Document:

OIL AND GAS LEASE AND OPTION AGREEMENT

STATE OF TEXAS     )
                                  KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF VICTORIA )

      That this Oil and Gas Lease and Option Agreement, executed, entered into
and effective as of the 22nd day of August, 2003. (hereinafter the "Lease")
between PATRICIA EDWARDS CARSON, INDIVIDUALLY AND AS CO-INDEPENDENT EXECUTRIX
UNDER THE WILL OF PATTIE WELDER EDWARDS, DECEASED, and DAVID EDWARDS,
INDIVIDUALLY AND AS CO-INDEPENDENT EXECUTOR UNDER THE WILL OF PATTIE WELDER
EDWARDS, DECEASED, MARIE WELDER FORD, and DIANA WELDER HAMILTON, A WIDOW,
hereinafter called "Lessors," and VAQUERO PARTNERS, LLC, a Texas limited
liability company, whose address is 2 Tiki Circle, Galveston, Texas 77554, as
"Lessee,"

                                   WITNESSETH

                                       I.

      That Lessors, for and in consideration of the sum of Ten Dollars ($10.00)
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and, further, in consideration of the covenants and
agreements on the part of the Lessee hereinafter stated to be kept and
performed, hereby GRANT, LEASE AND LET exclusively unto Lessee for the purpose
of exploring for, developing and producing oil and gas only (including
casinghead gas, distillate and condensate), laying pipelines, building roads,
tanks and other necessary facilities to produce, save, take care of, treat and
transport said products on the premises described on Exhibit "A" ("the Land")
attached hereto and made a part hereof for all purposes.

                                       II.

      This Lease shall be for a primary term (hereinafter the "Primary Term")
beginning on the effective date hereinabove and continuing for a period of six
(6) months and so long thereafter as oil or gas is produced in paying quantities
from the Land or so long as the Lease is continued in force and effect as
otherwise herein expressly provided but subject to all of the provisions for
termination as hereinafter set forth. In the event Lessee shall drill and
complete a well capable of producing oil or gas in paying quantities within the
Primary Term, then this Lease shall continue in force and effect for an
additional period of six (6) months beyond the Primary Term (hereinafter the
"Extended Primary Term"). Likewise, in the event Lessee drills and completes a
well capable of producing oil or gas in paying quantities within such Extended
Primary Term, this Lease shall continue in force and effect for an additional
six (6) month period beyond the Extended Primary Term (hereinafter the "Extended
Primary Terms"). Lessee shall earn the ability to further extend the Primary
Term for additional Extended Primary Terms so long as a well capable of
producing oil or gas in paying quantities is drilled and completed within such
subsequent 6 month extension period.

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      Lessee covenants and agrees that it will, within the Primary Term,
commence and thereafter diligently prosecute with good and adequate machinery
operations for the drilling of a well in search of oil and gas to a depth of not
less than 9,000 feet. If Lessee shall fail within the Primary Term to commence
and prosecute in good faith the attempt to effectuate production as herein
provided, Lessee shall pay to Lessors the sum of Two Hundred Thousand Dollars
($200,000.00), said sum having been determined by the parties hereto to be a
reasonable measure of damages which are difficult to assess to Lessors by reason
of such failure.

      The Primary Term shall be extended for the number of days as there shall
exist a condition constituting force majeure (as such term is commonly defined
in the oil and gas industry), which condition may include the unavailability of
a suitable rig; provided, however, a force majeure condition based on rig
availability shall not extend the Primary Term beyond one year from the
effective date.

      The mineral rights herein granted by Lessors to Lessee hereunder are not
limited as to subsurface depths, except with respect to any currently existing
producing units on the Land as identified on Exhibit "A" ("existing producing
units") attached hereto and made a part hereof for all purposes. With respect to
any such existing producing units, the rights herein granted by Lessors to
Lessee shall be limited to such depth intervals extending from one hundred feet
(100') below the deepest producing depth in each such unit, and below.

      If, at the expiration of the Primary Term, a well has been completed on
the Land capable of producing oil or gas in paying quantities, but is not
actually producing oil or gas, said well shall be deemed to be producing in
paying quantities and shall maintain this lease in force for a period of ninety
(90) days after the expiration of the Primary Term; provided, however, that
after the expiration of such ninety-day period this Lease is subject to
termination as otherwise herein provided. This provision shall likewise be
applicable to all wells drilled within any Extended Primary Terms hereunder.

      If, at the expiration of the Primary Term of this Lease, oil or gas is not
being produced on the Land, but Lessee is then engaged in drilling or reworking
operations thereon, then this Lease shall remain in force so long as operations
for drilling or reworking of any well are being prosecuted in good faith with no
cessation of operations of more than ninety (90) days, and if they result in the
production of oil or gas, so long thereafter as oil or gas is produced in paying
quantities from said Land; provided, however, notwithstanding any other
provision hereinabove to the contrary, it is agreed that upon the discontinuance
by Lessee of reworking operations for a period of more than ninety (90) days,
Lessee may not then perpetuate this Lease by further reworking operations
(without further drilling operations as hereinafter set out). Lessee shall still
have an additional ninety (90) days (or one hundred eighty (180) days total from
the cessation of reworking operations) within which to commence additional
continuous drilling operations in order to keep in force the total acreage
covered by this Lease before the operation of the automatic termination
provisions of this Section II. This provision shall likewise be applicable to
all wells drilled within any Extended Primary Terms hereunder.

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      If at any time while this Lease is in force there is production of oil or
gas in paying quantities on the Land and such production shall cease, this Lease
shall not terminate if Lessee shall, prior to the expiration of ninety (90) days
after such cessation of production, commence and diligently and continuously
prosecute operations for the reworking of the well on the Land (or, at Lessee's
option, drilling a new well), and if such operations result in the production of
oil or gas in paying quantities, so long thereafter as oil and gas in paying
quantities is produced from the Land.

                                      III.

      The royalties reserved by Lessors and which shall be paid by Lessee are as
follows:

A.    On all oil and on all liquid hydrocarbons extracted from gas under the
      provisions of Paragraph B below, thirty percent (30%) of that produced and
      saved from the Land, the same to be delivered to Lessor into the storage
      tanks or into the pipeline to which the wells may be connected, or, at
      Lessor's option, such oil and liquid hydrocarbons shall be sold with
      Lessee's oil and liquid hydrocarbons at the same price received by Lessee
      (but in no event for less than market value thereof), or at Lessors'
      option, such product shall be delivered to Lessors at the wells into tanks
      or other receptacle located on the land to be furnished by Lessor.
      Lessors' options hereunder may be exercised from time to time, and the
      exercise or failure to exercise an option at any time shall not constitute
      a waiver of Lessors' rights to exercise further options. Lessors' royalty
      shall be free of all costs, charges and expense. The term "market value"
      of oil as used in this Section III shall be presumed to mean oil produced
      hereunder and sold by Lessee pursuant to an arms-length contract with a
      purchaser which is not a subsidiary or affiliate of Lessee, and if such
      contract contains a provision for the determination, at least monthly, of
      the price for which such oil is sold, to insure that the price for such
      oil will always be reasonably equivalent to the current prices of oil paid
      to producers, when produced in Railroad Commission District No.2, the
      "market value" of oil sold pursuant to such contract shall be the price
      received by Lessee therefor.

      Upon Lessors' royalty, Lessee shall pay all production, severance and all
      other taxes (except, of course, ad valorem and income taxes) assessed by
      any authority upon such oil or the production thereof.

B.    Lessee shall pay to Lessors as royalty on all gas produced from the Land,
      (1) when sold by Lessee at the well, thirty percent (30%) of the net
      proceeds realized by Lessee, computed at the mouth of the well, (2) on all
      other gas produced from the Land, including casinghead gas and residue gas
      at the tailgate of any plant through which gas from the Land may be
      processed, thirty percent (30%) of the gas, in kind, at the well or at the
      outlet site of the separator herein provided for, or at the tailgate of
      any plant through which gas is processed, as the case may be. Prior to the
      use or sale of all gas produced from the Land, Lessee shall run such gas
      through a fuel-type separator or other comparable equipment ordinarily

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      used in the industry for the purposes of separating, extracting and saving
      liquid and liquefiable hydrocarbons recoverable from the gas; provided,
      however, Lessee shall not be required to run the gas through a fuel-type
      separator or comparable equipment if the gas is to be processed in a
      recycling, absorption, pressuring or other plant belonging wholly or in
      part to Lessee or any subsidiary or company, or if the liquid hydrocarbon
      content of the gas is so small as to make the installation and operation
      of fuel-type separators or comparable equipment would diminish the ability
      to sell and deliver the separated gas against existing gathering system or
      pipeline pressures.

      Upon Lessors' royalty, Lessee shall pay all production, severance and all
      other taxes (except, of course, ad valorem and income taxes) assessed by
      any authority upon such gas or the production thereof.

C.    On all other products or liquid hydrocarbons separated, extracted or
      manufactured from gas produced from the Land by any extraction, cryogenic,
      absorption, pressuring or other plant belonging wholly or in part to
      Lessee or any company controlled in whole or in part by Lessee, thirty
      percent (30%) of the market value at the plant of all such products or
      liquid hydrocarbons separated, extracted or manufactured, or at Lessors'
      option, thirty percent (30%) of such other products or liquid hydrocarbons
      in kind shall be delivered to Lessor at the plant. In the event of the
      blending of any part of such condensate or other products with chemical
      additives for making any product therefrom, the royalty on such products,
      whether paid in kind or at market value, shall be calculated at the plant
      on the resulting blended product, less Lessors' proportionate share of the
      direct costs of such chemical additives and the blending thereof.

D.    All royalties that may become due hereunder shall be paid to Lessors by
      mailing checks to each of the Lessors promptly after the sale of such
      production, and not later than the last day of the month following the
      month of sale or use thereof as to oil, and not later than the fifteenth
      day of the second month following the month of sale or use thereof as to
      gas.

E.    Unless specifically provided in Paragraph C above, all royalties payable
      under sub-paragraphs A, B, and C of this Section III shall be without
      deduction or cost of gathering, transporting, trucking, piping,
      separating, dehydrating, treating, compressing, repressuring or otherwise
      treating or making the oil or gas ready for sale or use. The term "market
      value" of gas as used in this Section III shall mean gas produced
      hereunder sold by Lessee pursuant to an arms-length contract with a
      purchaser which is not a subsidiary or affiliate of Lessee, and if such
      contract (a) contains a BTU provision and (b) contains a provision for the
      determination, at least annually, of the price for which such gas is sold,
      to insure that the price for such gas will always be reasonably equivalent
      to the current market value of gas when produced in Railroad Commission
      District No.2, the "market value" of gas sold pursuant to such contract
      shall be presumed to be the price received by Lessee therefor.

F.    Lessor shall own and/or be paid an undivided thirty percent (30%) of all
      gas contracts, take-or-pay settlements, awards, payments and/or benefits
      which arise out of, relate to or concern gas produced from, or
      attributable to the Land. In no event shall the royalty provided herein
      for the market value of gas for royalty purposes ever bear, directly or
      indirectly, in any deduction, gas contract, take-or-pay, amelioration,
      allocation, deduction, recoupment or make-up which is not the direct
      result of a take-or-pay settlement and/or benefit in which Lessor has
      fully participated to the extent of its undivided thirty percent (30%)
      royalty share.

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G.    In the event that Lessee shall, prior to the time provided in Section V to
      designate the released acreage and the units held by production, acquire
      from third parties the leasehold interest in and to any one or more of the
      wells listed on Exhibit "A" as not being included in the lands herein
      leased, and during such period of time rework any such well or wellbore,
      then the royalty to be paid on any oil or gas produced from any such
      reworked well shall be twenty-five percent (25%).

H.    In accounting to Lessors for royalties payable hereunder, Lessee shall be
      required, on a monthly basis, to account to Lessors separately for each
      well on the Land based upon the volume of production at each wellhead,
      with a statement reflecting the gross production of each well, the gross
      price per unit of production (gas being expressed in thousand cubic feet
      and oil being expressed in barrels of 42 gallons), the royalty interest in
      such production and the amount owed and paid to such royalty owner. In the
      event that there are any settlements or adjustments reflected in any
      month, the statement would detail all of the causes and specifics of such
      adjustments. No adjustments shall be made more than one (1) year after the
      date of actual production. Royalties not paid when due shall bear interest
      at the prime rate of interest at First Victoria National Bank in Victoria,
      Texas (or its successor bank) plus two percent (2%) (but not to exceed the
      maximum legal interest rate allowed by law) from the due date until paid.
      If any royalty payments are not received by Lessors within six (6) months
      following the sale of any production, this Lease will automatically
      terminate as to that Lessor. However, if there is a bona fide dispute or a
      good faith question, based upon an attorney's written opinion of royalty
      entitlement, Lessee may pay the portion of the Lessors' royalty that is in
      question to a trustee and invested in a governmentally insured interest
      bearing account, pending resolution of the net settlement issue, with
      interest to belong to the rightful royalty owner. If the parties do not or
      cannot agree upon a trustee, Lessee may tender the royalty into a Court of
      competent jurisdiction by a Bill of Interpleader, to be so held and
      invested by the Clerk under the direction of the Court. If the royalty is
      so paid to such trustee or to the Court within the time provided, then the
      Lessor shall not have the right to terminate the Lease for the non-timely
      payment of royalty. It is agreed that as to this Lease the Lessee shall be
      under the duty to exercise its utmost good faith in the sale of Lessors'
      royalty production and accounting to Lessors for Lessors' royalty, oil and
      gas, or ,liquefiable hydrocarbons, sulphur and other products extracted,
      separated or saved from the oil and gas residue gas from the leased
      premises. Lessors shall have the right at all reasonable time, personally
      or by representative, to inspect the books, accounts, contracts, records
      and data of Lessee pertaining to the marketing of the oil and/or gas from
      the Land. Lessors may at any time and from time to time, at Lessors'
      option and expense, examine any oil or gas meters placed upon any well
      upon the Land, install or construct a metering system or device at any
      well on the Land and employ a gauger to act with any gauger employed by
      Lessee in order to measure and to verify and confirm the amount of
      production from any well.

                                       IV.

      There exists on the Land a well formerly used as a salt water disposal
well known as the Marie Welder Ford No.2 SWD. Lessors grant to Lessees during
the existence of this Lease the right to the use of said well for the disposal
of salt water generated in the production of oil or gas from the Land but not
otherwise. Lessors make no representation that such well is equipped as a salt

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water disposal well or is capable of being used as such or that there is any
receiving strata capable of accepting salt water disposal. Lessee, if it shall
elect to attempt to utilize said well bore, shall, at its sole cost and expense,
rework said well bore to accomplish the same and shall comply with any statute,
rule, regulation or requirement of any governmental authority having
jurisdiction in the premises and shall indemnify and hold harmless Lessors
against any claim, damage or expense arising directly or indirectly out of the
use, operation or possession of said well by Lessee. Lessors do not warrant to
Lessee that any equipment in, on or associated with said well or said well bore
has been abandoned to Lessors. Lessors do not represent to Lessee that rights to
grant to Lessee the use of said well, well bore, or associated equipment are in
Lessors. In requesting the grant of this authority to utilize this well, as in
this paragraph provided, Lessee acknowledges that it is relying solely upon
Lessee's investigation and judgment respecting same, and not on any statement,
act, promise or other matter to them made, or claimed to be made, by Lessors or
any agent, representative, or associate thereof.

                                       V.

      A.    Notwithstanding any other provisions contained herein to the
            contrary, upon the expiration of the Primary Term (or Extended
            Primary Terms) as hereinabove provided, the acreage to be held under
            this Lease with respect to wells drilled by Lessee hereunder shall
            be as follows:

            i.    For gas wells: the acreage to be held by each gas well
                  producing gas in paying quantities from a horizon, the top of
                  which is above 9,000 feet subsurface, shall be one hundred
                  sixty (160) acres in as nearly the form of a square or
                  rectangle as may be practicable (but if a rectangle, its
                  longest sides shall be no more than twice the length of its
                  shortest sides), with the well located at a legal spacing
                  distance within its boundaries. The acreage to be held by a
                  gas well producing in paying quantities from a horizon, the
                  top of which is 9,000 feet subsurface or below, shall be three
                  hundred twenty (320) acres.

            ii.   For oil wells: the acreage to be held by each oil well
                  producing oil in paying quantities from a horizon, the top of
                  which is above 9,000 feet subsurface, shall be forty (40)
                  acres in as nearly the form of a square or rectangle as may be
                  practicable (but if a rectangle, its longest sides shall be no
                  more than twice the length of its shortest sides), with the
                  well located at a legal spacing distance within its
                  boundaries. The acreage to be held by an oil well producing in
                  paying quantities from a horizon, the top of which is 9,000
                  feet subsurface or below, shall be eighty (80) acres.

            iii.  In every case, the acreage to be held by a producing well
                  shall only include all depths from the surface of the earth
                  down to and including the stratigraphic equivalent of one
                  hundred (100) feet below the deepest point that production
                  casing is set in the producing well for such unit. Such
                  production casing shall always be prudently set by Lessee in

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                  each applicable well drilled hereunder and shall never extend
                  deeper than what is needed by Lessee to prudently complete the
                  deepest zone in such well (hereinafter "deepest zone"). Such
                  deepest zone shall be presumed to mean the lowest zone in each
                  well in which Lessee, in its sole discretion and good faith,
                  is desirous at the time of setting production casing, in
                  attempting an oil and/or gas completion during the term of
                  this Lease.

      B.    Within sixty (60) days following the expiration of the Primary Term
            (or Extended Primary Terms) as herein provided, Lessee shall execute
            and deliver to Lessors an instrument of designation in recordable
            form, acknowledging such termination and identifying the acreage and
            depths held by each producing well. In such instrument of
            designation, the acreage held shall be identified by a good and
            sufficient legal description, and all acreages and depths not held
            shall be released. Such release shall, upon the date of such
            delivery, terminate this Lease as to the lands and formations
            therein released, but Lessee shall not in any way be relieved or
            released thereby of any past-due charges or of performing any
            obligations which may have accrued under this Lease prior to the
            time of delivery of such release. Notwithstanding a partial
            termination of this Lease under the above provisions, it is agreed
            that Lessee shall have and retain such easements of ingress and
            egress over the land covered hereby as shall be necessary to enable
            Lessee to develop or operate the portion or portions of this Lease
            then in effect for the production of oil and gas therefrom, and it
            is further agreed that it shall not be necessary for Lessee to
            remove or relocate any pipelines, tank batteries or other surface
            equipment or installations from any portions of this Lease which
            have terminated for so long as same continue to be used for the
            development and operation of such portions of this Lease as are
            continued in force and effect.

      C.    The acreage around and the depths held by each producing well shall
            be known as a "unit," and it shall be considered that each unit is
            subject to a separate and independent lease after the execution by
            Lessee of such instrument of designation. Thereafter, production
            from or drilling or reworking operations on one designated unit
            shall not serve to keep this Lease in effect as to any other
            designated unit. Subject to the provisions of Section II herein, if
            production in paying quantities shall cease entirely as to any
            designated unit, and if Lessee commences or causes to be commenced,
            within ninety (90) days after such cessation, and thereafter
            diligently prosecutes or causes to be prosecuted operations for
            reworking or additional drilling on such unit in an effort to obtain
            or restore production in paying quantities, then this Lease as to
            such unit shall continue only so long as production in paying
            quantities continues, or so long as such drilling or reworking
            operations are carried out without cessation of more than ninety
            (90) consecutive days.

      D.    In forming each unit, Lessee shall use its best efforts to make each
            of the units contiguous to each other so that there are no strips or
            gores lying between any unit designated around each producing well.

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                                       VI.

      Lessee shall have the free use of dry gas from the Land for all operations
hereunder and the royalty paid to Lessors on dry gas shall be in the net
quantity after deducting any so used for Lessee's operations but all monetary
costs of Lessee's operations hereunder shall be borne solely by Lessee, Lessee
shall have the right at any time during or within ninety (90) days after the
expiration of this Lease to remove all property and fixtures placed by Lessee on
the Land, including the right to draw and remove all oil and gas well casing. No
well shall be drilled within five hundred (500) feet of any residence, building,
well, tank or other improvement (except fences) now located or hereafter to be
located on the Land without Lessors' written consent to such location. Lessors
shall have the privilege of making connections and using surplus gas from any
gas well on the Land for stoves and inside lights in any principal dwelling
located on the Land, and shall be done at Lessors' sole cost, risk and expense.

                                      VII.

A.    Neither Lessee nor its employees nor anyone else on Lessee's behalf or in
      connection with operations under this Lease shall hunt or conduct any
      activity on the Land outside of the necessary work of developing and
      operating the Land. Lessee agrees that when Lessors instruct Lessee in
      writing to enclose in fence any of their well sites, tank batteries, pits
      and other structures on the Land, Lessee will construct such fence of not
      less than four (4) strands of barbed wire with fence posts not more than
      sixteen (16) feet apart. Lessee will, when required by Lessors, keep all
      gates locked on the Land, or on adjoining lands of Lessors over which
      Lessee may travel to reach the Land. Any employee or agent violating any
      provision of this Lease, whenever Lessors obtain knowledge from any source
      that any provision of this Lease has been violated by an employee or
      agent, shall be prohibited from any future access to the Land. Lessee
      shall dispose of salt water in such a way as to prevent damage to the
      Land.

B.    Lessee agrees to pay the surface owners reasonable compensation for all
      use of or damage to the surface estate (or any incident of the surface
      estate) owned by them, which use is made or which damages are incurred in
      the exercise of the rights granted to the Lessee by this Lease. Lessee's
      obligation to compensate surface owners for such use or damage shall exist
      whether or not such use or damage is due to the negligence of the Lessee,
      its agents, employees, invitees, or independent contractors. Lessee agrees
      to pay for all damages to crops, cattle livestock, grass, trees and any
      other personal or real property situated on the Land resulting from
      Lessee's operations thereon. Payment of any compensation to the surface
      owners shall not relieve Lessee of its obligation to restore the surface
      to a state as nearly as possible to its original condition.
      Notwithstanding, for the term of this Lease, damages pursuant to this
      Paragraph B shall be not less than $3,500.00 for each well drilled.

C.    Within a reasonable time after cessation of any drilling or reworking
      operations, not to exceed three (3) months, Lessee shall level all dumps,
      fill all pits, remove all debris and all Lessee's equipment and materials,
      restore the Land so that it will support the crops and natural range
      vegetation that was originally thereon, and generally restore the surface
      of the Land to substantially the same condition as it was before the
      commencement of such operations. Lessee shall remove all slush materials

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      or mud from any pits located on the Land immediately after the drill pipe
      has been finally removed from the hole (if a dry hole), or immediately
      after shut-in operations are completed (if a completion attempt is made),
      and Lessee shall level all pits to surface owner's satisfaction within
      thirty (30) days after the completion of all drilling operations on any
      location. If requested by Lessors, Lessee agrees to firewall all Christmas
      trees, pumping units, tanks, separators, and other machinery constructed
      on the Land and to maintain such firewalls in good repair at all times for
      the continuation of this Lease. Lessee shall keep all tanks, fences and
      other equipment at each well location painted and shall keep the well site
      and all roads leading thereto free from all weeds and debris.

D.    Lessee agrees not to allow any waste oil or salt water to flow over the
      surface of the Land or to allow same to drain down any draws, creeks, or
      ravines on the Land. Lessee agrees to construct salt water and waste
      disposal facilities as shall be required by the rules and regulations of
      the Railroad Commission of Texas, or other governmental authority having
      jurisdiction in the premises, and to dispose of all waste oil, salt water
      and other contaminated substances in compliance with the rules and
      regulations.

E.    Lessee agrees that, prior to commencement of any operations on the Land,
      Lessee will give the surface owner notice of the commencement of its
      operations, the approximate date of such commencement and the location of
      same; such notice to be given within a reasonable time prior to the
      commencement of such operations.

F.    Lessee will bury all pipelines located off of the actual location pad so
      that the top shall remain more than three (3) feet below the surface of
      the Land. If requested by the surface owner, Lessee shall keep the top
      soil separated during its excavation. Lessee shall periodically check all
      pipelines to make sure the surface has not subsided and created any
      rutting or drainage problems. Except for the normal wellhead and surface
      equipment at the well site, including separator, dehydrator, Christmas
      tree, tanks, gaugers and compressors, there shall be no above-ground
      device or property on the Land, including, but not limited to, cathodic
      protection devices, houses, camps, or plants.

                                      VIII.

      Assignments of less than the entirety of this Lease shall be only with
Lessors' consent, which consent shall not be unreasonably withheld. The
provisions hereof shall extend to the heirs, personal representatives,
successors and assigns of the parties hereto, but no sale or assignment by
Lessors shall operate to enlarge the obligations or diminish the rights and
privileges of Lessee. No assignment by the Lessee, or any assignee of Lessee,
shall be valid or have any force until Lessors shall have been furnished with a
copy certified by the County Clerk of Victoria County, Texas, or with a
photostatic copy of such assignment, as recorded. Each and every assignee of
this Lease shall take subject to the terms and provisions of this instrument,
and each and every provision, condition and requirement hereof shall be binding

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<PAGE>

upon each and every assignee, and without any diminution or release of Lessee of
the obligations assumed by it hereunder. No sale or assignment by the Lessors
shall be binding on Lessee for any purpose until Lessee shall have been
furnished with a copy certified by the county clerk of Victoria County, Texas,
or with a photostatic copy of such assignment. If any assignee of Lessee be a
corporation or a trustee or any entity other than an individual person, then
when requested by Lessors, each assignee shall deliver to Lessors an affidavit
by that assignee (or an officer of assignee) setting out the names of the
holders of the beneficial interest in the trust or business entity, or the names
(so far as is reasonably practicable) of the stockholders of the corporation all
to the end that Lessors shall at all times be fully informed as to the identity
of the person or persons actually owning or benefiting from (directly or
indirectly) the rights of Lessee under this Lease. To the same end, when
requested by Lessors, any individual at any time holding the rights of Lessee
under this Lease shall make and deliver to Lessors an affidavit disclosing
whether he holds the Lease for any undisclosed parties, and if so, for whom.

                                       IX.

      It is understood and agreed that should Lessee be prevented, through no
fault of Lessee, from complying with any express or implied covenant of this
Lease, from conducting drilling or reworking operations thereon, or conducting
continuous drilling operations or from producing oil or gas therefrom by reason
of force majeure or as a result of any Federal or state law, or an order, ruling
or regulation of governmental authority, then while so prevented, Lessee's
obligation to comply with such covenant shall be suspended and Lessee shall not
be liable in damages for failure to comply therewith, and this Lease shall be
extended while and so long as Lessee is prevented by any such cause from
conducting drilling or reworking operations or, continuous drilling operations,
or from producing oil or gas from the land, and the time while Lessee is so
prevented shall not be counted against Lessee. Notwithstanding the foregoing
this Lease may not be extended by operation of force majeure for continuous
periods of time in excess of two (2) years. However, it is controllingly
provided that this clause shall not excuse the timely and proper payments
provided for in this Lease. Lessee shall always in good faith notify Lessors, in
writing, of any lengthy delays or interruptions in drilling, producing,
marketing or operations performed hereunder pursuant to this Section IX.

                                       X.

A.    Lessee, while actually operating on the Lease, agrees to keep the fences,
      as they now exist at the gates, and all the gates on the Land, in good
      repair, and agrees to keep up and replace, when necessary, any gates
      utilized by it. Lessee agrees that before constructing any road for use in
      its operations on the Land, it will submit a diagram or road pattern to
      the Lessors, and will obtain Lessors' consent in writing prior to the
      construction of each and every road desired to be built by it for use in
      its operations on the Land. Upon completing a well as a producer of oil
      and/or gas on the Land, Lessee agrees that all roads built on the Land to
      such productive well shall be constructed and maintained as graded,
      all-weather roads. When any roads constructed by Lessee are no longer used
      by Lessee, if Lessee has constructed any character of topping, such as
      caliche or otherwise, on such roads, surface owner shall have the right to
      require Lessee to remove such topping from the roads. Upon such
      abandonment of any roads, Lessee shall restore the surface of the land to
      substantially its former condition. Lessee shall pay the surface owner
      compensation for damage and loss, if any, of or interference with the use

                                       10
<PAGE>

      of the surface lands caused by such roads. Lessee understands that its
      right of ingress and egress to the Land shall be limited to such place or
      places of entry as Lessors may designate from time to time but Lessors'
      designation of such ingress and egress shall not be unreasonable. Lessee
      shall exercise due care to prevent injury being done to Lessors from any
      undue use or occupation of Lessee on the Land, and shall repair any and
      all damage done to Lessors' fences or their property. Lessee shall install
      adequate bridges or culverts wherever any road construction by it crosses
      a natural stream or drainage, and agrees to maintain in good condition all
      such bridges and culverts installed by it, as well as all bridges and
      culverts used by it and at any time installed upon said Land. Such roads,
      as well as any pipelines laid by Lessee, shall be constructed so as not to
      interfere with the natural flow of surface waters or with any drainage.
      Lessee shall not permit any animals of any kind to be brought upon the
      Land without the consent of Lessors, and shall not permit any trespass to
      be done on the Land. The rights of ingress and egress granted herein are
      not given to any other person than Lessee and its agents, servants,
      employees and purchasers of production, and Lessee will, as far as may be
      reasonable, endeavor to keep all trespassers off the Land. Lessors, of
      course, may use the Land for any purposes not inconsistent with the
      exercise of the rights and privileges granted Lessee herein. It is
      understood that Lessee has no right to locate on the Land any buildings,
      except such as are necessary to enclose meters at the wells, without
      Lessors' consent in writing.

B.    Lessee will not cut or go over any fence or fences of Lessors at any time
      or in connection with any operation of the land without first obtaining
      Lessors' express consent thereto in writing. If Lessors consent to the
      cutting of any fence, the cut must be made in a place designated by
      Lessor, and prior to cutting any fence of Lessors, Lessee will brace the
      existing fence adequately on both sides of the proposed cut so that there
      will be no slackening of the wires. If the cut in such fence is an outside
      fence of Lessors, promptly after making such cut, Lessee shall install and
      maintain an adequate metal gate in such opening, which Lessee shall keep
      locked at all times when not in use, and if Lessors shall desire, Lessee
      shall also install and maintain a substantial iron cattle guard capable of
      turning cattle, which gate and cattle guard shall become the property of
      Lessor. If the cut in the fence is an inside fence of Lessors, Lessee
      shall install a substantial metal gate in such opening, which gate shall
      become the property of Lessors. Lessee shall promptly close all gates
      which Lessee, its agents, servants, and/or employees may use in Lessee's
      operations on the Land, to prevent the escape of cattle or stock of
      Lessors through any open gates. Lessee further agrees to comply with all
      reasonable rules and regulations imposed by Lessors with regard to
      opening, closing and locking of all such gates.

                                       XI.

      Lessee shall not use water from any of Lessors' tanks or wells, but may
use water from its own wells dri1led on the Land as is reasonably necessary for
operations in drilling and producing oil and gas. Any excessive or unreasonab1e
use of water shall constitute a breach of covenant, and in this regard, it is
specifically agreed that unless agreed to in writing by Lessors, the use of
fresh water produced from the Land for purposes of conducting secondary recovery
operations shall constitute excessive and unreasonable use of water. Should
Lessee or its assigns drill a well or wells for water upon the Land it is
understood that said well or wells and all casing in connection therewith shall,
at Lessors' option, become the property of Lessors, free of all charges, when
Lessee permanently ceases to use said water well. However, Lessee shall have the
exclusive right to use water from any such well during the term of this Lease,
subject to the reasonable use of same as is above provided. If Lessee drills a
well or wells for water on the Land, such well or wells shall be completed with
casing of minimum size of four (4") diameter to the full depth of casing set.

                                       11
<PAGE>

                                      XII.

      Lessors specially warrant (by, through and under Lessors, but no further)
to Lessee that they have good title to the Land; provided, however, that any
recovery under this covenant of warranty shall be limited only to the amount of
monies or royalties attributable to the failed portion of title paid by Lessee
to Lessors under Section III of this Lease. Without impairment of Lessee's
rights under the above special warranty in event of failure of title, it is
agreed that if Lessors own an interest in said Land less than the entire fee
simple estate, then the royalties, and any other benefits to be paid Lessors
shall be reduced to the proportion which Lessors' interest bears to the whole
thereof. Any non-participating or other outstanding royalty interests shall be
deducted from the royalties herein provided for, and shall not be paid in
addition thereto. In connection with the warranty above set forth, it is
understood that this Lease is subject to all easements and rights-of-way
previously granted upon the Land. In connection with Lessors' warranty herein
set forth, it is agreed that if there be any conflict between the field notes
used as description of the Land and any lease previously granted by any party
outstanding that this warranty does not apply to such conflict, and that the
Lessee accepts these field notes at its risk.

                                      XIII.

      All operations or tests upon the Land conducted by the Lessee, its
contractors or employees, shall at all times be open to the inspection and
examination of Lessors or their duly accredited representatives. Lessee shall
furnish to Lessors a copy of any application or report filed with any department
or agency of the State of Texas, or any other governmental authority, with
respect to any operations on the Land, and will furnish Lessors, on request,
copies of tank or line gauge and oil or gas run tickets, the same to be
furnished to the Lessors as often as may be reasonably requested.

                                      XIV.

      Should any well be drilled and completed as a producer of oil or gas in
paying quantities on acreage adjoining the Land, and if such well be located
within 1,000 feet of any exterior boundary line of the Land ("Adjoining Lease
Well"), even though such Adjoining Lease Well may be located on acreage
belonging to Lessors not covered by this Lease, as to which an offset well has
not been already drilled or is not being drilled on the Land, then within ninety
(90) days after receipt by Lessee of written notice from Lessors that actual
production from such Adjoining Lease Well has been obtained and is being
produced, Lessee shall either:

      a)    commence the drilling of a well to offset the Adjoining Lease Well;

      b)    execute and deliver to Lessors a recordable release surrendering the
            producing zone(s) in which such Adjoining Lease Well is completed
            limited to the acreage directly offsetting such Adjoining Lease Well
            ("Surrendered Area"). In the event of such surrender of producing
            zone(s) by Lessee herein, the size and shape of the Surrendered Area

                                       12
<PAGE>

            as to such producing zone(s) shall be identical to the acreage
            designations provided in Section V herein. Such release shall
            surrender only the zone(s) in the Surrendered Area that are actually
            producing in such Adjoining Lease Well; or

      c)    obtain a written waiver from Lessors releasing Lessee from any
            obligations under this Section XIV as to such producing zone(s) in
            such Adjoining Lease Well.

      It is controllingly provided that an express covenant or condition of this
Lease shall not diminish, lessen or relieve any implied covenant, duty or
obligation of Lessee that otherwise arises under a lease or by operation of law.

                                       XV.

      During the drilling or reworking of any well hereunder, Lessee shall cause
daily drilling reports to be mailed to Lessors or Lessors' agent. Whenever there
is run upon any well drilled under this Lease, a Schlumberger or other
electrical survey, or any other test, and whenever a core analysis is taken of
any core from any such well, Lessee shall cause the well servicing company to
mail a copy to Lessors at the same time a copy is delivered to Lessee or Lessee
shall mail or deliver a copy of same to Lessors as soon as possible but not
later than seven (7) days after receiving a copy of any log, test or report of
such survey test or core analysis, to the end that Lessors may be promptly
apprised of the results of all electric survey tests and core analysis made on
all wells drilled hereunder. All such reports and communication by Lessee to
Lessors shall always be kept confidential unless a written release of such
information is given by Lessee or such information has previously been released
to non-leasehold estate owners. In the event Lessee does not cause to be
delivered to Lessors daily drilling reports or cause a copy of the log, test or
core analysis to be mailed or delivered within such time, and after seventy-two
(72) hours following written notice by Lessors of such breach, the information
has not been provided to Lessors as herein provided, Lessee shall pay to Lessors
the sum of Two Thousand Five Hundred Dollars ($2,500.00) per day for each day of
delay thereafter until Lessee performs the covenants in this Section. The sums
herein specified to be paid by Lessee are agreed to be liquidated damages
because of the uncertainty of ascertaining the actual damages for each day
Lessee is in breach of the covenants of this Section.

                                      XVI.

      The breach by Lessee of any obligation hereunder shall not work a
forfeiture or termination of this Lease nor be cause for cancellation or
rescission hereof in whole or in part, save as expressly provided in Sections II
and IX hereof.

                                      XVII.

      Lessee may at any time surrender and relinquish all, or any part or
portions, of the Land, severed horizontally or vertically, or both, by executing
and delivering to Lessors a legally sufficient instrument of release in
recordable form. Such release shall, upon the date of such delivery, terminate
this Lease as to the lands and formations therein released, but Lessee shall not
in any way be relieved or released thereby of any past due charges or of

                                       13
<PAGE>

performing any obligations which may have accrued under this Lease prior to the
time of delivery of such release. In the event that Lessee should elect to
release, surrender or abandon any portion of the Land containing a well or wells
equipped for production, Lessee shall give written notice of such election to
Lessors not less than thirty (30) days prior to such intended date of release,
surrender or abandonment. Lessors shall have the option to take over any such
well or wells by giving Lessee written notice of their election to do so at any
time prior to such intended date. Within ten (10) days after receipt by Lessee
of such written notice of election by Lessors to take over such well or wells,
Lessee shall execute and deliver to Lessors a legally sufficient instrument of
release in recordable form as hereinabove provided, in return for which Lessors
shall pay to Lessee the reasonable salvage value of the property and equipment
on such well or wells. Additionally, Lessors agree to be solely liable for the
costs of plugging any well or wells taken over from Lessee pursuant to this
Section.

                                     XVIII.

      It is expressly understood and agreed that upon the termination of this
Lease, as to all or any part of the Land, for any cause whatsoever (that is,
whether by automatic termination, forfeiture, surrender or other causes) Lessors
shall have full right to make and grant an additional lease or leases with and
to other parties for the purposes of exploring, drilling and producing oil and
gas, and for any other purposes, from such portions of the Land covered by this
Lease as are not then retained and held by Lessee under this Lease, just as
fully as if this Lease had never been made.

                                      XIX.

      Lessee agrees to indemnify and hold harmless the parties herein designated
as "Lessors", their heirs, representatives, successors and assignees, from and
against any and all claims, demands, causes of action and damages arising out of
and incidental to, or resulting from, the operation of or for Lessee hereunder,
and from and against all costs and expenses incurred by the parties herein
designated as Lessors, their heirs, representatives, successors and assigns, by
reason of any such claim, demands, and causes of action and damages. Each
assignee of Lessee of this Lease or any interest therein, agrees to indemnify
and hold harmless the parties herein designated as Lessor in the same manner as
is provided above for Lessee.

                                       XX.

      If Lessee shall have the title to the Land or any part thereof examined by
an attorney, Lessee agrees to furnish Lessors with a copy of such attorney's
title opinion upon receipt. If Lessee causes an Abstract of Title or supplements
thereto to be prepared, he shall notify Lessors of same, and shall make the same
available at all reasonable times, and shall furnish the same to Lessors free of
charge upon termination of the Lease, or six (6) months after the first well on
the Land begins production, whichever date is earlier. Lessee shall at all times
have access to such Abstract of Title for so long as this Lease is in effect.

                                       14
<PAGE>

                                      XXI.

      Lessee agrees and obligates itself to properly plug any well drilled on
the Land in accordance with the regulations of the Railroad Commission of Texas,
or any other governmental agency having jurisdiction; and, if the Lease is
assigned, the Assignee, by acceptance of said Assignment, agrees and obligates
itself to the Lessors to also assume full and complete obligation to properly
plug any well drilled on the part of the premises assigned to it, but no future
Assignments shall relieve the Lessee or Assignee of this obligation. It is the
intent of this provision that the Lessee and each and every Assignee shall be
obligated to the Lessors to plug every well drilled on the Land in which they at
anytime own an interest (in accordance with the rules of the Railroad Commission
of Texas), or to see that the well is properly plugged if such well is no longer
used in connection with the production of oil and/or gas. Lessors shall be
entitled to enforce this obligation as against the Lessee or any subsequent
Assignee. Each Lessee and each subsequent Assignee shall jointly and severally
indemnify and hold Lessors harmless from any and all plugging obligations, save
and except as provided in Section XVII for any well taken over by Lessors.

                                      XXII.

      Lessee represents and warrants to Lessors that Lessee and its agents,
employees, representatives or assigns will not commit any act or omission that
could in any way constitute, cause or result in a violation of any applicable
law, statute, ordinance, rule, regulation, order or determination of any
governmental authority in connection with its activities and operation on the
Land, including without limitation, all applicable laws pertaining to health or
the environment (hereinafter sometimes collectively called the "Applicable
Environmental Laws"), including without limitation, the Comprehensive
Environmental Response Compensation and Liability Act of 1980 ("CERCLA"), the
Resource Conservation and Recovery Act of 1976 ("RCRA"), the Texas Water Code
and the Texas Soil and Waste Disposal Act. Lessee shall take all steps necessary
to prevent the contamination of the Land by hazardous substances or solid wastes
and hazardous substances and solid wastes shall not be disposed of or otherwise
released on the Land. The terms "hazardous substance" and "release" shall have
the meanings specified in CERCLA, and the terms "solid wastes" and "disposal"
(or "disposed") shall have the meaning specified in RCRA; provided, to the
extent that the laws of the State of Texas establish a meaning for "hazardous
substance", "release", "solid wastes" or "disposal" which is broader than that
specified in either CERCLA or RCRA, such broader meaning shall apply. If Lessee
becomes aware that at any time during the term of this Lease or at any time
subsequent thereto that the Land or Lessee is in violation of any Applicable
Environmental Laws, Lessee shall immediately disclose such fact in writing to
Lessors.

      Lessee agrees to indemnify and hold harmless Lessors and Lessors' agents,
representatives, successors, assigns and devisees, from and against any and all
actions, liabilities, claims, damages (including consequential damages),
penalties, forfeitures, administrative and judicial proceedings, and the cost
and expenses incident thereto (including cost of defense settlement and
reasonable expert witnesses and attorneys' fees), fines, charges, orders,
remedial actions, requirement and enforcement actions of any kind, whether
foreseeable or unforeseeable, which Lessors or their agents, employees,
representatives, successors, assigns and devisees may hereafter, incur or be a

                                       15
<PAGE>

party to, be responsible for or payout as a result of death or bodily injury to
any person, destruction or damage to any property, contamination of or adverse
effects on the environment, whether threat thereof, or any violation of
Applicable Environmental Laws, arising directly or indirectly, in whole or in
part, out of: (1) failure of any of Lessee's representations and warranties
herein given to be true and correct, (2) Lessee's breach of any of its covenants
herein, or (3) Lessee's ownership, operation, occupancy, construction, use and
maintenance of the Land. The forgoing indemnity shall further apply to any
residual contamination on or under the Land, or affecting any natural resources
therein, and to any contamination of the land or natural resources arising in
connection with the generation, use, handling, storage, transport or disposal of
any hazardous substances, regardless of whether any such activities were
undertaken in accordance with the Applicable Environmental Laws. The
indemnities, representations and warranties given above shall survive for a
period of time from the effective date hereof to twenty-one (21) years
subsequent to the date of the termination of the Lease as to all of the Land
covered hereby.

                                     XXIII.

      This Lease shall be binding on the heirs, successors, administrators and
on the assigns (as herein limited) of the parties hereto. Words of any gender in
this Lease shall be deemed to include either gender, and words in the singular
number shall be deemed to include the plural, whenever required by this context.

      All notices and copies of surveys, tests and other materials to be
delivered to Lessors shall be delivered in person or posted by United States
mail to: Richard Thomas, 1014 Santa Fe. Corpus Christi, Texas 78404. Royalties
to Lessors should be paid to: Lessors at addresses listed on Exhibit "B"
attached hereto and made a part hereof for all purposes until changed by Lessors
after providing notice of such change to Lessee. All notices and other
information to be delivered to Lessee shall until be delivered or posted by
United States mail to Lessee at Lessee's address as herein provided.

      However, notwithstanding anything contained in this Lease to the contrary,
the applicable drillsite tenant or surface owner given by Lessors to Lessee
shall act with full authority as Lessors' agent insofar as necessary to give
written approval on Lessors' behalf for any operations affecting the surface of
the Land which require Lessors' written approval. In this capacity as agent,
such tenant or surface owner's authority will not be limited to, but include
authority to approve location exceptions and road and building locations
provided for in this Lease.

                                      XXIV.

      For additional consideration as set forth hereinbelow, Lessors hereby
grant to Lessee the option, extending for a period of one (1) year from the
effective date hereof, to lease ("Option Lease") from Lessors a minimum of 1,500
acres of land from those lands ("Additional Land") as described on Exhibit "C"
attached hereto and made a part hereof for all purposes. The Option Lease shall
provide for the same terms and conditions as this Lease. The consideration

                                       16
<PAGE>

hereby paid by Lessee to Lessors for the granting of this option is based upon
$25.00 per net mineral acre included within the acreage described on Exhibit
"C", and Lessors hereby acknowledge the receipt and the sufficiency thereof. At
such time as Lessee exercises the option within the proscribed one year period,
Lessee shall pay to Lessors upon execution of the Option Lease a cash bonus
consideration equal to the sum of $100.00 per net mineral acre included in said
Option Lease. Lessors and Lessee hereby further agree that the provisions of
this Section shall survive the prior termination, if any, whether in whole or in
part, of this Lease.

                                      XXV.

      Lessors and Lessee hereby acknowledge that the metes and bounds
description of the properties identified on Exhibits "A" and "C" may be in error
for a number of reasons, and that Lessee may decide to have said properties
properly surveyed. In the event Lessee should have said properties surveyed,
Lessors and Lessee hereby agree to amend this Lease to include the corrected
property descriptions and to substitute newly revised Exhibits "A" and "C" for
the original ones attached hereto.

                                      XXVI.

      IN WITNESS WHEREOF this instrument is executed on the _______ day of
_________, 2003, but effective as of the date first above written.

LESSORS:                                        /s/ Marie Welder Ford
                                                --------------------------------
                                                MARIE WELDER FORD

                                                /s/ Diana Welder Hamilton
                                                --------------------------------
                                                DIANA WELDER HAMILTON

                                                /s/ David Edwards
                                                --------------------------------
                                                DAVID EDWARDS, INDIVIDUALLY AND
                                                AS CO- INDEPENDENT EXECUTOR
                                                UNDER THE WILL OF PATTIE WELDER
                                                EDWARDS, DECEASED

                                                /s/ Patricia E. Carson
                                                --------------------------------
                                                PATRICIA EDWARDS CARSON,
                                                INDIVIDUALLY AND AS
                                                CO-INDEPENDENT EXECUTRIX UNDER
                                                THE WILL OF PATTIE WELDER
                                                EDWARDS, DECEASED

                                       17
<PAGE>

LESSEE:                                         VAQUERO PARTNERS, LLC

                                                By: /s/ Rick Trapp
                                                    ----------------------------
                                                    RICK TRAPP,
                                                    CHIEF EXECUTIVE OFFICER &
                                                    PRESIDENT

STATE OF TEXAS    )

COUNTY OF NUECES  )

This instrument was acknowledged before me on this 19th day of August 2003, by
MARIE WELDER FORD.

                                                /s/ Donna L. Elledge
                                                --------------------------------
                                                Notary Public, State of Texas

STATE OF TEXAS    )

COUNTY OF NUECES  )

      This instrument was acknowledged before me on this 19th day of August
2003, by DIANA WELDER HAMILTON.

                                                /s/ Donna L. Elledge
                                                --------------------------------
                                                Notary Public, State of Texas

STATE OF TEXAS           )

COUNTY OF SAN PATRICIO   )

      This instrument was acknowledged before me on this 21st day of August
2003, by DAVID EDWARDS, INDIVIDUALLY AND AS CO-INDEPENDENT EXECUTOR UNDER THE
WILL OF PATTIE WELDER EDWARDS, DECEASED.

                                                /s/ Donna L. Elledge
                                                --------------------------------
                                                Notary Public, State of Texas

                                       18
<PAGE>

STATE OF TEXAS           )

COUNTY OF ________       )

      This instrument was acknowledged before me on this 20th day of August
2003, by PATRICIA EDWARDS CARSON, CO-INDEPENDENT EXECUTRIX UNDER THE WILL OF
PATTIE WELDER EDWARDS, DECEASED.

                                                /s/ Maria Alvarado
                                                --------------------------------
                                                Notary Public, State of Texas

STATE OF TEXAS           )

COUNTY OF _________      )

      This instrument was acknowledged before me on this 21st day of August,
2003, by Rick Trapp, Chief Executive Officer and President of VAQUERO PARTNERS,
LLC.

                                                /s/ Donna L. Elledge
                                                --------------------------------
                                                Notary Public, State of Texas

                                       19
<PAGE>

                                   EXHIBIT "A"

Attached to and made a part of that certain Oil and Gas Lease dated _______,
2003 by and between ______________________ as Lessor and ____________ as Lessee.

TRACT 1: A tract or parcel of land containing 656.73 acres, more or less, being
all of the S.A. & M.G.R.R. Co. Survey, Abstract 329, Victoria County, Texas.

TRACT 2: A tract or parcel of land containing 242.147 acres, more or less, being
located in the S.A. & M.G.R.R. Co. Survey, Abstract 326, Victoria County, Texas
and being more particularly described as follows: Beginning at the most southern
southeast corner of said abstract and proceed northwesterly along the northeast
line of the S.A. & M.G.R.R. Co. Survey, Abstract 326 and the southwest line of
the S.A. & M.G.R.R. Co. Survey, Abstract 327 3,452.00 feet, more or less; thence
proceed westerly in a line parallel to the south boundary line of said Abstract
326 2,650.00 feet, more or less to the west boundary line of said Abstract 326;
thence proceed southerly 3,050.00 feet, more or less, to a corner and the south
boundary line of said Abstract 326; thence proceed easterly 4,266.66 feet, more
or less, to the point of beginning.

TRACT 3: A tract or parcel of land containing 234.56 acres, more or less, being
located in the S.A. & M.G.R.R. Co. Survey, Abstract 328, Victoria County, Texas
and being more particularly described as follows: Beginning at the most easterly
southeast corner of said Abstract 328 and proceed westerly along the southern
boundary line of said Abstract 3,350.00 feet, more or less, to a corner; thence
proceed northerly in a line parallel to the eastern boundary line of said
abstract 3,050.00 feet, more or less; thence proceed easterly in a line parallel
to the southern boundary line of said Abstract 328 3,426.11 feet, more or less,
to the eastern boundary line of said Abstract 328; thence proceed southeasterly
along the northeast line of the S.A. & M.G.R.R. Co. Survey, Abstract 328 and the
southwest line of the S.A. & M.G.R.R. Co. Survey, Abstract 326 3,050.00 feet,
more or less, to the point of beginning.

TRACT 4: A tract or parcel of land containing 280.00 acres, more or less, being
located in the B. Fowler Survey, Abstract 387, Victoria County, Texas and being
more particularly described as follows: The northwestern 260 acres of the B.
Fowler Survey, Abstract 387. Said tract being located north of a line parallel
to the north boundary line of said Abstract 387 and situated a sufficient
distance south of said north line in order to encompass 280.00 acres, more or
less.

TRACTS 1 through 4 above being further depicted and outlined in red on the plat
attached hereto as Exhibit "A-1" and made a part hereof for all purposes.

      Anything in the foregoing Lease or this Exhibit "A" to the contrary
notwithstanding, it is specifically agreed by and between the parties hereto
that the Land covered by this Lease and this Option Agreement, and each of them,
and whether paid for in the bonus calculation or in the option payment, does not
presently include:

                                       20
<PAGE>

      A.    Any acreage currently held by production under any previously
            recorded oil, gas and mineral lease, or any oil, gas and mineral
            lease referred to by a recorded memorandum of existence of such
            lease;

      B.    Any acreage currently claimed by other lessees (or claimed lessees)
            to acreage covered by a production unit and particularly those
            acreages relating to the wells known as the Welder Heirs Nos. 1, 2
            and 3 currently claimed by Dominion Exploration & Production and the
            acreage claimed by Setex Oil & Gas as to Well Nos. 1, 2 & 4 and that
            acreage claimed by Venus Energy, including the well known as E-2;
            and

      C.    That certain eighty (80) acres described in Oil, Gas and Mineral
            Lease by and between Lessors and Epic Oil & Gas, Inc. dated the 14th
            day of April, 2003, recorded in Volume ___, Page ___, Deed Records
            of Victoria County, Texas.

      It is further agreed that, in the event Lessee should acquire rights under
the aforementioned excluded acreage ("excluded acreage rights") from any
claiming third parties, said excluded acreage rights shall thereupon be included
within this Lease and Option Agreement without the necessity of any further
consideration being paid by Lessee to Lessors hereunder.

                                       21
<PAGE>

                                   EXHlBIT "B"

                              ADDRESSES OF LESSORS
                   TO WHICH ROYALTY CHECKS SHOULD BE DELIVERED

                                Marie Welder Ford
                                   4225 Avalon
                           Corpus Christi, Texas 78412

                              Diana Welder Hamilton
                               Hamilton Interests
                                  1014 Santa Fe
                           Corpus Christi, Texas 78404

                David Edwards, Individually and as Co-Independent
           Executor Under the Will of Pattie Welder Edwards, Deceased
                                  P. 0. Box 459
                               Sinton, Texas 78387

           Patricia Edwards Carson, Individually and as Co-Independent
           Executrix Under the Will of Pattie Welder Edwards. Deceased
                                  P. O. Box 41
                           Mountain Home, Texas 78058

                                       22
<PAGE>

                                   EXHIBIT "C"

Attached to and made a part of that certain Option of Oil and Gas Lease dated
_______, 2003 by and between ______________________ as Lessor and ____________
as Lessee.

TRACT 1: A tract or parcel of land containing 1,123.04 acres, more or less, and
being located in the southeast corner of the L. Navarro Survey, Abstract 89,
Victoria County, Texas, and being designated as Tract 11.

TRACT 2: A tract or parcel of land containing 573.28 acres, more or less, being
all of the S.A. & M.G.R.R. Co. Survey, Abstract 319, Victoria County, Texas.

TRACT 3: A tract or parcel of land containing 594.68 acres, more or less, being
all of the S.A. & M.G.R.R. Co. Survey, Abstract 330, Victoria County, Texas

TRACT 4: A tract or parcel of land containing 157.87 acres, more or less, being
located in the S. A. & M.G. R.R. Co. Survey, Abstract 326, Victoria County,
Texas and being more particularly described as follows: Beginning at a point on
the northeast line of the S.A. & M. G.R.R. Co. Survey, Abstract 326 and the
southwest line of the S.A. & M.G.R.R. Co. Survey, Abstract 327 at a point which
is 3,452.00 feet, more or less, northwest of the most southerly southeast corner
of said abstract 326; thence proceed northwesterly with the east line of said
abstract 326 850.00 feet, more or less to a corner; thence continue
northwesterly to the Victoria County line; thence southwesterly along the
Victoria County line to the west line of said Abstract 326; thence southerly
along the west line of said abstract 326 to a point which is 3,050.00 feet, more
or less, north of the southern line of said abstract 326; thence easterly back
to the point of beginning.

TRACT 5: A tract or parcel of land containing 331.44 acres, more or less, being
all of the S.A. & M.G.R.R. Co. Survey, Abstract 328, Victoria County, Texas,

      LESS AND EXCEPT:

      A tract or parcel of land containing 234.56 acres, more or less, being
      located in the S.A. & M.G.R.R. Co. Survey, Abstract 328, Victoria County,
      Texas and being more particularly described as follows: Beginning at the
      most easterly southeast corner of said Abstract 328 and proceed westerly
      along the southern boundary line of said Abstract 3,350.00 feet, more or
      less, to a corner; thence proceed northerly in a line parallel to the
      eastern boundary line of said abstract 3,050.00 feet, more or less; thence
      proceed easterly in a line parallel to the southern boundary line of said
      Abstract 328 3,426.11 feet, more or less, to the eastern boundary line of
      said Abstract 328; thence proceed southeasterly along the northeast line
      of the S.A. & M.G.R.R. Co. Survey, Abstract 328 and the southwest line of
      the S.A. & M.G.R.R. Co. Survey, Abstract 326 3,050.00 feet, more or less,
      to the point of beginning.

                                       23
<PAGE>

TRACT 6: A tract or parcel of land containing 288.67 acres, more or less and
being the southeast 3,000.00 feet, more or less, of the S.A. & M.G.R.R. Co.
Survey, Abstract 327, Victoria County, Texas.

TRACT 7: A tract or parcel of land containing 180.39 acres, more or less, being
located in the R. Stayton. Survey, Abstract 436, Victoria County, Texas and
being more fully described as follows: Beginning at the southwest corner of the
R. Stayton Survey, Abstract 436 thence proceed westerly along the southwest
boundary line of said abstract 2,869 feet, more or less, to a corner; thence
proceed in a easterly direction perpendicular to the southwest line of said
abstract 3,881 feet, more or less, to a corner; thence proceed South 6 degrees
West 2,487.65 feet, more or less, to a corner; thence proceed South 36 degrees
East 1,012 feet, more or less, to a corner on the southern boundary line of said
abstract; thence proceed southwesterly along the southern boundary line of said
abstract to the point of beginning.

TRACT 8: A tract or parcel of land containing 614.84 acres, more or less, and
being all of the C. Weber Survey, Abstract 427, Victoria County, Texas.

TRACT 9: A tract or parcel of land containing 633.68 acres, more or less, and
being all of the S.A. & M.G.R.R. Co., Abstract 332, Victoria County, Texas.

TRACT 10: A tract or parcel of land containing 294.82 acres, more or less, being
all of the J. Kibbe, Abstract 424, Victoria County, Texas.

TRACT 11: A tract or parcel of land containing 734.35 acres, more or less, being
located in the B. Fowler Survey, Abstract 387, Victoria County, Texas and being
more particularly described as follows: A tract or parcel of land containing
1014.35 acres of land, more or less, being located in the B. Fowler Survey,
Abstract 387, Victoria County, Texas and being more particularly described as
follows: Beginning at the northwest corner of the B. Fowler Survey, Abstract 387
an proceed southerly along the western boundary line of said abstract 10,600
feet, more or less, to a corner; thence proceed North 55 degrees East 7,100
feet, more or less, to the northeast boundary line of said abstract; thence
proceed northwesterly along the eastern boundary line of said abstract to the
northeast corner thereof; thence proceed westerly along the northern boundary
line of said abstract to the point of beginning.

      LESS & EXCEPT:

      A tract or parcel of land containing 280.00 acres of land, more or less,
      being located in the B. Fowler Survey, Abstract 387, Victoria County,
      Texas and being more particularly described as follows: The northwestern
      260 acres of the B. Fowler Survey, Abstract 387. Said tract being located
      north of a line parallel to the north boundary line of said Abstract 387
      and situated a sufficient distance south of said north line in order to
      encompass 280.00 acres, more or less.

TRACT 12: A tract or parcel of land containing 558.30 acres, more or less, and
being all of the S.A. & M.G.R.R. Co., Abstract 320, Victoria County, Texas, LESS
& EXCEPT lots 54-63, inclusive.

                                       24
<PAGE>

TRACT 13: A tract or parcel of land containing 640.00 acres, more or less, and
being all of the S.A. & M.G.R.R. Co., Abstract 331, Victoria County, Texas.

TRACT 14: A tract or parcel of land containing 200.58 acres, more or less, being
located in the northwestern portion S.A. & M.G.R.R. Co. Survey, Abstract 318,
Victoria County, Texas and being designated as Tract 1.

TRACTS 1 through 14 above being further depicted and outlined in red on the plat
attached hereto as Exhibit "C-1" and made a part hereof for all purposes.

                                       25DUNE ENERGY, INC.
                    16 RIVER HOLLOW LANE HOUSTON, TEXAS 77027
                      TEL. 713-960-0995   FAX 832-201-8903

                                                        October 30, 2003

Mr. Mohammad Yamin Merchant
President
Penroc Oil Corporation
P.O. Box 2769
1515 Calle Sur
Hobbs, NM 88241

Dear Merch:

      I would like to memorialize in this single correspondence, the agreement
between Penroc Oil Corporation ("Penroc") and Dune Energy, Inc. ("Dune"),
whereby Dune has agreed to purchase from Penroc and Penroc has agreed to sell to
Dune, 34.98% of Penroc's 2% working interest (the "Interest") in the Los Mogotes
field, located in Zapata County, Texas, as more fully described on Exhibit A
hereto.

      The total purchase price for the Interest is $874,500 plus interest at the
rate of 9% per annum on such purchase price accrued from April 1, 2003. On June
3, 2003, Dune delivered to Penroc and Penroc acknowledges receiving, a deposit
on the Interest in the amount of $174,800. The remaining balance of the purchase
price ($699,700) shall be delivered to Penroc no later than June 30, 2004, and
shall bear interest at the rate of 9% per annum from June 3, 2003 through the
date of the closing. As additional consideration for the Interest, Dune has
agreed to issue 50,000 shares of its common stock to M.Y. Merchant and to grant
M.Y. Merchant "piggy-back" registration rights with respect to such shares in
the event Dune shall file a registration statement with the Securities and
Exchange Commission.

      The effective date is April 1, 2003 with respect to revenue and lease
operating expenses and February 1, 2003 with respect to capital expenditures.
Accordingly, Dune's proportionate share of revenues generated at Los Mogotes,
less its proportionate share of lease operating expenses and capital
expenditures will be allocated to Dune as of those dates and applied to adjust
the purchase price due at the closing. At the closing, Dune will assign to
Penroc a 1% gross overriding royalty interest reduced proportionately to Dune's
acquired working interest with an effective date of April 1, 2003, and Dune
shall pay 34.98% of Penroc's legal costs in acquiring its 2% interest.

      Dune agrees to provide to Penroc at no cost, all of its independently
commissioned engineering reports with respect to Los Mogotes. Dune has also
authorized Penroc to sign all AFE's on Dune's behalf prior to closing. Dune
acknowledges that Penroc is executing all AFE's at the request of Dune and Dune
agrees to in no way hold Penroc responsible for any welss drilled pursuant to
such authorization that may either be dry holes or wells that subsequently
perform below expectations. Penroc shall not be held responsible for interest on
the down payment or revenues received from POGO, but rather an adjustment in the
net proceeds due Penroc shall be made at closing, based on accounting records
from POGO.

<PAGE>
                                      -2-

      In the event that Dune has not delivered the full purchase price for the
Interest on or before June 30, 2004, then in such event (i) Dune shall
immediately forfeit all of its right, title and interest in and to the Interest
and (ii) Penroc shall immediately refund to Dune, the sum of $174,800, adjusted
for an accrued negative cash flow, if any, less 9% on the outstanding balance of
the purchase price accrued from April 1, 2003.

      If you concur that this letter correctly sets forth all of our agreements
and understandings with respect to the transaction, please sign below and return
a copy to me at your earliest convenience.

                                                Very truly yours,

                                                DUNE ENERGY, INC.

                                                By: /s/ Mark Harrington
                                                    ----------------------------
                                                    Mark Harrington, President

ACCEPTED AND AGREED:
PENROC OIL CORPORATION

By: /s/ Mohammad Yamin Merchant
    ----------------------------------
    Mohammed Yamin Merchant, President

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