Document:

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                                                                     Exhibit 4.8

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE "BLUE SKY" OR SECURITIES LAWS, AND CANNOT BE SOLD,
TRANSFERRED, ASSIGNED, OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH
APPLICABLE FEDERAL AND STATE SECURITIES LAWS AND ANY RESTRICTIONS IMPOSED
HEREBY, AND WILL NOT BE TRANSFERRED OF RECORD UNLESS COMPLIANCE WITH SUCH LAWS
AND RESTRICTIONS IS MET.

                                                               December 23, 2003

                         PARALLEL PETROLEUM CORPORATION

                           WARRANT PURCHASE AGREEMENT

Stonington Corporation
300 Park Avenue, Suite 1700
New York, New York 10022

Dear Sirs:

      Parallel Petroleum Corporation, a Delaware corporation (the "Company"),
agrees to issue and sell to you warrants (the "Warrants") to purchase the number
of shares of the Common Stock, $.01 par value (the "Common Stock"), of the
Company as set forth herein, subject to the terms and conditions contained
herein.

      1. Issuance of Warrants. The Warrants, which shall be in the form attached
hereto as Exhibit A, shall be issued to you on the date hereof (the "Closing
Date") concurrently with the execution hereof in consideration of the payment by
you to the Company of the sum of One Hundred Dollars ($100.00) cash, the receipt
of which is hereby acknowledged. All of the Warrants shall provide that you, or
such other holder or holders of the Warrants to whom transfer is authorized in
accordance with the terms of this Agreement, shall have the right to purchase up
to an aggregate of 100,000 shares of Common Stock of the Company for a purchase
price of $3.98 per share (the "Purchase Price"), the market value of the Common
Stock on the Closing Date. The term "Common Stock" shall mean the Common Stock,
$.01 par value, of the Company, as constituted on the date hereof, and any stock
or securities into which such Common Stock shall have been changed or any stock
or securities resulting from any reclassification of such Common Stock. The
shares of Common Stock

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purchasable upon exercise of the Warrants are sometimes herein called the
"Warrant Stock." The number of shares, character and Purchase Price of the
Warrant Stock are subject to adjustment as hereinafter provided. The term "Other
Securities" means any stock (other than Common Stock) and other securities of
the Company or any other person (corporate or otherwise) which holders of
Warrants at any time shall be entitled to receive, or shall have received, upon
the exercise of Warrants, in lieu of or in addition to Common Stock, or which at
any time shall be issuable or shall have been issued in exchange for or
replacement of Common Stock or Other Securities.

      2. Private Placement: Restricted Transferability.

      (a) The Warrantholder acknowledges that the Warrants and the Warrant Stock
have not been registered under the Securities Act of 1933, as amended (the
"Act"), or any applicable state blue sky or securities laws and that the
Warrants and the Warrant Stock, or any part thereof, can be sold, transferred,
assigned or otherwise disposed of only in compliance with applicable federal and
state securities laws, and subject to the other restrictions contained herein.

      (b) The Warrantholder represents and warrants that the Warrants and the
Warrant Stock are being or will be purchased without a view to distribution or
resale thereof in violation of the registration requirements of the Act. It is
understood that a subsequent sale of the Warrants or Warrant Stock under certain
circumstances might be deemed to constitute a distribution within the meaning of
and require registration under the provisions of the Act.

      (c) The Warrantholder shall not sell, transfer or hypothecate the Warrants
for a period of one year following the Closing Date, except:

            (1) To any person who, on the date of transfer, is an officer or
            director of the Warrantholder;

            (2) To the executor, administrator or personal representative of any
            person referred to in (1) above in the event of the death or
            incapacity of such person;

            (3) To a successor to the Warrantholder in a merger or
            consolidation;

            (4) To a purchaser of all or substantially all of the assets of the
            Warrantholder; or

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            (5) To the shareholders of the Warrantholder or the shareholders or
            partners of the transferees of the Warrant holder, as provided in
            this paragraph, in the event of liquidation or dissolution.

      (d) The Warrantholder agrees not to make any sale or other disposition of
either the Warrants or the Warrant Stock except pursuant to a registration
statement which has become effective under the Act, setting forth the terms of
such offering, the underwriting discount and the commissions and any other
pertinent data with respect thereto, unless the Warrantholder has provided the
Company with an opinion of counsel reasonably acceptable to the Company that
such registration is not required. Any transfer of Warrants to a person other
than as described in Section 2(c) shall be subject to the prior written approval
of the Company.

      (e) Any certificates for Warrant Stock may have affixed thereon an
appropriate legend as to the restrictions on transferability contained herein
and in the Warrants unless, in the opinion of counsel for the Company, such
legend would not be necessary and appropriate.

      (f) Notwithstanding anything herein to the contrary, each certificate for
Warrant Stock issued hereunder shall bear a legend reading substantially as
follows (unless the Company receives an opinion of counsel satisfactory to it
that such legend is not required in order to assure compliance with the Act or
unless such registration(s) as would cause such shares to no longer be
restricted have been effectuated):

      THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE
      OFFERED FOR SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT REGISTRATION UNDER
      THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAWS OR AN
      OPINION OF COUNSEL (SATISFACTORY TO THE COMPANY) THAT SUCH REGISTRATION IS
      NOT REQUIRED.

      3. Exercise of Warrants.

      (a) During the period commencing one year after the Closing Date and
ending at 5:00 p.m. Midland, Texas time on December 23, 2008, Warrants may be
exercised from time to time as to all or any portion of the whole number of
shares of Warrant Stock by the holder thereof upon surrender of the Warrant(s),

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accompanied by a subscription for shares to be purchased in the form attached
hereto as Exhibit B and by cash or by a certified or bank cashier's check
payable to the order of the Company in the amount obtained by multiplying the
number of shares of Warrant Stock as to which the Warrant is being exercised (as
so designated by the holder) by the Purchase Price, delivered to the Company at
its principal office at 1004 N. Big Spring, Suite 400, Midland, Texas 79701, and
such holder shall thereupon be entitled to receive pursuant to Section 4 of this
Agreement the number of shares of Warrant Stock to which such holder is entitled
upon such exercise of the Warrant (subject to any adjustments in the number or
character thereof required by Sections 6 and 7 of this Agreement) plus all other
stock and Other Securities and property (including cash, where applicable) to
which such holder is then entitled pursuant to Sections 6 and 7 of this
Agreement.

      (b) Notwithstanding anything to the contrary contained in this Section 3,
any holder may elect to exercise any Warrant in whole or in part by receiving
shares of Warrant Stock equal to the value (determined below) of the Warrant (or
any part hereof), upon surrender of the Warrant (or any part thereof) at the
office or agency described in Section 3(a) above, together with notice of such
election, specifying the part of the Warrant so surrendered, in which event the
Company shall issue and deliver to the holder a number of shares of Warrant
Stock determined using the following formula:

            X = (Y) (A-B)
                 -------
                    A

      where

            X =   the number of shares of Warrant Stock to be issued to the
                  holder of the Warrant;

            Y =   the number of shares of Warrant Stock purchasable under the
                  Warrant, or portion of the Warrant, surrendered;

            A =   the Current Market Value per share of the Warrant Stock,
                  determined pursuant to Section 4 of this Agreement; and

            B =    the then current Purchase Price per share of Warrant Stock.

      (c) Upon any partial exercise of Warrants, the Company at its expense will
forthwith issue and deliver to or upon the order of the holder hereof a new

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Warrant or Warrants of like tenor, in the name of the holder thereof or as such
holder (upon payment by such holder of any applicable transfer taxes) may
request, calling in the aggregate on the face or faces thereof for the number of
shares of Warrant Stock equal to the number of such shares called for on the
face of the Warrant minus the number of such shares which have previously been
designated by the holder in the form of subscription at the end hereof in
connection with previous exercises by the holder.

      (d) Each exercise of Warrants shall be deemed to have been effected
immediately prior to the close of business on the date on which the Warrants
shall have been surrendered to the Company in accordance with this Section 3,
and at such time the person or persons in whose name or names any certificate
for shares of Warrant Stock (or Other Securities) shall be issuable upon such
exercise shall be deemed to have become the holder or holders of record thereof.

      (e) Appropriate adjustments as provided in this Agreement shall be made in
connection with the exercise of the Warrants to reflect any change in the number
of shares of Warrant Stock or amount of Other Securities for which the Warrants
may be exercised.

      4. Delivery of Stock Certificates, etc. on Exercise. As soon as
practicable after the exercise of the Warrants in full or in part, and in any
event within 30 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the holder thereof, or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of fully paid and nonassessable shares of Warrant
Stock (or Other Securities) to which such holder shall be entitled upon such
exercise, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash equal to such fraction multiplied by the Current
Market Value on the date of exercise of one full share of such Warrant Stock (or
Other Securities) together with any other stock or Other Securities and property
(including cash, where applicable) to which such holder is entitled upon such
exercise pursuant to Section 6 of this Agreement or otherwise. For purposes of
the foregoing computation (and as elsewhere herein provided), the term "Current
Market Value" means on the date of determination (a) in the case of any security
traded on a national securities exchange (as defined in the Securities Exchange
Act of 1934, as amended), or the National Market System of The Nasdaq Stock
Market, the closing price thereof on such date or, if none, then on the next
preceding business day on which sales occurred, (b) in the case of any security
traded over the counter, the last sales price on such date if reported by the
National Association of Securities Dealers Automated Quotation System (or other
similar service, including, without limitation, the National

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Quotation Bureau, Inc.) or, if none, then on the next preceding day on which
sales prices, including, without limitation, on the National Quotation Bureau,
Inc. were reported, and (c) in the case of any other property (including the
securities referred to in clause (b) above, if no sales prices have been
reported as therein specified), the value determined, in accordance with
generally accepted accounting principles, by independent public accountants of
national standing.

      5. Payment of Taxes, etc. The Company covenants and agrees that the shares
of Warrant Stock delivered upon exercise of the Warrants shall, at the time of
delivery for such shares of Warrant Stock, be validly issued and outstanding and
fully paid and nonassessable shares of Common Stock The Company further
covenants and agrees that it will pay when due and payable any and all federal
and state original issue taxes which may be payable in respect of the issue of
the Warrants or any shares of Warrant Stock (or Other Securities) issuable upon
the exercise of the Warrants.

      6. Protection Against Dilution. The Purchase Price for the shares of
Warrant Stock and number of shares of Warrant Stock issuable upon exercise of
the Warrants is subject to adjustment from time to time as follows:

      (a) Stock Dividends, Subdivision, Reclassifications, Etc. In case at any
time or from time to time after the date of execution of this Agreement, the
Company shall: (i) take a record of the then holders of its Common Stock for the
purpose of entitling them to receive a dividend or a distribution on its shares
of Common Stock payable in shares of its capital stock, whether in shares of
Common Stock or capital stock of any other class; or (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares; or (iii) combine or reclassify its outstanding Common Stock into a
smaller number of shares, then, and in each such case, the Purchase Price then
in effect shall be adjusted to that price determined by multiplying the Purchase
Price in effect immediately prior to such event by a fraction (i) the numerator
of which shall be the total number of outstanding shares of Common Stock
immediately prior to such event, and (ii) the denominator of which shall be the
total number of outstanding shares of Common Stock immediately after such event;
provided, however, that if such record date is fixed and such dividend or
distribution is not fully made on the date fixed therefor, the Purchase Price
shall be recomputed accordingly as of the close of business on the date
originally fixed for the payment of such dividend or the making of such
distribution and thereafter the Purchase Price shall be adjusted pursuant to
this paragraph 6(a) at the time of actual payment of such dividends or
distributions.

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      (b) Issuance of Options, Rights, Warrants, Etc. In case at any time or
from time to time after the date of execution of this Agreement, the Company
shall issue options, rights, warrants or other securities entitling the holder
or holders thereof to subscribe for, or purchase shares of, Common Stock without
consideration or at a price (which shall include the per share amount of
consideration, if any, paid to the Company for the issuance of such options,
rights, warrens or other such securities) per share less than the Current Market
Value per share on the record date for the issuance of such options, rights,
warrants or other securities, then the Purchase Price in effect on the date
immediately prior to such record date shall immediately be adjusted to a price
equal to the quotient obtained by dividing:

            (i) An amount equal to the sum of (A) the number of shares of Common
            Stock issued and outstanding on such record date multiplied by the
            Purchase Price in effect on the date immediately prior to such
            record date and (B) the aggregate consideration to be received by
            the Company if all such options, rights, warrants or other
            securities were exercised, by

            (ii) An amount equal to the sum of (A) the number of shares of
            Common Stock issued and outstanding on such record date and (B) the
            number of shares issuable upon exercise of such options, rights,
            warrants or other securities (in each case increased or decreased to
            the extent that the number of such shares shall have been increased
            by a dividend or distribution or by a subdivision or combination in
            accordance with subsection (a) above);

provided, however, that such adjustment shall be made only if the aforesaid
quotient shall be less than the Purchase Price in effect immediately prior to
the issue of such options, rights, warrants or other securities. If the record
date for the issuance by the Company of any such options, rights, warrants or
other such securities is fixed and such issuance is not fully made on the date
fixed therefor, the Purchase Price shall be recomputed accordingly as of the
close of business on the date originally fixed for such issuance and thereafter
the Purchase Price shall be adjusted pursuant to this paragraph 6(b) at the time
of actual issuance of such options, rights, warrants or other such securities.
If any of such options, rights, warrants or other such securities shall expire
without having been exercised, then the Purchase Price shall be recomputed as of
the close of business of the date of such expiration to the Purchase Price which
would have been in effect had

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an adjustment been made on the basis that the only additional shares of Common
Stock so issued pursuant to the issuance of such options, rights, warrants or
other such securities were such additional shares of Common Stock, if any,
actually issued or sold upon the exercise of such options, rights, warrants or
such other securities and the maximum number of such additional shares of Common
Stock still issuable upon the exercise of such options, rights, warrants or
other such securities that have not expired and the Company shall be deemed to
have received as consideration for the issuance of such additional shares of
Common Stock an amount equal to the total amount of consideration, if any,
received by the Company for the issuance and sale of the options, rights,
warrants or other such securities, whether exercised or not and whether they
have expired or not, plus the amount of consideration, if any, actually received
by the Company (other than by cancellation of liabilities or obligations
evidenced by such options, rights, warrants or other securities) upon the
exercise of such options, rights, warrants or other securities so exercised for
additional shares of Common Stock, plus the minimum amounts of consideration, if
any, payable to the Company (other than by cancellation of liabilities or
obligations evidenced by such options, rights, warrants or other securities)
upon the exercise of such outstanding options, rights, warrants or other
securities that have not yet expired; provided, however, that any such
adjustment pursuant to this sentence shall not increase the then Purchase Price
to a level above the Purchase Price in effect immediately prior to the issuance
or sale of such options, rights, warrants or other such securities, taking into
account any interim adjustments prescribed by Section 6 hereof.

      (c) Issuance of Additional Shares of Common Stock. In case at any time or
from time to time after the Closing Date, the Company shall issue or sell any
shares of its Common Stock for a consideration per share less than the Current
Market Price, then the Purchase Price upon each such issuance shall be adjusted
to that price determined by multiplying the per share Purchase Price in effect
immediately prior to such event by a fraction:

            (i) the numerator of which shall be the number of shares of Common
            Stock outstanding immediately prior to the issuance of such
            additional shares of Common Stock plus the number of shares of
            Common Stock which the aggregate consideration for the total number
            of such additional shares of Common Stock so issued would purchase
            at the Current Market Price, and

            (ii) the denominator of which shall be the number of shares of
            Common Stock outstanding immediately prior to the issuance of such
            additional shares of Common

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            Stock plus the number of such additional shares of Common Stock so
            issued.

      The provisions of this subparagraph shall not apply to any additional
shares of Common Stock which are distributed to holders of Cormnon Stock as a
stock dividend or subdivision, for which an adjustment is provided for under
subparagraph (a) above. No adjustment of the per share Purchase Price shall be
made under this subparagraph upon the issuance of any additional shares of
Common Stock which are issued pursuant to the exercise of any warrants, options
or other subscription or purchase rights, if any such adjustment shall
previously have been made upon the issuance of such warrants, options or other
rights pursuant to subparagraph (b) of this paragraph 6.

      (d) Extraordinary Dividends. In case the Company shall declare a dividend
upon its Common Stock (except a dividend payable in Common Stock referred to in
subsection (a)(i) of this Section 6) payable otherwise than out of earnings,
retained earnings, surplus or earned surplus, the Purchase Price in effect
immediately prior to the declaration of such dividend shall be reduced by an
amount equal: in the case of a dividend in cash, to the amount thereof payable
per share of the Common Stock; or, in the case of any other dividend, to the
fair market value thereof per share of the Common Stock as determined in good
faith by the Board of Directors of the Company. Such reductions shall take
effect as of the date on which a record is taken for the purpose of such
dividend, or, if a record is not taken, the date as of which the holders of
Common Stock of record entitled to such dividend are to be determined. If such
record date is fixed and such dividend is not fully made on the date originally
fixed therefor, the Purchase Price shall be recomputed accordingly as of the
close of business on the date originally fixed for the payment of such dividend
and thereafter the Purchase Price shall be adjusted pursuant to this paragraph
6(d) at the time of actual payment of such dividends.

      (e) Adjustment of Number of Shares Purchasable. When any adjustment is
required to be made in the Purchase Price under paragraphs 6(a), 6(b) and 6(c),
the number of shares of Common Stock issuable upon exercise of the Warrants
shall be changed (to the nearest full share) to the number of shares determined
by dividing (i) an amount equal to the number of shares issuable pursuant to the
exercise of the Warrants immediately prior to the adjustment, multiplied by the
Purchase Price in effect immediately prior to the adjustment, and then divided
by (ii) the Purchase Price in effect immediately after such adjustments.

      (f) Minimum Adjustment. Except as hereinafter provided, no adjustment of
the per share Purchase Price hereunder shall be made if such adjustment

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      results in a change of the per share Purchase Price then in effect of less
than $.05 thereof. Any adjustment of less than $.05 of any per share Purchase
Price shall be earned forward and shall be made at the time of and together with
any subsequent adjustment which, together with adjustment or adjustments so
carried forward, amounts to $.05 of the per share Purchase Price then in effect
or more.

      (g) Limitation on Adjustment. Notwithstanding any provision herein to the
contrary, no adjustment of the Purchase Price or number of shares of Warrant
Stock issuable upon exercise of the Warrants shall be made as a result of or in
connection with:

            (i) the issuance of shares of Common Stock pursuant to the exercise
            of any options, warrants, rights or conversion privileges which are
            outstanding on the date hereof;

            (ii) the issuance or exercise of any options, warrants or rights or
            shares of Common Stock to officers, directors or employees of the
            Company pursuant to any stock option, stock purchase, stock bonus or
            other employee or director benefit plan approved by the Board of
            Directors of the Company, or

            (iii) the issuance or exercise of any options, warrants or other
            rights to purchase Common Stock to the Warrantholder.

      7. Other Adjustments.

      (a) In the event of any reorganization or consolidation of the Company
with, or any merger of the Company with or into, another corporation (other than
a reorganization, consolidation or merger in which the Company is a surviving
corporation) or in case of any sale or transfer to another corporation of all or
substantially all of the assets of the Company, the corporation resulting from
such reorganization or consolidation or surviving such merger or to which such
sale or transfer shall be made, as the case may be, shall make suitable
provision (which

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shall be fair and equitable to the holders of the Warrants) and shall assume the
obligations of the Company hereunder (by written instrument executed and mailed
to each holder of the Warrants then outstanding) pursuant to which, upon
exercise of the Warrants, at any time after the consummation of such
reorganization, consolidation, merger or conveyance, the holder shall be
entitled to receive the stock or Other Securities or property which such holder
would have been entitled to upon consummation if such holder had exercised the
Warrants immediately prior thereto.

      (b) The Purchase Price shall be adjusted to the extent necessary to
appropriately and equitably, as nearly as possible, reflect the events described
in this Section 7.

      8. No Impairment. The Company will not, by amendment of its articles or
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution or similar action, avoid or seek to avoid the
observance or performance of any of the terms of this Agreement or of the
Warrants, but will at all times in good faith assist in the carrying out of such
terms to the extent necessary or appropriate in order to protect the rights of
the holders under the terms of this Agreement and the Warrants. In this regard,
the Company (a) will not increase the par value of any shares of stock
receivable upon exercise of the Warrants above the amount payable therefor upon
such exercise, (b) will take all such action as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
nonassessable shares of stock upon the exercise of the Warrants from time to
time, and (c) will not transfer all or substantially all of its properties and
assets to any other person (corporate or otherwise), or consolidate with or
merge or liquidate into any other person or permit any other person to
consolidate with or merge into the Company (if the Company is not the surviving
person), unless such other person shall expressly assume in writing and be bound
by all the terms of this Agreement and the Warrants.

      9. Certificate as to Adjustments. In each case of an adjustment or
readjustment in the Purchase Price, the Company will promptly cause its
principal financial officer to compute such adjustment or readjustment in
accordance with the terms of this Agreement and mail to each holder of the
Warrants a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based.

      10. Notices of Record Date. etc. In the event of:

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      (a) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right; or

      (b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all of the assets of the Company to or consolidation or merger of
the Company with or into any other person; or

      (c) any voluntary or involuntary dissolution, liquidation or winding-up of
the Company;

then, and in each such event, the Company will mail or cause to be mailed to the
holders of record of the Warrants as of a date which shall not be more than
twenty (20) days prior to the date of such notice a notice specifying (i) the
date or expected date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, and (ii) the date or expected date on
which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place
and the time, if any is to be fixed, as of which the holder of record of Common
Stock (or Other Securities) shall be entitled to exchange their shares of Common
Stock (or Other Securities) for securities or other property deliverable upon
such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up.

      11. Reservation of Stock, etc. The Company will at all times reserve and
keep available, solely for issuance and delivery upon exercise of the Warrants,
all shares of Common Stock (or Other Securities) from time to time issuable upon
the exercise of the Warrants at the time outstanding. All shares of Common Stock
issuable upon the exercise of the Warrants shall be duly authorized, validly
issued, fully paid and nonassessable with no liability on the part of the
holders thereof.

      12. Exchange of Warrants. Upon the surrender for exchange of the Warrants,
properly endorsed, to the Company, the Company at its expense will (subject to
the provisions of Section 2(c)) issue and deliver to or upon the order of the
holder thereof a new Warrant or Warrants of like tenor, in the name of such
holder or as such holder (upon payment by such holder of any applicable transfer
taxes) may direct, calling in the aggregate on the face or faces thereof for the

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number of shares of Warrant Stock called for on the face or faces of the Warrant
or Warrants so surrendered.

      13. Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Warrants and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity bond or, in the case of any banking or other financial
institution, an indemnity agreement, reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, upon surrender and
cancellation of the Warrants, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant or Warrants of like tenor.

      14. Warrant Agent. The Company may, by written notice to each holder of
Warrants, appoint an agent for the purpose of issuing Warrant Stock (or Other
Securities) upon the exercise of the Warrants pursuant to Section 3, exchanging
Warrants pursuant to Section 13, and replacing Warrants pursuant to Section 13,
or any of the foregoing, and thereafter any such issuance, exchange or
replacement, as the case may be, shall be made at such office by such agent.

      15. Required Registration.

      (a) Subject to the provisions of this Section 15, at any time after the
exercise in full of all of the Warrants, the holders of not less than eighty
percent (80%) of the Warrant Stock may make a written request to the Company
requesting that the Company register the Warrant Stock with the Securities and
Exchange Commission (the "Commission") under the Act and effect the registration
or qualification or filing for exemption under the Act and applicable state law
of such Warrant Stock, and the Company shall promptly give written notice to
each holder of Warrant Stock of a proposed registration or qualification or
filing for exemption and shall, subject to the further conditions of this
Section 15, as expeditiously as possible, endeavor, in good faith, to use its
best efforts to effect any such registration or qualification or filing for
exemption for all of the Warrant Stock owned by the holders thereof who shall
have advised the Company in writing within 30 days after the giving of such
written notice by the Company of their desire to have their Warrant Stock
registered or qualified or exempted, and the Company will keep effective such
registration, qualification, exemption, notification or approval for such
period, not to exceed nine months, as may be necessary to effect sales or
disposition of the Warrant Stock.

      (b) The Company shall not be required to register, qualify, file or effect
any registration, qualification or exemption of the Warrant Stock pursuant to
subparagraph (a) above:

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            (1) at any time after the fifth anniversary of the Closing Date;

            (2) on more than one occasion;

            (3) as to Warrant Stock sold or otherwise disposed of in any manner
            to a person which, by virtue of the terms of this Agreement, is not
            entitled to the rights provided by this Section 15; or

            (4) as to Warrant Stock eligible for sale pursuant to Rule 144 under
            the Act, or any similar rule that may hereafter be adopted.

      (c) If at any time or from time to time during the effectiveness of a
registration statement filed pursuant to subparagraph (a) above (the
"Registration Statement"), the Company is engaged in or proposes to engage in
(i) a registered public offering of securities of the Company or (ii) any other
activity which, in the good faith determination of the Board of Directors of the
Company, would be adversely affected by offers or sales of the Warrant Stock
pursuant to the Registration Statement to the detriment of the Company, then the
holders of the Warrant Stock shall, upon the written request of the Company,
cease making offers and sales of the Warrant Stock pursuant to the Registration
Statement (including sales pursuant to Rule 144 under the Act) for the period of
time specified by the Company, which period shall not (i) in the case of a
registered public offering, exceed the period beginning ten days prior to the
effective date of the registration statement relating to such offering and
ending 180 days after such effective date, and (ii) in case of any other
activity, exceed the period beginning ten days prior to, and ending 180 days
after, the date of commencement of such other activity. Each holder of Warrant
Stock agrees to enter into such further agreements with the Company or any
underwriter of securities of the Company deemed necessary by the Company or any
such underwriter to carry out the purposes of this subparagraph (c). The period
of time that the Company is obligated to maintain the effectiveness of the
Registration Statement hereunder shall be tolled during the period holders of
the Warrant Stock must cease making offers and sales of the Warrant Stock
pursuant to the Company's request under this subparagraph (c).

      (d) In connection with the registration of the Warrant Stock pursuant to
this Section 15, each holder of the Warrant Stock whose shares are bemg
registered shall furnish the Company with information concerning such holder and
the proposed sale or distribution as shall be required for use in the
preparation of the Registration Statement and related applications. The Company

                                       14
<PAGE>

shall not be required to use its best efforts to register, or maintain the
effectiveness of any registration of, Warrant Stock under the Act or the
securities or blue sky laws of any states unless and until the holder of such
Warrant Stock furnishes to the Company such information regarding such holder
and its Warrant Stock and the intended method of disposition of such Warrant
Stock as the Company may reasonably request in order to satisfy the requirements
applicable to such registration.

      (e) Notwithstanding anything to the contrary in subparagraphs (a) or (b)
of this Section 15, the Company shall in no event be obligated to qualify to do
business in any jurisdiction where it is not so qualified or to take any action
that would subject it to taxation or to service of process in any state where it
is not otherwise subject to such taxation or service of process.

      (f) All expenses, disbursements and fees (including, without limitation,
fees and expenses of counsel, auditing fees, printing expenses, registration and
filing fees and blue sky fees and expenses, but excluding any underwriting
discounts or commissions) incurred in connection with the registration by the
Company of any shares for any holder of the Warrant Stock under subparagraph (a)
above shall be borne by the Company.

      (g) The rights and obligations of the Warrantholders under this Section 15
may not be assigned or transferred to any person without the prior written
consent of the Company.

      16. Indemnification; Contribution.

      (a) The Company will indemnify and hold harmless each holder of Warrant
Stock registered pursuant to this Agreement with the Commission, or under any
blue sky law or regulation, against any losses, claims, damages or liabilities,
joint or several, to which such holder may become subject under the Act or
otherwise, but only to the extent that such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, registration statement, prospectus or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse each
such holder for any legal or other expenses reasonably incurred by such holder
in connection with investigating or defending any such action or claim;
provided, however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any such

                                       15
<PAGE>

document, in reliance upon and in conformity with written information furnished
to the Company by any holder expressly for use therein

      (b) Each holder of Common Stock registered pursuant to this Agreement will
indemnify and hold harmless the Company against any and all losses, claims,
damages or liabilities to which the Company may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus,
registration statement or prospectus, or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in any such document, in reliance upon and in
conformity with written information furnished to the Company by such holder
expressly for use therein, or in a document to be filed with the Commission or
any state securities commission.

      (c) Promptly after receipt by an indemnified party under subsections (a)
or (b) of this Section 16 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under either such subsection, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under either of such subsections. In case
any such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to assume the defense thereof by notice in writing to
the indemnified party. After receipt of written notice from the indemnifying
party to such indemnified party of its election to assume the defense thereof,
the indemnifying party shall not be liable to such indemnified party under
either of such subsections for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of investigation
incurred prior to the assumption by the indemnifying party.

      (d) If the indemnification provided for in this Section 16 is unavailable
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses,

                                       16
<PAGE>

claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the holder or holders from this Agreement and from the offering of
the shares of Warrant Stock. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company and the
holders in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the holder and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the holders
agree that it would not be just and equitable if contribution pursuant to this
subparagraph (d) were determined by pro rata allocation (even if the holders
were treated as one entity for such purpose) or by any other method of
allocation which does not take into account the equitable considerations
referred to above in this subparagraph (d). Except as provided in subparagraph
(c) of this Section 16, the amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subparagraph (d) shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. Notwithstanding any provision in this
subparagraph (d) to the contrary, no holder shall be liable for any amount, in
the aggregate, in excess of the net proceeds to such holder from the sale of
such holder's shares (obtained upon exercise of Warrants) giving rise to such
losses, claims, damages or liabilities.

      (e) The obligations of the Company under this Section 16 shall be in
addition to any liability which the Company may otherwise have at law or in
equity.

      17. Remedies. The Company stipulates that the remedies at law of the
holders of the Warrants in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Agreement or the Warrants are not and will not be adequate, and that such terms
may be specifically enforced by a decree for the specific performance of any

                                       17
<PAGE>

agreement contained herein or by an injunction against a violation of any of the
terms hereof or otherwise.

      18. Negotiability, etc. The Warrants are issued upon the following terms,
to all of which each holder or owner thereof by the receipt and holding thereof
consents and agrees:

      (a) subject to Section 2 and Section 15(g) hereof, title to the Warrants
and all rights thereunder may be transferred in whole or in part, without charge
to the holder thereof (except for transfer taxes), by endorsement (by the holder
thereof executing the form of assignment at the end thereof) and delivery in the
same manner as in the case of a negotiable instrument transferable by
endorsement and delivery;

      (b) subject to Section 2 and Section 15(g) thereof, any person in
possession of Warrants properly endorsed is authorized to represent himself as
absolute owner thereof and is empowered to transfer absolute title thereto by
endorsement and delivery thereof to a bona fide purchaser thereof for value;
each prior taker or owner waives and renounces all of his or its equities or
rights in the Warrants in favor of each such bona fide purchaser, and each bona
fide purchaser shall acquire absolute title thereto and to all rights
represented thereby; and

      (c) until the Warrants are transferred on the books of the Company, the
Company may treat the registered holder thereof as the absolute owner thereof
for all purposes, notwithstanding any notice to the contrary.

      19. Notices. All notices and other communications from the Company to the
holders of Warrants shall be mailed by first class mail, postage prepaid, at
such address as may have been furnished to the Company in writing by each such
holder, or, until an address is so furnished, to and at the address of the last
holder of Warrants who has so furnished an address to the Company.

      20. Not Stockholders. The holders of the Warrants shall not, by virtue of
ownership of the Warrants, be entitled to any rights whatsoever of a stockholder
of the Company but shall, upon written request to the Company, be entitled to
receive quarterly or annual reports, or any other reports to stockholders, of
the Company.

      21. Successors and Assigns; Binding Effect. This Agreement shall be
binding upon and inure to the benefit of the Company and Stonington Corporation
and their respective successors and permitted assigns.

                                       18
<PAGE>

      22. Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the remainder of this
Agreement.

      23. Miscellaneous. This Agreement and the Warrants and any term hereof or
thereof may be changed, waived, discharged or terminated only by an instrument
in writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. This Agreement and the Warrants shall be
construed and enforced in accordance with and governed by the laws of the State
of Texas, except that they shall be construed and enforced in accordance with
and governed by the laws of the Company's state of domicile with respect to
matters of corporate law relating to the Company. The headings in this Agreement
are for purposes of reference only and shall not limit or otherwise affect the
meaning hereof.

      24. Definition. All references to the word "you" and to "Stonington
Corporation" in this Agreement shall be deemed to apply with equal eject to any
persons or entities to whom Warrants have been transferred in accordance with
the terms hereof, and, where appropriate, to any persons or entities holding
shares of Warrant Stock issuable upon exercise of Warrants.

Dated: November 20, 2001.

                                               PARALLEL PETROLEUM CORPORATION

                                               By:     /s/ Larry C. Oldham
                                                   ----------------------------
                                                   Larry C. Oldham, President

Accepted as of the 23rd day
of December, 2003.

STONINGTON CORPORATION

By:        /s/ William D. Forster
    -----------------------------------
       William D. Forster, President

                                       19
<PAGE>

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT REGISTRATION UNDER THE SECURITIES
ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
(SATISFACTORY TO THE COMPANY) THAT SUCH REGISTRATION IS NOT REQUIRED.

                                                                       EXHIBIT A

Warrant No. _____________

                         PARALLEL PETROLEUM CORPORATION

                          COMMON STOCK PURCHASE WARRANT

      THIS IS TO CERTIFY that ______________, or its assigns as permitted in
that certain Warrant Purchase Agreement dated November 20, 2001 (the "Warrant
Purchase Agreement"), between the Company (as hereinafter defined) and
Stonington Corporation, is entitled to purchase at any time or from time to time
on and after November 20, 2002 until 5:00 p.m., Midland, Texas time, on November
20, 2006, up to 275,000 shares of Common Stock, $.01 par value, of Parallel
Petroleum Corporation (the "Company"), at a Purchase Price per share as set
forth in the Warrant Purchase Agreement. This Warrant is issued pursuant to the
Warrant Purchase Agreement and all rights of the holder of this Warrant are
further governed by, and subject to, the terms and provisions of such Warrant
Purchase Agreement, copies of which are available upon written request to the
Company. The holder of this Warrant and the shares issuable upon the exercise
hereof shall be entitled to the benefits, rights and privileges and subject to
the obligations, duties and liabilities provided in the Warrant Purchase
Agreement.

      Subject to the provisions of the Warrant Purchase Agreement, and hereof,
this Warrant and all rights hereunder are transferable, in whole or in part, but
only to the extent expressly permitted in the Warrant Purchase Agreement and
herein and then only at the principal office of the Company at One Marienfeld
Place, 110 N. Marienfeld, Suite 465, Midland, Texas 79701, Attention: President
(or at any other principal office of the Company of which the Company shall have
provided written notice to the holder hereof), by the holder hereof or by a duly
authorized attorney-in-fact, upon surrender of this Warrant duly endorsed,
together with an Assignment hereof. Until transfer hereof on the books of the
Company, the Company may treat the registered holder hereof as the sole owner
hereof for all purposes.

                                       A-1
<PAGE>

      IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and
its corporate seal to be hereunto affixed by its proper corporate officers
thereunto duly authorized.

                                     PARALLEL PETROLEUM CORPORATION

                                     By: _____________________________________
                                         Name: _______________________________
                                         Title: ______________________________

Attest:

_____________________________________
Assistant Secretary

(Seal)

                                       A-2
<PAGE>

                               FORM OF ASSIGNMENT

                  [To be signed only upon transfer of Warrant]

      For value received, the undersigned hereby sells, assigns and transfers
unto ________ _______________________________ the right represented by the
within Warrant to purchase ________________ shares of Common Stock of Parallel
Petroleum Corporation to which the within Warrant relates, and appoints
___________________________________ his attorney-in-fact to transfer such right
on the books of Parallel Petroleum Corporation with full power of substitution
in the premises.

Dated: __________________, 200__.

                                       _____________________________________

                                       _____________________________________

                                       A-3
<PAGE>

                                                                       EXHIBIT B

                              FORM OF SUBSCRIPTION

       [To be signed only upon exercise of all or any part of the Warrant]

To Parallel Petroleum Corporation:

      The undersigned, as the holder of Warrant No. _______________, hereby
irrevocably elects to:

_______________   (a)   exercise the purchase right represented by such Warrant,
                        and to purchase thereunder * shares of Common Stock of
                        Parallel Petroleum Corporation and herewith makes
                        payment in cash or by certified check or bank cashier's
                        check of $________________ therefor, and requests that a
                        certificate for such shares be issued in the name of,
                        and delivered to the undersigned;

                                       OR

_______________   (b)   exercise the attached Warrant for [all of the shares]
                        [* of the shares] [cross out inapplicable phrase]
                        purchasable under the Warrant pursuant to the net
                        exercise provisions of Section 3(b) of such Warrant.

Dated:  _______________________

                                  __________________________________________
                                  (Signature must conform in all respects to
                                  name of holder as specified on the face of
                                  the Warrant)

                                  __________________________________________
                                  (Address)
----------------
* Insert here the number of shares set forth on the face of the Warrant (or, in
the case of a partial exercise, the portion thereof as to which the Warrant is
being exercised), in either case WITHOUT MAKING ANY ADJUSTMENT for additional
Common Stock or any Other Securities or property or cash which, pursuant to the
adjustment provisions of the Warrant, may be deliverable upon exercise.

                                       B-1<PAGE>

                                                                    Exhibit 10.1

                         PARALLEL PETROLEUM CORPORATION
                             1992 STOCK OPTION PLAN

                             I. Purpose of the Plan

      The PARALLEL PETROLEUM CORPORATION 1992 STOCK OPTION PLAN (the "Plan") is
intended to provide a means whereby certain employees and directors who are not
employees ("Nonemployee Directors") of PARALLEL PETROLEUM CORPORATION, a
Delaware corporation (the "Company"), and its subsidiaries may develop a sense
of proprietorship and personal involvement in the development and financial
success of the Company, and to encourage them to remain with and devote their
best efforts to the business of the Company, thereby advancing the interests of
the Company and its shareholders. Accordingly, the Plan provides for granting
certain employees and Nonemployee Directors the option ("Option") to purchase
shares of the common stock of the Company ("Stock"), as hereinafter set forth.
Options granted under the Plan to employees may be either incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), ("Incentive Stock Options") or options which do not
constitute Incentive Stock Options. Options granted under the Plan to
Nonemployee Directors will be options which do not constitute Incentive Stock
Options.

                               II. Administration

      The Plan shall be administered by the Board of Directors of the Company
(the "Board") or by a committee (the "Committee") of two or more directors of
the Company appointed by the Board. If the Plan is administered by the Board,
each member of the Board shall not be eligible, and shall not have been eligible
at any time within one year prior to his or her appointment to the Board, to
participate in the Plan or in any other stock, stock option or stock
appreciation rights plan of the Company or any of its affiliates ("Company Stock
Plan"), other than the eligibility of Nonemployee Directors to participate in
the Plan pursuant to paragraph (b) of Article IV or eligibility to participate
in any other Company Stock Plan which would not cause such individuals to cease
to be "disinterested persons" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "1934 Act"). Moreover, members
of the Committee shall not be eligible, and shall not have been eligible at any
time within one year prior to their appointment to the Committee, to participate
in a Company Stock Plan, other than the eligibility of Nonemployee Directors to
participate in the Plan pursuant to paragraph (b) of Article IV or eligibility
to participate in any other Company Stock Plan which would not cause such
members to cease to be "disinterested persons" within the meaning of Rule 16b-3
under the 1934 Act. If a Committee is not appointed by the Board, the Board
shall act as and be deemed to be the Committee for all purposes of the Plan
other than the immediately preceding sentence. The Committee shall have sole
authority to select the employees who are to be granted Options from among those
eligible hereunder and to establish the number of shares which may be issued to
employees under each Option. The Committee is authorized to interpret the Plan
and may from time to time adopt such rules and regulations, consistent with the
provisions of the Plan, as it may deem advisable to carry out the Plan. All
decisions made by the Committee in selecting the

<PAGE>

employees to whom Options shall be granted, in establishing the number of shares
which may be issued to employees under each Option and in construing the
provisions of the Plan shall be final.

                             III. Option Agreements

      Each Option granted to an employee shall be evidenced by an Employee
Option Agreement in the form of either Exhibit 1 or Exhibit 2 attached to this
Plan, and shall contain such other additional terms and conditions, and may be
exercisable for such periods, as may be approved by the Committee, subject,
however, to the express provisions of this Plan. The terms and conditions of the
respective Employee Option Agreements need not be identical. Specifically, an
Employee Option Agreement may provide for the payment of the option price, in
whole or in part, (i) in cash at the time of such exercise, (ii) by the delivery
of a number of shares of Stock (plus cash if necessary) having a fair market
value on the date of delivery equal to such option price, or (iii) any
combination of (i) and (ii) above. For all purposes under the Plan, the fair
market value of a share of Stock on a particular date shall be equal to the mean
of the reported high and low sales prices of the Stock on the stock exchange
composite tape if the Stock is traded on a stock exchange on that date, or if no
prices are reported on that date, on the last preceding date on which such
prices of the Stock are so reported. If the Stock is traded over the counter at
the time a determination of its fair market value is required to be made
hereunder, its fair market value shall be deemed to be equal to the average
between the reported high and low or closing bid and asked prices of Stock on
the most recent date on which Stock was publicly traded. In the event Stock is
not publicly traded at the time a determination of its value is required to be
made hereunder, the determination of its fair market value shall be made by the
Committee in such manner as it deems appropriate. Each Option granted to a
Nonemployee Director shall be evidenced by a Nonemployee Option Agreement in the
form attached to this Plan as Exhibit 3. Each Option and all rights granted
thereunder shall not be transferable other than by will or the laws of descent
and distribution, and shall be exercisable during the optionee's lifetime only
by the optionee or the optionee's guardian or legal representative.

                           IV. Eligibility of Optionee

      (a) Subject to the provisions of Article II and paragraphs (b) and (c)
below, Options may be granted only to individuals who are key employees
(including officers and directors who are also key employees) of the Company or
any parent or subsidiary corporation (as defined in Section 424 of the Code) of
the Company at the time the Option is granted. Options may be granted to the
same employee on more than one occasion.

      (b) Subject to the limitation on the number of shares of stock set forth
in Article V, (i) each individual who is a Nonemployee Director on March 1, 1992
is hereby granted, effective as of such date, an Option to purchase 25,000
shares of Stock and (ii) each individual who becomes a Nonemployee Director
following March 1, 1992 shall be granted, effective the Monday following such
individual's election to the Board as a Nonemployee Director, an Option to
purchase 25,000 shares of Stock.

                                        2
<PAGE>

      (c) No Incentive Stock Option shall be granted to an individual if, at the
time the Option is granted, such individual owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company or of
its parent or subsidiary corporation, within the meaning of Section 422(b)(6) of
the Code, unless (i) at the time such Option is granted the option price is at
least 110% of the fair market value of the Stock subject to the Option and (ii)
such Option by its terms is not exercisable after the expiration of five years
from the date of grant. To the extent that the aggregate fair market value
(determined at the time the respective Incentive Stock Option is granted) of
stock with respect to which Incentive Stock Options granted after 1986 are
exercisable for the first time by an individual during any calendar year under
all incentive stock option plans of the Company and its parent and subsidiary
corporations exceeds $100,000, such Incentive Stock Options shall be treated as
options which do not constitute Incentive Stock Options. The Committee shall
determine, in accordance with applicable provisions of the Code, Treasury
Regulations and other administrative pronouncements, which of an employee
optionee's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the employee optionee of such
determination as soon as practicable after such determination.

                          V. Shares Subject to the Plan

      The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 750,000 shares of Stock. Such shares may consist
of authorized but unissued shares of Stock or previously issued shares of Stock
reacquired by the Company. Any of such shares which remain unissued and which
are not subject to outstanding Options at the termination of the Plan shall
cease to be subject to the Plan, but, until termination of the Plan, the Company
shall at all times make available a sufficient number of shares to meet the
requirements of the Plan. Should any Option hereunder expire or terminate prior
to its exercise in full, the shares theretofore subject to such Option may again
be subject to an Option granted under the Plan. The aggregate number of shares
which may be issued under the Plan shall be subject to adjustment in the same
manner as provided in Paragraph IX hereof with respect to shares of Stock
subject to Options then outstanding. Exercise of an Option in any manner shall
result in a decrease in the number of shares of Stock which may thereafter be
available, both for purposes of the Plan and for sale to any one individual, by
the number of shares as to which the Option is exercised. Separate stock
certificates shall be issued by the Company for those shares acquired pursuant
to the exercise of an Incentive Stock Option and for those shares acquired
pursuant to the exercise of any Option which does not constitute an Incentive
Stock Option.

                                VI. Option Price

      Subject to the provisions of Article VII, the purchase price of Stock
issued under each Option shall be the fair market value of Stock subject to the
Option on the date the Option is granted.

                                       3
<PAGE>

                    VII. Options Exchanged for Prior Options

      An Option may be granted in exchange for an individual's right and option
to purchase shares of Stock pursuant to the terms of an agreement that existed
prior to the date such Option is granted ("Prior Option"). An Option Agreement
that grants an Option in exchange for a Prior Option shall provide for the
surrender and cancellation of the Prior Option. The purchase price of Stock
issued under an Option granted in exchange for a Prior Option shall be
determined by the Committee and, such purchase price may, without limitation, be
equal to the price for which the optionee could have purchased Stock under the
Prior Option.

                               VIII. Term of Plan

      The Plan shall be effective upon the date of its adoption by the Board.
Except with respect to Options then outstanding, if not sooner terminated under
the provisions of Paragraph X, the Plan shall terminate upon and no further
Options shall be granted after the expiration of ten years from the date of its
adoption by the Board.

                     IX. Recapitalization or Reorganization

      (a) The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting Stock or the rights thereof, the dissolution or liquidation of the
Company or any sale, lease, exchange or other disposition of all or any part of
its assets or business or any other corporate act or proceeding.

      (b) The shares with respect to which Options may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased.

      (c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an Option theretofore granted the
optionee shall be entitled to purchase under such Option, in lieu of the number
of shares of Stock as to which such Option shall then be exercisable, the number
and class of shares of stock and securities to which the optionee would have
been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitalization, the optionee had been the holder of record of
the number of shares of Stock as to

                                        4
<PAGE>

which such Option is then exercisable. If (i) the Company shall not be the
surviving entity in any merger or consolidation (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary of the
Company), (ii) the Company sells, leases or exchanges or agrees to sell, lease
or exchange all or substantially all of its assets to any other person or entity
(other than a wholly-owned subsidiary of the Company), (iii) the Company is to
be dissolved and liquidated, (iv) any person or entity, including a "group" as
contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or
control (including, without limitation, power to vote) of more than 50% of the
outstanding shares of Stock, or (v) as a result of or in connection with a
contested election of directors, the persons who were directors of the Company
before such election shall cease to constitute a majority of the Board (each
such event is referred to herein as a "Corporate Change"), then effective as of
a date (selected by the Committee) within (a) ten days after the approval by the
shareholders of the Company of such merger, consolidation, sale, lease or
exchange of assets or dissolution or such election of directors or (b) thirty
days of such change of control, the Committee, acting in its sole discretion
without the consent or approval of any optionee, shall effect one or more of the
following alternatives with respect to the then outstanding Options held by
employees, which may vary among individual employee optionees: (1) accelerate
the time at which such Options may be exercised so that such Options may be
exercised in full for a limited period of time on or before a specified date
(before or after such Corporate Change) fixed by the Committee, after which
specified date all unexercised Options and all rights of employee optionees
thereunder shall terminate, (2) require the mandatory surrender to the Company
by selected employee optionees of some or all of such Options (irrespective of
whether such Options are then exercisable under the provisions of the Plan) as
of a date, before or after such Corporate Change, specified by the Committee, in
which event the Committee shall thereupon cancel such Options and pay to each
employee optionee an amount of cash per share equal to the excess of the amount
calculated in Subparagraph (d) below (the "Change of Control Value") of the
shares subject to such Option over the exercise price(s) under such Options for
such shares, (3) make such adjustments to such Options as the Committee deems
appropriate to reflect such Corporate Change (provided, however, that the
Committee may determine in its sole discretion that no adjustment is necessary
to such Options) or (4) provide that thereafter upon any exercise of an Option
theretofore granted the employee optionee shall be entitled to purchase under
such Option, in lieu of the number of shares of Stock as to which such Option
shall then be exercisable, the number and class of shares of stock or other
securities or property to which the employee optionee would have been entitled
pursuant to the terms of the agreement of merger, consolidation or sale of
assets and dissolution if, immediately prior to such merger, consolidation or
sale of assets and dissolution the employee optionee had been the holder of
record of the number of shares of Stock as to which such Option is then
exercisable. In the event of a Corporate Change, as described in the immediately
preceding sentence, any then outstanding Options held by Nonemployee Directors
shall become fully exercisable on the fifth day following the approval by the
shareholders of the Company of such Corporate Change.

      (d) For the purposes of clause (2) in paragraph (c) above, the "Change of
Control Value" shall equal the amount determined in clause (i), (ii) or (iii),
whichever is applicable, as follows: (i) the per share price offered to
shareholders of the Company in any such merger, consolidation, sale of assets or
dissolution transaction, (ii) the price per share offered to shareholders of the
Company in any tender offer or exchange offer whereby a Corporate Change

                                        5
<PAGE>

takes place, or (iii) if such Corporate Change occurs other than pursuant to a
tender or exchange offer, the fair market value per share of the shares into
which such Options being surrendered are exercisable, as determined by the
Committee as of the date determined by the Committee to be the date of
cancellation and surrender of such Options. In the event that the consideration
offered to shareholders of the Company in any transaction described in this
Subparagraph (d) or Subparagraph (c) above consists of anything other than cash,
the Committee shall determine the fair cash equivalent of the portion of the
consideration offered which is other than cash.

      (e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be
subject to any required shareholder action.

      (f) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Options theretofore granted or the purchase price per
share.

                     X. Amendment or Termination of the Plan

      The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time, provided, that no change in any Option theretofore granted may be
made which would impair the rights of the optionee without the consent of such
optionee; and provided, further, that the Board may not make any alteration or
amendment which would materially increase the benefits accruing to participants
under the Plan, increase the aggregate number of shares which may be issued
pursuant to the provisions of the Plan, change the class of individuals eligible
to receive Options under the Plan, or extend the term of the Plan, without the
approval of the shareholders of the Company.

                               XI. Securities Laws

      The Company shall not be obligated to issue any Stock pursuant to any
Option granted under the Plan at any time when the shares covered by such Option
have not been registered under the Securities Act of 1933 and such other state
and federal laws, rules or regulations as the Company or the Committee deems
applicable and, in the opinion of legal counsel for the Company, there is no
exemption from the registration requirements of such laws, rules or regulations
available for the issuance and sale of such shares.

                                        6
<PAGE>

                                    EXHIBIT 1

                       NONSTATUTORY STOCK OPTION AGREEMENT

      AGREEMENT made as of the ______ day of _____________, 1992, between
PARALLEL PETROLEUM CORPORATION, a Delaware corporation (the "Company"), and
____________________ ("Employee").

      To carry out the purposes of the PARALLEL PETROLEUM CORPORATION 1992 STOCK
OPTION PLAN (the "Plan"), by affording Employee the opportunity to purchase
shares of common stock of the Company ("Stock"), and in consideration of the
mutual agreements and other matters set forth herein and in the Plan, the
Company and Employee hereby agree as follows:

      1. Grant of Option. The Company hereby irrevocably grants to Employee the
right and option ("Option") to purchase all or any part of an aggregate of
shares of Stock, on the terms and conditions set forth herein and in the Plan,
which Plan is incorporated herein by reference as a part of this Agreement;
provided, however, that the grant of this Option is subject to, and contingent
upon, approval of the Plan by the shareholders of the Company. This Option shall
not be treated as an incentive stock option within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").

      2. Purchase Price. The purchase price of Stock purchased pursuant to the
exercise of this Option shall be $__________ per share, which has been
determined to be the fair market value of the Stock at the date of grant of this
Option. For all purposes of this Agreement, fair market value of Stock shall be
determined in accordance with the provisions of the Plan.

      3. Exercise of Option. Subject to the earlier expiration of this Option as
herein provided, this Option may be exercised, by written notice to the Company
at its principal executive office addressed to the attention of its President or
Chief Executive Officer, at any time and from time to time after the date the
Plan is approved by the shareholders of the Company, but, except as otherwise
provided below, this Option shall not be exercisable for more than a percentage
of the aggregate number of shares offered by this Option determined by the
number of full years from the date of grant hereof to the date of such exercise,
in accordance with the following schedule:

<TABLE>
<CAPTION>
                                                    Percentage of
                                                   Shares That May
          Number of Full Years                      Be Purchased
          --------------------                    ----------------
<S>                                               <C>
Less than   _____ year                                 _____%

            _____ year                                 _____%

            _____ years                                _____%

            _____ years                                _____%

            _____ years                                _____%

            _____ years                                _____%

            _____ years or more                        _____%
</TABLE>

                                        7
<PAGE>

      This Option is not transferable by Employee otherwise than by will or the
laws of descent and distribution, and may be exercised only by Employee during
Employee's lifetime and while Employee remains an employee of the Company,
except that:

      (a) If Employee's employment with the Company terminates by reason of
disability (within the meaning of Section 22(e)(3) of the Code), this Option may
be exercised in full by Employee (or Employee's estate or the person who
acquires this Option by will or the laws of descent and distribution or
otherwise by reason of the death of Employee) at any time during the period of
one year following such termination.

      (b) If Employee dies while in the employ of the Company, Employee's
estate, or the person who acquires this Option by will or the laws of descent
and distribution or otherwise by reason of the death of Employee, may exercise
this Option in full at any time during the period of one year following the date
of Employee's death.

      (c) If Employee's employment with the Company terminates for any reason
other than as described in (a) or (b) above, unless Employee is terminated for
cause, this Option may be exercised by Employee at any time during the period of
three months following such termination, or by Employee's estate (or the person
who acquires this Option by will or the laws of descent and distribution or
otherwise by reason of the death of Employee) during a period of one year
following Employee's death if Employee dies during such three-month period, but
in each case only as to the number of shares Employee was entitled to purchase
hereunder upon exercise of this Option as of the date Employee's employment so
terminates. For purposes of this Agreement, "cause" shall mean Employee's gross
negligence or willful misconduct in performance of the duties of Employee's
employment, or Employee's final conviction of a felony or of a misdemeanor
involving moral turpitude.

      This Option shall not be exercisable in any event after the expiration of
ten years from the date of grant hereof. The purchase price of shares as to
which this Option is exercised shall be paid in full at the time of exercise (a)
in cash (including check, bank draft or money order payable to the order of the
Company), (b) by delivering to the Company shares of Stock having a fair market
value equal to the purchase price, or (c) any combination of (a) or (b). No
fraction of a share of Stock shall be issued by the Company upon exercise of an
Option or accepted by the Company in payment of the purchase price thereof;
rather, Employee shall provide a cash payment for such amount as is necessary to
effect the issuance and acceptance of only whole shares of Stock. Unless and
until a certificate or certificates representing such shares shall have been
issued by the Company to Employee, Employee (or the person permitted to exercise
this Option in the event of Employee's death) shall not be or have any of the
rights or privileges of a shareholder of the Company with respect to shares
acquirable upon an exercise of this Option.

      4. Withholding of Tax. To the extent that the exercise of this Option or
the disposition of shares of Stock acquired by exercise of this Option results
in compensation income to Employee for federal or state income tax purposes,
Employee shall deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the Company may require
to meet its obligation under applicable tax laws or regulations, and, if

                                        8
<PAGE>

Employee fails to do so, the Company is authorized to withhold from any cash or
Stock remuneration then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon an exercise of
this Option, the Company is further authorized in its discretion to satisfy any
such withholding requirement out of any cash or shares of Stock distributable to
Employee upon such exercise.

      5. Status of Stock. Employee understands that at the time of the execution
of this Agreement the shares of Stock to be issued upon exercise of this Option
have not been registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities law. The Company may effect such a registration
in the future; however, until the shares of Stock acquirable upon the exercise
of the Option have been registered for issue under the Act, the Company will not
issue such shares unless the holder of the Option provides the Company with a
written opinion of legal counsel, who shall be satisfactory to the Company,
addressed to the Company and satisfactory in form and substance to the Company's
counsel, to the effect that the proposed issuance of such shares to such Option
holder may be made without registration under the Act. In the event exemption
from registration under the Act is available upon an exercise of this Option,
Employee (or the person permitted to exercise this Option in the event of
Employee's death), if requested by the Company to do so, will execute and
deliver to the Company in writing an agreement containing such provisions as the
Company may require to assure compliance with applicable securities laws.

      Employee agrees that the shares of Stock which Employee may acquire by
exercising this Option shall be acquired for investment without a view to
distribution, within the meaning of the Act, and shall not be sold, transferred,
assigned, pledged or hypothecated in the absence of an effective registration
statement for the shares under the Act and applicable state securities laws or
an applicable exemption from the registration requirements of the Act and any
applicable state securities laws. Employee also agrees that the shares of Stock
which Employee may acquire by exercising this Option will not be sold or
otherwise disposed of in any manner which would constitute a violation of any
applicable securities laws, whether federal or state.

      In addition, Employee agrees (i) that the certificates representing the
shares of Stock purchased under this Option may bear such legend or legends as
the Committee deems appropriate in order to assure compliance with applicable
securities laws, (ii) that the Company may refuse to register the transfer of
the shares of Stock purchased under this Option on the stock transfer records of
the Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to its transfer
agent, if any, to stop registration of the transfer of the shares of Stock
purchased under this Option.

      6. Employment Relationship. For purposes of this Agreement, Employee shall
be considered to be in the employment of the Company as long as Employee remains
an employee of either the Company, a parent or subsidiary corporation (as
defined in Section 425 of the Code) of the Company, or a corporation or a parent
or subsidiary of such corporation assuming or substituting a new option for this
Option. Any question as to whether and when there has been a

                                        9
<PAGE>

termination of such employment, and the cause of such termination, shall be
determined by the Committee, and its determination shall be final.

      7. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Employee.

      8. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Texas.

      IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Employee has executed
this Agreement, all as of the day and year first above written.

                                       PARALLEL PETROLEUM CORPORATION

                                       By:
                                           ____________________________

                                           ____________________________
                                                    Employee

                                       10
<PAGE>

                                    EXHIBIT 2

                        INCENTIVE STOCK OPTION AGREEMENT

      AGREEMENT made this _____ day of _________________, 1992, between PARALLEL
PETROLEUM CORPORATION, a Delaware corporation (the "Company"), and ("Employee").

      To carry out the purposes of the PARALLEL PETROLEUM CORPORATION 1992 STOCK
OPTION PLAN (the "Plan"), by affording Employee the opportunity to purchase
shares of the common stock of the Company ("Stock"), and in consideration of the
mutual agreements and other matters set forth herein and in the Plan, the
Company and Employee hereby agree as follows:

      1. Grant of Option. The Company hereby irrevocably grants to Employee the
right and option ("Option") to purchase all or any part of an aggregate of
shares of Stock, on the terms and conditions set forth herein and in the Plan,
which Plan is incorporated herein by reference as a part of this Agreement;
provided, however, that the grant of this Option is subject to, and contingent
upon, approval of the Plan by the shareholders of the Company on or before 12
months after the date the Plan was adopted by the Board of Directors of the
Company. This Option is intended to constitute an incentive stock option, within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").

      2. Purchase Price. The purchase price of Stock purchased pursuant to the
exercise of this option shall be $_____ per share, which has been determined to
be the fair market value of the Stock at the date of grant of this Option. For
all purposes of this Agreement, fair market value of Stock shall be determined
in accordance with the provisions of the Plan.

      3. Exercise of Option. Subject to the earlier expiration of this Option as
herein provided, this Option may be exercised, by written notice to the Company
at its principal executive office addressed to the attention of its President or
Chief Executive Officer at any time and from time to time after approval of the
Plan by the shareholders of the Company, but, except as otherwise provided
below, this Option shall not be exercisable for more than a percentage of the
aggregate number of shares offered by this Option determined by the number of
full years from the date of grant hereof to the date of such exercise, in
accordance with the following schedule:

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                      Percentage of
                                       Shares That
          Number of Full Years       May Be Purchased
          --------------------       ----------------
<S>                                  <C>
Less than        _____ year              _____ %

                 _____ year              _____ %

                 _____ years             _____ %

                 _____ years             _____ %

                 _____ years             _____ %

                 _____ years             _____ %

                 _____ years              100%
</TABLE>

      This Option is not transferable by Employee otherwise than by will or the
laws of descent and distribution, and may be exercised only by Employee during
Employee's lifetime and while Employee remains an employee of the Company,
except that:

      (a) If Employee's employment with the Company terminates by reason of
disability (within the meaning of Section 22(e)(3) of the Code), this Option may
be exercised in full by Employee (or Employee's estate or the person who
acquires this Option by will or the laws of descent and distribution or
otherwise by reason of the death of Employee) at any time during the period of
one year following such termination.

      (b) If Employee dies while in the employ of the Company, Employee's
estate, or the person who acquires this Option by will or the laws of descent
and distribution or otherwise by reason of the death of Employee, may exercise
this Option in full at any time during the period of one year following the date
of Employee's death.

      (c) If Employee's employment with the Company terminates for any reason
other than as described in (a) or (b) above, unless Employee is terminated for
cause, this Option may be exercised by Employee at any time during the period of
three months following such termination, or by Employee's estate (or the person
who acquires this Option by will or the laws of descent and distribution or
otherwise by reason of the death of Employee) during a period of one year
following Employee's death if Employee dies during such three-month period, but
in each case only as to the number of shares Employee was entitled to purchase
hereunder as of the date Employee's employment so terminates. For purposes of
this Agreement, "cause" shall mean Employee's gross negligence or willful
misconduct in performance of the duties of his employment, or Employee's final
conviction of a felony or of a misdemeanor involving moral turpitude.

      This Option shall not be exercisable in any event after the expiration of
ten years from the date of grant hereof The purchase price of shares as to which
this Option is exercised shall be paid in full at the time of exercise (a) in
cash (including check, bank draft or money order payable to the order of the
Company), or (b) by delivering to the Company shares of Stock having a fair
market value equal to the purchase price, or (c) a combination of (a) and (b).
No fraction of a share of Stock shall be issued by the Company upon exercise of
an Option or accepted by the Company in payment of the exercise price thereof;
rather, Employee shall provide a cash payment for such amount as is necessary to
effect the issuance and acceptance of only whole shares of Stock.

                                       12
<PAGE>

Unless and until a certificate or certificates representing such shares shall
have been issued by the Company to Employee, Employee (or the person permitted
to exercise this Option in the event of Employee's death) shall not be or have
any of the rights or privileges of a shareholder of the Company with respect to
shares acquirable upon an exercise of this Option.

      4. Withholding of Tax. To the extent that the exercise of this Option or
the disposition of shares of Stock acquired by exercise of this Option results
in compensation income to Employee for federal or state income tax purposes,
Employee shall deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the Company may require
to meet its obligation under applicable tax laws or regulations, and, if
Employee fails to do so, the Company is authorized to withhold from any cash or
Stock remuneration then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon an exercise of
this Option, the Company is further authorized in its discretion to satisfy any
such withholding requirement out of any cash or shares of Stock distributable to
Employee upon such exercise.

      5. Status of Stock. Employee understands that at the time of the execution
of this Agreement the shares of Stock to be issued upon exercise of this Option
have not been registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities law. The Company may effect such a registration
in the future; however, until the shares of Stock acquirable upon the exercise
of the Option have been registered for issue under the Act, the Company will not
issue such shares unless the holder of the Option provides the Company with a
written opinion of legal counsel, who shall be satisfactory to the Company,
addressed to the Company and satisfactory in form and substance to the Company's
counsel, to the effect that the proposed issuance of such shares to such Option
holder may be made without registration under the Act. In the event exemption
from registration under the Act is available upon an exercise of this Option,
Employee (or the person permitted to exercise this Option in the event of
Employee's death), if requested by the Company to do so, will execute and
deliver to the Company in writing an agreement containing such provisions as the
Company may require to assure compliance with applicable securities laws.

      Employee agrees that the shares of Stock which Employee may acquire by
exercising this Option shall be acquired for investment without a view to
distribution, within the meaning of the Act, and shall not be sold, transferred,
assigned, pledged or hypothecated in the absence of an effective registration
statement for the shares under the Act and applicable state securities laws or
an applicable exemption from the registration requirements of the act and any
applicable state securities laws. Employee also agrees that the shares of Stock
which Employee may acquire by exercising this Option will not be sold or
otherwise disposed of in any manner which would constitute a violation of any
applicable securities laws, whether federal or state.

      In addition, Employee agrees (i) that the certificates representing the
shares of Stock purchased under this Option may bear such legend or legends as
the Committee deems appropriate in order to assure compliance with applicable
securities laws, (ii) that the Company may refuse to register the transfer of
the shares of Stock purchased under this Option on the stock transfer records of
the Company if such proposed transfer would in the opinion of counsel

                                       13
<PAGE>

satisfactory to the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to its transfer
agent, if any, to stop registration of the transfer of the shares of Stock
purchased under this Option.

      6. Employment Relationship. For purposes of this Agreement, Employee shall
be considered to be in the employment of the Company as long as Employee remains
an employee of either the Company, a parent or subsidiary corporation (as
defined in Section 425 of the Code) of the Company, or a corporation or a parent
or subsidiary of such corporation assuming or substituting a new option for this
Option. Any question as to whether and when there has been a termination of such
employment, and the cause of such termination, shall be determined by the
Committee and its determination shall be final.

      7. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Employee.

      8. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Texas.

      IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Employee has executed
this Agreement, all as of the day and year first above written.

                                       PARALLEL PETROLEUM CORPORATION

                                       By:
                                           __________________________

                                           __________________________
                                                   Employee

                                       14
<PAGE>

                                    EXHIBIT 3

                       NONSTATUTORY STOCK OPTION AGREEMENT
                            FOR NONEMPLOYEE DIRECTORS

      AGREEMENT made as of the _____ day of __________, 1992, between PARALLEL
PETROLEUM CORPORATION, a Delaware corporation (the "Company"), and
______________________________ ("Director").

      To carry out the purposes of the PARALLEL PETROLEUM CORPORATION 1992 STOCK
OPTION PLAN (the "Plan"), by affording Director the opportunity to purchase
shares of common stock of the Company ("Stock"), and in consideration of the
mutual agreements and other matters set forth herein and in the Plan, the
Company and Director hereby agree as follows:

      1. Grant of Option. The Company hereby irrevocably grants to Director the
right and option ("Option") to purchase all or any part of an aggregate of
25,000 shares of Stock, on the terms and conditions set forth herein and in the
Plan, which Plan is incorporated herein by reference as a part of this
Agreement; provided, however, that the grant of this Option is subject to, and
contingent upon, approval of the Plan by the shareholders of the Company. This
Option shall not be treated as an incentive stock option within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").

      2. Purchase Price. The purchase price of Stock purchased pursuant to the
exercise of this Option shall be $ , which has been determined to be the fair
market value of the Stock at the date of grant of this Option. For all purposes
of this Agreement, fair market value of Stock shall be determined in accordance
with the provisions of the Plan.

      3. Exercise of Option. Subject to the earlier expiration of this Option as
herein provided, this Option may be exercised, by written notice to the Company
at its principal executive office addressed to the attention of its President or
Chief Executive Officer, at any time and from time to time following the
expiration of six months from the date of grant hereof, but, except as otherwise
provided below, this Option shall not be exercisable for more than a percentage
of the aggregate number of shares offered by this Option determined by the
number of full years from the date of grant hereof to the date of such exercise,
in accordance with the following schedule:

<TABLE>
<CAPTION>
                                         Percentage of
                                        Shares That May
          Number of Full Years           Be Purchased
          --------------------         ----------------
<S>                                    <C>
Less than        1 year                      0%
                 1 year                     50%
                 2 years or more           100%
</TABLE>

                                       15
<PAGE>

      This Option is not transferable by Director otherwise than by will or the
laws of descent and distribution, and may be exercised only by Director during
Director's lifetime and while Director remains a director of the Company, except
that:

      (a) If Director ceases to be a director of the Company because of
disability (within the meaning of Section 22(e)(3) of the Code), this Option may
be exercised in full by Director (or Director's estate or the person who
acquires this Option by will or the laws of descent and distribution or
otherwise by reason of the death of Director) at any time during the period of
one year following such termination.

      (b) If Director dies while he is a director of the Company, Director's
estate, or the person who acquires this Option by will or the laws of descent
and distribution or otherwise by reason of the death of Director, may exercise
this Option in full at any time during the period of one year following the date
of Director's death.

      (c) If Director ceases to be a director of the Company for any reason
other than as described in (a) or (b) above, unless Director is removed for
cause, this Option may be exercised by Director at any time during the period of
three months following the date Director ceases to be a director of the Company,
or by Director's estate (or the person who acquires this Option by will or the
laws of descent and distribution or otherwise by reason of the death of
Director) during a period of one year following Director's death if Director
dies during such three-month period, but in each case only as to the number of
shares Director was entitled to purchase hereunder upon exercise of this Option
as of the date Director's employment so terminates. For purposes of this
Agreement, "cause" shall mean Director's gross negligence or willful misconduct
in the performance of his duties as a director, or Director's final conviction
of a felony or of a misdemeanor involving moral turpitude.

      This Option shall not be exercisable in any event after the expiration of
ten years from the date of grant hereof. The purchase price of shares as to
which this Option is exercised shall be paid in full at the time of exercise (a)
in cash (including check, bank draft or money order payable to the order of the
Company), (b) by delivering to the Company shares of Stock having a fair market
value equal to the purchase price, or (c) any combination of (a) or (b). No
fraction of a share of Stock shall be issued by the Company upon exercise of an
Option or accepted by the Company in payment of the purchase price thereof;
rather, Director shall provide a cash payment for such amount as is necessary to
effect the issuance and acceptance of only whole shares of Stock. Unless and
until a certificate or certificates representing such shares shall have been
issued by the Company to Director, Director (or the person permitted to exercise
this Option in the event of Director's death) shall not be or have any of the
rights or privileges of a shareholder of the Company with respect to shares
acquirable upon an exercise of this Option.

      4. Status of Stock. Director understands that at the time of the execution
of this Agreement the shares of Stock to be issued upon exercise of this Option
have not been registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities law. The Company may effect such a registration
in the future; however, until the shares of Stock acquirable upon the exercise
of the Option have been registered for issue under the Act, the

                                       16
<PAGE>

Company will not issue such shares unless the holder of the Option provides the
Company with a written opinion of legal counsel, who shall be satisfactory to
the Company, addressed to the Company and satisfactory in form and substance to
the Company's counsel, to the effect that the proposed issuance of such shares
to such Option holder may be made without registration under the Act. In the
event exemption from registration under the Act is available upon an exercise of
this Option, Director (or the person permitted to exercise this Option in the
event of Director's death), if requested by the Company to do so, will execute
and deliver to the Company in writing an agreement containing such provisions as
the Company may require to assure compliance with applicable securities laws.

      Director agrees that the shares of Stock which Director may acquire by
exercising this Option shall be acquired for investment without a view to
distribution, within the meaning of the Act, and shall not be sold, transferred,
assigned, pledged or hypothecated in the absence of an effective registration
statement for the shares under the Act and applicable state securities laws or
an applicable exemption from the registration requirements of the Act and any
applicable state securities laws. Director also agrees that the shares of Stock
which Director may acquire by exercising this Option will not be sold or
otherwise disposed of in any manner which would constitute a violation of any
applicable securities laws, whether federal or state.

      In addition, Director agrees (i) that the certificates representing the
shares of Stock purchased under this Option may bear such legend or legends as
the Committee deems appropriate in order to assure compliance with applicable
securities laws, (ii) that the Company may refuse to register the transfer of
the shares of Stock purchased under this Option on the stock transfer records of
the Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to its transfer
agent, if any, to stop registration of the transfer of the shares of Stock
purchased under this Option.

      5. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Director.

      6. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Texas.

      IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized, and Director has executed
this Agreement, all as of the day and year first above written.

                                               PARALLEL PETROLEUM CORPORATION

                                               By:
                                                   __________________________

                                                   __________________________
                                                            Employee

                                       17

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