
      in the omitted divisions are hereby incorporated into said recorded counterpart
      by reference.

     

    Definitions.
      For all
      purposes of this Exhibit
      A,
      the
      following terms shall have indicated meanings:

     

    “Block”
means
      several leases within an immediate vicinity.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
       

    

    “Net
      Revenue Interest”
means
      with respect to any Property, the decimal or percentage share of production
      from
      or allocable to such property, after deduction of all overriding royalties
      and
      other burdens (including lessor royalties), that an owner of a Working Interest
      is entitled to receive

     

    “Working
      Interest”
means
      the property interest which entitles the owner thereof to explore and develop
      certain land for Hydrocarbon production purposes, whether under an oil and
      gas
      lease or unit, a compulsory pooling order or otherwise.

     

    “Overriding
      Royalty Interest”
means
      (i)
      with
      respect to a Unit for which an Overriding Royalty Interest is stated, that
      interest in the applicable Hydrocarbons produced, saved, and sold from such
      unitized area which is afforded to Grantor by virtue of its ownership of such
      expense-free interest in the Leases included in whole or in part in such area
      after deducting landowner royalties and any other burdens to which such interest
      may be subject, and (ii)
      with
      respect to a Well for which an Overriding Royalty Interest is stated, an
      expense-free interest in the applicable Hydrocarbons produced, saved and sold
      from a Well or Subject Lease which is afforded to Grantor by virtue of its
      ownership of such expense-free interest in the Lease (hereinafter defined)
      on
      which such Well is located after deducting landowner royalties and any other
      burdens to which such interest may be subject.

     

    “Well”
means
      any existing oil or gas well, salt water disposal well, injection well, water
      supply well or any other well located on or related to the Properties or any
      well which may hereafter be drilled and/or completed on the Properties, or
      any
      facility or equipment in addition to or replacement of any well, including
      a
      well producing or capable of producing oil and/or gas that is described or
      referred to in this Exhibit
      A.

     

    “Unit”
means
      a
      unit, pool, or communitized area described or referred to in this Exhibit
      A.

     

    “Permitted
      Encumbrances”
shall
      mean (i)
      minor
      irregularities in title which do not (a) materially interfere with the
      occupation, use and enjoyment by Grantor of any of the Mortgaged Properties
      in
      the normal course of business as presently conducted, or (b) materially impair
      the value thereof for such Mortgaged Properties, (ii)
      all
      interests in the Mortgaged Properties securing obligations owed to, or claimed
      by, any Person other than Noteholder, whether such interest is based on the
      common law, statute or contract, and whether such interest includes liens or
      security interests arising by virtue of mortgage, encumbrance, pledge, security
      agreement, conditional sale or trust receipt or lease, consignment or bailment
      for security purposes, so long as each said interest has been expressly
      consented to by Noteholder in writing, (iii)
      Liens
      of landlords, vendors, including purchase money liens incident to the purchase
      of new Equipment, carriers, warehousemen, mechanics, laborers and materialmen
      arising by law, and of operators arising by contract, in the ordinary course
      of
      business for sums not yet due or being contested in good faith by appropriate
      action promptly initiated and diligently conducted, if such reserve as shall
      be
      required by generally accepted accounting principles shall have been made
      therefor; (iv)
      the
      specific exceptions and encumbrances affecting each of the Mortgaged Properties
      as described in this Exhibit, (v) any liens which are subordinate to the liens
      created hereby pursuant to a Subordination Agreement approved by Lender; and
      (vi)
      the
      agreements and matters set forth in Exhibit
      B,
      if any;
      INSOFAR ONLY as the foregoing exceptions, encumbrances and agreements are valid
      and subsisting and are enforceable against the particular Lease(s) which are
      made subject to said exceptions, encumbrances or agreements.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
       

    

    Scope
      and Format of Description.
      The
      Subject Interests are expressly limited to the Subject Leases insofar and only
      insofar as they cover lands and depth intervals in which Grantor owns an
      undivided interest and do not include lands and depth intervals in which Grantor
      owns no undivided interest even though such lands or depth intervals are covered
      by the Subject Leases; provided,
      however, that this provisions shall not impair Lender’s/Mortgagee’s rights under
      the warranty of title contained in the Mortgage. The format of the description
      is as follows:

     

    With
      respect to each Lease, the description includes the Lease, the date, the Lessor,
      the Lessee, the recording information, the governmental or state serial number
      assigned to the lease (if applicable), and a description of the lands covered
      by
      the Lease. If the recorded instrument is a short form of memorandum of a Lease,
      the term “Lease”
      shall be
      deemed to include all of the terms and provisions of the Lease referred to
      in
      such short form or memorandum. Certain property descriptions are in abbreviated
      to Sections, Townships, and Ranges. In such descriptions, the following terms
      may be abbreviated as follows:

     

    
      	
              Northwest
                Quarter

            	
              NW,
                NW/4, or NW/4;

            
	
              Southwest
                Quarter

            	
              SW,
                SW/4, or SW/4;

            
	
              Southeast
                Quarter

            	
              SE,
                SE/4, or SE/4;

            
	
              Northeast
                Quarter

            	
              NE,
                NE/4, or NE/4;

            
	
              North
                Half

            	
              N/2
                or N/2;

            
	
              South
                Half

            	
              S/2
                or S/2;

            
	
              East
                Half

            	
              E/2
                or E/2;

            
	
              West
                Half

            	
              W/2
                or W/2;

            

    

     

    The
      applicable Blocks are followed by an N, S, E, or W to indicate whether the
      Block
      is North, South, East, or West. Certain descriptions merely refer to the Block
      in which the property is located in whole or in part. In such cases, the
      recorded Leases and any amendments thereof and any other recorded instruments
      affecting Grantor’s title more particularly describe the land within such Block
      in which Grantor owns an interest, and the descriptions contained in such
      instruments are incorporated herein by this reference. In the case of certain
      federal and state leases, the interests set forth may be in the nature of either
      record, title or operating rights. The land description does not necessarily
      signify that Grantor owns the entire interest in such Lease as to all of such
      land or as to all depth intervals. The statement of an Working Interest and
      a
      Net Revenue Interest for a Well or Unit does not necessarily signify that
      Grantor owns the same applicable Lease or leases as to the areas or depth
      intervals not attributable to the Well or Unit.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
       

    

    The
      statement of a Working Interest and a Net Revenue Interest with respect to
      a
      Well or Wells signifies that Grantor owns that Working Interest and Net Revenue
      Interest in the Well or Wells with respect to the intervals in which the Well
      or
      Wells are currently completed, and excludes a unitized area or formation, if
      any, included within a Unit which is also described in this Exhibit
      A.

     

    Each
      Well
      or Unit with respect to which the Working Interest and Net Revenue Interest
      of
      Grantor is stated is described as follows: (i)
      each
      well is described by reference to the Well name given to the Well in Grantor’s
      records, which may or may not be the name stated in the records of the
      applicable state or federal regulatory authority, and (ii)
      each
      Unit is described by the name by which such Unit is referred to in Grantor’s
      records, which may or may not be the name used (if a name is used) in the
      instrument creating such Unit.

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