Document:

Exhibit 10.1

                             LLC OPERATING AGREEMENT

                       LIMITED LIABILITY COMPANY AGREEMENT

                                       OF

                          RIDGEWOOD ENERGY K FUND, LLC

     THIS LIMITED  LIABILITY  COMPANY  AGREEMENT (this  "Agreement") is made and
entered  as of  April 1,  2004 by and  among  Ridgewood  Energy  Corporation,  a
Delaware Corporation ("Ridgewood"), and the Investors as defined below.

     WHEREAS,  Ridgewood  has formed  and the  Investors  have  agreed to become
members of RIDGEWOOD  ENERGY K FUND, LLC, a Delaware limited  liability  company
(the  "Fund")  and the  Manager  has caused a  certificate  of  formation  to be
executed  and filed with the  Delaware  Secretary  of State  pursuant to Section
18-201 of the Delaware Limited Liability Company Act ("Delaware Act").

     NOW,  THEREFORE,  in  consideration  of the  mutual  terms,  covenants  and
conditions contained herein, the parties agree as follows:

                       ARTICLE 1: ORGANIZATION AND POWERS

     1.1  Name.  The name of the Fund is  "RIDGEWOOD  ENERGY K FUND,  LLC".  The
Manager may conduct the  business of the Fund or hold its  property  under other
names as necessary to comply with law or to further the affairs of the Fund,  as
it deems advisable in its sole discretion.  This Agreement,  the Certificate and
any other documents, and any amendments of any of the foregoing, required by law
or appropriate, shall be recorded in all offices or jurisdictions where the Fund
shall  determine  such recording to be necessary or advisable for the conduct of
the business of the Fund.

     1.2 Purpose  (a) The Fund's  purpose is to acquire,  drill,  construct  and
develop  natural gas and oil  prospects,  including  natural gas  infrastructure
prospects,  in the offshore  waters of Texas and Louisiana in the Gulf of Mexico
("Oil and Gas  Projects").  In addition  to these  acquisition  and  development
activities,  the Fund may participate in  pre-development  and other preparatory
activities  for  the  Oil  and  Gas  Projects,   including  without  limitation,
evaluation,  investigation,  due  diligence  activities,  permitting,  and other
development  activities.  The Fund may effect any of these  transactions  on its
own, together with Affiliates,  or together with  non-Affiliates,  and may do so
with the encouragement or consent of

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management or controlling  equity holders of the entity it invests in or without
such consent.

     (b) In carrying out its purposes, the Fund has the power to perform any act
that is necessary,  advisable, customary or incidental thereto. It may invest in
a passive or active  manner  in,  develop,  plan,  construct,  manage,  operate,
advise,  transfer or dispose of, any  facility or interest and produce or market
products  or  services.  The  Fund  may act  independently,  through  subsidiary
organizations,  in cooperation with others or through business entities in which
others have  interests  whether as principal,  agent,  partner,  owner,  member,
associate,  joint venturer or otherwise.  When related to its purposes, the Fund
may also guarantee  obligations of other  persons,  supply  collateral for those
obligations or for the issuance of letters of credit or surety bonds  benefiting
other  persons,  enter  into  leases as lessor  or  lessee or  acquire  goods or
services for the use or benefit of other persons.

     (c)  Without the prior  affirmative  vote or written  consent of  Investors
whose aggregate  Capital  Contributions  constitute more than 50% of all Capital
Contributions  to the Fund at such time,  the Fund will not take any action that
would cause it to be required to register as an "investment  company" subject to
the requirements of the Investment  Company Act of 1940 and will not hold itself
out as an "investment company."

     (d) The Fund may make interim investments of funds in any vehicle otherwise
permitted  by this  Agreement  and may take all action  necessary,  advisable or
appropriate to maintain its existence,  enforce this Agreement and its rights or
the rights of the Shareholders and comply with legal requirements.

     1.3 Relationship among Shareholders; No Partnership. As among the Fund, the
Shareholders  and the  officers  and  agents  of the Fund,  a limited  liability
company and not a partnership is created by this  Agreement and the  Certificate
irrespective  of  whether  any  different  status may be held to exist as far as
others  are  concerned  or  for  tax  purposes  or in  any  other  respect.  The
Shareholders  hold only the  relationship  of members of the Fund with only such
rights as are conferred on them by this Agreement and the Delaware Act.

     1.4 Organization Certificates. The parties hereto have or shall cause to be
executed and filed (a) the Certificate, (b) such certificates as may be required
by so-called  "assumed name" laws in each  jurisdiction  in which the Fund has a
place of business, (c) all such other certificates, notices, statements or other
instruments  required by law or appropriate for the formation and operation of a
Delaware limited liability company in all jurisdictions where the Fund may elect
to do business,  and (d) any amendments of any of the foregoing  required by law
or otherwise appropriate.

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     1.5 Principal  Place of Business.  The  principal  place of business of the
Fund shall be 1314 King Street, Wilmington,  Delaware 19801, or such other place
as the Fund may  designate  from time to time by notice.  The Fund may  maintain
such other  offices at such other places as the Fund may  determine to be in the
best interests of the Fund.

     1.6 Admission of Investors.  (a) The Fund shall have the unrestricted right
at all times prior to the  Termination  Date to admit to the Fund such Investors
as it may deem  advisable.  One Investor  Share will be issued for each accepted
subscription  for  $150,000  of  Capital   Contributions  (before  discounts  or
incentives) and fractional Shares may be issued in the Manager's sole discretion
for proportional amounts of Capital  Contributions.  After the Termination Date,
the sale of Shares or  different  classes of Shares shall be governed by Section
9.6.

     (b) The aggregate  subscriptions  received for Capital Contributions of the
Investors  and  accepted  by the  Fund  will  not  exceed  267  Investor  Shares
($40,050,000  nominal),  immediately  following the admission of such Investors.
However,  at any  time  prior  to the  Termination  Date,  the  Fund in its sole
discretion may increase the number of Investor  Shares to 400 Investor Shares or
more.

     (c) (i) If, by the close of business on December 31, 2004,  Investor Shares
representing  Investor Capital Contributions in the aggregate amount of at least
$1,500,000  have not been sold, the Fund shall be  immediately  dissolved at the
expense of the Manager and all subscription funds shall be forthwith returned to
the respective subscribers together with any interest earned thereon.

          (ii) If the Fund  withdraws  the Offering  after the Fund has received
Investor Shares  representing  Investor  Capital  Contributions in the aggregate
amount of at least  $1,500,000,  but before the Termination Date, the Fund shall
be  immediately  dissolved  at the expense of the  Manager and all  subscription
funds, net of third party fees, shall be returned to the respective  subscribers
together  with  any  interest  earned  thereon.  For  purposes  of this  Section
1.6(c)(ii),  third party fees do not include any fees paid to the Manager or its
affiliates.

     (d) Each Investor  shall execute a  Subscription  Agreement and will make a
Capital  Contribution to the Fund equal to $150,000 per Investor Share. The Fund
may  accept  or  reject  any  subscription  in  whole  or in  part  in its  sole
discretion.  Each Investor who executes an accepted Subscription Agreement shall
be  admitted  to the  Fund  as a  Shareholder.  All  funds  received  from  such
subscriptions  until used by the Fund will be deposited in the Fund's name in an
account at a commercial bank.

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     (e) The Capital  Contribution  for Investor Shares must be paid to the Fund
at the time of subscription.

     1.7 Term of the Fund. For all purposes,  this Agreement  shall be effective
on and after its date and the Fund shall  continue in existence  until  December
31, 2040, at which time the Fund shall terminate unless sooner  terminated under
any other provision of this Agreement.

     1.8 Powers of the Fund.  Without  limiting  any powers  granted to the Fund
under this  Agreement or  applicable  law, in carrying out its purposes the Fund
has all  powers  granted  to a limited  liability  company  organized  under the
Delaware Act, including, without limitation:

     (a) To borrow  money or to loan money and to pledge or mortgage any and all
Fund  Property  and to  execute  conveyances,  mortgages,  security  agreements,
assignments and any other contract or agreement deemed proper and in furtherance
of the Fund's purposes and affecting it or any Fund Property; provided, however,
that the Fund shall not loan money to the Manager, or any other Managing Person;

     (b) To pay all  indebtedness,  taxes and  assessments due or to be due with
regard  to Fund  Property  and to give or  receive  notices,  reports  or  other
communications  arising out of or in connection with the Fund's business or Fund
Property;

     (c) To collect all monies due the Fund;

     (d) To  establish,  maintain  and  supervise  the  deposit of funds or Fund
Property  into,  and the  withdrawals  of the same from,  Fund bank  accounts or
securities accounts;

     (e) To employ accountants to prepare required tax returns and provide other
professional services and to pay their fees at the Fund expense;

     (f) To make any election  relating to adjustments in basis on behalf of the
Fund  or  the  Shareholders  which  is or  may  be  permitted  under  the  Code,
particularly with respect to Sections 743, 754 and 771 of the Code;

     (g) To employ  legal  counsel for Fund  purposes  and to pay their fees and
expenses at the Fund expense; and

     (h) To invest in any asset  consistent  with the  objectives of the Fund as
described in the Memorandum; and

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                             ARTICLE 2: DEFINITIONS

     The following terms, whenever used herein, shall have the meanings assigned
to them in this  Article  2 unless  the  context  clearly  indicates  otherwise.
References  to  sections  and  articles  without  further  qualification  denote
sections and articles of this  Agreement.  The singular shall include the plural
and the  masculine  gender shall include the  feminine,  and vice versa,  as the
context requires, and the terms "person" and "he" and their derivations whenever
used herein shall  include  natural  persons and  entities,  including,  without
limitation, corporations,  partnerships, limited liability companies and trusts,
unless the context indicates otherwise.

     "Act" -- The federal Securities Act of 1933, as amended,  and the rules and
regulations promulgated thereunder.

     "Adjusted Capital Account Deficit" -- with respect to any Shareholder,  the
deficit balance, if any, in such Shareholder's  Capital Account as of the end of
the relevant Fiscal Year, with the following adjustments:

A credit to such  Capital  Account  of any  amounts  which such  Shareholder  is
obligated to restore  pursuant to any  provision of this  Agreement or is deemed
obligated  to restore  pursuant to the  penultimate  sentences  of  Regulations,
Section 1.704-2(g)(1) and 1.704-2(i)(5); and

A  debit  from  such  Capital  Account  for  the  items  described  in  Sections
1.704-1(b)(2)(ii)(d)(4),  1-704-1(b)(2)(ii)(d)(5) and 1-704-1(b)(2)(ii)(d)(6) of
the Regulations.

The foregoing  definition of "Adjusted  Capital Account  Deficit" is intended to
comply with the provisions of Section  1-704-1(b)(2)(ii)(d)  of the  Regulations
and shall be interpreted consistently therewith.

     "Affiliate" -- An "Affiliate" of, or person  "Affiliated" with, a specified
person  is  a  person  that  directly,   or  indirectly   through  one  or  more
intermediaries, controls, is controlled by, or is under common control with, the
person specified.

     "Agreement" -- This Limited Liability Company Agreement, as further amended
from time to time.

     "Available  Cash from  Dispositions"  -- The amount by which (a) the sum of
(i) the  total  cash  proceeds  received  by the  Fund in  connection  with  the
transfer,  injury,  distribution,  condemnation,  or other  disposition  of Fund
Property (or interest therein) that is made other than in the ordinary course of
the  Fund's  business,  plus (ii) the  proceeds  of any  insurance  payments  or
financing  transactions  that are not otherwise  used to  construct,  replace or
repair  Fund  Property,  exceed (b) the amount that the  Manager  determines  is
necessary to be retained by the Fund (i) to satisfy any debt or other obligation
of the Fund that is secured by,  attributable to or otherwise connected with the
Fund Property

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disposed  of  (including  Shareholder  loans,  if any)  and  (ii)  to  establish
reasonable reserves for actual or contingent obligations of the Fund.

     "Available  Cash from  Operations"  -- The total cash  received by the Fund
from  operation  of the  business  in the  ordinary  course (but  excluding  any
Available  Cash  Flow from  Dispositions  and  excluding  any  Investor  Capital
Contributions), less (i) all operating expenses and other cash expenditures, and
(ii) such  reserves  for  operating  expenses,  debt service and other actual or
contingent  obligations and liabilities of the Fund as the Manager may determine
are necessary or advisable.

     "Capital  Account"  -- The  amount  representing  a  Shareholder's  capital
interest in the Fund, as determined under Article 6 hereof.

     "Capital  Contributions"  -- The  aggregate  capital  contributions  of the
Investors  accepted by the Fund in payment of the purchase  price of one or more
whole or  fractional  Investor  Shares,  minus any return of capital by the Fund
pursuant to Section 5.3.

     "Certificate"  -- The Certificate of Formation of the Fund, as amended from
time to time.

     "Code" -- The United States Internal  Revenue Code of 1986, as amended from
time to time, or any corresponding provision or provisions of any succeeding law
and, to the extent applicable, any rules and regulations promulgated thereunder.

     "Delaware Act" -- The Delaware  Limited  Liability  Company Act, as amended
from time to time  (currently  codified as Title 6,  Chapter 18 of the  Delaware
Code).

     "Dry-Hole Costs" -- The cost of drilling a well.

     "Escrow  Date" -- The  later of the  dates  on which  the Fund (i)  accepts
Investor subscriptions of at least $1,500,000 in the aggregate,  and (ii) has in
deposit at least  $1,500,000 in collected  funds in escrow under Section 1.6(c),
provided, however, the Escrow Date shall not be later than December 31, 2004.

     "Fiscal Year" -- The calendar year ending December 31st.

     "Fund" --  Ridgewood  Energy K Fund,  LLC,  a  Delaware  limited  liability
company.

     "Fund Property" -- All property owned or acquired by the Fund.

     "Investor"  -- A purchaser of whole or  fractional  Investor  Shares (which
will include the Manager to the extent it acquires  Investor  Shares for its own
account) whose subscription is accepted by the Fund.

     "Investor  Share" -- A Investor  Share in the Fund  representing a required
Capital Contribution (before any discounts or waivers of fees) of $150,000.

     "Losses" -- Defined at "Profits" or "Losses."

     "Management  Share" -- The equity interest in the Profits and Losses of the
Fund and in  distributions  granted to Ridgewood as compensation  for organizing
and sponsoring the Fund and acting as its Manager.

     "Managing  Person"  -- Any of the  following:  (a) Fund  officers,  agents,
consultants  or  Affiliates,  the  Manager  and  (b)  any  directors,  trustees,
officers,

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agents or Affiliates of any  organizations  named in (a), above,  when acting on
behalf of the Fund.

     "Manager" -- Ridgewood Energy Corporation and any successor,  substitute or
different Manager under this Agreement.

     "Memorandum"  -- The  Confidential  Memorandum  dated  April 1, 2004 of the
Fund, as the same may be amended or supplemented from time to time.

     "1940 Act" -- The federal Investment  Company Act of 1940, as amended,  and
the rules and regulations promulgated thereunder.

     "Non-recourse   Deductions"   --  Shall  have  the  meaning  set  forth  in
Regulations Section 1.704-2(b)(1) and 1.704-2(c).

     "Non-recourse Liability" -- Shall have the meaning set forth in Regulations
Section 1.752-1(a)(2).

     "Oil and Gas  Projects"  -- The natural gas or oil  projects  acquired  and
developed by the Fund.

     "Partnership  Minimum  Gain"  --  Shall  have  the  meaning  set  forth  in
Regulations Section 1.704(2)(b)(2) and 1.704-2(d).

     "Placement  Agent"  --  Ridgewood   Securities   Corporation,   a  Delaware
corporation,  or any  successor.

     "Profits" or "Losses" -- For a given fiscal period,  an amount equal to the
taxable  income or loss for such  period,  determined  in  accordance  with Code
Section  703(a) (for this purpose,  all items of income,  gain,  expense,  loss,
deduction or credit  required to be stated  separately  pursuant to Code Section
703(a)(1)  shall be  included  in taxable  income or loss),  with the  following
adjustments:

          (a)  Any  income  that  is  exempt  from  federal  income  tax and not
otherwise  taken into  account in computing  Profits or Losses  pursuant to this
definition   and  any  income  and  gain   described   in   Regulation   Section
1.704-1(b)(2)(iv)(g) shall be added to such taxable income or loss;

          (b) Any expenditures described in Code Section 705(a)(2)(B) or treated
as  Code  Section  705(a)(2)(B)  expenditures  pursuant  to  Regulation  Section
1.704-1(b)(2)(iv)(i),  and not otherwise taken into account in computing Profits
or Losses  pursuant to this  definition  shall be  subtracted  from such taxable
income or loss;

          (c) In the event of a  distribution  in kind under  Section  8.2,  the
amount  of any  unrealized  gain or loss  deemed to have  been  realized  on the
property  distributed  shall be added or subtracted  from such taxable income or
loss; and

          (d) Notwithstanding any other provision of this definition,  any items
that are  specially  allocated  pursuant to Sections  4.3,  and 7.3 shall not be
taken into account in computing Profits or Losses.

     "Regulation" -- A final or temporary Treasury regulation  promulgated under
the Code.

     "Ridgewood   Energy   Corporation"  or  "Ridgewood"  --  Ridgewood   Energy
Corporation, a Delaware corporation.

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     "Salvage  Fund" -- As used  herein  shall  have the  meaning  set  forth in
Section 9.7.

     "Shareholder"  -- The Investors and the owner of the Management  Share. The
Shareholders are the members of the Fund.

     "Share" -- A Shareholder's interest as a member of the Fund.

     "Subscription  Agreement" -- The form of subscription  agreement (contained
in  Exhibit  D  to  the  Memorandum,  which  is  separately  bound)  which  each
prospective  Investor  must  complete and execute in order to  subscribe  for an
interest in the Fund.

     "Supplemental Offering" -- A supplemental offering by the Fund at a date to
be determined and as further described in Section 9.6.

     "Termination  Date" -- The date on which the  initial  offering of Investor
Shares is ended,  as set or  extended  from time to time by the Fund in its sole
discretion,  provided that the Termination  Date may not occur before the Escrow
Date, and that if the Offering is withdrawn,  the  Termination  Date is the date
the Fund elects to do so. In no event shall the  Termination  Date extend beyond
ninety (90) days beyond December 31, 2004.

     "Working Interest" -- For purposes of this Agreement, a Working Interest is
an  interest  under an oil and  natural  gas  well,  which  carries  with it the
obligation  to pay the costs of the  operation of such well.  The holders of the
entire  Working  Interest  bear  100%  of  the  costs  of  exploring,  drilling,
developing and operating the well and are entitled to receive  revenues  derived
from the oil and natural gas production of the well which remain after deduction
of the cost of processing,  transporting and marketing such oil and natural gas,
royalty payments.

                             ARTICLE 3: LIABILITIES

     3.1  Liability of Investors  in General.  Except as expressly  set forth in
this  Agreement or required by law, no Investor  shall be personally  liable for
any debt, obligation, or liability of the Fund whether arising in contract, tort
or  otherwise,  in any amount beyond the unpaid  amount,  if any, of the Capital
Contribution  subscribed for by him,  solely by reason of being a Shareholder of
the Fund.

     3.2  Liability of Investors  to Fund and  Shareholders.  No Investor in his
capacity  as such  shall be liable,  responsible  or  accountable  in damages or
otherwise to any other Shareholder or the Fund for any claim, demand, liability,
cost,  damage or cause of action of any nature  whatsoever that arises out of or
that is incidental to the management of the Fund's affairs.

     3.3 Liability of Managing Persons to Third Person,  Fund and  Shareholders.
No  Managing  Person  shall be liable  to any  person  other  than the Fund or a
Shareholder  for any  obligation  of the Fund.  No  Managing  Person  shall have
liability to the Fund or to any Shareholder for any loss suffered by the Fund

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that arises out of any action or inaction of the Managing Person if the Managing
Person, in good faith,  determined that such course of conduct was in the Fund's
best  interest and such course of conduct did not  constitute  bad faith,  gross
negligence  or  willful  misconduct  of such  Managing  Person.  Nothing in this
Section 3.3, however, shall limit or supersede any contractual or other defenses
a Managing Person may have against the Fund or a Shareholder.

     3.4 Indemnification of Managing Persons.  (a) Each Managing Person shall be
indemnified  from Fund  Property  against  any losses,  liabilities,  judgments,
expenses  and  amounts  paid in  settlement  of any claims  sustained  by him in
connection with the Fund or claims by the Fund, in right of the Fund or by or in
right of any  Shareholder,  if the Managing Person would not be liable under the
standards of Section 3.3, or with respect to any criminal  action or  proceeding
he had no reasonable cause to believe his conduct was unlawful, and, in the case
of Managing Persons other than the Manager, they were acting within the scope of
authority  validly  delegated  to them by the  Manager  or this  Agreement.  The
termination of any action,  suit or proceeding by judgment,  order or settlement
shall not, of itself,  create a presumption that the Managing Person charged did
not act in good faith and in a manner  that he  reasonably  believed  was in the
Fund's best  interests.  To the extent that any Managing Person is successful on
the merits or  otherwise  in defense of any  action,  suit or  proceeding  or in
defense of any claim,  issue or matter  therein,  the Fund shall  indemnify that
Managing  Person against the expenses,  including  reasonable  attorneys'  fees,
actually and  reasonably  incurred by him in connection  therewith.  The Manager
shall have full and  complete  discretion  to authorize  indemnification  of any
Managing Person  consistent with the requirements of this Agreement at any time,
regardless  of whether a claim is pending or  threatened  and  regardless of any
conflict of  interest  between the Manager and the Fund that may arise in regard
to the decision to indemnify a Managing Person.

     (b) Notwithstanding the foregoing,  no Managing Person, the Placement Agent
or any broker-dealer  entitled to  indemnification  pursuant to Section 12.10 of
this Agreement  shall be  indemnified,  for any losses,  liabilities or expenses
arising from or out of an alleged violation of federal or state securities laws,
unless (i) there has been a successful  adjudication on the merits of each count
involving  alleged  securities law  violations as to the particular  indemnitee,
(ii) those claims have been dismissed with prejudice on the merits by a court of
competent  jurisdiction  as to the  particular  indemnitee  or  (iii) a court of
competent   jurisdiction  approves  a  settlement  of  the  claims  against  the
particular  indemnitee.  In any  claim  for  federal  or  state  securities  law
violations,  the party seeking  indemnification shall place before the court the
positions  of the  Securities  and  Exchange  Commission  and  other  securities
administrators  to the  extent  required  by them with  respect  to the issue of
indemnification for securities law violations.

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     (c) The  restrictions  of this  Section 3.4 do not apply to the purchase of
directors and officers'  insurance or any other insurance or bond by the Fund or
by a  Managing  Person on behalf  of the  Fund,  nor do they  apply to any claim
against or proceeds of that insurance or bond.

     3.5 General Provisions.  The following provisions shall apply to all rights
of  indemnification  and advances of expenses  under this  Agreement  and to all
liabilities described in this Article 3:

     (a) Expenses,  including  attorneys' fees, incurred by a Managing Person in
defending any action, suit or proceeding shall be paid by the Fund in advance of
the final  disposition  of the action,  suit or  proceeding  upon  receipt of an
undertaking  by the  recipient  to repay such amount if it shall  ultimately  be
determined  that the Managing  Person is not entitled to be  indemnified  by the
Fund under this  Agreement  or  otherwise  and if it is  reasonable  to make the
advance.  It is  reasonable to make the advance if at least one of the following
conditions is satisfied:

               (i) The Managing  Person  provides  appropriate  security for the
undertaking;

               (ii) The Managing Person is insured against losses or expenses of
defense or settlement so that the advances may be recovered;

               (iii) The Managing  Person was not a "controlling  person" of the
Fund, as defined by the federal securities laws; or

               (iv) There are other reasonable grounds for making the advance.

     (b) Rights to indemnification and advances of expenses under this Agreement
are not exclusive of any other rights to  indemnification or advances to which a
Managing Person may be entitled,  both as to action in a representative capacity
or as to action in  another  capacity  taken  while  representing  another.  The
restrictions  of Section  3.5(a) or of any other  provision of this Article 3 do
not apply to the  purchase of  directors  and  officers'  insurance or any other
insurance or bond by the Fund or by a Managing Person on behalf of the Fund, nor
do they apply to any claim against or proceeds of that insurance or bond.

     (c) Each  Managing  Person  shall be  entitled  to rely upon the opinion or
advice of or any statement or computation by any counsel, engineer,  accountant,
investment  banker or other person  retained by such Managing Person or the Fund
that he believes to be within such person's  professional or expert  competence.
In so doing,  he or she will be  deemed to be acting in good  faith and with the
requisite  degree of care unless he or she has actual  knowledge  concerning the
matter in question that would cause such reliance to be unwarranted.

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     3.6 Dealings  with the Fund.  With regard to all rights of the Fund and all
actions to be taken on its behalf,  the Fund, the Fund's officers and agents, or
the Shareholders,  shall be the principal and the Fund shall be entitled as such
to the extent permitted by law to enforce the same, collect damages and take all
other  action.  All  agreements,  obligations  and  actions of the Fund shall be
executed or taken in the name of the Fund or by an  appropriate  nominee.  Money
may be paid and property  delivered to any duly  authorized  officer or agent of
the Fund who may receive  same in the name of the Fund and no person  dealing in
good faith  thereby  shall be bound to see to the  application  of any moneys so
paid or property so delivered.  No entity whose  securities are held by the Fund
shall be affected by notice of such fact or be bound to see to the  execution of
the Fund or to  ascertain  whether any transfer of its  securities  by or to the
Fund is authorized.

                    ARTICLE 4: ALLOCATION OF PROFIT AND LOSS

     4.1  General.  The rules set forth below in this  Article 4 shall apply for
the purposes of determining each  Shareholder's  allocable share of the items of
income,  gain, loss and expense of the Fund comprising  Profits or Losses of the
Fund for each Fiscal Year,  determining  special  allocations  of other items of
income,  gain, loss and expense, and adjusting the balance of each Shareholder's
Capital Account to reflect the aforementioned  general and special  allocations.
For each Fiscal  Year,  the special  allocations  in Section 4.3 hereof shall be
made  immediately  prior to the  general  allocations  of  Section  4.2  hereof.
Allocations  to the Investors  shall be made in accordance  with their  relative
Investor Shares.

     4.2 General Allocations.

     (a) Except as  provided  in Section  4.3 hereof and subject to Article 7, 8
and 9 hereof, all items of income, gain, expense,  loss, deduction and credit of
the Fund shall be allocated 15% to the Manager and 85% to the Investors.

     (b) Loss Limitation.  Notwithstanding anything to the contrary contained in
this Section 4.2, the amount of Fund Losses allocated pursuant to Section 4.2(b)
to any Shareholder shall not exceed the maximum amount of such items that can be
so  allocated  without  causing  such  Shareholder  to have an Adjusted  Capital
Account  Deficit at the end of any Fiscal Year.  All such items in excess of the
limitation  set  forth  in this  Section  4.2(c)  shall  be  allocated  first to
Shareholders who would not have an Adjusted  Capital Account Deficit,  pro rata,
until no Shareholder  would be entitled to any further  allocation,  and then to
the Manager.

     (c) No Deficit Restoration Obligation.  Except as provided in Section 14.7,
at no time  during  the term of the  Fund or upon  dissolution  and  liquidation
thereof shall a Shareholder with a negative balance in his, her or its Capital

                                      A-11

<PAGE>

Account have any  obligation  to the Fund or the other  Shareholders  to restore
such negative balance, except as may be required by law.

     (d) Items.  Except as otherwise  provided in this  Agreement,  all items of
Fund income, gain, expense, loss, and deduction for a particular Fiscal Year and
any other  allocations  not  otherwise  provided for shall be divided  among the
Shareholders  in the same  proportions  as they share Profits or Losses,  as the
case may be, for such Fiscal Year.

     (e) Tax  Reporting.  The  Shareholders  shall be bound by the provisions of
this Agreement in reporting their shares of Fund Profits, Losses and other items
for income tax purposes.

     (f) Allocation to Fiscal Periods.  The Fund may use any permissible  method
under Code Section 706(d) and the Regulations  thereunder to determine  Profits,
Losses and other items on a daily, monthly or other basis for any Fiscal Year in
which there is a change in a Shareholder's interest in the Fund.

     (g) Capital Account  Regulations.  The definition of "Capital  Account" and
certain  other  provisions  of  this  Agreement  are  intended  to  comply  with
Regulations Sections 1.704-1(b) and 1.704-2 and shall be interpreted and applied
in  a  manner  consistent  with  such  Regulations.  These  Regulations  contain
additional  rules  governing  maintenance of Capital  Accounts that may not have
been provided for in this Agreement because,  in part, these rules may relate to
transactions that are not expected to occur and in some instances are prohibited
by this Agreement.  If the Fund after consultation with its regular  accountants
or tax counsel  determines  that it is prudent to modify the manner in which the
Capital  Accounts,  or any debits or credits  thereto,  are computed in order to
comply with such  Regulations,  or to avoid the effects of unanticipated  events
that might otherwise  cause this Agreement not to comply with such  Regulations,
the Fund shall make such  modification  without  the need of prior  notice to or
consent of any Shareholder;  so long as no such modification is likely to have a
material effect on the amounts distributable to any Shareholder.

     4.3 Capital Contribution  Allocations.  Subject to Section 1.6 and Articles
7,  8,  and  9  hereof,  all  items  of  expense,  loss,  deduction  and  credit
attributable to the expenditure of any Capital  Contributions and all income and
gains derived from temporary investment of the Fund's funds prior to application
of such funds to the  business of the Fund shall be  allocated 1% to the Manager
and 99% to the Investors.

     4.4 Tax Allocations.  The tax allocations made pursuant to this Section 4.4
shall be solely for tax purposes and shall not affect any Shareholder's  Capital
Account or share of non-tax allocations or distributions under this Agreement.

                                      A-12

<PAGE>

     (a) Section  704(c)  Allocations.  In the event any property of the Fund is
credited to the Capital  Account of a Shareholder  at a value other than its tax
basis, the allocations of taxable income, gain, loss and deductions with respect
to such  property  shall be made in a manner that will comply with Code  Section
704(b) and  704(c) and the  Regulations  thereunder.  The Fund,  in the sole and
absolute  discretion  of  the  General  Shareholder,  may  make,  or  not  make,
"curative"  or  "remedial"  allocations  (within the meaning of the  Regulations
under Code Section 704(c) including, but not limited to:

     (i)  "curative"  allocations  which offset the effect of the "ceiling rule"
for  a  prior   Fiscal  Year   (within  the  meaning  of   Regulations   Section
1.704-3(c)(3)(ii)); and

     (ii)  "curative"  allocations  from  dispositions  of contributed  property
(within the meaning of Regulations Section 1.704-3(c)(3(iii)(B)).

     (b)  Depreciation  Recapture.  To the maximum extent permitted by the Code,
income  realized by the Fund in the nature of recapture of depreciation or other
cost recovery  allowances (other than of Non-recourse  Deductions or Shareholder
Non-recourse  Deductions)  shall  be  allocated  to  Shareholders  in  the  same
proportions  as  depreciation  allowances  were  allocated  to them  pursuant to
Section 4.3(a).

                ARTICLE 5: CAPITAL CONTRIBUTIONS OF SHAREHOLDERS

     5.1 Additional  Capital  Contributions.  Investors shall not be required or
permitted to make additional contributions to the Fund.

     5.2 Manager's Capital Contributions. The Manager in its capacity as Manager
shall only be required to make Capital  Contributions in accordance with Section
14.7.

     5.3.  Returns of  Capital.  If the Fund for any reason at any time does not
find it necessary or appropriate to retain or expend all Capital  Contributions,
the Manager in its sole  discretion may cause the Fund to return any or all such
excess  Capital  Contributions  ratably  to  Investors.  The  Investors  will be
notified of the source of the payment.  The Fund is not  obligated to return the
amount of any fees charged in connection with the Investor Capital  Contribution
and the return of a Investor Capital Contribution is net of any fees so charged.

                           ARTICLE 6: CAPITAL ACCOUNTS

                                      A-13

<PAGE>

     6.1 Capital Accounts. A Capital Account shall be established and maintained
for each Shareholder and shall be adjusted as follows:

     (a) The Capital Account of each Shareholder shall be increased by:

     (1) The amount of such Shareholder's Capital Contributions to the Fund;

     (2) The  amount  of  Profits  allocated  to such  Shareholder  pursuant  to
Articles 4 and 7;

     (3) The fair market value of property contributed by the Shareholder to the
Fund (net of liabilities secured by the contributed property that the Fund under
Code Section 752 is considered to have assumed or taken subject to);

     (4) Any items in the nature of income or gain that are specially  allocated
to such Shareholder or adjusted pursuant to Sections 4.3 and 7.4; and

     (b) The Capital Account of each Shareholder shall be decreased by:

     (1) The amount of Losses allocated to such Shareholder pursuant to Articles
4 and 7;

     (2) All  amounts of money and the fair  market  value of  property  paid or
distributed  to such  Shareholder  pursuant  to the  terms  hereof  (other  than
payments made with respect to loans made by such  Shareholder to the Fund),  net
of liabilities  secured by that property that the Shareholder under Code Section
752 is considered to have assumed or taken subject to;

     (3) Any  items in the  nature of  expenses  or  losses  that are  specially
allocated to such Shareholder pursuant to Sections 4.3 and 7.4; and

     (4) Any return of a Capital Contribution under Section 5.3.

     6.2 Calculation of Capital  Account.  Whenever it is necessary to determine
the Capital Account of any Shareholder,  the Capital Account of such Shareholder
shall be determined in accordance with the rules of Regulation  Sections 1.704-1
(b) (2) (iv) and 1.704-2 (as amended from time to time).  If necessary to comply
with the Code, an adjusted Capital Account may be employed.

     6.3  Effect of Loans.  Loans by any  Shareholder  to the Fund  shall not be
considered contributions to the capital of the Fund.

                                      A-14

<PAGE>

     6.4 Withdrawal of Capital. No Shareholder shall be entitled to withdraw any
part of his Capital Account or to receive any distribution from the Fund, except
as specifically provided herein.

     6.5 Capital  Accounts  of New  Shareholders.  Any person who shall  acquire
Shares in  accordance  with the  terms  and  conditions  of  Article  13 of this
Agreement  shall have the Capital  Account of his transferor  after  adjustments
reflecting the transfer, if any, except as specifically provided herein.

     6.6 Limitation.  Neither the Manager nor any other Managing Person shall be
required or shall have any personal liability to fund any or all of any negative
Capital Account of any Investor,  including without limitation  Investor Capital
Contributions.

           ARTICLE 7: ADDITIONAL PROVISIONS APPLICABLE TO ALLOCATIONS

     7.1  Determination  of Income and Loss. At the end of each Fiscal Year, and
at such other times as the Fund shall deem necessary or  appropriate,  each item
of Fund income,  gain, expense,  loss,  deduction and credit shall be determined
for the period then ending and shall be allocated to the Capital Account of each
Shareholder in accordance with this Agreement.  With respect to the admission of
Shareholders,  the Fund will use the "interim closing date" method of accounting
as permitted by the Regulations.

     7.2 Determination of Income and Loss in the Event of Transfer. In the event
that a Shareholder  transfers  his interest in the Fund in  accordance  with the
terms of this Agreement,  the determination and allocation  described in Section
7.1  shall  be made as of the  date of such  transfer  and  thereafter  all such
allocations  shall be made to the account of the  transferee  of such  interest;
provided,  however,  that the Fund may  determine  that such  determination  and
allocation shall be pro rata to the Shareholders based upon the actual number of
days in such  Fiscal  Year that each such  Shareholder  held an  interest in the
Fund. In the event of a pro rata  determination  and  allocation,  the foregoing
provisions of this Section relating to a pro rata  determination  and allocation
will not be applicable to the  distributive  shares,  with respect to the Shares
transferred,  of items of Fund income, gain, expense, loss, deduction and credit
arising out of (a) the sale or other  disposition  of all or  substantially  all
Fund Property, or (b) other extraordinary  nonrecurring items, all of which will
be allocated to the holder of such Trust interest on the date such items of Fund
income, gain, expense, loss, deduction and credit are earned or incurred.

     7.3  Allocation  of Net Income and Net Losses.  All items of income,  gain,
expense, loss, deduction and credit of the Fund from operations and in the

                                      A-15

<PAGE>

ordinary  course of operation  of Fund  Property  shall be  allocated  among the
Shareholders in accordance with Article 4.

     7.4 Qualified Income Offset and Other Allocation  Provisions.  (a) If there
is a  net  decrease  in  "partnership  minimum  gain"  (within  the  meaning  of
Regulation  Section  1.704-2(d))  during a fiscal  period,  then there  shall be
allocated to each  Shareholder  items of income and gain for such fiscal  period
(and,  if necessary,  subsequent  fiscal  periods) in proportion  to, and to the
extent of, an amount equal to the portion of such Shareholder's share of the net
decrease in partnership minimum gain during such fiscal period that is allocable
to the  disposition  of  Fund  Property  subject  to one  or  more  Non-recourse
liabilities of the Fund. However, such allocation shall be reduced to the extent
(i) the  Shareholder  contributes  capital to the Fund that is used to repay the
Non-recourse  liability and (ii) the Shareholder's  share of the net decrease in
partnership  minimum gain is caused by the repayment.  The foregoing is intended
to be a "minimum gain chargeback"  provision as described in Regulation  Section
1.704-2(f),  and shall be interpreted  and applied in all respects in accordance
with  such  Regulation.  If  there  is  a  net  decrease  in  the  minimum  gain
attributable to a "partner  non-recourse debt" (as defined in Regulation Section
1.704-2(b) (4)) for a fiscal period,  then, in addition to the amounts,  if any,
allocated pursuant to the first sentence of this Subsection 7.4(a),  there shall
be allocated to each Shareholder with a share of such minimum gain  attributable
to a "partner non-recourse debt" items of income and gain for such fiscal period
(and,  if necessary,  subsequent  fiscal  periods) in proportion  to, and to the
extent of, an amount equal to the portion of such Shareholder's share of the net
decrease in the minimum gain attributable to a partner  non-recourse debt during
such fiscal  period  that is  allocable  to the  disposition  of Trust  Property
subject  to one or more  non-recourse  liabilities  of the Fund.  However,  such
amount shall be reduced to the extent (i) the Shareholder contributes capital to
the  Fund  that is  used to  repay  the  Non-recourse  liability  and  (ii)  the
Shareholder's  share of the net decrease in the minimum gain  attributable  to a
partner non-recourse debt is caused by the repayment.

     (b) If during  any  fiscal  period of the Fund a  Shareholder  unexpectedly
receives an  adjustment,  allocation  or  distribution  described in  Regulation
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), which causes or increases a deficit
balance in the  Shareholder's  Capital Account,  there shall be allocated to the
Shareholder  items of income and gain  (consisting of a pro rata portion of each
item of Fund income,  including  gross  income,  and gain for such period) in an
amount and manner  sufficient  to eliminate  such deficit  balance as quickly as
possible.  The foregoing is intended to be a "qualified income offset" provision
as  described  in  Regulation   Section   1.704-1(b)(2)(ii)(d),   and  shall  be
interpreted and applied in all respects in accordance with such Regulation.

                                      A-16

<PAGE>

     (c)  Notwithstanding  anything to the contrary in Article 4 or this Article
7, any item of deduction,  loss or Code Section 705(a)(2)(B) expenditure that is
attributable  to "partner  non-recourse  debt" shall be allocated in  accordance
with the manner in which the  Shareholders  bear the  economic  risk of loss for
such debt (determined in accordance with Regulation Section 1.704-2(i)).

     (d) To the extent that any item of income, gain, loss or deduction has been
specially  allocated  pursuant to paragraph  (a), (b) or (c) of this Section 7.4
("Required  Allocations")  and such allocation is inconsistent with how the same
amount  otherwise  would  have  been  allocated  under  Sections  4.1  and  4.2,
subsequent  allocations  under Sections 4.1 and 4.2 shall be made, to the extent
possible,  in a  manner  consistent  with  paragraphs  (a),  (b) and (c) of this
Section  7.4 which  negates as rapidly as  possible  the effect of all  previous
Required Allocations.

     (e) Solely for federal,  state and local income and  franchise tax purposes
and not for book or Capital Account purposes,  income,  gain, loss and deduction
with  respect to property  carried on the Fund's books at a value other than its
tax basis shall be allocated (i) in the case of property contributed in kind, in
accordance with the  requirements of Code Section 704(c) and such Regulations as
may be promulgated  thereunder  from time to time, and (ii) in the case of other
property,  in  accordance  with the  principles  of Code Section  704(c) and the
Regulations thereunder,  in each case, as incorporated among the requirements of
the relevant provisions of the Regulations under Code Section 704(b).

                    ARTICLE 8: DISTRIBUTIONS TO SHAREHOLDERS

     8.1  Distributions of Available Cash from Operations.  Subject to the terms
of this  Agreement,  the  Fund  shall  make  distributions  to  Shareholders  of
Available  Cash from  Operations  with respect to each Fiscal Year in the manner
and at the time  determined  by the Manager.  The amount of Available  Cash From
Operations  determined to be available,  if any, will be distributed  15% to the
Manager and 85% to the Investors.

     8.2 Distribution of Available Cash from Dispositions.  Subject to the terms
of this Agreement, the Fund shall make distribution to Shareholders of Available
Cash from  Dispositions  with respect to each Fiscal Year,  in the manner and at
the times determined by the Manager, as follows:

     (i)  Before   Investors  have  received  total   distributions   (including
     distributions  from Available Cash From Operations)  equal to their Capital
     Contributions,  99% of Available Cash From Dispositions will be distributed
     to Investors and 1% to the Manager.

                                      A-17

<PAGE>

     (ii) After Investors have received total distributions (including Available
     Cash  From  Operations  and  any   distributions  of  Available  Cash  From
     Dispositions) equal to their Capital  Contributions,  85% of Available Cash
     From Dispositions will be distributed to Investors and 15% to the Manager.

     8.3 Interim  Distributions Based on Estimates.  To the extent that the Fund
makes  interim  distributions  prior  to  the  end  of  any  Fiscal  Year,  such
distributions  are  provisional  and may be made  based  upon  estimates  of the
Manager of the results of  operations  of the Fund for the balance of the Fiscal
Year,  subject to a true-up at the end of such Fiscal  Year.  To the extent that
the Fund subsequently  determines that any amounts were improperly  distributed,
and not repaid to the Fund by any Shareholder,  the Fund may take such action as
the  Manager  shall  determine  to  recover  such  amounts,  including,  without
limitation,  the offset any amounts of future  distributions to such Shareholder
to satisfy such repayment obligation.

     8.4  Distribution in Kind. If the Fund elects to make  distribution in kind
of any of the assets of the Fund,  it shall give notice of its  election to each
Shareholder,  specifying  the  nature  and  value  of  all  such  assets  to  be
distributed  in kind,  the  deadline  for  giving  notice of refusal to accept a
distribution in kind and to the extent  advisable,  the estimated time necessary
for the Fund to liquidate  assets if those assets are not  distributed and other
information as required. In making such election, the Fund shall not arbitrarily
value  assets  to be  distributed  in kind nor  shall it  specify  assets  to be
distributed  in  kind  in  such  a  manner  as  to  unreasonably   advantage  or
disadvantage any Shareholder.  A Shareholder may refuse to accept a distribution
in kind by giving  written  notice to the Fund not later  than 30 days after the
effective date of the Fund's notice of  distribution.  If a Shareholder  refuses
distribution  in kind,  the Fund shall  retain in the Fund's name the portion of
the assets which were to be  distributed  in kind and which were to be allocated
to the refusing  Shareholder  (the  "Retained  Assets") and shall  liquidate the
Retained  Assets in accordance  with this  Agreement.  Upon  liquidation  of the
Retained  Assets,  the sum  realized  shall be  distributed  to the  Shareholder
refusing  distribution  in kind in full  discharge of the Fund's  obligation  to
distribute  the Retained  Assets.  In  determining  the Capital  Accounts of the
Shareholders, a distribution of assets in kind shall be considered a sale of the
property  distributed so that any  unrealized  gain or loss with respect to such
property  shall  be  deemed  to have  been  realized  and  allocated  among  the
Shareholders in accordance with Article 4.

     8.5  Amounts  Withheld.  All amounts  withheld  pursuant to the Code or any
provision  of any  state  or  local  tax law  with  respect  to any  payment  or
distribution  to the  Fund or the  Shareholders  shall  be  treated  as  amounts
distributed  to the  Shareholders  pursuant to this  Article 8 for all  purposes
under

                                      A-18

<PAGE>

this Agreement. The Fund may allocate any such amounts among the Shareholders in
any manner that is in accordance with applicable law.

     8.6  Limitations.  Distributions  to Shareholders  shall not be made to the
extent they are  prohibited  by  restrictions  contained  in the Delaware Act or
other provisions of this Agreement.  Further,  distribution shall not be made to
any Investor to the extent that the effect of such distributions would cause the
balance of such Investor's Capital Account to be below zero unless such Investor
undertakes an affirmative  obligation to make a cash contribution to the Fund in
the amount of any negative balance in such Investor's  Capital Account and posts
security satisfactory to the Manager to satisfy such restoration obligation.

                          ARTICLE 9: OPERATION OF FUND

     9.1  Investment  Fee. The Fund shall pay  Ridgewood out of Fund Property an
investment  fee in an amount  equal to 4.5% of the base  amount of each  Capital
Contribution  per Investor  Share.  The base amounts are computed at the rate of
$150,000 of Capital  Contributions per Investor Share,  without  considering any
discounts or waivers of fees. The investment fee payable in respect of Investors
whose  subscriptions  for  Shares  are  accepted  by the Fund in 2004 is for the
Manager's  services provided in that year and the fee payable by Investors whose
subscriptions  for Shares are  accepted by the Fund in a later year is for those
services for capital  contributed  in that year.  The fee in respect of services
performed  by the  Manager  during any year in which such  additional  funds are
received by the Fund under  Section 9.5 shall be payable  upon the later of each
date  on  which  payment  is  accepted  by the  Fund or the  fulfillment  of any
applicable escrow conditions.

     9.2 Placement Agent and other Selling  Commissions.  (a) The Fund shall pay
out of Fund Property to Ridgewood Securities Corporation or to any broker-dealer
who effects the sale of one or more whole or  fractional  Shares,  cash  selling
commissions  in an  aggregate  amount  equal  to 8% of the base  amount  of each
Capital  Contribution.  The base amounts are computed at the rate of $150,000 of
Capital  Contributions per Investor Share,  without considering any discounts or
waivers  of  fees.  For  serving  as  Placement  Agent,   Ridgewood   Securities
Corporation  shall in addition be entitled to receive out of Fund Property a fee
in an amount equal to 1% of each Capital Contribution.  Such commissions payable
on each  Capital  Contribution  in  respect  of  sales  of  Shares  prior to the
Termination Date and shall be due and payable promptly after the latest to occur
of (i)  acceptance  by the Fund of an Investor's  subscription,  (ii) the Escrow
Date, or (iii) the receipt by the Fund of the Investor's  Capital  Contribution.
Except as set forth in this Section 9.2(a),  the Placement Agent is not entitled
to any other fee or reimbursement from the Fund.

                                      A-19

<PAGE>

     (b) Ridgewood may pay additional compensation to registered  broker-dealers
assisting  in the sale of  Investor  Shares  out of its own funds,  including  a
portion of the cash otherwise distributable to the Manager hereunder or the fees
payable to it by the Fund. In addition,  Ridgewood, in its sole discretion,  may
waive or pay over to certain  Investors a portion of  distributions or fees from
the Fund otherwise payable to it.

     9.3 Other Expenses.

     (a) Subject to Sections 9.3(b) and (c), the Fund shall reimburse  Ridgewood
for all actual and necessary direct expenses paid or incurred in connection with
the  operation  of the Fund,  including  but not limited to travel  expenses and
third party  accounting,  legal and  consulting  fees,  to the extent that those
expenses were incurred by Ridgewood in carrying out responsibilities assigned to
it by this Agreement and were consistent with such Agreement.

     (b) The Fund shall pay the Manager out of Fund Property an  organizational,
distribution  and  offering  fee in an  amount  equal  to 3.5%  of each  Capital
Contribution  to cover all  expenses  incurred  in the offer and sale of Shares,
including legal, accounting,  and consulting fees, printing, filing, postage and
other  expenses of  organizing  the Fund,  distribution  and  selling  costs and
closing costs for the  offering.  The fee shall be payable on the Escrow Date as
to Shares  purchased  through that date and on each date thereafter on which the
Fund receives and collects full payment for  additional  accepted  subscriptions
for  Shares.   If  these   expenses   exceed  3.5%  of  the  aggregate   Capital
Contributions, the Manager shall pay such excess.

     (c) The  Fund  shall  reimburse  Ridgewood  for  direct  expenses  actually
incurred for operational or project  development  services provided by Ridgewood
to the extent (i) the charges for the services do not exceed  amounts that would
be charged by unrelated firms offering similar services and (ii) the Oil and Gas
Projects do not reimburse the Manager for those expenses.

     (d) In respect of the acquisition or disposition of all or a portion of the
Fund Property, the Fund may be required to or may find it advantageous to and is
authorized to, engage a broker or similar  adviser and to pay a brokerage fee to
the  broker  or other  persons  responsible  for  bringing  the  acquisition  or
disposition opportunity to the Fund's attention or for investigating, evaluating
or negotiating the acquisition or disposition of the Fund's interest therein.

     9.4  Management  Fee. For each  12-month  period  beginning on the date the
offering of Investor Shares is commenced,  and ending upon the winding up of the
Fund's business,  the Fund shall pay the Manager from Fund Property a Management
Fee,  payable in advance in equal  monthly  installments,  at the annual rate of
2.5% of the aggregate of Capital Contributions.

                                      A-20

<PAGE>

     9.4.1. The fee will be payable by the Fund in equal monthly installments in
advance beginning on the date the offering  commences,  and is payable from Fund
cash flow,  if any, or from other Fund  assets,  including  without  limitation,
contributed capital and interest earned on interim investments.

     9.4.2  The  Management  Fee  shall be in lieu of any  reimbursement  to the
Manager for administrative  and overhead expenses,  including without limitation
postage, communication,  computer service, accounting,  regulatory reporting and
compensation costs of the Manager allocable to the Fund.

     9.4.3 The Management  Fee does not defray fees,  expenses and payments such
as legal, outside accounting and consulting expenses,  including amounts paid by
the Fund to persons other than Ridgewood or any Affiliate of Ridgewood, the Fund
or Robert E. Swanson for  performing  due  diligence or  identifying  investment
opportunities   for  the  Fund.   The   Management  Fee  also  does  not  defray
extraordinary  expenses  incurred by  Ridgewood  or any  expenses  described  in
Section 9.3(a). Amounts not defrayed by the Management Fee shall be borne by the
Fund or Ridgewood under Section 9.3.

     9.5 Payment and  Recoupment of Fees. As soon as funds have been released to
the Fund from the escrow account referred to in Section 1.6(c), they may be used
to pay the fees  referred  to in  Sections  9.1,  9.2 and 9.4 then  due.  If the
Manager  withdraws  the  offering  of Shares,  or rejects any  subscription  for
Shares,  any person that has received payments from the proceeds of the offering
shall return such payments to the Fund upon demand by the Manager.

     9.6 Supplemental  Offering of Shares. The Fund from time to time may create
and sell additional Investor Shares or additional classes or series of Shares if
the Manager in its sole  discretion  determines  that the best  interests of the
Fund so require.  The Manager is  authorized to determine or alter any or all of
the powers,  rights,  qualifications,  limitations  or  restrictions  granted or
imposed upon any such series or supplemental Shares or the offering thereof, and
to fix,  alter or  reduce  the  number of Shares  comprising  any such  class or
series,  and to provide for the rights and terms of  redemption or conversion of
the Shares of any such class or series.  Any such  Shares may be offered to such
persons and on such terms and conditions as the Fund may determine.

     9.7 Salvage Fund. The Fund will (and may be required by the operator of any
Oil and Gas  Project  to)  reserve  and  set  aside  each  month  in a  separate
interest-bearing  account  ("Salvage Fund") a portion of the Fund's net revenue,
if any,  that the  Fund may  receive  form  the  production  and sale of oil and
natural gas from each Oil and Gas Project in which the Fund has  invested  until
such time as the Salvage Fund contains an amount equal to the Fund's anticipated
salvage value of dismantling  production platforms,  plugging and abandoning the
platform wells, and removing the platforms and platform wells in respect of each
such Oil

                                      A-21

<PAGE>

and Gas Project after its useful life, in accordance with applicable federal and
state law and  regulations.  Any portion of the Salvage Fund that remains  after
the Fund  pays  its  share  of the  salvage  costs  will be  distributed  to the
Investors in accordance with the provisions of Section 8.1.

                             ARTICLE 10: ACCOUNTING

     10.1 Elections.  The Fund shall elect the calendar year as its Fiscal Year.
The Fund shall adopt the accrual  method of  accounting  or such other method of
accounting as the Fund shall determine. The Fund shall elect to be taxed only as
a  partnership  unless this  provision  is amended with the consent of Investors
whose aggregate  Capital  Contributions  constitute more than 50% of all Capital
Contributions  to the Fund.  The Fund may but shall not be  required  to make an
election under Section 754 of the Code or corresponding state taxation laws. The
Manager is empowered  to make any other  election  permitted  by law,  including
without  limitation an election under Code Section 771,  without prior notice to
or consent by any other Shareholder.

     10.2 Books and Records.  The Fund's books and records  shall be kept at the
principal  place of business of the Fund and shall be  maintained  in accordance
with generally accepted accounting  principles,  consistently  applied. The Fund
shall  maintain  supplemental  records on the basis  utilized in  preparing  the
Fund's  federal  income tax return with such  adjustments  in  accounting as are
required  by this  Agreement  or as the  Fund  determines  would  be in the best
interests of the Fund.

     10.3 Reports.  The Fund will keep each  Shareholder and assignee  complying
with Article 13 currently advised as to activities of the Fund by communications
furnished at least quarterly.  An independent  certified public  accounting firm
selected by the Fund will prepare the Fund's  federal  income tax return as soon
as practicable  after the conclusion of each year and each  Shareholder  will be
furnished,  at that time,  with the necessary  accounting  information  for each
Shareholder  to take into  account  and  report  separately  such  Shareholder's
distributive  share of the income and  deductions of the Fund. The Fund will use
its  reasonable  best  efforts  to  obtain  the  information  necessary  for the
accounting firm as soon as practicable and to transmit the resulting  accounting
and tax  information to the  Shareholders as soon as possible after receipt from
the accounting firm.

     10.4 Bank Accounts. The Fund shall maintain separate segregated accounts in
its name at one or more commercial banks, and the cash of the Fund shall be kept
in any of those accounts as determined by the Fund.

     10.5  Interim  Assets.  To the  extent  the  Fund's  liquid  capital is not
otherwise committed to transactions or required for other purposes, the Fund may

                                      A-22

<PAGE>

invest such liquid  capital in any manner it deems prudent,  including,  but not
limited to, the following:

          (a)  Obligations  of banks or savings and loan  associations  that are
insured in their entirety by agencies of the United States government;

          (b)  Obligations  of or guaranteed by the United States  government or
its agencies; and

          (c)  Money  market  or  other  short-term   obligations  or  financial
instruments (having a maturity of one year or less).

                 ARTICLE 11: RIGHTS AND OBLIGATIONS OF INVESTORS

     11.1  Participation in Management.  No Shareholder  (other than the Manager
acting in its  capacity  as such)  shall have the  right,  power,  authority  or
responsibility  to  participate  in the ordinary and routine  management  of the
Fund's affairs or to bind the Fund in any manner.

     11.2  Rights to Engage  in Other  Ventures.  No  Investor  or any  officer,
director,  shareholder or other person holding a legal or beneficial interest in
any Investor shall, by virtue of his ownership of a direct or indirect  interest
in the Fund,  be in any way  prohibited  from or  restricted  in engaging in, or
possessing  an  interest  in,  any other  business  venture of a like or similar
nature including any other oil and gas fund, project or property.

     11.3 Limitations on Transferability.  The interest of an Investor shall not
be transferable except under the conditions set forth in Article 13 hereof.

     11.4  Information.  (a) In addition  to  information  to be provided  under
Section 10.3, the Fund will provide each Investor with  information as specified
in this Section  11.4. No Investor has any rights to  information  from the Fund
except as provided in this Section 11.4 and Section  10.3,  or by law other than
the Delaware Act.

     (b) No Investor or other  person  acting in the right of or for the benefit
of an  Investor  is  entitled  to  receive  from  the  Fund or its  Manager  any
information  concerning any other Investor or offeree of the Fund's  securities,
without the prior written consent of the other Investor or offeree.

     (c) The Fund may withhold,  redact or summarize  other types of information
so as to prevent  Investor  information  from being  disclosed  in  violation of
Section 11.4.(b).

     (d) Each Investor is entitled to obtain the following  information from the
Fund upon  reasonable  written  demand  stating the purpose of the demand (which
must be reasonably related to the Investor's interest in the Fund):

                                      A-23

<PAGE>

     (i) True and full  information  regarding the Fund's business and financial
condition and the contributions to the Fund;

     (ii) Promptly after becoming available, a copy of the Fund's federal, state
and local income tax returns or  information  returns for the preceding year and
prior years to the extent reasonably available;

     (iii) A copy of the  Certificate  and  this  Agreement  and all  amendments
thereto;

     (iv) Copies of material  agreements  between the Fund and Ridgewood  Energy
Corporation or other Ridgewood Programs; and

     (v) Other  reasonable  information  regarding  the Fund,  but not including
information that the Fund is entitled to withhold under this Section 11.4.

     (e) Investors are not entitled to agreements,  technical information, trade
secrets and other confidential information relating to the Fund's development of
the Oil and Gas Projects, or to the acquisition or transaction documents related
thereto, unless the Manager, in its sole discretion,  determines that disclosure
will not harm the Fund or the Oil and Gas Projects.

     (f)  Notwithstanding  Section 11.4(d),  the Fund may keep confidential from
Investors for such period of time as it deems  reasonable any other  information
that it  reasonably  believes  to be in the  nature  of trade  secrets  or other
information  that  the  Fund in good  faith  believes  would  not be in the best
interests  of the Fund to disclose or that could damage the Fund or its business
or that the Fund is required by law or by  agreement  with a third party to keep
confidential.

     (g) This Section 11.4 sets out all rights that  Investors have to demand or
receive  information from the Fund, except as provided by the federal securities
laws or other laws that are not superseded by this Agreement.

     (h)  The  Fund  may  establish  reasonable  standards  governing,   without
limitation,  the  information and documents to be furnished and the time and the
location, if appropriate, of furnishing that information and documents. Costs of
providing  information and documents  shall be borne by the requesting  Investor
except for de minimis amounts consistent with the Fund's ordinary practices. The
Fund shall be entitled to reimbursement for its direct,  out-of-pocket  expenses
incurred  in  declining   unreasonable  requests  (in  whole  or  in  part)  for
information.

     (i) Providing  information  to one Investor or to persons  outside the Fund
does not act as a waiver of the Fund's rights to withhold information to another
Investor.

     (j) The Fund may keep its records in other than  written form if capable of
conversion into written form within a reasonable time.

                                      A-24

<PAGE>

                                   ARTICLE 12:
                    POWERS, DUTIES AND LIMITATIONS OF MANAGER

     12.1  Management of the Fund.  The Manager  shall have full,  exclusive and
complete  discretion  in the  management  and  control  of the  Fund,  except as
otherwise  provided herein. The Manager agrees to manage and control the affairs
of  the  Fund  to the  best  of  its  ability  and  to  conduct  the  operations
contemplated  under  this  Agreement  in a careful  and  prudent  manner  and in
accordance with good industry practice. The Manager may bind the Fund.

     12.2 Acceptance of  Subscriptions.  The Manager shall not cause the Fund to
accept any subscription for Shares except as provided in Article 1 or in Section
9.6, as the case may be.

     12.3  Specific  Limitations.  (a) The  Manager  shall  not  take any of the
following  actions  without  the  affirmative  vote or  written  consent  of all
Investors pursuant to the procedures set forth in Article 15 of this Agreement:

     (1) Any act that would make it impossible  to carry on the Fund's  ordinary
business;

     (2)  Causing  the  dissolution  or  termination  of the  Fund  prior to the
expiration of its term, except as provided under Article 14;

     (3) Possessing Fund Property or assigning  rights in specific Fund Property
for other than a Fund purpose; or

     (4)  Constituting  any other  person as a Manager,  except as  provided  in
Article 14.

     (b) The  Manager  shall not take any action that would cause the Fund to be
regulated as an  "investment  company"  under the 1940 Act, nor will the Manager
take any action  that would cause the Fund to change its  investment  objectives
and  policies  without  the  approval  of  Investors  whose  aggregate   Capital
Contributions  constitute more than 50% of all Capital Contributions to the Fund
at such time.

     (c) The  Manager  shall  not sell,  exchange,  lease,  mortgage,  pledge or
transfer all or a substantially  all of the Fund's assets if not in the ordinary
course of  operation  of Fund  Property  without  the  approval  of a 50% of all
Capital Contributions to the Fund at such time.

     (d) The Fund and the  Fund's  agents  shall  not  take any  action  that is
prohibited to the Manager by this or any other provision of this Agreement.

     12.4  Specific  Powers.  In  addition  to the powers  and duties  otherwise
provided for in this Agreement, the Manager has the following powers and duties:

                                      A-25

<PAGE>

     (a) To direct or supervise  the Fund and the Fund's  agents in the exercise
of any action relating to the Fund's affairs,  including without  limitation the
powers described in Section 1.8;

     (b) To take the actions  specified  in Section  12.3 or  elsewhere  in this
Agreement if the approvals specified therein are obtained;

     (c) To amend  this  Agreement  as  specified  in  Section  15.7(a) or other
provisions of this Agreement;

     (d) To lend money to the Fund or request  the  Investment  Adviser to do so
(without  being  obligated to do so) if such loan bears interest at a reasonable
rate not  exceeding the interest cost to the Manager or the amount that would be
charged to the Fund by an  unrelated  lender on a  comparable  loan for the same
purpose  (without  reference to the  financial  abilities or  guarantees  of the
Manager or the Investment  Adviser).  The Manager or the Investment  Adviser may
not receive points or other  financing  charges or fees regardless of the amount
loaned to the Fund.  Before the Manager makes any loans to the Fund, the Manager
will attempt to obtain a loan from an unrelated lender secured,  if at all, only
by Fund Property;

     (e) To approve in its sole discretion any transfer of Investor Shares;

     (f)  To  terminate  the  offering  of  Shares  at  any  time  prior  to the
Termination Date;

     (g) To withdraw  the offering of Shares at any time as provided for in this
Agreement;

     (h) To acquire such assets or properties,  real or personal, as the Manager
in its sole  discretion  deems  necessary or appropriate  for the conduct of the
Fund's  business and to sell,  exchange,  hedge or distribute to Shareholders in
kind or otherwise dispose of any part of the Fund Property;

     (i) To operate any Oil and Gas Project or other Fund  Property  acquired by
the  Fund,  or to  contract  for  operation  under  Section  12.5,  or to engage
non-Affiliates  to operate any  Project or other Fund  Property on such terms as
they may determine in their sole discretion;

     (j) To waive any fees or  compensation  payable  to it and to  credit  such
waived  amount  in  its  discretion  against  any  obligations  it may  have  to
contribute capital under Section 14.7;

                                      A-26

<PAGE>

     (k) To provide,  or arrange for the provision of, managerial  assistance to
the Oil and Gas Projects in which the Fund invests; and

     (l) To retain and own Working  Interests  in oil and natural gas wells that
are in the same lease  block as, but are not part of, Fund  Property  and to own
Working  Interests  in oil  and  natural  gas  wells  that  may be  part of Fund
Property.

     (m) To  establish  valuation  principles  and to  periodically  apply  such
principles to the Fund's investment portfolio.

     12.5  Operation by an Affiliate.  The Fund,  by action of the Manager,  may
engage  an  Affiliate  of the  Manager  to  provide  development,  construction,
operating, management,  purchasing, planning and administrative services for any
or all Oil and Gas Projects  operated by the Fund.  The Affiliate of the Manager
under this Section  12.5 shall act under the  supervision  and  direction of the
Manager and does not have the  authority to bind the Fund or act directly in its
name except as authorized by the Manager or an officer of the Fund.  The Manager
under this  Section  12.5 shall be  reimbursed  for all costs  incurred by it as
provided in Section 9.3(c) but shall not receive any  compensation  in excess of
its costs. The Fund may enter into an Operation Agreement or other agreements to
implement  this Section  12.5.  The Manager under this Section 12.5 shall not be
compensated or reimbursed for any services related to the  administration of the
Fund as a whole, to relations with Investors or the offering of Shares or to the
identification, acquisition or disposition of Oil and Gas Projects.

     12.6 Officers of Fund.  (a) The Manager  shall appoint a President,  one or
more Vice Presidents, a Secretary and such other officers and agents of the Fund
as the Manager may from time to time consider appropriate,  none of whom need be
a  Shareholder.  Except  as  otherwise  prescribed  by the  Manager  or in  this
Agreement, each officer shall have the powers and duties usually appertaining to
a similar officer of a Delaware  corporation  under the direction of the Manager
and shall hold office at the pleasure of the Manager. Unless otherwise specified
by the Manager,  the President of the Fund shall be its chief executive officer.
Any two or more offices may be held by the same  person.  Any officer may resign
by delivering a written  resignation to the Manager and such  resignation  shall
take effect upon delivery or as otherwise specified therein.

     (b) All  conveyances  of real property or any interest  therein by the Fund
may be made by the  Manager,  which  shall  execute  on  behalf  of the Fund any
instruments  necessary to effect the conveyance.  A certificate of the Secretary
of the Fund stating  compliance with this Section 12.6(b) shall be conclusive in
favor of any person relying thereon.

                                      A-27

<PAGE>

     (c) All other documents, agreements,  instruments and certificates that are
to be made,  executed or endorsed on behalf of the Fund shall be made,  executed
or endorsed by such officers of the Fund,  the Manager or persons as the Manager
shall from time to time  authorize and such authority may be general or confined
to specific  instances.  In the absence of other  provisions,  the  President is
authorized  to execute  any  document,  to take any action on behalf of the Fund
within  this  Section  12.6(c),  and to  authorize  other  officers  to  execute
confirmatory documents or certificates.

     12.7  Presumption  of Power.  The  execution  by the  Manager or the Fund's
officers of leases,  assignments,  conveyances,  contracts or  agreements of any
kind whatsoever shall be sufficient to bind the Fund. No person dealing with the
Manager or the Fund's officers shall be required to determine their authority to
make or execute any undertaking on behalf of the Fund, nor to determine any fact
or  circumstances  bearing upon the existence of their  authority nor to see the
application or distribution of revenues or proceeds  derived  therefrom,  unless
and until such person has received written notice to the contrary.

     12.8  Obligations  Not Exclusive.  The Manager and the officers of the Fund
shall be required to devote only such part of their time as is reasonably needed
to  manage  the  business  of the  Fund or  discharge  their  duties,  it  being
understood  that  Ridgewood,  as Manager,  and the officers of the Fund have and
shall have other  business  interests  and  therefore  shall not be  required to
devote their time exclusively to the Fund.  Ridgewood Energy Corporation and the
officers  of the  Fund  shall  in no way be  prohibited  from or  restricted  in
engaging in, or possessing an interest in, any other business  venture of a like
or similar nature.  Nothing in this Section 12.8 shall relieve  Ridgewood Energy
Corporation  of  its  or  their  fiduciary  or  contractual  obligations  to the
Investors,  except as  limited in Article  3.  Notwithstanding  anything  to the
contrary  contained in this Article or  elsewhere in this  Agreement,  Ridgewood
Energy  Corporation has no duty to take any  affirmative  action with respect to
management  of the Fund's  business or Fund  Property  which  might  require the
expenditure  of monies by the Fund or Ridgewood  Energy  Corporation  unless the
Fund is then  possessed of such monies  available for the proposed  expenditure.
Except as otherwise  provided in this Agreement,  under no  circumstances  shall
Ridgewood  Energy  Corporation be required to expend its own funds in connection
with the day to day operation of Fund business.

     12.9 Removal or Incapacity  of a Manager.  (a)  Investors  whose  aggregate
Capital  Contributions  constitute at least 25% of all Capital  Contributions to
the Fund at such time may propose the removal of the Manager,  either by calling
a meeting or soliciting consents in accordance with the terms of this Agreement.
On the  affirmative  vote of Investors  whose  aggregate  Capital  Contributions
constitute more than 50% of all Capital  Contributions  to the Fund at

                                      A-28

<PAGE>

such time the  Manager  shall be  removed  effective  as of the date the vote is
completed.

     (b) If Ridgewood is removed as Manager or is incapable of acting as Manager
as enumerated in Section  14.1(c),  or it resigns for cause, it may elect in its
sole  discretion  to take  and to cause  the  Fund to take one of the  following
courses of action:

     (1) The former  Manager may elect to exchange  its  Management  Share for a
series of cash payments from the Fund to the former  Manager in amounts equal to
the amounts of  distributions  to which the former Manager would  otherwise have
been entitled under this  Agreement in respect of  investments  made by the Fund
prior to the date of the removal or other  incapacity.  Such  payments  shall be
payable out of the Fund's  available cash before any  distributions  are made to
the  Investors  pursuant  to  this  Agreement.  For  purposes  of  this  Section
12.9(b)(1), from and after the date of any such removal or other incapacity: (i)
the former Manager's  interest in the Fund  attributable to its Management Share
shall be terminated and its Capital Account shall be reduced by the amount which
is  attributable  to its  Management  Share and (ii) the  former  Manager  shall
continue to receive its pro rata share of all allocations to Investors  provided
in this  Agreement  that are  attributable  to Investor  Shares  acquired by the
Manager.

     (2)  In  the  alternative,  the  former  Manager  may  engage  a  qualified
independent  appraiser  and  cause  the  Fund to  engage  a  separate  qualified
independent  appraiser (at the Fund's expense in each case),  who together shall
value the Fund Property as of the date of such removal or other incapacity as if
the Fund  Property  had been sold at its fair market  value so as to include all
unrecognized  gains or losses.  If the two  appraisers  cannot agree on a value,
they shall appoint a third  independent  appraiser (whose cost shall be borne by
the  Fund)  whose  determination,  made on the same  basis,  shall be final  and
binding.  Based on the appraisal,  the Fund shall make allocations to the former
Manager's  Capital Account of Profits,  Losses and other items as of the date of
such removal or other incapacity as if the Fund's Fiscal Year had ended,  solely
for the purpose of determining  the former  Manager's  Capital  Account.  If the
former Manager has a positive  Capital Account after such  allocation,  the Fund
shall  deliver  a  promissory  note of the Fund to the  former  Manager,  with a
principal  amount equal to the balance in that  Capital  Account and which shall
bear  interest  at a rate per annum  equal to the prime  rate in effect at Chase
Manhattan Bank, N.A. on the date of removal or other  incapacity,  with interest
payable annually and principal payable annually only to the extent of 25% of any
available cash before any distributions  thereof are made to the Investors under
this  Agreement.  If the  Capital  Account of the former  Manager has a negative
balance  after such  allocation,  the former  Manager  shall  contribute  to the
capital of the Fund,  in its  discretion,  either cash in an amount equal to the
negative balance in its Capital Account or a promissory note to the Fund in such
principal  amount  maturing  five years after the date of such  removal or other
incapacity,  bearing  interest payable annually at the rate

                                      A-29

<PAGE>

specified  above.  For purposes of this Section  12.9(b)(2),  from and after the
date of any such removal or other  incapacity,  the former Manager's  Management
Share in the Fund shall be  terminated  and the former  Manager  shall no longer
have any  interest  in the Fund other than the right to receive  the  promissory
note and payments thereunder as provided above.

     (c) In the event  that the  Manager  is  removed  or no longer  serves as a
Manager due to an incapacity  enumerated in Section 14.1(c),  the former Manager
shall not be  entitled to any  uncollected  fees  specified  in Article 9 to the
extent not accrued before the date of such removal or other incapacity.

     12.10 Indemnification of Placement Agent. (a) The Placement Agent shall not
have any duty,  responsibility or obligation to the Fund or any Shareholder as a
consequence of its right to receive any selling  commissions or placement  agent
fees from the Fund in  connection  with any  offering  of Shares,  except to the
extent provided under applicable  Federal and State law. The Placement Agent has
not assumed,  and will not assume, any  responsibility  with respect to the Fund
nor will it be permitted by the Fund to assume any duties,  responsibilities  or
obligations regarding the management,  operations or any of the business affairs
of the Fund, subsequent to any offering of Shares.

     (b) The Placement  Agent shall be indemnified and held harmless by the Fund
against  any  losses,  damages,   liabilities  or  costs  (including  reasonable
attorneys' fees) arising from any threatened, pending or completed action, suit,
claim or proceeding by any  Shareholder  against the Placement  Agent (except as
may be  limited  by the  Act or  applicable  state  statutes),  based  upon  the
assertion  that the  Placement  Agent  has any  continuing  duty or  obligation,
subsequent  to any  offering  of  Shares,  to the  Fund  or any  Shareholder  or
otherwise to monitor Fund  operations  or report to  Investors  concerning  Fund
operations.

     12.11  Potential  Conflicts of Interest.  There are potential  conflicts of
interest  involved in the  operation  of the Fund.  Some,  but not all, of these
potential  conflicts  have been  described in the  Memorandum.  In determining a
course  of  action or  deciding  among  various  alternatives  that  potentially
conflict, the Manager will consider these and other conflicts that may exist and
exercise  reasonable  business judgment when determining such action or choosing
among  various  alternatives.  The Manager  shall not be liable to  Shareholders
hereunder  regarding such action unless the Manager  exercised bad faith,  gross
negligence  or willful  misconduct  in  choosing or  implementing  its course of
action.

                         ARTICLE 13: TRANSFERS OF SHARES

     13.1 Transfer or Resignation by a Manager. A Manager shall not sell, assign
or otherwise  transfer its Management Share or resign without cause (which

                                      A-30

<PAGE>

cause shall not include the fact or the  determination  that  continued  service
would be unprofitable  to the Manager)  without first obtaining the consent of a
Majority  of the  Voting  Shares,  except  that (i) a  Manager  may  pledge  its
Management Share for a loan;  provided that such pledge does not reduce the cash
flow of the Fund  distributable  to other  Shareholders  and (ii) a Manager  may
waive or assign compensation or fees payable to it.

     13.2 Transfers by Investors. An Investor may sell, exchange or transfer his
Shares except as restricted by and upon  compliance with all applicable laws and
all of the following provisions of this Section 13.2:

     (a) Shares may not be transferred to any person or entity if, as determined
by the Fund, such assignment would have adverse  regulatory  consequences to the
Fund or any Fund Property.

     (b) Within 30 days after written notice of a proposed sale or assignment is
received  by the  Fund  from an  Investor,  the  Fund  may  request  in its sole
discretion  an  opinion  of  counsel  acceptable  to the Fund that the  proposed
transfer (i) would not invalidate the exemption  afforded by Section 4(2) of the
Act or by Regulation D promulgated  under the Act and the exemption  afforded by
any applicable state securities laws as to any offering of interests in the Fund
and (ii)  complies  with the  exemption  afforded by Section 4(1) of the Act and
qualifies  for  an  exemption  from  registration  under  any  applicable  state
securities laws (including any investor  suitability  standard applicable to the
transferee or the Fund).

     (c) The written  approval of the Manager must be obtained,  the granting or
denial of which shall be within its sole and absolute discretion.

     (d) The transferor  and  transferee  must deliver a dated notice in writing
signed by each,  confirming that (i) the transferee accepts and agrees to comply
with  all the  terms  of this  Agreement  and  (ii)  the  transfer  was  made in
compliance with this Agreement and all applicable laws and regulations.

     (e) The  transferor,  transferee  and  the  Fund  must  execute  all  other
certificates,  instruments and documents and take all such additional  action as
the Fund may deem appropriate.

     (f) The Fund may require as a condition to any  transfer  that may create a
future  interest that an opinion of counsel  acceptable to the Fund be delivered
to the Fund confirming that the proposed  transfer does not have adverse effects
on the Fund under the rule against  perpetuities  or similar  provisions of law.
Transfers shall be effective and recognized upon fulfillment of the requirements
of clauses (a) through (f) above and the transferee  shall be an Investor owning
Investor  Shares  with the same rights as  appertained  to the  transferor.  Any
purported sale

                                      A-31

<PAGE>

or transfer  consummated without first complying with this Section 13.2 shall be
void.

     13.3  Assignments  by Operation of Law. If any Investor  shall die, with or
without leaving a will, or become non compos mentis,  bankrupt or insolvent,  or
if a corporate,  partnership or trust Investor dissolves during the Fund term or
if any other  involuntary  transfer of an Investor's  Shares is made,  the legal
representatives,  heirs  and  legatees  (and  spouse,  if the  Shares  have been
community  property  of  such  Investor  and  his  or  her  spouse),  bankruptcy
assignees,  successors, assigns and corporate, partnership or trust distributees
or such other  involuntary  transferees  shall not become  transferees but shall
have  (subject  to the other  terms and  provisions  hereof)  such rights as are
provided with respect to such persons  under the law;  provided,  however,  that
such legal representatives,  heirs and legatees,  spouse,  bankruptcy assignees,
successors,  assigns  and  corporate,   partnership  or  trust  distributees  or
involuntary transferees may become transferees in accordance with the provisions
of Section 13.2.

     13.4 Expenses of Transfer.  In the sole  discretion of the Fund, the person
acquiring  Shares  pursuant to any of the  provisions  of this Article 13 may be
required to bear all costs and  expenses  necessary to effect a transfer of such
Shares including,  without  limitation,  reasonable  attorney's fees incurred in
preparing any required  amendments  to this  Agreement  and the  Certificate  to
reflect such transfer or acquisition and the cost of filing such amendments with
the appropriate governmental officials.

     13.5 Survival of Liabilities. No sale or assignment of Shares shall release
the transferor from those  liabilities to the Fund which survive such assignment
or sale as a matter of law or that are imposed under Section 3.4.

     13.6 No Accounting.  No transfer of Shares, whether voluntary,  involuntary
or by operation of law,  shall entitle the transferor or transferee to demand or
obtain immediate valuation, accounting or payment of the transferred Shares.

                                   ARTICLE 14
                    DISSOLUTION, TERMINATION AND LIQUIDATION

     14.1  Dissolution.  Unless the provisions of Section 14.2 are elected,  the
Fund shall be dissolved and its business  shall be wound up upon the decision of
the Manager to withdraw the offering of Shares  described in the  Memorandum  in
accordance with Section 12.4(g) or on the earliest to occur of:

     (a) December 31, 2040;

                                      A-32

<PAGE>

     (b) The sale of all or substantially all of the Fund Property;

     (c) The death, removal, dissolution, resignation, insolvency, bankruptcy or
other legal  incapacity  of the  Manager or any other event which would  legally
disqualify the Manager from acting hereunder;

     (d)  The  decision  of all  Investors  or the  Manager  and a  Majority  of
Investors; or

     (e) The  occurrence of any other event,  which,  by law,  would require the
Fund to be dissolved.

     14.2  Continuation  of the  Fund.  Upon  the  occurrence  of any  event  of
dissolution  described  in Sections  14.1 (a) through (e),  inclusive,  the Fund
shall be  dissolved  and wound up unless (i) the  Manager  and a Majority of the
Voting  Shares  within  90 days  after  the  occurrence  of any  such  event  of
dissolution  elect  to  continue  the Fund or,  (ii) if there  are no  remaining
Manager  within 90 days after the  occurrence of any such event of  dissolution,
holders of a Majority of the Voting  Shares  shall elect,  in writing,  that the
Fund shall be continued on the terms and conditions  herein  contained and shall
designate one or more persons  willing to be  substituted  as a Manager.  In the
event there is no remaining  Manager and a Majority of the Voting  Shares elects
to continue the Fund, it shall be continued  with the new Manager or Manager who
shall succeed to and assume all of the powers, privileges and obligations of the
previous Manager  hereunder except as specified in Section 12.9. In the event of
a dissolution  under this Section 14.2, the former Manager shall have the rights
specified in Section 12.9.

     14.3  Obligations  on  Dissolution.  The  dissolution of the Fund shall not
release any of the parties hereto from their contractual  obligations under this
Agreement.

     14.4 Liquidation Procedure. Upon dissolution of the Fund for any reason:

     (a) A reasonable  time shall be allowed for the orderly  liquidation of the
assets of the Fund and the discharge of liabilities to creditors so as to enable
the Fund to minimize the losses normally attendant to a liquidation;

     (b) The  Shareholders  shall  continue to receive  Available Cash Flow from
Operations or Available Cash From  Dispositions,  as the case may be, subject to
the other  provisions of this  Agreement and to the provisions of subsection (c)
hereof, and shall share Profits and Losses for all tax and other purposes during
the period of liquidation; and

                                      A-33

<PAGE>

     (c) The  Manager  shall act as  liquidating  Manager  and shall  proceed to
liquidate  the Fund  Properties  to the extent that they have not  already  been
reduced to cash unless the liquidating  Manager elects to make  distributions in
kind to the extent and in the manner herein  provided and such cash, if any, and
property in kind,  shall be applied and  distributed to the  Shareholders to the
extent of, and in proportion to, the positive balances of their Capital Accounts
and then in accordance with Article 8.

     14.5 Liquidating  Trustee.  (a) If the dissolution of the Fund is caused by
circumstances  under which no Manager is available to act as liquidating Manager
or if all  liquidating  Manager  are unable or refuse to act,  the  holders of a
Majority of the Voting  Shares  shall  appoint a  liquidating  trustee who shall
proceed to wind up the business  affairs of the Fund. If no liquidating  trustee
is appointed within 180 days after the event of dissolution, any Shareholder may
petition the Court of Chancery of Delaware to appoint a liquidating trustee. The
liquidating  trustee  shall have no liability to the Fund or to any  Shareholder
for any loss  suffered by the Fund which arises out of any action or inaction of
the liquidating trustee if the liquidating  trustee,  in good faith,  determined
that such course of conduct was in the best  interests of the  Shareholders  and
such  course of conduct  did not  constitute  negligence  or  misconduct  of the
liquidating  trustee.  The liquidating  trustee shall be indemnified by the Fund
against  any  losses,  judgments,  liabilities,  expenses  and  amounts  paid in
settlement of any claims  sustained by it in connection with the Fund,  provided
that the same were not the result of negligence or misconduct of the liquidating
trustee.

     (b)  Notwithstanding  the  above,  the  liquidating  trustee  shall  not be
indemnified  and no  expenses  shall be  advanced  on its behalf for any losses,
liabilities or expenses  arising from or out of an alleged  violation of federal
or state securities laws, unless (1) there has been a successful adjudication on
the merits of each count involving  alleged  securities law violations as to the
particular indemnitee,  or (2) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as to the particular indemnitee,
or (3) a court of competent  jurisdiction  approves a  settlement  of the claims
against a particular indemnitee.

     (c) In any claim for  indemnification  for federal or state  securities law
violations,  the party seeking  indemnification shall place before the court the
position  of the  Securities  and  Exchange  Commission  and  the  Massachusetts
Securities  Division (if applicable) and the Tennessee  Securities  Division (if
applicable),  or other applicable  securities  administrators if required,  with
respect to the issue of indemnification for securities law violations.

                                      A-34

<PAGE>

     (d) The Fund  shall not incur the cost of that  portion  of any  insurance,
other than public  liability  insurance,  which  insures  any party  against any
liability the indemnification of which is herein prohibited.

     14.6 Death, Insanity,  Dissolution or Insolvency of an Investor. The death,
insanity, dissolution, winding up, insolvency, bankruptcy, receivership or other
legal  termination  of an Investor who is not a Manager  shall have no effect on
the life of the Fund and the Fund shall not be dissolved thereby.

     14.7  Manager's  Capital   Contributions.   Upon  or  prior  to  the  first
distribution in liquidation,  the Manager shall contribute to the capital of the
Fund an amount  equal to any  deficit in the  Capital  Account  of such  Manager
calculated  just  prior  to the date of such  distribution,  to the  extent  not
previously  contributed.  The Manager,  in its discretion,  may comply with this
Section  14.7  by  waiving  all or a  portion  of a  distribution  or any  other
compensation to which it is entitled under this Agreement.

     14.8  Withdrawal  of  Offering.  Dissolution  of the  Fund  resulting  from
withdrawal  of the offering of Shares is governed by Section  1.6(c) and Section
12.4(g).

                                   ARTICLE 15
                                  MISCELLANEOUS

     15.1  Notices.  Notices  or  instruments  of any kind  which  may be or are
required to be given  hereunder by any person to another shall be in writing and
deposited in the United States Mail,  certified or registered,  postage prepaid,
or delivered  overnight  and addressed to the  respective  person at the address
appearing  in the records of the Fund.  Any  Investor  may change his address by
giving notice in writing, stating his new address, to the Fund. Any notice shall
be deemed to have been  given  effective  as of 72 hours,  excluding  Saturdays,
Sundays and holidays,  after the depositing of such notice in an official United
States Mail  receptacle.  Notice to the Fund may be addressed  to its  principal
office.

     15.2 Meetings of Shareholders.  (a) Meetings. The Manager may call meetings
of the Shareholders, the Investors or any subgroup thereof concerning any matter
on which they may vote as provided by this Agreement or by law or to receive and
act upon a report of the Manager on matters  pertaining  to the Fund's  business
and activities.  Investors holding 10% or more of the outstanding  securities or
Shares entitled to vote on the matter may also call meetings by giving notice to
the Fund demanding a meeting and stating the purposes therefore. After calling a
meeting or within 20 days after receipt of a written request or requests meeting
the  requirements  of  the  preceding  sentence,  the  Fund  shall  mail  to all
Shareholders  entitled  to vote on the  matter  written  notice of the

                                      A-35

<PAGE>

place and purposes of the  meeting,  which shall be held on a date not less than
15 days nor more than 45 days  after the Fund mails the notice of meeting to the
Shareholders. Any Shareholder entitled to vote on the matter may appear and vote
or consent at a meeting by proxy,  provided that such  authority is granted by a
writing signed by the  Shareholder  and delivered to the Fund at or prior to the
meeting.

     (b) Consents.  Any consent required by this Agreement or any vote or action
by the Shareholders or any subgroup thereof may be effected without a meeting by
a consent or  consents in writing  signed by the  persons  required to give such
consent,  to vote  or to take  action.  The  Manager  may  solicit  consents  or
Investors  holding 10% or more of the outstanding  securities or Shares entitled
to vote on the matter may demand a solicitation  of consents by giving notice to
the Fund stating the purpose of the consent and including a form of consent. The
Fund shall effect a solicitation  of consents by giving those  Shareholders  who
may vote a notice of solicitation  stating the purpose of the consent, a form of
consent and the date on which the consents are to be  tabulated,  which shall be
not less than 15 days nor more than 45 days after the Fund  transmits the notice
of  solicitation  for  consents.  If  Investors  holding  10%  or  more  of  the
outstanding  securities  or  Shares  entitled  to vote on the  matter  demand  a
solicitation,  the Fund shall transmit the notice of solicitation not later than
20 days after receipt of the demand.

     (c) General.  To the extent not inconsistent with this Agreement,  Delaware
law  governing  stockholders'  meetings,  proxies and consents for  corporations
shall  apply as to the  procedure,  validity  and use of  meetings,  proxies and
consents.  Any  Shareholder  may waive notice of or attendance at any meeting or
notice of any consent,  whether before or after any action is taken. The date on
which the Fund  transmits  the notice of meeting or notice  soliciting  consents
shall be the record date for determining the right to vote or consent. A list of
the names,  addresses and shareholdings of all Shareholders  shall be maintained
as part of the Fund's books and records.

     (d) Interested  Parties.  A Shareholder  may vote Shares owned by it on any
question permitted under this Agreement  regardless of whether that Shareholder,
Affiliates of that  Shareholder or other persons  associated  with or related to
that  Shareholder  have  a  personal  interest  in  the  subject  matter  of the
transaction.  Delaware law governing the voting of shares in a corporation shall
determine  the  legal  effect  of a vote by a  Shareholder  having  an  interest
described in the preceding sentence.

     15.3 Loan to Trust by Shareholder. If any Shareholder shall, in addition to
his Capital Contribution to the Fund, lend any monies to the Fund, the amount of
any such loan shall not increase his Capital Account nor shall it entitle him to

                                      A-36

<PAGE>

any increase in his share of the  distributions  of the Fund,  but the amount of
any such loan shall be an obligation on the part of the Fund to such Shareholder
and shall be repaid to him on the terms and at the interest  rate  negotiated at
the time of the loan,  and the loan  shall be  evidenced  by a  promissory  note
executed by the Fund except that no Shareholder shall be personally obligated to
repay the loan, which shall be payable and collectible only out of the assets of
the Fund.

     15.4 Delaware Laws Govern.  This Agreement  shall be governed and construed
in accordance  with the laws of the State of Delaware.  Each Party hereto agrees
and consents (i) to be subject to the personal jurisdiction of the courts of the
State of Delaware,  (ii) that venue for any litigation between or against any of
the parties hereto may be maintained in New Castle County,  Delaware,  and (iii)
that  service of process  may be  achieved  by mail  return  receipt  requested,
overnight delivery or personal hand delivery.

     15.5 Limited Power of Attorney.  Each Investor irrevocably  constitutes and
appoints  the  Manager  as his true and  lawful  attorney-in-fact  and agents to
effectuate and to act in his name, place and stead, in effectuating the purposes
of the Fund including the  execution,  verification,  acknowledgment,  delivery,
filing and  recording  of this  Agreement as well as all  authorized  amendments
thereto and hereto, all assumed name and doing business certificates, documents,
bills of  sale,  assignments  and  other  instruments  of  conveyances,  leases,
contracts,  loan documents and  counterparts  thereof,  and all other  documents
which may be  required to effect a  continuation  of the Fund and which the Fund
deems necessary or reasonably  appropriate,  including  documents required to be
executed  in order to  correct  typographical  errors  in  documents  previously
executed by such Investor and all  conveyances  and other  instruments  or other
certificates  necessary or appropriate to effect an authorized  dissolution  and
liquidation of the Fund. The power of attorney granted herein shall be deemed to
be coupled with an interest,  shall be irrevocable  and shall survive the death,
incompetency or legal disability of an Investor.

     15.6  Disclaimer.  In forming this Fund,  all Investors  recognize that the
Fund's  businesses  are highly  speculative  and that  neither  the Fund nor the
Manager nor any other Managing  Person makes any guaranty or  representation  to
any Investor as to the probability or amount of gain or loss from the conduct of
Fund business.

     15.7  Amendment and  Construction  of Agreement.  (a) This Agreement may be
amended by the Manager, without notice to or the approval of the Investors, from
time to time  for the  following  purposes:  (1) to cure any  ambiguity,  formal
defect or omission or to correct or supplement any provision  herein that may be
inconsistent  with any other provision  contained herein or in the Memorandum or
to effect any amendment without notice to or approval by

                                      A-37

<PAGE>

Investors, as specified in other provisions of this Agreement;  (2) to make such
other changes or provisions in regard to matters or questions arising under this
Agreement  that will not  materially  and  adversely  affect the interest of any
Investor; (3) to otherwise equitably resolve issues arising under the Memorandum
or this  Agreement  so long as  similarly  situated  Investors  are not  treated
materially  differently;  (4) to maintain the federal tax status of the Fund and
any of its  Shareholders  (so  long as no  Investor's  liability  is  materially
increased  without  his  consent)  or as  provided  in  Section  4.3(d);  (5) as
otherwise provided in this Agreement or (6) to comply with law.

     (b) Other  amendments  to this  Agreement  may be  proposed  by either  the
Manager or 10% or more of the Capital  Contributions,  in each case by calling a
meeting or requesting consents under Section 15.2 and specifying the text of the
amendment and the reasons  therefore.  No amendment  under this Section  15.7(b)
that increases any Shareholder's  liability,  changes the Capital  Contributions
required of him or his rights in interest in the  Profits,  Losses,  deductions,
credits, revenues or distributions of the Fund in more than a de minimis manner,
his rights on dissolution,  or any voting or management rights set forth in this
Agreement  shall  become  effective as to that  Shareholder  without his written
approval thereof. Unless otherwise provided herein, all other amendments must be
approved by the holders of a Majority of the  outstanding  Voting Shares and, if
the terms of a series of Shares or  securities  so  require,  by the vote of the
holders of such class, series or group specified therein.

     (c) The Manager has power to construe  this  Agreement  and to act upon any
such  construction.  Its  construction of the same and any action taken pursuant
thereto  by the Fund or a  Managing  Person  in good  faith  shall be final  and
conclusive.

     15.8 Bonds and  Accounting.  The Manager shall not be required to give bond
or  otherwise  post  security for the  performance  of their duties and the Fund
waives all  provisions of law requiring or permitting  the same. No person shall
be entitled at any time to require  the Fund or any  Shareholder  to submit to a
judicial or other accounting or otherwise elect any judicial,  administrative or
executive supervisory proceeding applicable to non-business trusts.

     15.9 Binding  Effect.  This Agreement shall be binding upon and shall inure
to the  benefit of the  Shareholders  (and  their  spouses if the Shares of such
Shareholders  shall be community  property) as well as their  respective  heirs,
legal  representatives,  successors and assigns.  This Agreement constitutes the
entire  agreement  among  the  Fund and the  Shareholders  with  respect  to the
formation  and  operation  of the Fund,  other than the  Subscription  Agreement
entered into between the Fund and each Investor and the Management Agreement.

                                      A-38

<PAGE>

     15.10  Headings.  Headings of  Articles  and  Sections  used herein are for
descriptive  purposes  only and shall not  control or alter the  meaning of this
Agreement as set forth in the text.

     15.11 Tax Matters  Partner.  The Manager is the tax matters  partner of the
Fund under Code Section 6221.

RIDGEWOOD ENERGY CORPORATION
Initial Manager

By:
    -------------------------------
    Robert E. Swanson, President

                                      A-39Exhibit 10.2

                                     JOINT

                              OPERATING AGREEMENT

                                    BETWEEN

                          GRYPHON EXPLORATION COMPANY

                                  AS OPERATOR

                                      AND

                              MARINER ENERGY, INC.

                                      AND

                          RIDGEWOOD ENERGY CORPORATION

                                AS NON-OPERATORS

                                    COVERING

                             N/2 SW/4 and S/2 SW/4

                          GALVESTON AREA, BLOCK 246-L

                                 OFFSHORE TEXAS

                                     DATED

                                 August 1, 2004

<PAGE>

                           JOINT OPERATING AGREEMENT

     THIS  AGREEMENT  is made  effective  the 1st day of  August,  2004,  by the
signers hereof, herein referred to collectively as "Parties" and individually as
"Party".

                                  WITNESSETH:

     WHEREAS the PARTIES are owners of or have  contracted for the right to earn
an interest  in the oil and gas  lease(s)  identified  in Exhibit  "A",  and the
Parties desire to explore, develop, produce and operate said lease(s).

     NOW THEREFORE, in consideration of the premises and of the mutual agreement
herein, it is agreed as follows:

                                    ARTICLE I

                                   APPLICATION

     1.1  APPLICATION  TO BOTH  LEASES.  If more  than one oil and gas  lease is
identified  in Exhibit "A", this  Agreement  shall apply to both Leases and both
such Leases shall be considered as being covered by the operating agreement.

                                   ARTICLE II

                                  DEFINITIONS

     2.1 AFE.  An  Authorization  for  Expenditure  prepared  by a Party for the
purpose of  estimating  the costs to be  incurred  in  conducting  an  operation
hereunder.

     2.2 CASING POINT. That point at which a well drilled hereunder, has reached
the  proposed  objective  depth or zone,  logged  and  logs  distributed  to the
PARTICIPATING  PARTIES and any tests have been made which are necessary to reach
the decision whether to run casing.

     2.3 DEVELOPMENT OPERATIONS. Operations on the LEASES other than EXPLORATORY
OPERATIONS  as defined in Section  2.5 below.

     2.4 DEVELOPMENT WELL. Any well proposed as a DEVELOPMENT OPERATION.

     2.5 EXPLORATORY  OPERATIONS.  Operations on the LEASES, which are scheduled
for an objective zone, horizon or formation:

          (1)  which has not been  established as producible on the LEASES under
               2.18 below; or,

          (2)  which is already  established  as  producible on the Leases under
               2.18 below, but such objective zone, horizon or formation will be
               penetrated  at a location  more than 2,000 feet from the  nearest
               bottom  hole  location on the Lease at which such  objective  has
               been proved  producible,  or such objective is mutually agreed to
               be in a separate fault block.

     2.6 EXPLORATORY WELL. Any well proposed as an EXPLORATORY OPERATION.

     2.7  FACILITIES.  All  lease  equipment  beyond  the  wellhead  connections
acquired pursuant to this Agreement including any platform(s) necessary to carry
out the operation.

     2.8 LEASES.  The oil and gas leases identified in Exhibit "A" and the lands
affected  thereby.

     2.9 NON-CONSENT OPERATIONS. DEVELOPMENT or EXPLORATORY OPERATIONS conducted
by fewer than all Parties.

     2.10 NON-CONSENT PLATFORM. A drilling or production platform owned by fewer
than all PARTIES.

<PAGE>

     2.11  NON-CONSENT  WELL. A DEVELOPMENT or  EXPLORATORY  WELL owned by fewer
than all PARTIES.

     2.12 NON-OPERATOR. Any PARTY to the Agreement other than the OPERATOR.

     2.13 NON-PARTICIPATING PARTY. Any PARTY other than a PARTICIPATING PARTY.

     2.14  NON-PARTICIPATING  PARTY'S SHARE. The  PARTICIPATING  INTEREST a NON-
PARTICIPATING  PARTY  would  have had if all  PARTIES  had  participated  in the
operation.

     2.15  OPERATOR.  The PARTY  designated  under this Agreement to conduct all
operations.

     2.16  PARTICIPATING   INTEREST.  A  PARTICIPATING   PARTY'S  percentage  of
participation in an operation conducted pursuant to the Agreement.

     2.17  PARTICIPATING  PARTY.  A PARTY  who joins in an  operation  conducted
pursuant to this agreement.

     2.18 PRODUCIBLE  WELL. A well producing oil or gas, or if not producing oil
or gas,  a well  either  declared  or  capable of being  declared  producing  in
accordance  with any applicable  government  authority or by agreement of all of
the Parties.

     2.19 WORKING INTEREST.  The ownership of each PARTY to and to the LEASES as
set forth in Exhibit "A".

                                  ARTICLE III

                                    EXHIBITS

     3.1  EXHIBITS.  Attached  hereto  are  the  following  exhibits  which  are
incorporated herein by reference:

          3.1.1   Exhibit A.   Description of Leases and Working Interest

          3.1.2   Exhibit B.   Insurance Provision

          3.1.3   Exhibit C.   Accounting Procedure

          3.1.4   Exhibit D.   Nondiscrimination Provision

          3.1.5   Exhibit E.   Gas Balancing Agreement

                                   ARTICLE IV

                                    OPERATOR

     4.1 OPERATOR. Gryphon Exploration Company is hereby designated as OPERATOR.
OPERATOR  shall not have the right to assign or transfer  any rights,  duties or
obligations of OPERATOR to another PARTY subject to the provisions herein.

     4.2  RESIGNATION.  OPERATOR may resign at any time by giving  notice to the
PARTIES.  Such resignation  shall become effective at 7:00 a.m. on the first day
of the month following a period of ninety (90) days after said notice,  unless a
successor OPERATOR has assumed the duties of OPERATOR prior to that date.

     4.3 REMOVAL OF OPERATOR.  OPERATOR  may be removed if (1) OPERATOR  becomes
insolvent or unable to pay its debts as they mature or makes an  assignment  for
the benefit of creditors or commits any act of  bankruptcy or seeks relief under
laws  providing  for the relief of debtors;  or (2) a receiver is appointed  for
OPERATOR  or for  substantially  all  of its  property  and/or  affairs;  or (3)
OPERATOR or its  designee  no longer owns an interest in the  property or divest
itself of more than fifty percent  (50%) or more of the interest  owned by it in
the Lease at the time it was designated OPERATOR;  or (4) OPERATOR has committed
a material  breach of any substantive  provision  hereof or fails to perform its
duties  hereunder in a reasonable and prudent manner,  or failed to rectify such
default within sixty (60)

                                       3

<PAGE>

days after  notice from another  PARTY to do so. The PARTY giving  notice to the
OPERATOR  of a default  shall  also  furnish a copy of such  notice to the other
PARTIES.  In such event,  the OPERATOR may be removed by an affirmative  vote of
two (2) or more  PARTIES  having a combined  WORKING  INTEREST of fifty  percent
(50%) in the LEASE.

     4.4  SELECTION OF SUCCESSOR.  Upon  resignation  or removal of OPERATOR,  a
successor  OPERATOR shall be selected by an affirmative  vote of two (2) or more
PARTIES having a combined WORKING  INTEREST of fifty-one  percent (51%) or more;
however,  if the  removed or  resigned  OPERATOR  fails to vote or votes only to
succeed itself,  the successor OPERATOR shall be selected by an affirmative vote
of the PARTIES having a combined WORKING INTEREST of fifty-one  percent (51%) or
more of the remaining  WORKING  INTEREST after excluding the WORKING INTEREST of
the removed or resigned OPERATOR.

     4.5 DELIVERY OF PROPERTY.  Prior to the effective  date of  resignation  or
removal, OPERATOR shall deliver promptly to successor OPERATOR the possession of
everything owned by the PARTIES pursuant to this Agreement.

                                    ARTICLE V

                        AUTHORITY AND DUTIES OF OPERATOR

     5.1 EXCLUSIVE RIGHT TO OPERATE.  Unless  provided,  OPERATOR shall have the
exclusive right and duty to conduct all operations pursuant to the Agreement.

     5.2  WORKMANLIKE  CONDUCT.  OPERATOR shall conduct all operations in a good
and workmanlike  manner,  as would a prudent  OPERATOR under the same or similar
circumstances.  OPERATOR shall not be liable to the PARTIES for losses sustained
or liabilities  incurred except such as may result from its gross  negligence or
willful misconduct.  Unless otherwise provided,  OPERATOR shall consult with the
PARTIES and keep them informed of all important matters.

     5.3 LIENS AND  ENCUMBRANCES.  OPERATOR shall endeavor to keep the LEASE and
equipment  free  from  all  liens  and  encumbrances  occasioned  by  operations
hereunder, except those provided for in Section 8.5.

     5.4 EMPLOYEES.  OPERATOR shall select employees and determine their number,
hours of labor and compensation.  Such employees shall be employees of OPERATOR.

     5.5 RECORDS.  OPERATOR shall keep accurate  books,  accounts and records of
operations  hereunder which,  unless  otherwise  provided for in this Agreement,
shall be  available  to  NON-OPERATOR  pursuant to the  provisions  contained in
Exhibit "C".

     5.6  COMPLIANCE.  OPERATOR  shall  comply  with and  require all agents and
contractors to comply with all applicable laws, rules, regulations and orders of
any governmental agency having jurisdiction.

     5.7  DRILLING.  OPERATOR  shall have all drilling  operations  conducted by
qualified and responsible  independent  contractors under competitive contracts.
However,  OPERATOR may employ its equipment and personnel in the conduct of such
operations,  but its charges therefor shall not exceed the then prevailing rates
in the area and such work shall be  performed  pursuant  to a written  agreement
among the PARTICIPATING PARTIES.

     5.8 REPORTS.  OPERATOR shall make reports to governmental  authorities that
it has a duty to make as OPERATOR  and shall  furnish  copies of such reports to
the PARTIES.  OPERATOR  shall give timely  written  notice to the PARTIES of all
litigation and hearings affecting the LEASES or operations hereunder.

                                       4

<PAGE>

     5.9  INFORMATION  TO  PARTICIPATING  PARTIES.  OPERATOR  shall  furnish all
PARTICIPATING PARTIES hereto the following  information  pertaining to each well
being drilled:

          (a)  copy of  application  for  permit  to  drill  and all  amendments
               thereto;

          (b)  daily drilling  reports by telephone  followed by written reports
               (or by FACSIMILE);

          (c)  complete report of all core analyses;

          (d)  two (2) copies of any logs or surveys as run;

          (e)  two (2)  copies of any well test  results,  bottom-hole  pressure
               surveys, gas and condensate analyses or similar information;

          (f)  one (1) copy of reports made to regulatory agencies; and

          (g)  twenty-four  (24) hour  notice of  logging,  coring  and  testing
               operations;

          (h)  upon request prior to resumption of drilling operations,  samples
               of cuttings  and cores  marked as to depth,  to be  packaged  and
               shipped to the requesting PARTY at their expense.

          (i)  all  other   reasonable   information,   available  to  OPERATOR,
               pertaining to any well drilled pursuant to this Agreement.

                                   ARTICLE VI

                          VOTING AND VOTING PROCEDURES

     6.1   DESIGNATION   OF   REPRESENTATIVE.   The  name  and  address  of  the
representative  and  alternate  authorized  to represent and bind each PARTY for
operations  provided  in  Article  IX,  shall be as shown on  Exhibit  "A".  The
designated  representative  or alternate may be changed by written notice to the
other PARTIES.

     6.2 VOTING  PROCEDURES.  Unless  otherwise  provided,  any matter requiring
approval of the PARTIES shall be determined as follows:

          6.2.1 Voting  Interest.  Each PARTY shall have a voting interest equal
to its WORKING INTEREST or its PARTICIPATING INTEREST as applicable.

          6.2.2 Vote Required.  Except as may be specifically provided elsewhere
herein,  if there are three or more  Parties  to this  agreement,  any  proposal
requiring approval of the PARTIES shall be decided by an affirmative vote of two
(2) or more PARTIES having a combined voting interest of fifty-one percent (51%)
or more. If there are only two parties to this agreement, any proposal requiring
approval of the Parties,  other than the proposals described in Article 12.7 and
Article 13.1, shall be decided by an affirmative vote of one (1) or more Parties
having a combined voting interest of fifty-one percent (51%) or more.

          6.2.3 Votes. The PARTIES may vote at meetings, by telephone, confirmed
in writing to OPERATOR; or by letter,  telegram,  telex or telecopies.  However,
any PARTY not  attending a meeting must vote prior to the meeting in order to be
counted.  Provided,  however,  no vote  shall be taken in a meeting in which all
Parties are not present unless such vote was  specifically set out in the formal
agenda.  OPERATOR shall give prompt notice of the results of such voting to each
PARTY.

          6.2.4 Meetings. Meetings of the PARTIES may be called by OPERATOR upon
its own motion or at the  request of one (1) or more  PARTIES  having a combined
voting  interest  of not less  than ten  percent  (10%).  Except  in the case of
emergency or except when agreed by unanimous consent, no meeting shall be called
on less than five (5) days advance  written  notice,  (including  the agenda for
such meeting). The OPERATOR shall be chairman of each meeting.

                                       5

<PAGE>

                                   ARTICLE VII

                                     ACCESS

     7.1 ACCESS TO LEASE.  Each PARTY shall have access to the LEASE as its sole
risk and expense at all reasonable  times to inspect  operations and records and
data  pertaining  thereto.

     7.2 REPORTS.  OPERATOR shall furnish to a requesting  PARTY any information
to which such PARTY is entitled hereunder. The costs of gathering and furnishing
information  not  otherwise  furnished  under  Article V shall be charged to the
requesting PARTY.

     7.3  CONFIDENTIALITY.  Except as  provided  in  Section  7.4 and except for
necessary  disclosures  to  governmental  agencies,  no PARTY shall  release any
geological,  geophysical or reservoir  information or any logs, surveys or other
information  pertaining to the progress,  tests or results of any well or status
of the LEASE unless agreed to by the PARTICIPATING  PARTIES. At such time as the
PARTIES mutually agree such information is non-confidential, it may be publicly
released.  Unless otherwise provided,  OPERATOR shall initially release the same
subsequent  to approval of its content by the PARTIES.  OPERATOR  shall have the
exclusive  right to  designate  certain  wells as  "tight"  for the  competitive
protection of the PARTIES.

     7.4 LIMITED  DISCLOSURE.  Any PARTY may make confidential data available to
affiliates,  to reputable  engineering firms and gas transmission  companies for
hydrocarbon  reserve and other  technical  evaluations,  to reputable  financial
institutions  for study prior to commitment of funds and to bonafide  purchasers
of all of a PARTY'S interest in the LEASE. Any third party permitted such access
shall first agree in writing  neither to disclose such data to others nor to use
such data except for the purpose for which it is disclosed.  Each PARTY shall be
furnished with copies of third parties execution of the same.

                                  ARTICLE VIII

                                  EXPENDITURES

     8.1 BASIS OF CHARGE TO THE  PARTIES.  Subject to other  provisions  of this
Agreement,  OPERATOR shall pay all costs and each PARTY shall reimburse OPERATOR
in proportion to the PARTICIPATING INTEREST. All charges, credits and accounting
for expenditures  shall be pursuant to the Accounting  Procedure attached hereto
as Exhibit "C". The provisions of this  Agreement  shall prevail in the event of
conflict with Exhibit "C".

     8.2  AUTHORIZATION.  OPERATOR shall neither make any single expenditure nor
undertake  any  project  costing  in excess  of  Seventy-five  Thousand  Dollars
($75,000.00)  without prior  approval of the PARTIES.  OPERATOR  shall furnish a
written AFE, for information  purposes only, to the PARTIES on any  expenditures
in  excess  of  Twenty-five  Thousand  Dollars  ($25,000.00)  or when  costs are
anticipated to exceed 120% of a previously approved AFE. Subject to any election
provided  in  Article  X and XI,  approval  of a well  operation  shall  include
approval of a all necessary  expenditures  through installation of the wellhead.
In the event of an emergency, OPERATOR may immediately make such expenditures as
in its opinion are required to deal with the emergency. OPERATOR shall report to
the PARTIES,  as promptly as possible,  the nature of the  emergency  and action
taken.

     8.3 ADVANCE  BILLINGS.  OPERATOR shall have the right to require each PARTY
to advance its respective  share of estimated  expenditures  pursuant to Exhibit
"C". As to any party who fails to pay its share of said advance  payment  within
fifteen (15) days after  receipt of such  statement  and invoice,  Operator will
notify such affected

                                       6

<PAGE>

party of its default by certified  mail,  return  receipt  requested and if such
party fails to cure the default within ten (10) days from the date of receipt of
Operator's  Notice,  by payment in full of the outstanding  invoices for advance
payment, at Operator's election,  the affected Party shall be deemed non-consent
as to the proposed well attributable thereto.

     8.4  COMMINGLING OF FUNDS.  Funds received by OPERATOR under this Agreement
may be commingled with its own funds.

     8.5 SECURITY RIGHTS.  In addition to any other security rights and remedies
provided by law with  respect to services  rendered or materials  and  equipment
furnished  under  this  Agreement,  OPERATOR  shall  have a first lien upon each
PARTY'S  PARTICIPATING  and/or  WORKING  INTEREST,  including the production and
equipment  credited thereto,  in order to secure payment of charges against such
PARTY,  together with  interest  thereon at the rate set forth in Exhibit "C" or
the maximum rate allowed by law,  whichever is less, plus attorneys' fees, court
costs and other related collection costs. If any PARTY does not pay such charges
when due, OPERATOR shall have the additional right to collect from the purchaser
the proceeds from the sale of such PARTY'S share of production  until the amount
owed has been paid.  Each  purchaser  shall be  entitled  to rely on  OPERATOR'S
statement  concerning the amount owed. Each  NON-OPERATOR  shall have comparable
security rights on OPERATOR'S PARTICIPATING and/or WORKING INTEREST.

     8.6 UNPAID  CHARGES.  If any PARTY fails to pay the charges due  hereunder,
including  billings under Section 8.3,  within thirty (30) days after payment is
due,  the  PARTICIPATING  PARTIES  shall have the  obligation,  upon  OPERATOR'S
request, to pay the unpaid amount in proportion to their interest. Each PARTY so
paying its share of the unpaid amount shall be subrogated to OPERATOR'S security
rights to the extent of such payment.

     8.7  DEFAULT.  If any PARTY does not pay its share of the charges when due,
or prior to  commencement  of the  approved  operation  for which it is  billed,
whichever  is the  earlier,  OPERATOR  may give such PARTY  notice  that  unless
payment is made within  fifteen (15) DAYS,  such PARTY shall be in default.  Any
PARTY in default shall have no further access to the maps, cores, logs, surveys,
records, data,  interpretations or other information obtained in connection with
said operation.  A defaulting  PARTY shall not be entitled to vote on any matter
until such time as PARTY'S  payments  are current.  The voting  interest of each
non-defaulting PARTY shall be in the proportion its PARTICIPATING INTEREST bears
to the total non-defaulting PARTICIPATING INTEREST. As to any operation approved
or commenced  during the time a PARTY is in default,  such PARTY shall be deemed
to be a NON-PARTICIPATING PARTY.

     8.8 CARVED-OUT  INTERESTS.  Subject to the  reservations set out in Article
16.1, any overriding royalty, production payment, net proceeds interest, carried
interest or any other interest  carved-out of the WORKING INTEREST in the LEASES
after the effective date of this Agreement shall be subject to the rights of the
PARTIES to this Agreement, and any PARTY whose WORKING INTEREST is so encumbered
shall be responsible therefor. If a PARTY does not pay its share of expenses and
the proceeds from the sale of production  under Section 8.5 are insufficient for
that purpose,  the security  rights  provided for therein may be applied against
the carved-out  interests with which such WORKING INTEREST is burdened.  In such
event, the rights of the owner of such carved-out interest shall be subordinated
to the security rights granted by Section 8.5.

                                       7

<PAGE>

                                   ARTICLE IX

                                    NOTICES

     9.1 GIVING AND  RECEIVING  NOTICES.  All  notices  shall be in writing  and
delivered in person or by mail,  telex,  telegraph,  TWX,  telecopier  or cable;
however,  if a drilling  rig is on  location  at time of  proposal  and  standby
charges  are  accumulating,  such  notices  shall  be  given  by  telephone  and
immediately  confirmed  in  writing.  Notice  shall be  deemed  given  only when
received by the PARTY to whom such notice is directed, except that any notice by
certified mail or equivalent, telegraph or cable properly addressed, pursuant to
Section  6.1,  and with all postage and charges  prepaid  shall be deemed  given
seventy-two (72) hours after such notice is deposited in the mail or twenty-four
(24) hours after such notice is sent by facsimile (receipt  confirmed),  or when
filed with an operating, telegraph or cable company for immediate transmission.

     9.2 CONTENT OF NOTICE.  Any notice which requires a response shall indicate
the maximum  response  time  specified  in Section 9.3 If a proposal  involves a
Platform or Facility,  the notice shall contain a description of same, including
location  and  the   estimated   costs  of   fabrication,   transportation   and
installation.  If a proposal involves a well operation, the notice shall include
the estimated commencement date, the proposed depth, the objective zone or zones
to be tested,  the surface and bottom-hole  locations and the estimated costs of
the operation including all necessary  expenditures  through installation of the
wellhead.

     9.3 RESPONSE TO NOTICES.  Each PARTY'S  response to a proposal  shall be in
writing to OPERATOR,  with copies to the other PARTIES. Except for those notices
in Articles X, XI, XV and XVI, the maximum response time shall be as follows:

          9.3.1 Platform Construction. When any proposal for operations involves
the  construction of a platform,  the maximum  response time shall be forty-five
(45) days.

          9.3.2 Proposal Without Platform. When any proposal for operations does
not require  construction of a platform,  maximum  response time shall be thirty
(30) days;  however,  if a drilling rig is on location  and standby  charges are
accumulating, the maximum response time shall be forty-eight (48) hours.

          9.3.3 Other  Matters.  For all other  matters  requiring  notice,  the
maximum response time shall be thirty (30) days.

     9.4 FAILURE TO RESPOND.  Failure of any PARTY to respond to a notice within
the required period shall be deemed to be a negative response.

     9.5 RESTRICTIONS ON MULTIPLE WELL PROPOSALS. Unless otherwise agreed by the
PARTIES,  no more than one well shall be drilling or completing  for the account
of the  Parties on the Lease at the same  time.  Well  proposals  made under the
terms hereof shall be limited to one well each and except as provided  below, no
PARTY shall be required to make an election under more than one well proposal at
the same time or while a well is drilling or completing.  This  paragraph  shall
not limit the right of a PARTY to propose a well while  another is  drilling  or
completing,  however,  the time to elect under such a proposal shall be deferred
until (a) thirty (30) days after the previous well has been completed or plugged
and abandoned or (b) twenty-four  (24) hours from receipt of  notification  that
the  drilling  rig has been moved to the new  location  and standby  charges are
being accumulated, whichever is earlier.

                                       8

<PAGE>

                                    ARTICLE X

                                EXPLORATORY WELLS

     10.1 OPERATIONS BY ALL PARTIES.  Any PARTY may propose an EXPLORATORY  WELL
by notifying  the other  PARTIES.  If all the PARTIES  agree to  participate  in
drilling the  proposed  well,  OPERATOR  shall drill same for the benefit of all
PARTIES.

     10.2 SECOND OPPORTUNITY TO PARTICIPATE.  If fewer than all PARTIES elect to
participate,  OPERATOR shall inform all PARTIES of the elections made, whereupon
any PARTY  originally  electing not to participate may then elect to participate
by notifying the OPERATOR  within  forty-eight  (48) hours after receipt of such
information.

     10.3 OPERATIONS BY FEWER THAN ALL PARTIES. If fewer than all but one (1) or
more PARTIES owning not less than twenty percent (20%) WORKING INTEREST elect to
participate  in and  agree to bear the cost and risk of  drilling  the  proposed
well,  OPERATOR,  even if OPERATOR is a NON-PARTICIPATING  PARTY, shall have the
option of drilling such well for the PARTICIPATING PARTIES under this Agreement.
OPERATOR,  immediately after expiration of the applicable  notice period,  shall
advise  the  PARTICIPATING  PARTIES  of (a) the total  interest  of the  PARTIES
approving  such  operation,  and  (b)  its  recommendation  as  to  whether  the
PARTICIPATING  PARTIES  should  proceed with the  operation  as  proposed.  Each
PARTICIPATING  PARTY,  within  forty-eight  (48) hours  (inclusive  of Saturday,
Sunday or legal  holidays)  after  receipt  of such  notice,  shall  advise  the
proposing  PARTY  of its  desire  to (a)  limit  participation  to such  PARTY'S
interest  as shown on  Exhibit  "A",  or (b)  carry  its  proportionate  part of
NON-PARTICIPATING PARTIES' interest, or (c) participate with a lesser percentage
than its proportionate  part of the  NON-PARTICIPATING  PARTIES'  interest.  The
proposing  PARTY,  at its  election,  may  withdraw  such  proposal  if there is
insufficient  participation  and  shall  promptly  notify  all  PARTIES  of such
decision. If the well is commenced within ninety (90) days after the date of the
last applicable election date and is drilled as proposed in accordance with this
Agreement,  any  PARTY  electing  not to  participate  shall be  deemed  to have
relinquished its operating rights in such well as if it were a NON-CONSENT WELL.
However,  in the situation in which a rig is on location and standby charges are
accumulating,  thus  precipitating a forty-eight (48) hour response period,  the
well must be commenced  within  fifteen (15) days.  If no  operations  are begun
within such time  period,  the effect  shall be as if the  proposal had not been
made.  Operations shall be deemed to have commenced (a) on the date the contract
for a new platform is let, if the notice  indicated the need for such  platform;
or (b) the date rigging-up  operations on the well are commenced.  Recoupment of
costs shall be  determined by Sections  12.2 and 12.5,  if  applicable,  and the
drilling of such well shall be governed by Article XII as  applicable;  however,
percentages under Section 12.2 shall be as follows:

          12.2.1a) Eight hundred percent (800%)
          12.2.1b) Three hundred percent (300%)
          12.2.1c) One hundred percent (100%)
          12.2.1d) One hundred percent (100%)

Provided however,  if the proposed  EXPLORATORY WELL is the initial well drilled
by the PARTIES on the LEASE, then any NON-PARTICIPATING  PARTY shall permanently
assign its entire  interest  in the LEASE to the  PARTICIPATING  PARTIES and the
recoupment  of cost  provision  of this Article and Article XII shall not apply,
but the NON-PARTICIPATING PARTY shall not be relieved of any obligation accruing
prior to such assignment.

                                       9

<PAGE>

     10.4 COURSE OF ACTION AFTER DRILLING TO INITIAL OBJECTIVE DEPTH

          10.4.1  Casing  Point  Election.  After an  Exploratory  Well has been
drilled for all Parties to the objective depth,  and all authorized  logging and
testing has been  completed,  OPERATOR shall  immediately  notify the PARTIES of
OPERATOR'S proposal to either;

               (a)  further log or test the well,

               (b)  complete the well as originally planned,

               (c)  plug-back  and  complete  the  well in a  shallower  zone in
                    ascending order,

               (d)  deepen the well within a previously approved objective zone,
                    in descending order,

               (e)  deepen the well below the deepest approved objective zone or
                    zones,

               (f)  sidetrack the well to a new bottom hole location  within the
                    approved objective zone,

               (g)  other operations in the well, or

               (h)  plug and abandon the well.

Within  forty-eight (48) hours after receipt of OPERATOR'S  proposal,  the other
PARTIES   shall   respond   thereto   by  either   approving   it  or  making  a
counter-proposal.  If a  counter-proposal  is made,  the  PARTIES  shall have an
additional  forty-eight (48) hours to respond thereto.  If all PARTIES approve a
proposal  or  counter-proposal,  OPERATOR  shall  conduct the  operation  at the
PARTICIPATING  PARTIES  cost  and  risk.  A  proposal  to  complete,  rework  or
recomplete a well at a particular  depth will take  precedence  over proposal to
complete, rework or recomplete the well above such depth, with a deeper proposal
for  such  operations  always  taking  precedence  over  a  shallower  proposal.
Proposals for such  operations at any depth will take  precedence over proposals
to deepen the well below its originally proposed total depth or to sidetrack the
well once it has reached such depth.  However, upon reaching the AFE total depth
as initially proposed,  should OPERATOR determine that the well is still in pay,
then  before  any  subsequent  proposal  is made and  approved  by the  PARTIES,
OPERATOR shall notify the PARTIES  accordingly.  At that point should  competing
proposals to deepen and  complete be made,  a vote by two or more with  combined
voting  interest of fifty  percent  (50%) will  determine  whether  deepening or
completing  the well will take  priority.  Proposals  of the same type  shall be
given  precedence  in the  order in which  they are  made.  No  action  shall be
required on a proposal while there is pending a proposal,  with precedence being
on the same well on which the  parties  have not acted or on which  work has not
been completed. If fewer than all, but one (1) or more, Parties having a Working
Interest of 40% or more approve a proposal or counterproposal made under Section
10.4 and agree to bear the cost and risk  thereof,  Operator  shall  conduct the
same pursuant to Article 12.

                                   ARTICLE XI

                           DEVELOPMENT WELL OPERATIONS

     11.1  OPERATIONS  BY ALL  PARTIES.  Any  PARTY may  propose  a  DEVELOPMENT
OPERATION,  including any platform required by such operations, by notifying the
other PARTIES.  If all PARTIES elect to  participate in the proposed  operation,
OPERATOR  shall  conduct such  operation for the benefit of the PARTIES at their
cost and risk.

     11.2 SECOND OPPORTUNITY TO PARTICIPATE.  If fewer than all PARTIES elect to
participate,  the  OPERATOR  shall  inform the  PARTIES of the  elections  made,
whereupon any PARTY  originally  electing not to  participate  may then elect to
participate  by  notifying  the  OPERATOR  within  forty-eight  (48) hours after
receipt of such  information.  Thereafter,  if fewer than all  PARTIES  elect to
participate, the PARTICIPATING PARTIES shall be afforded the alternatives as set
out under Article 10.3.

                                       10

<PAGE>

     11.3 OPERATIONS BY FEWER THAN ALL PARTIES. Except for a DEVELOPMENT WELL(S)
under  Section  12.7,  if fewer than all  PARTIES,  but one (1) or more  PARTIES
having a combined  WORKING  INTEREST of twenty  percent  (20%) or more approve a
DEVELOPMENT OPERATION; OPERATOR shall conduct such operation pursuant to Article
XII. If such  operations  are to be  conducted  from an existing  platform,  the
operations  participated in by all of the PARTIES shall have preference,  unless
otherwise agreed to by the PARTIES hereto.

     11.4 TIMELY  OPERATIONS.  Operations  shall be commenced within ninety (90)
days following the date upon which the last applicable  election may be made. If
no operations  are begun within such time period,  the effect shall be as if the
proposal had not been made.  Operations shall be deemed to have commenced (a) on
the date the  contract for a new  platform is let, if the notice  indicated  the
need for such platform;  or (b) on the date rigging-up  operations are commenced
on an existing platform.

     11.5 COURSE OF ACTION AFTER DRILLING TO INITIAL OBJECTIVE DEPTH.  After any
DEVELOPMENT WELL has reached its objective  depth, the identical  procedures and
alternatives provided under Article 10.4 shall apply.

     11.6 DEEPER DRILLING. If a well is proposed to be drilled below the deepest
producible zone penetrated by a PRODUCIBLE WELL on the LEASE any PARTY may elect
to  participate  either in the well as  proposed  or to the base of the  deepest
producible  zone. A PARTY  electing to  participate  in such well to the base of
said zone shall bear its proportionate  part of the cost and risk of drilling to
said zone including completion or abandonment. All operations below the depth to
which such PARTY agreed to participate shall be governed by Article X.

                                   ARTICLE XII

                             NON-CONSENT OPERATIONS

     12.1 NON-CONSENT OPERATIONS.  OPERATOR shall conduct NON-CONSENT OPERATIONS
at the sole risk and expense of the  PARTICIPATING  PARTIES,  in accordance with
the following provisions;

          12.1.1  Non-Interference.  NON-CONSENT  OPERATIONS shall not interfere
unreasonably with operations being conducted by all PARTIES.

          12.1.2 Multiple Completion  Limitation.  NON-CONSENT  OPERATIONS shall
not  be  conducted  in a well  having  multiple  completions  unless:  (a)  each
completion is owned by the same PARTIES in the same proportions; (b) the well is
incapable  of  producing  from  any  of its  current  completions;  or  (c)  all
PARTICIPATING PARTIES in the well consent to such operations.

          12.1.3  Metering.  In NON-CONSENT  OPERATIONS,  production need not be
separately metered but may be determined on the basis of well test.

          12.1.4  Liens.   In  the  conduct  of  NON-CONSENT   OPERATIONS,   the
PARTICIPATING  PARTIES  shall  keep  the  LEASE  free and  clear  of  liens  and
encumbrances.

          12.1.5 Non-Consent Well. Operations on a NON-CONSENT WELL shall not be
conducted  in any  producible  zone  penetrated  by a  PRODUCIBLE  WELL  without
approval of each  NON-PARTICIPATING  PARTY unless; (a) such zone shall have been
designated in the notice as a completion  zone;  (b)  completion of such well in
said  zone will not  increase  the well  density  governmentally  prescribed  or
approved for such zone; and (c) the horizontal

                                       11

<PAGE>

distance  between the vertical  projections  of the midpoint of the zone in such
well and any existing well in the same zone will be a least one thousand (1,000)
feet if an  oil-well  completion  or two  thousand  (2,000)  feet if a  gas-well
completion.  Subject to the  foregoing  provisions  of this  Article,  until the
PARTICIPATING  PARTIES in a  NON-CONSENT  WELL have recouped the amount to which
they are entitled  hereunder,  they may conduct any reworking  operation on such
well which they may desire, including plugging back to a shallower zone but only
if such  shallower  zone is subject to  NON-CONSENT  elections  in the  original
proposal.  In this event, the cost of such reworking  operation shall be subject
to the penalty provisions of Section 12.2.1.

          12.1.6  Cost-Information.  OPERATOR  shall,  within one hundred twenty
(120) days after  completion  of a  NON-CONSENT  WELL,  furnish  the  PARTIES an
inventory  and an  itemized  statement  of the cost of such  well and  equipment
pertaining  thereto.  OPERATOR shall furnish to the PARTIES a monthly  statement
showing operating expenses and the proceeds from the sale of production from the
well for the preceding month.

          12.1.7 Completions. For the purposes of determinations hereunder, each
completion shall be considered a separate well.

     12.2   RELINQUISHMENT   OF  INTEREST.   Upon  commencement  of  NON-CONSENT
OPERATIONS,  each  NON-PARTICIPATING  PARTY'S  interest and leasehold  operating
rights in the NON-CONSENT  OPERATION and title to production there from shall be
owned  by  and  vested  in  each  PARTICIPATING   PARTY  in  proportion  to  its
PARTICIPATING  INTEREST for as long as the  operations  originally  proposed are
being  conducted  or  production  is  obtained,  subject to Sections  12.2.1 and
12.2.2.

          12.2.1 Production  Reversion  Penalties.  Except as to such operations
conducted pursuant to Section 12.7 or for the initial  EXPLORATORY WELL referred
to in  Section  10.3,  such  interest,  rights  and title  shall  revert to each
NON-PARTICIPATING  PARTY when the PARTICIPATING PARTIES have recouped out of the
proceeds of production from such  NON-CONSENT  OPERATIONS an amount equal to the
sum of the following:

               (a)  Six  hundred   percent  (600%)  of  the  cost  of  drilling,
                    completing, recomputing,  sidetracking, deepening, deviating
                    or plugging  back each  NON-CONSENT  WELL and  equipping  it
                    through   the   wellhead   connections,   reduced   by   any
                    contribution received under Section 21.1; plus,

               (b)  Three  hundred  percent  (300%)  of the  cost of  FACILITIES
                    necessary to carry out the operation; plus,

               (c)  One  hundred  percent  (100%)  of  the  cost  of  using  any
                    FACILITIES already installed  determined pursuant to Section
                    12.6 below; plus,

               (d)  One  hundred   percent  (100%)  of  the  cost  of  operating
                    expenses, royalties and severance, gathering, production and
                    windfall profit taxes.

Recoupment of costs shall be in the order listed above.  Upon the  recoupment of
such costs, a NON-PARTICIPATING PARTY shall become a PARTICIPATING PARTY in such
operations.

          12.2.2 Non-Production  Reversion.  If such NON-CONSENT OPERATIONS fail
to obtain  production or such operations result in production which ceases prior
to recoupment by the PARTICIPATING  PARTIES of the penalties provided for above,
such operating rights shall revert to each  NON-PARTICIPATING  PARTY except that
all  NON-CONSENT  wells,  platforms  and  FACILITIES  shall remain vested in the
PARTICIPATING PARTIES; however, any salvage in excess of the sum remaining under
Section 12.2.1 shall be credited to all PARTIES.

                                       12

<PAGE>

     12.3 DEEPENING OR  SIDETRACKING OF NON-CONSENT  WELL. If any  PARTICIPATING
PARTY  proposes to deepen or sidetrack a NON-CONSENT  WELL, a  NON-PARTICIPATING
PARTY may  participate by notifying the OPERATOR  within fifteen (15) days after
receiving  the proposal (48 hours if a rig is on location)  that it will join in
the (deepening or sidetracking)  operations,  and by paying to the PARTICIPATING
PARTIES an amount equal to such  NON-PARTICIPATING  PARTY'S  share of the actual
costs of drilling  and casing such well to the point at which such  deepening or
sidetracking operation is commenced. The PARTICIPATING PARTIES shall continue to
be entitled to recoup the full sum specified in Section 12.2.1 applicable to the
NON-CONSENT  WELL, less the amount paid under this section,  out of the proceeds
of production from the NON-CONSENT portion of the well.

     12.4 OPERATIONS FROM  NON-CONSENT  PLATFORMS.  Subject to the following,  a
PARTY which did not originally  participate in a platform  proposed  pursuant to
the terms herein,  shall be a NON-PARTICIPATING  PARTY as to ownership therein
and all operations  thereon until the PARTICIPATING  PARTIES as to such platform
have  recouped  the full sum  specified  in Section  12.2.1  applicable  to such
NON-CONSENT  PLATFORM  and the  NON-CONSENT  OPERATIONS  which  resulted  in the
setting of such PLATFORM and other NON-CONSENT  OPERATIONS thereon or therefrom.
However,  an original  NON-PARTICIPATING  PARTY may  participate  in  additional
operations  from such PLATFORM by notifying the OPERATOR within thirty (30) days
after  receiving a proposal for operations from such PLATFORM (48 hours if a rig
is on location and standby rig charges are being  incurred) that it will join in
such proposed operations by paying to the PARTICIPATING PARTIES in such PLATFORM
an amount equal to 300% of such  NON-PARTICIPATING  PARTY'S  share of the actual
cost of  such  PLATFORM,  less  any  recoupment  therefor  previously  obtained.
Thereafter,  such original NON-PARTICIPATING PARTY in the PLATFORM shall own its
proportionate  share  thereof.  The  PARTICIPATING  PARTIES in such NON-CONSENT
PLATFORM  shall  continue  to be entitled  to recoup the full sum  specified  in
Section  12.2.1  applicable  to any  other  NON-CONSENT  OPERATIONS  thereon  or
therefrom.

     12.5  DISCOVERY OR EXTENSION  FROM MOBILE  DRILLING  OPERATIONS.  If a NON-
CONSENT  WELL drilled from a mobile  drilling  rig or floating  drilling  vessel
results in the discovery or extension of productive  formations  and, if within
one (1) year from the date the drilling  equipment  is  released,  a platform or
other  fixed  structure  is ordered and if its  location is within one  thousand
(1,000) feet from an oil well or three  thousand  (3,000) feet if gas,  from the
vertical projection of the bottom-hole location of any such well (unless limited
by surface  restrictions),  the  recoupment  of amounts  applicable to such well
under Section  12.2.1 shall be out of such original NON-PARTICIPATING  PARTY'S
SHARE of all production from such  NON-CONSENT WELL and one-half of its share of
production from all other wells on the platform or other fixed structure drilled
to develop  reserves  resulting  from the  discovery or extension of  productive
formations in said NON-CONSENT WELL in which the NON-PARTICIPATING PARTY in such
NON-CONSENT WELL has a PARTICIPATING INTEREST.

     12.6  ALLOCATION OF PLATFORM COSTS TO NON-CONSENT  OPERATIONS.  NON-CONSENT
OPERATIONS shall be subject to further conditions as follows:

          12.6.1 Charges.  If a NON-CONSENT WELL is drilled from a platform (and
is producible or the slot is otherwise  rendered  unusable),  the  PARTICIPATING
PARTIES in such well shall pay to the  OPERATOR for credit to the owners of such
platform a charge (due upon completion of operations for such NON-CONSENT  WELL)
for

                                       13

<PAGE>

the  right  to use  the  platform  and  its  FACILITIES  as  follows:

               (a)  Such  PARTICIPATING  PARTIES  shall  pay a sum equal to that
                    portion of the total cost of the  platform  (including,  but
                    not  by way  of  limitation,  costs  of  design,  materials,
                    fabrication,  transportation,  installation  and other costs
                    associated  therewith,  plus  any  repairs  and  maintenance
                    expense  resulting  from  the  drilling  of  such  well  not
                    provided in Section  12.6,2),  which one platform slot bears
                    to  the  total  number  of  slots  on the  platform.  If the
                    NON-CONSENT   WELL   is   abandoned,   the   right   of  the
                    PARTICIPATING  PARTIES  to  use  that  platform  slot  shall
                    terminate unless such PARTIES commence drilling a substitute
                    well  from the same  slot  within  ninety  (90)  days  after
                    abandonment.

               (b)  If  the  NON-CONSENT  WELL  production  is  handled  through
                    existing FACILITIES, the PARTICIPATING PARTIES shall pay the
                    owners of the  facilities a sum equal to that portion of the
                    total   cost  of  such   FACILITIES   which  the  number  of
                    completions  in said  NON-CONSENT  WELL  bears to the  total
                    number of completions utilizing the FACILITIES.

          12.6.2 Operating  and Maintenance  Charges.  The PARTICIPATING PARTIES
shall pay all costs  necessary to connect a NON-CONSENT  WELL to the  FACILITIES
and that  proportionate  part of the expense of operating  and  maintaining  the
platform and other FACILITIES  applicable to the NON-CONSENT WELL, including the
cost of  insurance  thereon or in  connection  therewith,  whether by  insurance
policy of  self-insurance  by each PARTY for its interest or by OPERATOR for the
joint account.  Platform  operating and maintenance  expenses shall be allocated
equally to all completions served and operating and maintenance expenses for the
other FACILITIES shall be allocated equally to producing completions.

          12.6.3 Payments.  Payments of sums pursuant to Section 12.6.1 is not a
purchase of an  additional  interest in the platform or other  FACILITIES.  Such
payments shall be included in the total amount, which the PARTICIPATING  PARTIES
are entitled to recoup out of production from the NON-CONSENT WELL.

     12.7 NON-CONSENT DRILLING TO MAINTAIN LEASE. A lease maintenance  operation
is defined for the  purposes of this  paragraph  as one required to maintain the
joint LEASE or a portion  thereof,  at its  expiration  date or otherwise.  This
shall  include,  but not be  limited  to,  a well  proposed  to be and  actually
commenced and drilled during the last year of the primary term of the LEASE,  or
subsequent  thereto,  when: (a) the LEASE, or affected portion  thereof,  is not
otherwise  being held by  operations  or  production;  (b) a PRODUCIBLE  WELL(S)
thereon has not  established  sufficient  reserves,  as determined by one (1) or
more  PARTICIPATING  PARTIES owning fifty percent (50%) working  interest in the
well, to justify a platform;  or (c) any governmental agency having jurisdiction
requires  the same to avoid  loss or  forfeiture  of all or any  portion  of the
LEASE. Any PARTY may propose and carry out a lease maintenance operation and any
PARTY(S)  electing not to  participate  in such an operation  will assign to the
PARTICIPATING  PARTIES in the proportions in which they participate therein, all
of its rights,  titles and interest in such LEASE block, or the affected portion
thereof,  free and clear of any burdens  thereon  occurring  since the effective
date of this Agreement as provided herein,  retaining,  however, its interest in
previously completed wells which are

                                       14

<PAGE>

producing,  shut-in or temporarily  abandoned.  Such assignment,  effective upon
commencement  of lease  maintenance  operations,  will be promptly signed before
witnesses,  acknowledged and delivered to the PARTICIPATING  PARTIES.  If only a
portion of the LEASE is involved,  the  PARTICIPATING  PARTIES at their election
may require an assignment of operating  rights in lieu of the  assignment of all
interest. Upon acceptance by assignees, the assigning PARTY will thereupon cease
to be1 a PARTY hereto as to the assigned  interest,  subject to final accounting
between the PARTIES.  If such assignment is not accepted by the Assignees,  they
shall promptly prepare a release of such affected LEASE or portion thereof which
shall be executed by all PARTIES.  However,  nothing  herein  contained  will be
construed to permit any PARTY to refuse to pay in cash its share of the cost and
expense of any operation required on the joint LEASE block by final order of any
governmental authority or court having jurisdiction.

          12.7.1  Retention of Lease by Non-Consent  Well. If a NON-CONSENT WELL
is the only well on the  LEASE(S)  and is serving to  perpetuate  the  LEASE(S),
within  thirty (30) days after  expiration of the LEASE(S)  primary  term,  each
NON-PARTICIPATING PARTY shall elect one of the following;

               (a)  Immediately  assign its entire  interest in the  LEASE(S) to
                    the  PARTICIPATING  PARTIES in the  proportions in which the
                    NON-CONSENT OPERATION was conducted; or

               (b)  Immediately  pay to the  PARTICIPATING  PARTIES its share of
                    all costs  associated  with such well,  less any  recoupment
                    therefore previously  obtained,  such payment to be credited
                    against the total amount to be recovered out of its share of
                    production by the PARTICIPATING  PARTIES pursuant to Article
                    X or XII, whichever is applicable.

     12.8 ALLOCATION OF COSTS (SINGLE COMPLETION). For the purpose of allocating
costs on any well in which the  ownership is not the same for the entire  depth,
the cost of drilling,  completing  or equipping  such well shall be allocated on
the following basis;

          (a)  Intangible  drilling,  completion and material  costs  (including
               casing and tubing  costs) from the surface to a depth one hundred
               (100) feet below the base of the completed  zone shall be charged
               to the owners or the PARTIES participating in that zone.

          (b)  Intangible  drilling,  completion,  casing  string  and  material
               costs,  other than tubing  costs,  from a depth one hundred (100)
               feet below the base of the completed zone to total depth shall be
               charged to the owners or the PARTIES  participating  in the costs
               to total depth.

     12.9  ALLOCATION  OF  COSTS  (MULTIPLE  COMPLETIONS).  For the  purpose  of
allocating  costs on any well  completed in dual or multiple  zones in which the
ownership is not the same for the entire depth or the completions  thereof,  the
cost of drilling,  completing  and equipping such well shall be allocated on the
following basis:

          (a)  Intangible drilling,  completion  (including wellhead equipment),
               casing string and material costs,  other than tubing costs,  from
               the surface to a depth one  hundred  (100) feet below the base of
               the upper  completed  zone shall be divided  equally  between the
               completed  zones and charged to the owners thereof or the PARTIES
               participating in such zone.

          (b)  Intangible  drilling,  completion,  casing  string  and  material
               costs, other than tubing costs, from

                                       15

<PAGE>

               a depth  one  hundred  (100)  feet  below  the base of the  upper
               completed  zone to a depth one hundred  (100) feet below the base
               of the second completed zone shall be divided equally between the
               second and any other zone completed  below such depth and charged
               to the owners  thereof or to the  PARTIES  participating  in each
               zone.  If the well is completed in  additional  zones,  the costs
               applicable to each such zone shall be  determined  and charged to
               the owners  thereof in the same manner as  prescribed by the dual
               zones completion.

          (c)  Intangible drilling, completion, casing string and material costs
               other than  tubing  costs,  from a depth one  hundred  (100) feet
               below the base of the lower  completed  zone to total depth shall
               be  charged  to the owners or the  PARTIES  participating  in the
               costs to total depth.

          (d)  Costs of tubing  strings  serving  each  separate  zone  shall be
               charged to the owners or the PARTIES participating in each zone.

          (e)  For the  purposes of  allocating  tangible and  intangible  costs
               between  zones  that  occur at less than one  hundred  (100) foot
               intervals,  the costs for the  distance  between  the base of the
               upper zone to the top of the next  lower zone shall be  allocated
               equally between zones.

     12.10  ALLOCATION OF COSTS (DRY HOLE).  For the purpose of allocating costs
on any well  determined to be a dry hole, in which the ownership is not the same
for the entire depth or the completion thereof,  the cost of drilling,  plugging
and abandoning such well shall be allocated on the following basis:

          (a)  Costs to drill,  plug and abandon a well proposed for  completion
               in  single,  dual,  or  multiple  zones  shall be  charged to the
               PARTICIPATING  PARTIES  in the same  manner  as if the well  were
               completed as a producing well in all zones as proposed.

          (b)  Plugging and  abandoning  of any well  following  any  deepening,
               completion  attempt or other  operation shall be at the sole risk
               and  expense  of the  PARTICIPATING  PARTIES  in such  operation,
               subject however to the provisions of Section 10.4.

     12.11 INTANGIBLE  DRILLING AND COMPLETION  ALLOCATIONS.  For the purpose of
calculations  hereunder,  intangible  drilling and completion  costs,  including
non-controllable material costs, shall be allocated between zones, including the
interval from the lower  completed zones to total depth, on a drilling day ratio
basis beginning on the day the rig arrives on location and terminating  when the
rig is released.

     12.12 OPERATED WELLS. The designated  OPERATOR  hereunder shall operate all
wells drilled pursuant to the NON-CONSENT provision of this Agreement.  However,
notwithstanding  anything  herein to the contrary,  if the  NON-CONSENT  WELL is
drilled  from  a  mobile  drilling  rig  and  if the  designated  OPERATOR  is a
NON-PARTICIPATING  PARTY  therein,  the  PARTICIPATING  PARTY owning the largest
PARTICIPATING  INTEREST  shall serve as Operator for the drilling and completion
of such well, unless the PARTICIPATING PARTIES agree otherwise.  Upon completion
of any such well as a productive  well  (completion  through the wellhead),  the
well shall be turned over to the designated OPERATOR for further operations.

                                       16

<PAGE>

                                  ARTICLE XIII

                                   FACILITIES

     13.1  APPROVAL.  Any PARTY may propose the  installation  of  FACILITIES by
notice to the other PARTIES with  information  adequate to describe the proposed
FACILITIES  and the estimated  costs.  The  affirmative  vote of one (1) or more
PARTIES having a combined  PARTICIPATING INTEREST of forty percent (40%) or more
in the  wells to be served  shall be  required  before  such  FACILITIES  may be
installed.  If such required  approval is obtained,  the  PARTICIPATING  PARTIES
therein shall  proceed with the  installation  of such  FACILITIES at their sole
cost,  risk and expense  and the  NON-PARTICIPATING  PARTIES in such  FACILITIES
shall have no rights with respect thereto,  subject to recoupment of amounts set
forth under Article 12.2.1 from the completions  served  thereby.  Each PARTIES'
share shall be calculated by  multiplying  the total cost of the FACILITIES by a
fraction,  the  numerator of which is that  PARTY'S  number of  PRODUCIBLE  WELL
completions  served by the FACILITIES and the  denominator of which is the total
number  of  PRODUCIBLE  WELL  completions  served  by  the  FACILITIES.  Nothing
hereunder  shall limit a PARTY'S  rights under  Section 22.1;  however,  a PARTY
acting thereunder shall not be required to pay for joint account FACILITIES that
duplicate its FACILITIES constructed pursuant to Section 22.1

                                   ARTICLE XIV

                             ABANDONMENT AND SALVAGE

     14.1 PLATFORM SALVAGE AND REMOVAL COSTS. When the PARTIES owning FACILITIES
consisting of a platform, mutually agree to dispose of such platform it shall be
disposed of by the OPERATOR as approved by such  PARTIES.  The costs,  risks and
net proceeds,  if any,  resulting from such disposition  shall be shared by such
PARTIES  in  proportion  to  their   PARTICIPATING   INTEREST.   To  secure  the
availability  and  sufficiency  of funds for the  dismantling,  abandonment  and
removal of such platform,  the PARTICIPATING PARTIES, prior to the construction,
shall  assign to a trustee  of a bank (the  "Assignee")  an  overriding  royalty
interest equal to one-half percent (1/2%) of the whole of the oil, gas and other
minerals  produced,  saved and marketed  from the LEASE.  The assignee  shall be
selected  by an  affirmative  vote  of two or more  parties  having  a  combined
PARTICIPATING  INTEREST of fifty percent (50%) or more. The assigned  overriding
royalty interest shall burden the interest of the PARTIES in proportion to their
participation in the platform.  The Assignee,  who shall have no interest in the
overriding  royalty  interest,  shall  receive the proceeds and place same in an
interest bearing account or in insured certificates of deposit (the "Abandonment
Fund").  If a  platform  is not  constructed  within  one  year  of the  date of
overriding royalty interest is assigned,  the overriding royalty shall terminate
and  the  Assignee  shall  reassign  the  interest  and  properly  disburse  the
Abandonment  Fund to the  appropriate  Parties.  Any  proposal  to  construct  a
platform shall provide estimated cost of dismantling, abandonment and removal of
same. At such time as the  Abandonment  Fund equals these estimated  costs,  the
overriding  royalty  shall  be  assigned  to the  PARTICIPATING  PARTIES  by the
Assignee.  Similarly,  any excess Abandonment Funds after complete  dismantling,
abandonment  and removal costs are paid shall be disbursed to the  PARTICIPATING
PARTIES in proportion to their interest. A PARTICIPATING PARTY's interest in the
Abandonment  Fund may only be assigned or  transferred  in  conjunction  with an
assignment  or transfer of the subject  Lease(s).  In lieu of an  assignment  of
overriding  royalty interest,  any  PARTICIPATING  PARTY may elect to furnish an
irrevocable letter

                                       17

<PAGE>

of credit in favor of the Assignee, or proof of coverage under adequate plugging
and abandonment bonds,  subrogated in favor of the OPERATOR, to provide for that
PARTY's  estimated  proportionate  share of  platform  dismantling,  removal and
abandonment  costs. The letter of credit or plugging and abandonment bonds shall
provide that either  instrument shall remain in force in the event of a transfer
or  assignment  of the PARTY's  interest  until such time as the  transferee  or
assignee  provides  a similar  irrevocable  letter of  credit  or  plugging  and
abandonment bonds.

     14.2 PURCHASE OF SALVAGE MATERIALS. OPERATOR shall give all PARTIES written
notice  when it is  determined  under  Section  14.1  that  FACILITIES  or other
materials are not needed for further operations and may be moved from the LEASE.
Within  fifteen  (15) days after  receipt of such  notice any PARTY  desiring to
acquire such materials shall give OPERATOR  written notice of such fact. If more
than one PARTY desires to acquire such  materials,  OPERATOR  shall  designate a
time and place at which each PARTY may submit  written bids for such  materials.
If only one PARTY desires to acquire such  materials,  it may do so on the basis
of the value thereof as determined in accordance  with the provisions of Exhibit
"C", with  prefabricated  materials  being valued on the basis of cost including
but not limited to cost of  fabrication.  All  materials  removed from the LEASE
shall be removed at the expense of the PARTIES unless purchased hereunder,  then
at the expense of the acquiring PARTY. In the event no PARTY desires to purchase
said  materials,  the  materials  shall be  disposed of in  accordance  with the
provisions of Exhibit "C".

     14.3  ABANDONMENT OF PRODUCING  WELL. Any PARTY may propose the abandonment
of a well by  notifying  the other  PARTIES,  who shall have the time period set
forth in Section  9.3.2 from receipt  thereof  within which to respond.  No well
shall be abandoned without the mutual consent of the PARTICIPATING  PARTIES. The
PARTICIPATING  PARTIES  not  consenting  to the  abandonment  shall  pay to each
PARTICIPATING  PARTY  desiring to abandon its share of the current  value of the
well's salvageable material and equipment as determined pursuant to Exhibit "C",
less  the  estimated  current  costs  of  salvaging  same  and of  plugging  and
abandoning  the  well as  determined  by the  PARTICIPATING  PARTIES.  Provided,
however,  if such salvage value is less than such estimated  current costs, then
each  PARTICIPATING  PARTY  desiring to abandon  shall pay to  OPERATOR  for the
benefit of the  PARTICIPATING  PARTIES not consenting to abandonment a sum equal
to its share of such deficiency.

     14.4 ASSIGNMENT OF INTEREST. Each PARTICIPATING PARTY desiring to abandon a
well pursuant to Section 14.3 shall assign  effective as of the last  applicable
election  date,  to  the   non-abandoning   PARTIES,   in  proportion  to  their
PARTICIPATING INTERESTS, its interest in such well and the equipment therein and
its ownership in the  production of such well.  Any PARTY so assigning  shall be
relieved from any further  liability  with respect to said well except as to any
accrued liability.

     14.5 ABANDONMENT  OPERATIONS REQUIRED BY GOVERNMENTAL  AUTHORITY.  Any well
abandonment or platform  removal  required by a governmental  authority shall be
accomplished by OPERATOR with the costs,  risks and net proceeds,  if any, to be
shared by the  PARTIES  owning  such well or  platform  in  proportion  to their
PARTICIPATING INTEREST.

                                       18

<PAGE>

                                   ARTICLE XV

                                   WITHDRAWAL

     15.1 WITHDRAWAL.  Any PARTY may withdraw from this Agreement and thereby be
relieved of all  responsibilities  with respect to the LEASE by giving notice to
the other PARTIES of such desire  together with an offer to convey at no cost by
a recordable instrument,  without warranty,  express or implied,  except for its
own acts,  all of its  interest  in and to the LEASE,  the oil and gas,  and the
property and equipment owned hereunder.  Any such conveyance or assignment shall
be free and clear of any  overriding  royalties,  production  payments  or other
burdens on production  created after the  effective  date of this  Agreement and
shall be subject to the LEASE provisions and to the rules and regulations of the
lessor.  If any  PARTY(S)  desires to acquire  such  interest  and to assume the
obligations  of the  assigning  PARTY under this  Agreement  and the LEASE,  the
withdrawing  PARTY shall deliver such  conveyance  or assignment  ratably to the
acquiring  PARTIES,  unless the acquiring  PARTIES agree  otherwise. If no PARTY
desires to acquire such interest,  the PARTY desiring to withdraw may do so only
by paying to those  PARTIES not desiring to withdraw  its pro-rata  share of the
estimated  costs of  plugging  and  abandoning  all  wells  and  removal  of all
platforms,  structures and other equipment on the LEASE,  less any salvage value
approved under the voting procedure  hereof,  and such  withdrawing  PARTY shall
remain liable for any costs,  expenses or damages theretofore accrued or arising
out of any event occurring  prior to such PARTY'S  withdrawal.  Thereafter,  the
withdrawing  PARTY shall  assign its entire  interest  ratably to the  remaining
PARTIES.  If the  remaining  PARTIES do not wish to continue  operations  on the
LEASE, all PARTIES shall proceed with abandoning and surrendering the same.

     15.2  LIMITATIONS  ON  WITHDRAWAL.  No  PARTY  shall  be  relieved  of  its
obligations hereunder during a well or platform fire, blowout or other emergency
thereon,  but  may  withdraw  from  this  Agreement  and  be  relieved  of  such
obligations  after  termination of such emergency,  provided such PARTY shall be
and remain liable for its full share of all costs arising out of said emergency,
including  without  limitation,  the drilling of a relief well,  containment and
cleanup of oil spill and pollution and all costs of platform debris removal made
necessary by the emergency.

                                   ARTICLE XVI

                      RENTALS, ROYALTIES AND OTHER PAYMENTS

     16.1 CREATION OF OVERRIDING  ROYALTY.  If after the effective  date of this
Agreement, any PARTY creates any overriding royalty, production payment or other
burden payable out of production  attributable to such PARTY'S WORKING  INTEREST
in the LEASE owned and if any other PARTY(S)  becomes  entitled to an assignment
pursuant to the provisions of this Agreement (except for Paragraph 26.2) or as a
result of  NON-CONSENT  OPERATIONS  hereunder  becomes  entitled  to receive the
WORKING  INTEREST  otherwise  belonging  to a  NON-PARTICIPATING  PARTY  in such
operations,  the PARTY  entitled to receive the  assignment  from or the WORKING
INTEREST production of such NON-PARTICIPATING  PARTY shall receive same free and
clear of such burdens,  and the  NON-PARTICIPATING  PARTY  creating such burdens
shall save the  PARTICIPATING  PARTIES  harmless  with respect to the receipt of
such assigned interest or such WORKING INTEREST production.  Notwithstanding the
provisions  herein, the Parties agree to bear their  proportionate  share of the
overriding royalty interests set out on Exhibit "A".

                                       19

<PAGE>

     16.2  PAYMENT OF RENTALS  AND  MINIMUM  ROYALTIES.  OPERATOR  shall pay all
rentals,  minimum royalties, or similar payments accruing under the terms of the
LEASE and submit  evidence of such payment to the PARTIES.  As to any production
delivered in kind by OPERATOR to any  NON-OPERATOR or to another for the account
of such NON-OPERATOR,  said NON-OPERATOR shall provide OPERATOR with information
as to the  proceeds or value of such  production  in order that the OPERATOR may
make  payment of any minimum  royalty  due. The amount of such payment for which
each PARTY is  responsible  shall be charged by the  OPERATOR  to such  PARTIES.
OPERATOR shall diligently attempt to make proper payment,  but shall not be held
liable to the PARTIES in damages  for the loss of any LEASE or interest  therein
of through  mistake or oversight  any rental or minimum  royalty  payment is not
paid for or is erroneously paid. The loss of any LEASE or interest therein which
results  from a failure  to pay or an  erroneous  payment  of rental or  minimum
royalty  shall be a joint loss and there shall be no  readjustment  of interest.

     16.3  NON-CONCURRENCE  IN  PAYMENTS.  Should any PARTY(S) not concur in the
payment of any rental,  minimum royalty or similar payment,  such PARTY(S) shall
notify  OPERATOR  and all other owners in writing at least sixty (60) days prior
to the date on which such payment is due or accrues; and, in this event OPERATOR
shall make such payment for the benefit of all concurring PARTIES. In such event
the  non-concurring  PARTY(s)  shall,  upon request of any  concurring  PARTIES,
assign to the  concurring  PARTIES  in the ratio  that each  concurring  PARTY'S
interest  at the time bears to the total  interest  of all  concurring  PARTIES,
without warranty,  except for its own acts, such portions of its interest in and
to the LEASE or portion thereof involved as would be maintained by such payment.
That assignment shall be free and clear of any overriding royalties,  production
payments or other burdens on production created after the effective date hereof.
Thereafter,  the LEASE, or portion thereof,  involved shall no longer be subject
to this  Agreement.  The PARTIES then owning such LEASE or portion thereof agree
to operate said LEASE or portion thereof under a separate  agreement in the same
form as this Agreement.

     16.4 ROYALTY PAYMENTS, Each PARTY shall pay, deliver or cause to be paid or
delivered its pro- rata share of LEASE royalties, overriding royalties, payments
out of production or other amounts or charges which may be or become payable out
of its share of  production  and  shall  hold the  other  PARTIES  free from any
liability therefore. Each Party, electing to pay his share of royalties pursuant
to the terms of the Lease,  shall promptly  notify Operator of said election and
shall thereafter  provide to Operator a detailed  accounting of revenue received
and value paid to the  Lessor for such  Party's  share of  production  produced,
marketed  and sold.  Monthly  reports  shall be  submitted  to  Operator  within
forty-five days of actual receipt of the previous  month's  production  revenue.
During any time in which  PARTICIPATING  PARTIES in a NON-CONSENT  OPERATION are
entitled  to  receive  a  NON-PARTICIPATING  PARTY'S  share of  production,  the
PARTICIPATING  PARTIES  shall bear the LEASE  royalty  due with  respect to such
share of production and shall hold the  NON-PARTICIPATING  PARTIES harmless from
liability in connection therewith.  Any PARTY acting under the provisions of the
Article  shall  never be liable for a standard  of  performance  in making  such
payments or  deliveries  in excess of a good faith effort to pay or deliver same
prior to the due date and no liability (other than the liability to correct such
payment)  shall be  incurred  for  failure  through  error or  omissions  of the
employees of any such PARTY to make payment or delivery  within the time, in the
manner and for the amounts due

     16.5  FEDERAL  OFFSHORE OIL  POLLUTION  COMPENSATION  FUND FEE.  Each PARTY
agrees to pay and bear the Federal Offshore Oil Pollution  Compensation Fund Fee
payable on its share of oil produced,

                                       20

<PAGE>

such fee being required by Section 302 of the Outer  Continental Shelf Lands Act
Amendment of 1971 and any  regulation  lawfully  promulgated  pursuant  thereto;
provided, however, should the oil owned by a PARTY be reported by another PARTY,
it shall be the obligation of such reporting  PARTY and such reporting  PARTY is
specifically  authorized to an agrees to pay the Federal  Offshore Oil Pollution
Compensation  Fund Fee on those  volumes which it reports for the benefit of the
non-reporting  PARTY,  and such  reporting  PARTY may charge such  non-reporting
PARTY for the payments so made.

                                  ARTICLE XVII

                                      TAXES

     17.1  PROPERTY  TAXES.  OPERATOR  shall  render  property  covered by tills
Agreement as may be subject to ad valorem  taxation and shall pay such  property
taxes for the benefit of each PARTY.  OPERATOR shall charge each PARTY its share
of such tax  payments.  If the OPERATOR is required  hereunder to pay ad valorem
taxes based in whole or in part upon separate  valuation of each PARTY'S WORKING
INTEREST,  then notwithstanding  anything to the contrary herein, charges to the
Joint Account shall be made and paid by the PARTIES  hereto in accordance  with
the percentage of tax value generated by each PARTY'S WORKING INTEREST.

     17.2  CONTEST  OF  PROPERTY  TAX  VALUATION.   OPERATOR  shall  timely  and
diligently protest to a final determination any valuation it deems unreasonable.
Pending such determination,  OPERATOR may elect to pay under protest. Upon final
determination,  OPERATOR  shall pay the taxes and any interest,  penalty or cost
accrued as a result of such protest. In either event, OPERATOR shall charge each
PARTY its share.

     17.3 PRODUCTION AND SEVERANCE  TAXES.  Each PARTY shall pay, or cause to be
paid, all production,  severance and other taxes due on any production, which it
received pursuant to the terms of this Agreement.

     17.4 OTHER TAXES AND ASSESSMENTS. OPERATOR shall pay other applicable taxes
or assessments and charge each PARTY its share.

                                  ARTICLE XVIII

                                    INSURANCE

     18.1 INSURANCE. OPERATOR shall obtain the insurance provided in Exhibit "B"
and charge each PARTICIPATING  PARTY its proportionate share of the cost of such
coverage.

                                   ARTICLE XIX

                         LIABILITY, CLAIMS AND LAWSUITS

     19.1 INDIVIDUAL OBLIGATIONS. The obligations, duties and liabilities of the
PARTIES  shall be several and not joint or  collective;  and  nothing  contained
herein  shall ever be  construed as creating a  partnership  of any kind,  joint
venture,  association or other character of business entity  recognizable in law
for any purpose. Each PARTY shall hold all the other PARTIES harmless from liens
and encumbrances on the LEASE arising as a result of its acts.

     19.2 NOTICE OF CLAIM OR LAWSUIT. If a claim is made against any PARTY or if
any PARTY is sued on account of any matter  arising from  operations  hereunder,
such PARTY shall give prompt written notice to the other PARTIES.

                                       21

<PAGE>

     19.3  SETTLEMENTS.  OPERATOR  may settle any  single  damage  claim or suit
involving  operations  hereunder if the expenditure does not exceed Ten Thousand
Dollars  ($10,000.00),  if the claim is not  covered by  Exhibit  "B" and if the
payment is in complete settlement of such claim or suit.

     19.4  LEGAL  EXPENSE.  Legal  Expenses  shall be  handled  pursuant  to the
provisions of Exhibit "C".

     19.5 LIABILITY FOR LOSSES,  DAMAGES, INJURY OR DEATH. Liability for losses,
damages,  injury or death arising from operations  under this Agreement shall be
borne by the  PARTIES in  proportion  to their  PARTICIPATING  INTERESTS  in the
operations  out of which  such  liability  arises,  except  when such  liability
results from the gross  negligence or willful  misconduct of any party, in which
case such PARTY shall be liable.

     19.6  INDEMNIFICATION.  The  PARTICIPATING  PARTIES  agree to hold the NON-
PARTICIPATING  PARTIES  harmless and to  indemnify  and protect them against all
claims,  demands,  liabilities and liens for property damage or personal injury,
including death,  caused by or otherwise arising out of NON-CONSENT  OPERATIONS,
and any loss and costs  suffered by any  NON-PARTICIPATING  PARTY as an incident
thereof.

                                   ARTICLE XX

                           INTERNAL REVENUE PROVISION

     20.1 INTERNAL REVENUE PROVISION. Notwithstanding any provisions herein that
the rights and liabilities  hereunder are several and not joint or collective or
that  this  Agreement  and the  operations  hereunder  shall  not  constitute  a
partnership,  if  for  Federal  Income  Tax  purposes  this  Agreement  and  the
operations hereunder are regarded as a partnership,  then for Federal Income Tax
purposes  each  PARTY  elects to be  excluded  from the  application  of all the
provisions of  Subchapter  K, Chapter 1,  Subtitle A,  Internal  Revenue Code of
1986,  as  permitted  and  authorized  by  Section  761 of  said  Code  and  the
regulations promulgated  thereunder.  OPERATOR is hereby authorized and directed
to  execute on behalf of each PARTY such  evidence  of this  election  as may be
required by the Federal Internal Revenue Service including specifically, but not
by way of  limitation,  all of the  returns,  statements  and data  required  by
Federal  Regulations  1.761.1 and 1.761.2.  Should there be any requirement that
each PARTY  further  evidence this  election,  each PARTY agrees to execute such
documents  and  furnish  such other  evidence  as may be required by the Federal
Internal Revenue  Service.  Each PARTY further agrees not to give any notices or
take any other action inconsistent with the election made hereby. If any present
or future income tax law of the United  States of America or any state  contains
provisions  similar to those contained in Subchapter K, Chapter 1, Subtitle A of
the  Internal  Revenue  Code of 1986,  under which an  election  similar to that
provided by Section 761 of said Subchapter K is permitted, each PARTY makes such
election or agrees to make such  election as may be permitted  by such laws.  In
making this  election,  each PARTY states that the income derived by it from the
operations  under  this  Agreement  can be  adequately  determined  without  the
computation of partnership taxable income.

                                   ARTICLE XXI

                                  CONTRIBUTIONS

     21.1 NOTICE OF  CONTRIBUTIONS  OTHER THAN ADVANCES FOR SALE OF  PRODUCTION.
Each PARTY shall promptly notify the other PARTIES of all  contributions,  which
it may obtain, or is

                                       22

<PAGE>

attempting to obtain, concerning the drilling of any well on the LEASE. Payments
received as  consideration  for entering  into a contract for sale of production
from the LEASE,  loans and other financing  arrangements shall not be considered
contributions  for the  purposes  of the  Article.  No PARTY  shall  release  or
obligate  itself or release  information  in return for a  contribution  from an
outside party toward the drilling of a well without prior written consent of the
other PARTICIPATING PARTIES therein.

     21.2 CASH CONTRIBUTIONS.  In the event a PARTY receives a cash contribution
toward the drilling of a well, said cash contribution  shall be paid to OPERATOR
and OPERATOR  shall credit the amount  thereof to the PARTIES in  proportion  to
their PARTICIPATING INTEREST.

     21.3  ACREAGE  CONTRIBUTIONS.  In the  event a PARTY  receives  an  acreage
contribution  toward the drilling of a well, said acreage  contribution shall be
shared  by  each   PARTICIPATING   PARTY  who  accepts  in   proportion  to  its
PARTICIPATING INTEREST in the well.

                                  ARTICLE XXII

                            DISPOSITION OF PRODUCTION

     22.1  FACILITIES  TO TAKE IN KIND.  Any PARTY shall have the right,  at its
sole  risk  and  expense,  to  construct  FACILITIES  for  taking  its  share of
production in kind, provided that such FACILITIES at the time of installation do
not interfere  with  continuing  operations  on the LEASE and adequate  space is
available therefore.

     22.2 DUTY TO TAKE IN KIND. Each PARTY shall have the right and duty to take
in kind or separately dispose of its share of the oil and gas produced and saved
from the LEASE.

     22.3 FAILURE TO TAKE IN KIND. If any PARTY fails to take in kind or dispose
of its share of the oil and condensate,  OPERATOR may either (a) purchase oil or
condensate at OPERATOR'S  posted price or, in the absence of a posted price,  in
no event  less than the price  prevailing  in the area for oil of the same kind,
gravity and quality,  or (b) sell such oil or  condensate  to others at the best
price obtainable by OPERATOR, subject to revocation by the non-taking PARTY upon
thirty  (30) days  advance  notice.  All  contracts  of sale by  OPERATOR of any
PARTY'S share of oil or condensate shall be only for such reasonable  periods of
time as are  consistent  with  the  minimum  needs  of the  industry  under  the
circumstances,  but in no event shall any  contract be for a period in excess of
one (1) year.  Proceeds of all sales made by OPERATOR  pursuant to this  Section
shall be paid to the PARTIES entitled  thereto.  Unless required by governmental
authority  or judicial  process,  no PARTY shall be forced to share an available
market with any non-taking PARTY.

     22.4 EXPENSES OF DELIVERY IN KIND.  Any cost incurred by OPERATOR in making
delivery  of any  PARTY'S  share of oil and  condensate,  or  disposing  of same
pursuant to Section 22.3, shall be borne by such PARTY.

     22.5 GAS BALANCING PROVISIONS. Attached hereto is Exhibit "E" entitled "Gas
Balancing  Agreement",   containing  an  agreement  of  the  PARTIES,  which  is
incorporated into this Agreement as if copied at length herein.

                                       23

<PAGE>

                                  ARTICLE XXIII

                                 APPLICABLE LAW

     23.1 APPLICABLE  LAW. This Agreement shall be interpreted  according to the
laws of the State of Texas.

                                  ARTICLE XXIV

                    LAWS, REGULATIONS AND NON-DISCRIMINATION

     24.1 LAWS AND  REGULATIONS.  This  Agreement and  operations  hereunder are
subject to all applicable laws, rules, regulations and orders, and any provision
of the  Agreement  found to be  contrary to or  inconsistent  with any such law,
rule, regulation or order shall be deemed modified accordingly.

     24.2  NON-DISCRIMINATION.  In the  performance of work under the Agreement,
the  PARTIES  agree to comply,  and  OPERATOR  shall  require  each  independent
contractor to comply,  with the  governmental  requirements set forth in Exhibit
"D" and with all of the  provisions  of  Section  202(1) to (7),  inclusive,  of
Executive Order No. 11246, as amended.

                                   ARTICLE XXV

                                  FORCE MAJEURE

     25.1 NOTICE.  If any PARTY is rendered unable,  wholly or in part, by force
majeure  to carry out its  obligations  under  this  Agreement,  other  than the
obligation  to make money  payments,  that PARTY shall give to all other PARTIES
prompt  written  notice of the force majeure with  reasonably  full  particulars
concerning it; thereupon, the obligations of the PARTY giving the notice, so far
as they are affected by the force  majeure,  shall be suspended  during,  but no
longer than, the continuance of the force majeure.  The affected PARTY shall use
reasonable diligence to remove the force majeure as quickly as possible.

     25.2 STRIKES. The requirement that any force majeure shall be remedied with
all reasonable dispatch shall not require the settlement of strikes.

     25.3 FORCE MAJEURE.  The term "force majeure" as herein employed shall mean
an act of God,  strike,  lockout,  or other industrial  disturbance,  act of the
public  enemy,  war,  blockade,  public riot,  lightning,  fire,  storm,  flood,
explosion,  governmental  restraint,  unavailability  of equipment and any other
cause, whether of the kind specifically enumerated above or otherwise,  which is
not reasonably within the control of the PARTY claiming suspension.

                                  ARTICLE XXVI

                      SUCCESSORS, ASSIGNS AND PREFERENTIAL
                                RIGHT TO PURCHASE

     26.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to  the  benefit  of  the  PARTIES  and  their  respective  heirs,   successors,
representatives  and assigns and shall  constitute  a covenant  running with the
LEASE.  Each PARTY shall  incorporate  in any  assignment  of an interest in the
LEASE a provision that such assignment is subject to this Agreement.

     26.2  NOTICE OF  TRANSFER.  Should  any PARTY  desire to sell,  farmout  or
otherwise  dispose al all or any part of its Working  Interest in the Lease,  it
shall  promptly  give  written  notice  to the  other  PARTIES  giving  complete
information relative to the proposed  disposition.  The other PARTIES shall have
the right for a period of fifteen (15)

                                       24

<PAGE>

days after receipt of the notice to attempt to purchase or acquire the interest,
which the PARTY proposes to sell,  farmout or otherwise  dispose.  A transfer of
interest  hereunder shall not become effective as to the PARTIES until the first
day of the month  following  delivery  to  OPERATOR  of an  original  (or copies
thereof)  instrument of transfer approved by the proper  governmental  authority
and  conforming  to the  requirements  of this Section.  No such transfer  shall
relieve  the  transferring  PARTY  of any  obligations  or  liabilities  accrued
hereunder  prior to such  effective  date.  This Section  shall not apply when a
PARTY  wishes to mortgage  its interest or to dispose of its interest by merger,
reorganization,  consolidation, assignment of production payment, sale of all or
substantially  all of its  assets,  or sale or  transfer  of its  interest to an
affiliate.

          26.2.1 A PARTY may  sell,  transfer  or assign  all or any part of its
interest  in the  property  or this  Agreement  without the consent of any other
PARTY hereto, provided that:

               (a)  Any such sale,  transfer or assignment shall be made only to
                    a financially responsible PARTY or PARTIES.

               (b)  Such PARTY shall give the other  PARTIES  written  notice of
                    such sale,  transfer or assignment at least thirty (30) days
                    prior to executing any  instrument(s)  evidencing  the sale,
                    transfer or  assignment  (such notice to include the name of
                    each   proposed   transferee   and  the   interests)  to  be
                    transferred).

               (c)  Such PARTY shall  incorporate in each instrument  evidencing
                    the sale, transfer or assignment a provision making the same
                    expressly  subject  to the  Operating  Agreement  and  shall
                    obtain (and furnish to the other PARTIES) such  transferee's
                    written  consent  to be bound by all the  provisions  of the
                    Operating Agreement.

               (d)  If the  original  interest  of  any  PARTY  is at  any  time
                    transferred to two (2) or more transferees, OPERATOR may, at
                    its discretion, require such transferees to appoint a single
                    trustee with full authority to receive notices and payments,
                    approve  expenditures and pay the share of costs,  which are
                    chargeable against such transferees.

          26.2.2 The Provisions of this Article shall not, however, apply to and
it shall not be necessary to obtain the consent of any party in connection with;

               (a)  Any mortgage or other pledge,  including without  limitation
                    the  granting  of any  lien  or  security  interest  and any
                    assignment  of production  executed as further  security for
                    the debt secured by any such mortgage or pledge,  by a Party
                    hereto of its  interest or any portion  thereof in the joint
                    leases,  or the  Agreement,  or any  judicial,  trustee's or
                    other sales to foreclose the same;

               (b)  Any  transfer  or  disposition  of the  interest  of a PARTY
                    hereto by corporate  merger or  consolidation or by any sale
                    or sales of substantially all of its oil and gas properties;
                    or

               (c)  Any sale, merger, consolidation or other transfer by a PARTY
                    hereto  of  any  part  of  its   interest  to  or  with  any
                    "affiliate" (as such term is defined in Regulation C, issued
                    under the Securities Act of 1933).

                                       25

<PAGE>

               (d)  Any mortgage,  pledge,  transfer,  sale, merger or any other
                    disposition  enumerated in subparagraphs  (a), (b) or (c) of
                    this  Paragraph  shall  be made  expressly  subject  to this
                    Agreement.  Any  assignment  under this  provision  shall be
                    effective  upon  approval  of the lessor or at such  earlier
                    date as agreed to by the lessor.

     26.3  ASSIGNMENTS.  Any assignment,  vesting or  relinquishment of interest
between the PARTIES shall be without warranty of title,  except as to overrides,
production  payments,  liens,  encumbrances  or similar  burdens on the interest
assigned. Any assignment to a Third Party or a Working Interest herein shall not
be effective until approved by the Minerals Management Service.

                                  ARTICLE XXVII

                                      TERM

     27.1 TERM. This Agreement may be amended only in writing and only by mutual
consent of all  PARTIES.  This  Agreement  shall remain in effect so long as the
LEASE shall remain in effect and thereafter  until all claims,  liabilities  and
obligations  incurred in operations  hereunder have been settled;  however,  all
property  belonging  to the PARTIES  shall be  disposed of and final  settlement
shall be made under this Agreement.

                                 ARTICLE XXVIII

                             AREA OF MUTUAL INTEREST

     28.1 AREA OF MUTUAL  INTEREST.  The PARTIES hereby create an Area of Mutual
Interest  ("AMI")  identified on Exhibit "A-1"  attached  hereto and made a part
hereof.  This AMI shall  remain in force and effect as long as any leases  lying
within the AMI are being  maintained by the parties  hereto.  Any acquisition of
any right,  title or interest  acquired in, to and under any oil or gas lease or
any other interest in oil or gas,  including,  without  limitation,  contractual
rights,  which confer on the holder  thereof the right to share,  or acquire the
right to share,  in the  production or the proceeds of production of oil and gas
within the AMI (the  "Acquisition")  by a PARTY  herein  shall be for the mutual
benefit of the PARTIES.  Each PARTY shall have the right to  participate  in any
such  Acquisition in the same proportion as such PARTY'S WORKING INTEREST in and
to the LEASE as set forth in Exhibit "A". The PARTY making the Acquisition  (the
"Acquiring  Party")  shall  notify each of the other  PARTIES in writing  within
thirty (30) days of such  Acquisition  and shall  furnish a copy of all executed
agreements  pertaining thereto and such title information as the Acquiring PARTY
has,  stating  the cost of such  acquisition  or the  obligations  that  must be
assumed in connection  therewith.  Each of the other PARTIES shall have a period
of fifteen (15) working days (48 hours exclusive of Saturdays, Sundays and legal
holidays in the event that a well is being drilled within the AMI) after receipt
of such notice within which to elect and notify the  Acquiring  PARTY whether or
not it desires to participate in such Acquisition.  Failure to timely respond to
the  Acquiring   PARTY'S  notice  or  reimburse  the  Acquiring  PARTY  for  the
proportionate  share of the acquired interest shall be deemed an election not to
acquire such  interest.  Upon election and payment to the  Acquiring  PARTY of a
non-acquiring PARTY'S share of the cost of such acquisition,  such non-acquiring
PARTY shall be  entitled to an  assignment  of its  proportionate  share in such
Acquisition.

                                       26

<PAGE>

     If fewer than all PARTIES elect to  participate in the  Acquisition  within
the AMI,  the  Acquiring  PARTY shall  inform all  PARTIES  who have  elected to
participate in the  Acquisition,  in writing,  of the elections made. Each PARTY
receiving notice,  within forty-eight (48) hours (inclusive of Saturday,  Sunday
or legal  holidays)  after  receipt of such notice,  shall advise the  Acquiring
PARTY of its desire to (a) limit  participation to its WORKING INTEREST,  or (b)
acquire  its  proportionate  share  of the  interest  of  the  non-participating
PARTY(IES),  or  (c)  participate  for a  percentage  of  the  interest  of  the
non-participating PARTY(IES).

     The  interest  of any PARTY who elects to  participate  in any  acquisition
within the AMI shall be subject to and be burdened by the  obligations set forth
on Exhibit "A" with respect to the leases.

                                  ARTICLE XXIX

                             HEADINGS AND EXECUTION

     29.1 TOPICAL HEADINGS. The topical headings used herein are for convenience
only and shall not be construed  as having any  substantive  significance  or as
indicating  that all of the provisions of this  Agreement  relating to any topic
are to be found in any particular Section.

     29.2 COUNTERPART EXECUTIONS.  This Agreement may be signed in counterparts,
and shall be binding upon the PARTIES and upon their successors, representatives
and assigns.

                                        GRYPHON EXPLORATION COMPANY

                                        BY: /s/ Charles H. Odom
                                            ------------------------------------
                                            Charles H. Odom
                                            Vice President-Land

                                        MARINER ENERGY, INC.

                                        BY:
                                            ------------------------------------
                                        NAME:
                                              ----------------------------------
                                        TITLE:
                                               ---------------------------------

                                        RIDGEWOOD ENERGY CORPORATION

                                        BY: /s/ W. Greg Tabor
                                            ------------------------------------
                                        NAME: W. GREG TABOR
                                        TITLE: EXEC. VICE PRESIDENT

                                       27

<PAGE>

STATE OF Texas

COUNTY OF Harris

ON THIS  9th day of  September,  2004,  before  me  appeared  C.H.  Odom,  to me
personally  known,  who,  being  by me duly  sworn,  did say that he is the Vice
President for Gryphon Exploration Company, and that the foregoing instrument was
signed in behalf of said corporation by authority of its Board of Directors, and
said C.H. Odom  acknowledges  said  instrument to be a free act and deed of said
corporation.

----------------------------
[SEAL]     WANDA L. MARTIN
       MY COMMISSION EXPIRES               /s/ Wanda L. Martin
          DECEMBER 6, 2007                 -------------------------------------
----------------------------               Notary Public in and for State of
                                           Texas

STATE OF TEXAS

COUNTY OF HARRIS

ON THIS 9th day of  September,  2004,  before me appeared  W. GREG TABOR,  to me
personally  known,  who,  being  by me duly  sworn,  did say that he is the Vice
President for RIDGEWOOD ENERGY  CORPORATION,  and that the foregoing  instrument
was signed in behalf of said corporation by authority of its Board of Directors,
and said W. GREG TABOR acknowledges said instrument to be a free act and deed of
said corporation.

------------------------------
           MERCEDES S. ZUNIGA
[SEAL]   MY COMMISSION EXPIRES             /s/ Mercedes S. Zuniga
             June 16, 2005                 -------------------------------------
------------------------------             Notary Public in and for

STATE OF

COUNTY OF

ON THIS ____ day of  _________,  2004,  before me  appeared  ___________,  to me
personally  known,  who,  being  by me  duly  sworn,  did  say  that  he is  the
____________ for ________________,  and that the foregoing instrument was signed
in behalf of said  corporation by authority of its Board of Directors,  and said
__________  acknowledges  said  instrument  to be a free  act  and  deed of said
corporation.

                                           -------------------------------------
                                           Notary Public in and for

                                       28

<PAGE>

     If fewer than all PARTIES elect to  participate in the  Acquisition  within
the AMI,  the  Acquiring  PARTY shall  inform all  PARTIES  who have  elected to
participate in the  Acquisition,  in writing,  of the elections made. Each PARTY
receiving notice,  within forty-eight (48) hours (inclusive of Saturday,  Sunday
or legal  holidays)  after  receipt of such notice,  shall advise the  Acquiring
PARTY of its desire to (a) limit  participation to its WORKING INTEREST,  or (b)
acquire  its  proportionate  share  of the  interest  of  the  non-participating
PARTY(IES),  or  (c)  participate  for a  percentage  of  the  interest  of  the
non-participating PARTY(IES).

     The  interest  of any PARTY who elects to  participate  in any  acquisition
within the AMI shall be subject to and be burdened by the  obligations set forth
on Exhibit "A" with respect to the leases.

                                  ARTICLE XXIX

                             HEADINGS AND EXECUTION

     29.1 TOPICAL HEADINGS. The topical headings used herein are for convenience
only and shall not be construed  as having any  substantive  significance  or as
indicating  that all of the provisions of this  Agreement  relating to any topic
are to be found in any particular Section.

     29.2 COUNTERPART EXECUTIONS.  This Agreement may be signed in counterparts,
and shall be binding upon the PARTIES and upon their successors, representatives
and assigns.

                                           GRYPHON EXPLORATION COMPANY

                                           BY: /s/ Charles H. Odom
                                               ---------------------------------
                                               Charles H. Odom
                                               Vice President-Land

                                           MARINER ENERGY, INC.

                                           BY: /s/ Mike C. van den Bold
                                               ---------------------------------
                                           NAME: Mike C. van den Bold
                                           TITLE: Vice President - Exploration

                                           RIDGEWOOD ENERGY CORPORATION

                                           BY:
                                               ---------------------------------
                                           NAME:
                                                 -------------------------------
                                           TITLE:
                                                  ------------------------------

                                       29

<PAGE>

STATE OF Texas

COUNTY OF Harris

ON  THIS  9th day of  September,  2004,  before  me  appeared  C.H  Odom,  to me
personally  known,  who,  being  by me duly  sworn,  did say that he is the Vice
President for Gryphon Exploration Company, and that the foregoing instrument was
signed in behalf of said corporation by authority of its Board of Directors, and
said C.H. Odom  acknowledges  said  instrument to be a free act and deed of said
corporation.

------------------------------
            WANDA L. MARTIN
[SEAL]   MY COMMISSION EXPIRES             /s/ Wanda L. Martin
            DECEMBER 6, 2007               -------------------------------------
------------------------------             Notary Public in and for State of
                                           Texas

STATE OF TEXAS

COUNTY OF HARRIS

ON THIS 9TH day of SEPTEMBER,  2004, before me appeared MIKE C. VAN DEN BOLD, to
me personally  known,  who, being by me duly sworn,  did say that he is the VICE
PRESIDENT  for MARINER  ENERGY and that the foregoing  instrument  was signed in
behalf of said corporation by authority of its Board of Directors, and said MIKE
C. VAN DEN BOLD  acknowledges  said instrument to be a free act and deed of said
corporation.

------------------------------------
              SUSAN G. EDWARDS
[SEAL] NOTARY PUBLIC, STATE OF TEXAS
           MY COMMISSION EXPIRES           /s/ Susan G. Edwards
               SEPT. 2, 2007               -------------------------------------
------------------------------------       Notary Public in and for State of
                                           Texas

STATE OF

COUNTY OF

ON THIS ____ day of  _________,  2004,  before me  appeared  ___________,  to me
personally  known,  who,  being  by me  duly  sworn,  did  say  that  he is  the
____________ for ________________,  and that the foregoing instrument was signed
in behalf of said  corporation by authority of its Board of Directors,  and said
_________________ acknowledges said instrument to be a free act and deed of said
corporation.

                                           -------------------------------------
                                           Notary Public in and for

                                       30

<PAGE>

                                   EXHIBIT "A"

      Attached to and made a part of that certain Joint Operating Agreement
   dated effective August 1, 2004 by and between GRYPHON EXPLORATION COMPANY,
         as Operator, and MARINER ENERGY, INC., et al, as Non-Operators

OIL AND GAS LEASES:

     1.   Lease No. M-102437 by and between the Commissioner of the General Land
          Office of the State of  Texas,  as  Lessor,  and  Gryphon  Exploration
          Company,  as  Lessee,  effective  April 9,  2002,  covering  the North
          One-Half of the  Southwest  One-Quarter  (N/2 of SW/4) of Tract 246-L,
          Gulf of Mexico,  Galveston County, Texas, containing approximately 720
          acres as shown on the  official  map of the Gulf of  Mexico on file in
          the Texas General Land Office,  Austin, Texas, and recorded on May 29,
          2002 under File No.  ###-##-####  of the records of Galveston  County,
          Texas.

     2.   Lease No. M-102438 by and between the Commissioner of the General Land
          Office of the State of  Texas,  as  Lessor,  and  Gryphon  Exploration
          Company,  as  Lessee,  effective  April 9,  2002,  covering  the South
          One-Half of the  Southwest  One-Quarter  (S/2 of SW/4) of Tract 246-L,
          Gulf of Mexico,  Galveston County, Texas, containing approximately 720
          acres as shown on the  official  map of the Gulf of  Mexico on file in
          the Texas General Land Office,  Austin, Texas, and recorded on May 29,
          2002 under File No.  ###-##-####  of the records of Galveston  County,
          Texas.

PARTICIPANTS AND ADDRESSES:

     Gryphon Exploration Company
     1200 Smith Street
     Suite 1700
     Houston, Texas 77002
     Attention: Land Department
     Phone: (713) 576-2400
     FAX: (713) 576-2500

     Mariner Energy, Inc.
     2101 Citywest Blvd., Suite 1900
     Houston, Texas 77042-3020
     Attention: Mr. John Davis
     Phone: (713) 954-5500
     FAX: (713) 954-5570

     Ridgewood Energy Corporation
     5300 Memorial Drive, Suite 1070
     Houston, Texas 77007
     Attn: Mr. Greg Tabor
     Phone: (713) 862-9856
     Fax: (713) 802-9734

WORKING INTEREST

                               To Casing Point*   At Casing Point*
                               ----------------   ----------------
Gryphon Exploration Company        33.33333%          40.00000%
Mariner Energy, Inc.               40.00000%          40.00000%
Ridgewood Energy Corporation       26.66667%          20.00000%
                                  ---------          ---------
                                  100.00000%         100.00000%

          *The working  interest of Gryphon  Exploration  Company and  Ridgewood
     Energy  Corporation  to Casing  Point and at Casing Point is subject to the
     terms  and  conditions  of  that  certain  Participation   Agreement  dated
     September 2, 2004 between said parties.

     The above leases,  including  any leases  acquired by virtue of the Area of
     Mutual  Interest  provisions of Article XXVIII hereof,  are burdened by the
     following overriding royalty interests:

Jebco Seismic, L.P.            7.5% of 1.0% of 8/8ths
Multi Klient Invest AS        92.5% of 1.0% of 8/8ths
Gryphon Exploration Company        2.0% of 8/8ths

                                       31

<PAGE>

                                  EXHIBIT "A-l"
                            AREA OF MUTUAL INTEREST

      Attached to and made a part of that certain Joint Operating Agreement
   dated effective August 1, 2004 by and between GRYPHON EXPLORATION COMPANY,
         as Operator, and MARINER ENERGY, INC., et al, as Non-Operators

     The Area of Mutual Interest is comprised of the SW/4 of Tract 246-L and the
     SE/4 of Tract 247-L, Gulf of Mexico, Galveston County, Texas.

                                       32

<PAGE>

                                   EXHIBIT "B"
                                   INSURANCE

   Attached to and made a part of that certain Joint Operating Agreement dated
    effective August 1, 2004, by and between GRYPHON EXPLORATION COMPANY, as
           Operator, and MARINER ENERGY, INC., et al, as Non-Operators

Operator  shall, at all times while  conducting  operations on the Contract Area
and/or  Assigned  Premises,  carry  or  cause to be  carried  insurance  for the
following coverage's and in at least the minimum amounts noted.

     1.   Workers' Compensation and Occupational Disease insurance in accordance
          with the  statutory  requirements  of the state in which work is to be
          performed,  the state in which the Operator,  herein "Contractor",  or
          any of Operator's contractor(s) or sub-contractor(s), employees reside
          and the  state  in  which  the  Contractor  is  domiciled;  Employer's
          Liability  insurance  with limits of not less than  $1,000,000.  These
          coverage's shall include:

          a.   Protection for liabilities under the Federal  Longshoremen's  and
               Harbor Worker's  Compensation Act and the Outer Continental Shelf
               Lands Act.

          b.   Coverage for  liability  under the  Merchant  Marine Act of 1920,
               commonly known as the Jones Act; the Admiralty Act; and the Death
               on the High Seas Act with limits of not less than  $1,000,000 per
               accident.

          c.   Protection    against    liability   of   employer   to   provide
               transportation, wages, maintenance and cure to maritime employees
               and a Voluntary Compensation Endorsement.

          d.   Coverage  amended to provide that a claim In Rem shall be treated
               as a claim against the employer.

          e.   Territorial extension shall cover all work areas.

     2.   Comprehensive  General Liability insurance,  written on any occurrence
          reported basis with limits of $1,000,000 per occurrence  Bodily Injury
          and Property Damage, combined single limits, an annual aggregate of no
          less  than  $2,000,000  (if   applicable),   including  the  following
          coverage's:

          a.   Premises and Operations coverage's.

          b.   Independent Contractor's Contingent coverage.

          c.   Contractual  Liability  covering  liabilities  assumed under this
               Contract.

          d.   Products and Completed Operations coverage.

          e.   Coverage for explosion,  collapse and  underground  resources and
               property  damage under both  Premises/Operations  and Contractual
               Liability coverage parts, where applicable.

          f.   Broad Form Property Damage Liability endorsement.

          g.   Personal Injury Liability.

          h.   In Rem endorsement.

          i.   Territorial extension shall cover all work areas.

          j.   Where  applicable,  coverage  for  liability  resulting  from the
               consumption   of  food   prepared  or  served  by  contractor  or
               subcontractor.

          k.   Watercraft  exclusion deleted or Protection & Indemnity  provided
               as per 4.B.

          l.   Coverage is provided  for "Action  Over"  suits.

          m.   Coverage is silent as respects Punitive Damages.

     3.   Automobile  Liability  insurance  covering owned,  hired and non-owned
          vehicles with limits of $1,000,000  per  occurrence  Bodily Injury and
          Property Damage combined single limits.

                                       33

<PAGE>

     4.   Where the work  described by this Contract  involves the use of marine
          equipment.  Operator  will  require  the  contractor  to  provide  the
          following insurance:

          a.   Full Form Hull and Machinery  insurance,  with coverage  equal to
               that provided by the American  Institute  Hull Clauses  including
               collision liability,  with the sister ship clause unamended, with
               limits  of  liability  at least  equal  to the full  value of the
               vessel and with navigational  limitations adequate for Contractor
               to perform  the  contracted  work.  Where the  vessels  engage in
               towing  operations,  said  insurance  shall  include full tower's
               liability with the sister ship clause unamended.

          b.   Protection and indemnity insurance coverage in an amount at least
               equal  to the  full  value  of each  vessel  employed  under  the
               Contract.  Protection and indemnity  insurance shall include full
               coverage  for all  crew  liabilities  if  coverage  for  maritime
               employees is not provided under  Coverage B, Employers  Liability
               for Admiralty Jurisdiction.

          c.   Excess Protection and Indemnity  insurance,  including  Collision
               and Tower's  (where  applicable)  Liability in an amount at least
               equal  to the  value of each  vessel  covered  or the  difference
               between  the  full  value  of  each  vessel  and  $1,000,000  per
               occurrence.

          d.   Voluntary  Removal  of Wreck  and/or  Debris  insurance  covering
               Contractor's  operations in an amount of not less than $1,000,000
               per occurrence.

     All of the marine  coverage's  cited above shall name  Operator and all its
subsidiary and affiliated  companies as additional  insured's as their interests
may appear,  to the extent of  contractor's  obligations to defend and indemnify
the Parties.

          5.   Aircraft  Liability  insurance  (for  contracts  involving use of
               aircraft or helicopters)  with combined single limit coverage for
               public  liability,   passenger   liability  and  property  damage
               liability  of not less  than  $5,000,000  covering  all owned and
               non-owned  aircraft used by Contractor in connection with work to
               be performed.

          6.   Umbrella Liability  insurance written on an occurrence basis with
               no claims made features with a minimum combined single limit of $
               15,000,000  each  occurrence/aggregate  where  applicable,  to be
               excess of the coverage's  and limits  required in 1, 2, 3,4 and 5
               above.

          7.   OPERATOR  shall  carry  or  cause  to be  carried  the  following
               coverage's  for the  benefit  of and at the  expense of the Joint
               Account,   however,   proportionate   coverage   may  be  carried
               individually by each NON- OPERATOR, subject to proper evidence of
               such  proportionate  coverage being provided to Operator at least
               fifteen (15) days prior to  commencement  of  operations  for the
               drilling of the initial EXPLORATORY WELL.

               a.   Operator's  Extra Expense  Insurance,  including  control of
                    well and redrilling of the well (full restoration  redrill),
                    including,  but not limited to,  Seepage and  Pollution  and
                    Containment and Evacuation Expense with a limit of liability
                    of $30,000,000.

               b.   Physical Damage and Removal of Wreck Coverage for facilities
                    hereunder,  with limits not less than the replacement  value
                    thereof.  Notwithstanding the foregoing, this coverage to be
                    provided   fifteen(15)  days  prior  to  placement  of  such
                    facilities.

                                       34

<PAGE>

                                                      COPAS - 1986 - OFFSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                   EXHIBIT "C"

      Attached to and made a part of that certain Joint Operating Agreement
   dated effective August 1, 2004, by and between GRYPHON EXPLORATION COMPANY,
         as Operator, and MARNIER ENERGY, INC., et al, as Non-Operators.

                              ACCOUNTING PROCEDURE

                            OFFSHORE JOINT OPERATIONS

                              I. GENERAL PROVISIONS

1.   Definitions

     "Joint  Property" shall mean the real and personal  property subject to the
     agreement to which this Accounting Procedure is attached.

     "Joint  Operations"  shall mean all operations  necessary or proper for the
     development, operation, protection and maintenance of the Joint Property.

     "Joint Account" shall mean the account showing the charges paid and credits
     received in the conduct of the Joint  Operations and which are to be shared
     by the Parties.

     "Operator" shall mean the party designated to conduct the Joint Operations.

     "Non-Operators"  shall mean the  Parties of this  agreement  other than the
     Operator.

     "Parties" shall mean Operator and Non-Operators.

     "First Level Supervisors" shall mean those employees whose primary function
     in Joint  Operations is the direct  supervision of other  employees  and/or
     contract labor directly employed on the Joint Property in a field operating
     capacity.

     "Technical Employees" shall mean those employees, professional consultants,
     or contract personnel having special and specific  engineering,  geological
     or  other  professional   skills,  and  whose  primary  function  in  Joint
     Operations is the handling of specific  operating  conditions  and problems
     for the benefit of the Joint Property.

     "Personal  Expenses"  shall mean travel and other  reasonable  reimbursable
     expenses of Operator's employees or professional consultants.

     "Material" shall mean personal property,  equipment or supplies acquired or
     held for use on the Joint Property.

     "Controllable  Material"  shall  mean  Material  which  at the  time  is so
     classified  in  the  Material   Classification   Manual  as  most  recently
     recommended by the Council of Petroleum Accountants Societies.

     "Shore Base Facilities"  shall mean onshore support  facilities that during
     drilling,  development,  maintenance and producing  operations provide such
     services to the Joint  Property as receiving  and  transshipment  point for
     supplies,  materials  and  equipment;  debarkation  point for  drilling and
     production   personnel  and   services;   communication,   scheduling   and
     dispatching  center;   other  associated  functions  benefiting  the  Joint
     Property.

     "Offshore  Facilities" shall mean platforms and support systems such as oil
     and gas handling  facilities,  living  quarters,  offices,  shops,  cranes,
     electrical supply equipment and systems, fuel and water storage and piping,
     heliport,   marine   docking   installations,   communication   facilities,
     navigation aids, and other similar  facilities  necessary in the conduct of
     offshore operations.

2.   Statement and Billings

     Operator shall bill  Non-Operators  on or before the last day of each month
     for their proportionate share of the Joint Account for the preceding month.
     Such bills will be accompanied  by statements  which identify the authority
     for expenditure,  lease or facility, and all charges and credits summarized
     by appropriate  classifications of investment and expense except that items
     of  Controllable   Material  and  unusual  charges  and  credits  shall  be
     separately identified and fully described in detail.

3.   Advances and Payments by Non-Operators

     A.   Unless  otherwise  provided  for in the  agreement,  the  Operator may
          require the Non-Operators to advance their share of estimated costs to
          be incurred for the succeeding  month's  operation within fifteen (15)
          days after receipt of the billing or by the first day of the month for
          which the advance is  required,  whichever  is later.  Operator  shall
          adjust each  monthly  billing to reflect  advances  received  from the
          Non-Operators.

     B.   Each Non-Operator shall pay its proportion of all bills within fifteen
          (15) days after receipt.  If payment is not made within such time, the
          unpaid balance shall bear interest monthly at the prime rate in effect
          at Bank One,  Texas,  Houston,  Texas on the first day of the month in
          which  delinquency  occurs  plus  1%  or  the  maximum  contract  rate
          permitted by the applicable usury laws of the jurisdiction in which in
          the the Joint  Property is  located,  whichever  is the  lesser,  plus
          attorney's  fees,  court costs, and other costs in connection with the
          collection of unpaid amounts.

4.   Adjustments

     Payment of any such bills shall not prejudice the right of any Non-Operator
     to protest or question the  correctness  thereof;  provided,  however,  all
     bills and  statements  rendered to  Non-Operators  by  Operator  during any
     calendar year shall  conclusively  be presumed to be true and correct after
     twenty-four (24) months following the end of any such calendar year, unless
     within the said twenty-four (24) month period a Non-Operator  takes written
     exception thereto and makes claim on

                                        1

<PAGE>

     Operator for adjustment.  No adjustment favorable to Operator shall be made
     unless it is made within the same prescribed period. The provisions of this
     paragraph shall not prevent adjustments resulting from a physical inventory
     of Controllable Material as provided for in Section V.

5.   Audits

     A.   A  Non-Operator,  upon  notice in  writing to  Operator  and all other
          Non-Operators,  shall have the right to audit Operator's  accounts and
          records relating to the Joint Account for any calendar year within the
          twenty-four (24) month period following the end of such calendar year;
          provided,  however,  the making of an audit  shall not extend the time
          for the taking of written exception to and the adjustments of accounts
          as provided  for in Paragraph 4 of this Section I. Where there are two
          or more  Non-Operators,  the Non-Operators shall make every reasonable
          effort to conduct a joint  audit in a manner  which  will  result in a
          minimum  of  inconvenience  to the Operator.  Operator  shall  bear no
          portion of the Non-Operators' audit cost incurred under this paragraph
          unless  agreed to by the  Operator.  The audits shall not be conducted
          more than once each year without  prior  approval of Operator,  except
          upon the resignation or removal of the Operator,  and shall be made at
          the expense of those Non-Operators approving such audit.

     B.   The Operator shall reply in writing to an audit report within 180 days
          after receipt of such report.

6.   Approval By Non-Operators

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

                               II. DIRECT CHARGES

Operator shall charge the Joint Account with the following items:

1.   Rentals and Royalties

     Lease rentals and royalties paid by Operator for the Joint Operations.

2.   Labor

     A.   (1)  Salaries  and  wages  of  Operator's   field  employees  and
               contract  personnel  directly employed on the Joint Property
               in the conduct of Joint Operations.

          (2)  Salaries and wages of Operator's  employees or contract personnel
               directly  employed  on Shore Base  Facilities  or other  Offshore
               Facilities  serving the Joint  Property if such costs are charged
               under Paragraph 7 of this Section II.

          (3)  Salaries of First Level Supervisors in the field.

          (4)  Salaries   and  wages  and  fees  of   Technical   Employees   or
               professional  consultants directly employed on the Joint Property
               if such charges are excluded from the overhead rates.

          (5)  Salaries and wages of Technical  Employees either  temporarily or
               permanently assigned to and directly employed in the operation of
               the Joint Property if such charges are excluded from the overhead
               rates.

     B.   Operator's cost of holiday, vacation, sickness and disability benefits
          and other  customary  allowances  paid to employees whose salaries and
          wages are  chargeable to the Joint Account under  Paragraph 2A of this
          Section  II. Such costs  under this  Paragraph  2B may be charged on a
          "when and as paid basis" or by  "percentage  assessment" on the amount
          of salaries and wages  chargeable to the Joint Account under Paragraph
          2A of this  Section II. If  percentage  assessment  is used,  the rate
          shall be based on the Operator's cost experience.

     C.   Expenditures or contributions made pursuant to assessments  imposed by
          governmental  authority  which  are  applicable  to  Operator's  costs
          chargeable  to the Joint  Account  under  Paragraphs 2A and 2B of this
          Section II.

     D.   Personal  Expenses of those  employees  whose  salaries  and wages are
          chargeable to the Joint Account under Paragraph 2A of this Section II.

3.   Employee Benefits

     Operator's  current costs of established  plans for  employees'  group life
     insurance,  hospitalization,  pension,  retirement, stock purchase, thrift,
     bonus,  and other benefit plans of a like nature,  applicable to Operator's
     labor cost  chargeable to the Joint  Account under  Paragraphs 2A and 2B of
     this Section II shall be  Operator's  actual cost not to exceed the percent
     most recommended by the Council of Petroleum Accountants Societies.

4.   Material

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

5.   Transportation

     Transportation of employees and Material necessary for the Joint Operations
     but subject to the following limitations:

     A.   If  Material  is  moved to the  Joint  Property  from  the  Operator's
          warehouse  or other  properties,  no charge shall be made to the Joint
          Account  for a distance  greater  than the  distance  from the nearest
          reliable  supply  store where like  material is normally  available or
          railway receiving point nearest the Joint Property unless agreed to by
          the Parties.

     B.   If surplus Material is moved to Operator's  warehouse or other storage
          point,  no charge  shall be made to the Joint  Account  for a distance
          greater than the distance to the nearest  reliable  supply store where
          like  material  is  normally  available,  or railway  receiving  point
          nearest the Joint Property unless agreed to by the Parties.  No charge
          shall  be made to the  Joint  Account  for  moving  Material  to other
          properties belonging to the Operator, unless agreed to by the Parties.

                                       2

<PAGE>

     C.   In the  application  of  subparagraphs  A and B above,  the  option to
          equalize or charge actual  trucking cost is available  when the actual
          charge is $400 or less excluding accessorial charges. The $400 will be
          adjusted to the amount  most  recently  recommended  by the Council of
          Petroleum Accountants Societies.

6.   Services

     The cost of contract services,  equipment and utilities provided by outside
     sources,  except  services  excluded  by  Paragraph  9 of  Section  II  and
     Paragraph  i, ii,  and  iii,  of  Section  III.  The  cost of  professional
     consultant  services and contract services of technical  personnel directly
     engaged  on the  Joint  Property  if such  charges  are  excluded  from the
     overhead rates.  The cost of professional  consultant  services or contract
     services of technical  personnel  directly  engaged in the operation of the
     Joint  Property  shall be charged to the Joint  Account if such charges are
     excluded from the overhead rates.

7.   Equipment and Facilities Furnished By Operator

     A.   Operator  shall  charge the Joint  Account  for use of  Operator-owned
          equipment  and  facilities,   including  Shore  Base  and/or  Offshore
          Facilities,   at  rates  commensurate  with  costs  of  ownership  and
          operation. Such rates may include labor,  maintenance,  repairs, other
          operating expense,  insurance,  taxes,  depreciation,  and interest on
          gross  investment  less  accumulated  depreciation  not to exceed  Ten
          percent (10%) per annum. In addition, for platforms only, the rate may
          include an element of the  estimated  cost of platform  dismantlement.
          Such  rates  shall  not  exceed  average  commercial  rates  currently
          prevailing in the immediate area of the Joint Property.

     B.   In lieu of charges in  paragraph  7A above,  Operator may elect to use
          average commercial rates prevailing in the immediate area of the Joint
          Property.  For automotive  equipment,  Operator may elect to use rates
          published by the Petroleum Motor Transport Association.

8.   Damages and Losses to Joint Property

     All costs or  expenses  necessary  for the repair or  replacement  of Joint
     Property  made  necessary  because of damages or losses  incurred  by fire,
     flood, storm, theft,  accident, or other cause, except those resulting from
     Operator's gross negligence or willful  misconduct.  Operator shall furnish
     Non-Operator  written  notice  of  damages  or losses  incurred  as soon as
     practicable after a report thereof has been received by Operator.

9.   Legal Expense

     Expense of  handling,  investigating  and  settling  litigation  or claims,
     discharging  of  liens,   payments  of  judgements  and  amounts  paid  for
     settlement of claims  incurred in or resulting  from  operations  under the
     agreement  or necessary  to protect or recover the Joint  Property,  except
     that no charge for services of Operator's legal staff or fees or expense of
     outside attorneys shall be made unless previously agreed to by the Parties.
     All other  legal  expense  is  considered  to be  covered  by the  overhead
     provisions of Section III unless otherwise agreed to by the Parties, except
     as provided in Section I, Paragraph 3.

10.  Taxes

     All taxes of every kind and nature assessed or levied upon or in connection
     with  the  Joint  Property,   the  operation  thereof,  or  the  production
     therefrom,  and which taxes have been paid by the  Operator for the benefit
     of the Parties.  If the ad valorem taxes are based in whole or in part upon
     separate valuations of each party's working interest,  then notwithstanding
     anything to the contrary herein, charges to the Joint Account shall be made
     and paid by the Parties hereto in accordance  with the tax value  generated
     by each party's working interest.

11.  Insurance

     Net  premiums  paid for  insurance  required  to be  carried  for the Joint
     Operations for the protection of the Parties. In the event Joint Operations
     are  conducted  at  offshore   locations  in  which  Operator  may  act  as
     self-insurer for Workers' Compensation and Employers'  Liability,  Operator
     may include the risk under its self-insurance program in providing coverage
     under State and  Federal  laws and charge the Joint  Account at  Operator's
     cost not to exceed COPAS recommended rates.

12.  Communications

     Costs  of  acquiring,   leasing,  installing,   operating,   repairing  and
     maintaining communication systems, including radio and microwave facilities
     between the Joint Property and the Operator's  nearest Shore Base Facility.
     In the event  communication  facilities  systems serving the Joint Property
     are Operator-owned,  charges to the Joint Account shall be made as provided
     in Paragraph 7 of this Section II.

13.  Ecological and Environmental

     Costs incurred on the Joint  Property as a result of statutory  regulations
     for archaeological  and geophysical  surveys relative to identification and
     protection of cultural  resources and/or other  environmental or ecological
     surveys  as may be  required  by the  Bureau  of Land  Management  or other
     regulatory  authority.  Also, costs to provide or have available  pollution
     containment and removal  equipment plus costs of actual control and cleanup
     and resulting responsibilities of oil spills as required by applicable laws
     and regulations.

14.  Abandonment and Reclamation

     Costs  incurred for  abandonment  of the Joint  Property,  including  costs
     required by governmental or other regulatory authority.

15.  Other Expenditures

     Any other expenditure not covered or dealt with in the foregoing provisions
     of this Section II, or in Section III and which is of direct benefit to the
     Joint Property and is, incurred by the Operator in the necessary and proper
     conduct of the Joint Operations.

                                       3

<PAGE>

                                  III. OVERHEAD

     As  compensation  for  administrative,  supervision,  office  services  and
     warehousing  costs,  Operator  shall charge the Joint Account in accordance
     with this Section III.

     Unless otherwise agreed to by the Parties,  such charge shall be in lieu of
     costs and  expenses of all offices  and  salaries or wages plus  applicable
     burdens and expenses of all  personnel,  except those  directly  chargeable
     under Section II. The cost and expense of services from outside  sources in
     connection with matters of taxation,  traffic, accounting or matters before
     or involving  governmental  agencies shall be considered as included in the
     overhead  rates  provided  for in this  Section  III  unless  such cost and
     expense  are  agreed  to by the  Parties  as a direct  charge  to the Joint
     Account. Costs and fees associated with representation on matters before or
     involving  governmental  affairs  shall be a  direct  charge  to the  Joint
     Account. Costs and fees associated with representation on matters before or
     involving  governmental  affairs  shall be a  direct  charge  to the  Joint
     Account.

     i.   Except as  otherwise  provided in Paragraph 2 of this Section III, the
          salaries,  wages and Personal  Expenses of Technical  Employees and/or
          the cost of professional  consultant services and contract services of
          technical personnel directly employed on the Joint Property:

          |_|  shall be covered by the overhead rates.

          |X|  shall not be covered by the overhead rates.

     ii.  Except as  otherwise  provided in Paragraph 2 of this Section III, the
          salaries,  wages and Personal  Expenses of Technical  Employees and/or
          the costs of professional consultant services and contract services of
          technical personnel either temporarily or permanently  assigned to and
          directly employed in the operation of the Joint Property:

          |X|  shall be covered by the overhead rates.

          |_|  shall not be covered by the overhead rates.

1.   Overhead - Drilling and Producing  Operations

     As  compensation  for overhead  incurred in  connection  with  drilling and
     producing properties, Operator shall charge on either:

          |X|  Fixed Rate Basis, Paragraph 1A, or

          |_|  Percentage Basis, Paragraph 1B

     A.   Overhead - Fixed Rate Basis

          (1)  Operator  shall charge the Joint Account at the  following  rates
               per well per month.
               Drilling Well Rate $35,000 (Prorated for less than a full month)
               Producing Well Rate $3,500

          (2)  Application of Overhead - Fixed Rate Basis for Drilling Well Rate
               shall be as follows:

               (a)  Charges  for  drilling  wells  shall  begin on the date when
                    drilling or  completion  equipment  arrives on location  and
                    terminate on the date the drilling or  completion  equipment
                    moves off  location  or rig is  released,  whichever  occurs
                    first, except that no charge shall be made during suspension
                    of drilling  operations for fifteen (15) or more consecutive
                    calendar days.

               (b)  Charges  for  wells  undergoing  any  type  of  workover  or
                    recompletion  for a period of four (4) consecutive work days
                    or more  shall  be  made at the  drilling  well  rate.  Such
                    charges  shall be applied for the period from date  workover
                    operations,  with  rig or  other  units  used  in  workover,
                    commence  through date of rig or other unit release,  except
                    that no charge shall be made during suspension of operations
                    for fifteen (15) or more consecutive calendar days.

          (3)  Application  of  Overhead - Fixed Rate Basis for  Producing  Well
               Rate shall be as follows:

               (a)  An active  well either  produced  or  injected  into for any
                    portion  of the  month  shall be  considered  as a  one-well
                    charge for the entire month.

               (b)  Each active  completion in a  multi-completed  well in which
                    production is not  commingled  down hole shall be considered
                    as a one-well charge providing each completion is considered
                    a separate well by the governing regulatory authority.

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

               (d)  A  one-well  charge  shall  be made  for the  month in which
                    plugging and  abandonment  operations  are  completed on any
                    well.  This one-well charge shall be made whether or not the
                    well has produced except when drilling well rate applies.

               (e)  All other  inactive  wells  (including  but not  limited  to
                    inactive wells covered by unit allowable,  lease  allowable,
                    transferred  allowable,  etc.)  shall  not  qualify  for  an
                    overhead charge.

          (4)  The well  rates  shall be  adjusted  as of the first day of April
               each year  following the effective date of the agreement to which
               this Accounting  Procedure is attached.  The adjustment  shall be
               computed  by  multiplying  the  rate  currently  in  use  by  the
               percentage increase or decrease in the average weekly earnings of
               Crude Petroleum and Gas Production  Workers for the last calendar
               year  compared to the  calendar  year  preceding  as shown by the
               index of  average  weekly  earnings  of Crude  Petroleum  and Gas
               Production  Workers as published by the United States  Department
               of Labor, Bureau of Labor Statistics,  or the equivalent Canadian
               index as published  by  Statistics  Canada,  as  applicable.  The
               adjusted rates shall be the rates currently in use, plus or minus
               the computed adjustment.

                                       4

<PAGE>

B.   Overhead - Percentage Basis

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

               (a)  Development

               ________________  Percent  (____%) of the cost of  Development of
               the Joint Property  exclusive of costs provided under Paragraph 9
               of Section II and all salvage credits.

               (b)  Operating

               ________________  Percent  (____%) of the cost of  Operating  the
               Joint Property exclusive of costs provided under Paragraphs 1 and
               9 of  Section  II, all  salvage  credits,  the value of  injected
               substances  purchased  for  secondary  recovery and all taxes and
               assessments which are levied,  assessed and paid upon the mineral
               interest in and to the Joint Property.

          (2)  Application  of Overhead - Percentage  Basis shall be as follows:
               For the  purpose of  determining  charges on a  percentage  basis
               under Paragraph 1B of this Section III, development shall include
               all costs in connection with drilling,  redrilling,  deepening of
               any or all wells, and shall also include any remedial  operations
               requiring a period of five (5)  consecutive  work days or more on
               any or all wells;  also,  preliminary  expenditures  necessary in
               preparation for drilling and expenditures  incurred in abandoning
               when the well is not completed as a producer,  and original costs
               of construction or installation of fixed assets, the expansion of
               fixed assets and any other project clearly discernible as a fixed
               asset,  except  Major  Construction  as defined in Paragraph 2 of
               this  Section  III.  All  other  costs  shall  be  considered  as
               Operating  except  that  catastrophe   costs  shall  be  assessed
               overhead as provided in Section III, Paragraph 3.

2.   Overhead - Major Construction

     To compensate  Operator for overhead costs incurred in the construction and
     installation of fixed assets,  the expansion of fixed assets, and any other
     project  clearly  discernible as a fixed asset required for the development
     and operation of the Joint Property,  or in the dismantling for abandonment
     of  platforms  and related  production  facilities,  Operator  shall either
     negotiate a rate prior to the  beginning of  construction,  or shall charge
     the Joint Account for overhead  based on the following  rates for any Major
     Construction project in excess of $ 25,000.00

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

          (1)  6% of total costs if such costs are more than $25,000.00 but less
               than $100,000; plus

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

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

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

          (1)  3% of total costs if such costs are more than $25,000.00 but less
               than $100,000; plus

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

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

     Total cost shall mean the gross cost of any one project. For the purpose of
     this  paragraph,  the  component  parts of a single  project  shall  not be
     treated  separately  and the  cost  of  drilling  and  workover  wells  and
     artificial lift equipment shall be excluded.

     On each project,  Operator shall advise Non-Operator(s) in advance which of
     the above  options  shall apply.  In the event of any conflict  between the
     provisions  of this  paragraph  and  those  provisions  under  Section  II,
     Paragraph 2 or Paragraph 6, the provisions of this paragraph shall govern.

3.   Catastrophe Overhead

     To  compensate  Operator  for  overhead  costs  incurred  in the  event  of
     expenditures  resulting from a single occurrence due to oil spill, blowout,
     explosion,  fire, storm,  hurricane,  or other catastrophes as agreed to by
     the  Parties,  which are  necessary  to restore  the Joint  Property to the
     equivalent   condition   that  existed  prior  to  the  event  causing  the
     expenditures,  Operator shall either negotiate a rate prior to charging the
     Joint Account or shall charge the Joint  Account for overhead  based on the
     following rates:

          (1)  3% of total costs through $100,000; plus

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

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

     Expenditures  subject  to  the  overheads  above  will  not be  reduced  by
     insurance recoveries,  and no other overhead provisions of this Section III
     shall apply.

4.   Amendment of Rates

     The  overhead  rates  provided  for in this Section III may be amended from
     time to time only by mutual  agreement  between the  Parties  hereto if, in
     practice, the rates are found to be insufficient or excessive.

     IV.  PRICING  OF  JOINT   ACCOUNT   MATERIAL   PURCHASES,   TRANSFERS   AND
          DISPOSITIONS

Operator is  responsible  for Joint  Account  Material and shall make proper and
timely  charges and  credits  for all  Material  movements  affecting  the Joint
Property.  Operator  shall  provide all Material for use on the Joint  Property;
however,   at  Operator's   option,   such  Material  may  be  supplied  by  the
Non-Operator.  Operator  shall make timely  disposition  of idle and/or  surplus
Material,   such  disposal  being  made  either  through  sale  to  Operator  or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall

                                       5

<PAGE>

be under no  obligation  to  purchase,  interest  of  Non-Operators  in  surplus
condition A or B Material.  The  disposal of surplus  Controllable  Material not
purchased by the Operator shall be agreed to by the Parties.

1.   Purchases

     Material  purchased  shall be charged at the price paid by  Operator  after
     deduction  of all  discounts  received.  In case of  Material  found  to be
     defective  or returned  to vendor for any other  reasons,  credit  shall be
     passed  to the Joint  Account  when  adjustment  has been  received  by the
     Operator.

2.   Transfers and Dispositions

     Material furnished to the Joint Property and Material  transferred from the
     Joint Property or disposed of by the Operator unless otherwise agreed to by
     the  Parties,  shall be priced on the  following  basis  exclusive  of cash
     discounts:

     A.   New Material (Condition A)

          (1)  Tubular Goods Other than Line Pipe

               (a)  Tubular goods, sized 2-3/8 inches OD and larger, except line
                    pipe,  shall be priced at current new prices effective as of
                    date of movement plus  transportation  cost using the 80,000
                    pound carload weight basis to the railway receiving point or
                    shore based facilities  nearest the Joint Property for which
                    published rail rates for tubular goods exist.  If the 80,000
                    pound rail rate is not  offered,  the 70,000 pound or 90,000
                    pound rail rate may be used.

               (b)  For grades which are special to one mill only,  prices shall
                    be   computed   at  the  mill   base  of  that   mill   plus
                    transportation  cost from that mill to the railway receiving
                    point or shore based  facilities  nearest the Joint Property
                    as provided above in Paragraph 2.A.(1)(a).

               (c)  Special  end  finish  tubular  goods  shall be priced at the
                    lowest published out-of-stock price, f.o.b., Houston, Texas,
                    plus   transportation   cost,   using  Oil   Field   Haulers
                    Association  interstate  30,000  pound  truck  rate,  to the
                    railway  receiving point or shore based  facilities  nearest
                    the Joint Property.

               (d)  Macaroni  tubing  (size  less than  2-3/8  inch OD) shall be
                    priced at the lowest  published  out-of-stock  prices f.o.b.
                    the supplier plus transportation  costs, using the Oil Field
                    Haulers  Association  interstate  truck  rate per  weight of
                    tubing transferred,  to the railway receiving point or shore
                    based facilities nearest the Joint Property.

          (2)  Line Pipe

               (a)  Line pipe movements  (except size 24 inch OD and larger with
                    walls 3/4 inch and  over)  30,000  pounds  or more  shall be
                    priced  under   provisions   of  tubular  goods  pricing  in
                    Paragraph A.(1)(a) as provided above.

               (b)  Line pipe movements  (except size 24 inch OD and larger with
                    walls 3/4 inch and over) less than  30,000  pounds  shall be
                    priced  at  current  new  prices  effective  as of  date  of
                    shipment plus 20 percent, plus transportation costs based on
                    freight rates as set forth under provisions of tubular goods
                    pricing in Paragraph A.(1)(a) as provided above.

               (c)  Line pipe 24 inch OD and over and 3/4 inch  wall and  larger
                    shall be priced f.o.b.  the point of  manufacture at current
                    CEPS  prices  plus   transportation   cost  to  the  railway
                    receiving point nearest the Joint Property.

               (d)  Line pipe,  including  fabricated line pipe,  drive pipe and
                    conduit not listed on published  price lists shall be priced
                    at quoted prices plus freight to the railway receiving point
                    or shore based  facilities  nearest the Joint Property or at
                    prices agreed to by the Parties.

          (3)  Other  Material  shall be priced at the  current  new  price,  in
               effect at date of movement,  as listed by a reliable supply store
               nearest  the  Joint  Property,  or  point  of  manufacture,  plus
               transportation  costs,  if applicable,  to the railway  receiving
               point or shore based facilities nearest the Joint Property.

          (4)  Unused new Material,  except tubular goods,  moved from the Joint
               Property  shall be priced at the current new price,  in effect on
               date of movement,  as listed by a reliable  supply store  nearest
               the Joint Property, or point of manufacture,  plus transportation
               costs,  if applicable,  to the railway  receiving  point or shore
               based facilities nearest the Joint Property.  Unused new tubulars
               will be priced as provided above in Paragraph 2.A.(1) and (2).

     B.   Good Used Material (Condition B)

          Material in sound and serviceable condition and suitable for reuse
          without reconditioning:

          (1)  Material  moved to the Joint  Property  At  seventy-five  percent
               (75%) of current new price as determined by Paragraph A.

          (2)  Material used on and moved from the Joint Property

               (a)  At  seventy-five  percent  (75%)  of  current  new  price as
                    determined  by  Paragraph  A., if  Material  was  originally
                    charged to the Joint Account as new Material or

               (b)  At  sixty-five   percent  (65%)  of  current  new  price  as
                    determined  by  Paragraph  A., if  Material  was  originally
                    charged to the Joint Account as used Material.

          (3)  Material  not  used on and  moved  from  the  Joint  Property

               At seventy-five percent (75%) of current new price as determined
               by Paragraph A.

          The cost of reconditioning, if any, shall be absorbed by the
          transferring property.

     C.   Other Used Material

          (1)  Condition C

               Material which is not in sound and serviceable condition and not
               suitable for its original function until after reconditioning
               shall be priced at fifty percent (50%) of current new price as
               determined by Paragraph A. The cost of reconditioning shall be
               charged to the receiving property, provided Condition C value
               plus cost of reconditioning does not exceed Condition B value.

                                       6

<PAGE>

          (2)  Condition D

               Material,  excluding  junk,  no longer  suitable for its original
               purpose,  but usable for some other  purpose shall be priced on a
               basis   commensurate  with  its  use.  Operator  may  dispose  of
               Condition D Material under  procedures  normally used by Operator
               without prior approval of Non-Operators.

               (a)  Casing,  tubing,  or drill  pipe used as line pipe  shall be
                    priced as Grade A and B  seamless  line  pipe of  comparable
                    size and weight. Used casing,  tubing or drill pipe utilized
                    as line pipe shall be priced at used line pipe prices.

               (b)  Casing, tubing or drill pipe used as higher pressure service
                    lines than standard line pipe,  e.g. power oil lines,  shall
                    be  priced  under  normal  pricing  procedures  for  casing,
                    tubing,  or drill pipe.  Upset tubular goods shall be priced
                    on a non-upset basis.

          (3)  Condition E

               Junk shall be priced at prevailing  prices.  Operator may dispose
               of Condition E Material  under  procedures  normally  utilized by
               Operator without prior approval of Non-Operators.

     D.   Obsolete Material

          Material which is serviceable and usable for its original function but
          condition  and/or  value of such  Material is not  equivalent  to that
          which would justify a price as provided above may be specially  priced
          as agreed to by the  Parties.  Such price  should  result in the Joint
          Account being  charged with the value of the service  rendered by such
          Material.

     E.   Pricing Conditions

          (1)  Loading or unloading costs may be charged to the Joint Account at
               the rate of  twenty-five  (25CENTS)  per  hundred  weight  on all
               tubular goods  movements,  in lieu of actual loading or unloading
               costs  sustained at the stocking  point.  The above rate shall be
               adjusted as of the first day of April each year following January
               1,  1985 by the same  percentage  increase  or  decrease  used to
               adjust  overhead rates in Section III,  Paragraph 1.A.(4).  Each
               year,  the rate  calculated  shall be rounded to the nearest cent
               and shall be the rate in effect until the first day of April next
               year.  Such rate shall be  published  each year by the Council of
               Petroleum Accountants Societies.

          (2)  Material  involving erection costs shall be charged at applicable
               percentage of the current knocked-down price of new Material.

3.   Premium Prices

     Whenever  Material is not readily  obtainable at published or listed prices
     because of national emergencies, strikes or other unusual causes over which
     the Operator has no control,  the Operator may charge the Joint Account for
     the required  Material at the Operator's  actual cost incurred in providing
     such  Material,  in making it suitable  for use, and in moving to the Joint
     Property;  provided notice in writing is furnished to  Non-Operators of the
     proposed  charge prior to billing  Non-Operators  for such  Material.  Each
     Non-Operator  shall have the right,  by so electing and notifying  Operator
     within ten days after  receiving  notice from Operator,  to furnish in kind
     all or part of his share of such Material  suitable for use and  acceptable
     to Operator.

4.   Warranty of Material Furnished By Operator

     Operator  does not warrant the  Material  furnished.  In case of  defective
     Material,  credit shall not be passed to the Joint Account until adjustment
     has been received by Operator from the manufacturers or their agents.

                                 V. INVENTORIES

The Operator shall maintain detailed reports of Controllable Material.

1.   Periodic Inventories, Notice and Representation

     At  reasonable  intervals,  inventories  shall be taken by  Operator of the
     Joint Account  Controllable  Material.  Written notice of intention to take
     inventory  shall be given by Operator at least  thirty (30) days before any
     inventory is to begin so that  Non-Operators  may be  represented  when any
     inventory  is taken.  Failure  of  Non-Operators  to be  represented  at an
     inventory  shall  bind  Non-Operators  to  accept  the  inventory  taken by
     Operator.

2.   Reconciliation and Adjustment of Inventories

     Adjustments  to the Joint Account  resulting from the  reconciliation  of a
     physical  inventory shall be made within six months following the taking of
     the inventory. Inventory adjustments shall be made by Operator to the Joint
     Account for overages and shortages, but, Operator shall be held accountable
     only for shortages due to lack of reasonable diligence.

3.   Special Inventories

     Special  inventories  may be taken  whenever  there is any sale,  change of
     interest, or change of Operator in the Joint Property. It shall be the duty
     of the party  selling  to notify all other  Parties as quickly as  possible
     after the transfer of interest takes place. In such cases,  both the seller
     and the purchaser shall be governed by such inventory. In cases involving a
     change of Operator, all Parties shall be governed by such inventory.

4.   Expense of Conducting Inventories

     A.   The expense of conducting periodic inventories shall not be charged to
          the Joint Account unless agreed to by the Parties.

     B.   The expense of conducting special  inventories shall be charged to the
          Parties requesting such inventories,  except inventories  required due
          to change of Operator shall be charged to the Joint Account.

                                       7

<PAGE>

                                   EXHIBIT "D"

   Attached to and made a part of that certain Joint Operating Agreement dated
      effective August 1, 2004, by and between GRYPHON EXPLORATION COMPANY,
         as Operator, and MARINER ENERGY, INC., et al, as Non-Operators

                    CERTIFICATION OF NONSEGREGATED FACILITIES

Contractor  certifies that it does not maintain or provide for its employees any
segregated  facilities at any of its  establishments and that it does not permit
its  employees to perform  their  services at any  location,  under its control,
where segregated facilities are maintained. Contractor certifies further that it
will not maintain or provide for its employees any segregated  facilities at any
of its establishments and that it will not permit its employees to perform their
services at any location,  under its control,  where  segregated  facilities are
maintained. Contractor agrees that a breach of this certification is a violation
of the Equal Opportunity  Clause in any Government  contract between  Contractor
and Corporation. As used in this certification, the term "segregated facilities"
means any waiting rooms, work areas, rest rooms and wash rooms,  restaurants and
other  eating  areas,  time clocks,  locker rooms and other  storage or dressing
areas,  parking lots,  drinking  fountains,  recreation or entertainment  areas,
transportation,   and  housing  facilities  provided  for  employees  which  are
segregated by explicit directive or are in fact segregated on the basis of race,
color,  religion,  or  national  origin,  because  of habit,  local  customs  or
otherwise.  Contractor further agrees that (except where it has obtain identical
certifications  from proposed  subcontractors for specific time periods) it will
obtain identical  certifications from proposed subcontractors prior to the award
of  subcontracts  exceeding  $10,000 which are not exempt from the provisions of
the Equal  Opportunity  Clause;  that it will retain such  certifications in its
files;  and  that  it  will  forward  the  following  notice  to  such  proposed
subcontractors   (except  where  the  proposed   subcontractors  have  submitted
identical certifications for specific time periods):

NOTICE TO  PROSPECTIVE  SUBCONTRACTORS  OF  REQUIREMENT  FOR  CERTIFICATIONS  OF
NONSEGREGATED  FACILITIES.  A Certification  of  Non-segregated  Facilities,  as
required by the May 9, 1967, order on Elimination of Segregated  Facilities,  by
the Secretary of Labor (32 Fed.  Reg.  7439,  May 19,  1967),  must be submitted
prior to the award of a subcontract exceeding $10,000,  which is not exempt from
the  provisions  of the  Equal  Opportunity  Clause.  The  certification  may be
submitted either for each  subcontract or for all  subcontracts  during a period
(i.e., quarterly, semi-annually or annually). (1968 MAR.) (Note: The penalty for
making false statements in offers is prescribed in 18 U.S.C. 1001.)

Whenever used in the foregoing  Section,  the term  "contractor"  refers to each
party to this agreement.

                                       35

<PAGE>

                                   Exhibit "E"

                             GAS BALANCING AGREEMENT

      Attached to and made a part of that certain Joint Operating Agreement
       dated effective August 1, 2004, by and between GRYPHON EXPLORATION
     COMPANY, as Operator, and MARINER ENERGY, INC., et al, as Non-Operators

I.   Definitions

     A.   "Agreement" shall mean this Gas Balancing Agreement.

     B.   "Balanced"  is that  condition  which  occurs when a party  hereto has
          taken the same  percentage of the cumulative  volume of Gas production
          it is  entitled  to  take  pursuant  to the  terms  of  the  Operating
          Agreement.

     C.   "Gas" includes natural gas produced from a Well that produces Gas Well
          Gas, including all constituent parts of such natural gas except liquid
          hydrocarbons and condensate recovered by primary separation equipment.

     D.   "Gas Well Gas" is gas produced from a Well classified as a gas well by
          the regulatory body having jurisdiction.

     E.   "Overproduced"  is the  status of a party when the  percentage  of the
          cumulative  volume of Gas taken by that  party  exceeds  that  party's
          percentage  interest of the volume of cumulative Gas production of all
          parties to the Operating  Agreement under and pursuant to the terms of
          the Operating Agreement.

     F.   "Underproduced"  is the  status  of a party  when  the  percentage  of
          cumulative volume of Gas taken by that party is less than that party's
          percentage  interest of the volume of cumulative Gas production of all
          parties to the Operating  Agreement under and pursuant to the terms of
          said Operating Agreement.

     G.   "Well" is defined as each well subject to the Operating Agreement that
          produces  Gas Well Gas. If a single Well is  completed  in two or more
          reservoirs, such Well shall be considered a separate Well with respect
          to,  but only with  respect  to,  each  reservoir  from  which the Gas
          produced is not commingled in the well bore.

II.  Application of this Agreement

     The  parties  to the  Operating  Agreement  own the  working  or  operating
     interests in the Gas  underlying the Contract Area covered by the Operating
     Agreement and are entitled to share in the  percentages  therein  stated in
     the Operating Agreement.

     In  accordance  with the terms of the  Operating  Agreement,  each party is
     responsible  for marketing  it's share and shall take its full share of Gas
     produced from the Contract Area and market or otherwise dispose of same. In
     the event a party  hereto  elects in writing  not to take in kind or market
     its full share of Gas or has  contracted  to sell its share of Gas produced
     from  the  Contract  Area to a  purchaser  which,  at any time  while  this
     Agreement is in effect,  fails to take the share of Gas attributable to the
     interest of such party,  the terms of this  Agreement  shall  automatically
     become effective.

     The Operator is responsible  for  administering  the provisions of this Gas
     Balancing Agreement and as such shall have the sole option of administering
     all  reporting  of the same for the Parties or  retaining  the  services of
     third party  professionals  for this  specific  purpose.  The costs of such
     third party  services by Operator  shall be  considered  as included in the
     overhead rates.  The Operator shall cause  deliveries to be made to the Gas
     purchasers  at such rates as may be  required  to give effect to the extent
     practicable, to be or become Balanced.

     The  provisions of this  agreement  shall be applied to the Contract  Area,
     regardless of the number of wells.

III. Storing and Making Up Gas Production

     A.   Right to Take and Market Gas

          During any periods or periods when any party hereto does not take, has
          no market  for,  or the market of a party is not  sufficient  to take,
          that party's  full share of the Gas produced  from any Well located on
          the Contract Area, or such party's  purchaser  otherwise fails to take
          such party's  share of Gas produced  from any such Well located on the
          Contract Area,  resulting in such party becoming  Underproduced  (such
          party being herein referred to as an "Underproduced Party"), the other
          party or parties shall be entitled,  but not required, to produce from
          said  Well  on the  Contract  Area  (and  take  or  deliver  to  their
          respective purchaser(s)),  each month all or a part of that portion of
          the allowable Gas  production  assigned to such Well by the regulatory
          body having jurisdiction.  Any party so taking or delivering Gas which
          results in such party becoming  Overproduced  is herein referred to as
          an "Overproduced Party".

                                       36

<PAGE>

          Those parties which are capable of taking and/or marketing  quantities
          of Gas  allocable  to an  Underproduced  Party,  in the absence of any
          other  agreement  between  them,  shall  each  take a share of the Gas
          attributed  to the  Underproduced  Party  or  Parties  in  the  direct
          proportion that their respective  interests bear to the total interest
          of all parties taking Gas which are also considered Overproduced.

          All  parties  hereto  shall  share in and own the liquid  hydrocarbons
          recovered from such Gas by primary separation  equipment in accordance
          with  their  respective  interests  and  subject  to the  terms of the
          above-described  Operating Agreement,  whether or not such parties are
          actually taking and/or marketing Gas at such time.

     B.   Making Up Underproduction

          Any Underproduced Party shall endeavor to bring its taking of Gas into
          a Balanced  condition.  Upon thirty (30) days prior written  notice to
          the Operator,  any Underproduced  Party may thereafter begin taking or
          delivering  to its purchaser its full share of the Gas produced from a
          Well (less any used in operations,  vented or lost).  To allow for the
          recovery  of Gas in  storage  and to  balance  the Gas  account of the
          parties in accordance with their respective  interests,  Underproduced
          Party shall be  entitled  to take or deliver to a  purchaser  its full
          share of Gas  produced  from such Well  (less any used in  operations,
          vented or lost) plus, (i) for the months of March,  April,  May, June,
          July,  August,  September and October only of any calendar year during
          which this  agreement  may be in place,  an amount up to an additional
          fifty percent (50%) of the monthly quantity of Gas attributable to the
          Overproduced  Party or  Parties,  or (ii) for the months of  November,
          December,  January and  February  only of any  calendar  year or years
          during  which  this  agreement  may be in  place,  an  amount up to an
          additional  twenty-five  percent (25%) of the monthly  quantity of Gas
          attributable to the  Overproduced  Party or Parties.  If more than one
          Underproduced  Party is entitled to take  additional  Gas,  they shall
          divide  the   additional   Gas  in  proportion  to  their   respective
          Underproduced  accounts.  The first Gas made up shall be assumed to be
          the first Gas Underproduced.

     C    Gas Balance Reporting

          Each party  taking  will  promptly  provide to the  Operator  any data
          required by the Operator for  preparation of the  statements  required
          hereunder. Operator shall not be required to adjust its Gas accounting
          statements reflecting a different Gas purchaser until the first day of
          the month  following the month in which such notice is received by the
          Operator.  The Operator  will  maintain  appropriate  accounting  on a
          monthly and  cumulative  basis of the  quantities of Gas each party is
          entitled to take and/or market and the  quantities of Gas taken and/or
          marketed by each of the parties to their  respective  Gas  purchasers.
          Within  ninety  (90)  days  after the end of each  producing  calendar
          month,  the Operator shall furnish each party a statement  showing the
          status of the Overproduced and Underproduced accounts of all parties.

          To determine respective volumes of Gas taken by separate gas pipelines
          connected to the Well, measurement of Gas for overproduction and
          underproduction shall be accomplished by use of sales meters and lease
          measurement equipment, which shall be in accordance with AGA
          requirements.

          Each  party to this  Agreement  agrees  that it will not  utilize  any
          information obtained hereunder for any purpose other than implementing
          or administering the terms of this Agreement.

     D.   Royalty and Production Tax

          At all times  while Gas is produced  from the  Contract  Area,  unless
          otherwise  required by any State or Federal law or  regulations,  each
          party shall pay or cause to be paid all royalty due and payable on the
          actual volumes of gas taken for its account. Each party agrees to hold
          each other party harmless from any and all claims for royalty payments
          asserted by its royalty owners. The term "royalty owner" shall include
          owners of  royalty,  overriding  royalties,  production  payments  and
          similar interests payable out of production.

          Each party  producing or taking or delivering Gas to its Gas purchaser
          shall pay, or cause to be paid, all production and severance taxes due
          on all volumes of Gas actually taken or sold by such party.

IV.  Cash Settlement

     A    Volume/Value

          If, at the  permanent  termination  of  production  of Gas from a Well
          located on the Contract Area, an imbalance exists between the parties,
          a cash  settlement  of the imbalance  between the parties  relative to
          such Well  shall be made.  The amount of the cash  settlement  will be
          limited to the proceeds actually received by the Overproduced Party or
          Parties  at  the  time  of  overproduction,  less  transportation  and
          applicable treating charges and production and severance taxes paid on
          such overproduction. Royalty shall only be deducted from such proceeds
          attributable to the  overproduction if actually paid to royalty owners
          by the  Overproduced  Party or Parties.  No interest shall be added to
          any cash settlement hereunder.  If there is more than one Overproduced
          Party, the cash settlement shall be based on a weighted average of the
          proceeds  actually  received as above  described  by all  Overproduced
          Parties.

                                       37

<PAGE>

     B.   Collection and Distribution

          Operator shall provide to all parties hereto within sixty (60) days of
          permanent  determination  of Gas production a final  accounting of the
          Gas balance.  Overproduced Parties, within thirty (30) days of receipt
          of the final accounting of the Gas balance, shall pay their respective
          shares of the above  described  cash  settlement to the  Underproduced
          Parties in that proportion that each such Underproduced Party's volume
          of gas in  storage  bears to the total of all  Underproduced  Parties'
          volumes of gas in storage.

V.   Miscellaneous

     A.   Term

          This  Agreement  shall  remain  in  force  and  effect  as long as the
          Operating  Agreement  to which it is  attached  remains  in force  and
          effect,  and  thereafter  until the Gas balance  accounts  between the
          parties are settled in full,  and shall inure to the benefit of and be
          binding  upon the  parties  hereto,  their  heirs,  successors,  legal
          representatives and assigns.

     B.   Expenses

          Nothing herein shall change or affect each party's  obligations to pay
          its  proportionate  share of all costs  and  liabilities  incurred  in
          operations  on the Contract  Area as its share thereof is set forth in
          the Operating Agreement to which this Agreement is attached.

     C.   Well Tests

          Nothing  herein shall be  construed to deny any party the right,  from
          time to time,  to produce and take or deliver to its Gas  purchaser up
          to one  hundred  percent  (100%) of the entire Well stream to meet the
          deliverability test required by its Gas purchaser,  provided that such
          tests are reasonable in light of overall industry standards.

     D.   Monitoring of Takes of Production

          Each party shall,  at all times,  use its best efforts to regulate its
          takes and  deliveries  from each Well on said Contract Area so that no
          Well will be shut-in for overproducing the allowable  assigned thereto
          by the regulatory body having jurisdiction.  Additionally,  each party
          shall communicate, as necessary, the contents of this agreement to its
          respective Gas  purchaser(s) or  transporter(s)  and shall monitor its
          deliveries to its respective Gas purchaser(s) or  transporter(s) so as
          to ensure to the greatest extent practicable that its Gas purchaser(s)
          or  transporter(s)  does  not  take Gas in  excess  of the  quantities
          provided for herein.

     E.   Liquefiable Hydrocarbons Not Covered Under Agreement

          The  parties  shall  share  proportionately  in  and  own  all  liquid
          hydrocarbons  recovered with the gas by lease  equipment in accordance
          with their respective interests.

                                       38

<PAGE>

                                   EXHIBIT "B"
       Attached to and made a part of that certain Participation Agreement
              dated May 25, 2004 by and between Gryphon Exploration
                    Company and Ridgewood Energy Corporation

                                      JOINT

                               OPERATING AGREEMENT

                                     BETWEEN

                          GRYPHON EXPLORATION COMPANY,

                                  AS OPERATOR,

                                       And

                          RIDGEWOOD ENERGY CORPORATION,

                                AS NON-OPERATOR,

                                    COVERING

                          WEST CAMERON AREA, BLOCK 103

                               OFFSHORE LOUISIANA

                                      DATED

                                  May 25, 2004

<PAGE>

                            JOINT OPERATING AGREEMENT

     THIS  AGREEMENT is made  effective the 25th day of May, 2004 by the signers
hereof,  herein  referred to  collectively  as  "Parties"  and  individually  as
"Party".

                                   WITNESSETH:

     WHEREAS the PARTIES are owners of or have  contracted for the right to earn
an interest  in the oil and gas  lease(s)  identified  in Exhibit  "A",  and the
Parties desire to explore, develop, produce and operate said lease(s).

     NOW THEREFORE, in consideration of the premises and of the mutual agreement
herein, it is agreed as follows:

                                    ARTICLE I

                                   APPLICATION

     1.1  APPLICATION  TO BOTH  LEASES.  If more  than one oil and gas  lease is
identified in Exhibit "A", this Agreement  shall apply  separately to each Lease
and each Lease shall be considered as being covered by the operating agreement.

                                   ARTICLE II

                                  DEFINITIONS

     2.1 AFE.  An  Authorization  for  Expenditure  prepared  by a Party for the
purpose of  estimating  the costs to be  incurred  in  conducting  an  operation
hereunder.

     2.2 CASING POINT. That point at which a well drilled hereunder, has reached
the proposed  objective depth or zone,  logged and logs have been distributed to
the  PARTICIPATING  PARTIES and any tests have been made which are  necessary to
reach the decision whether to run casing.

     2.3 DEVELOPMENT OPERATIONS. Operations on the LEASES other than EXPLORATORY
OPERATIONS as defined in Section 2.5 below.

     2.4 DEVELOPMENT WELL. Any well proposed as a DEVELOPMENT OPERATION.

     2.5 EXPLORATORY  OPERATIONS.  Operations on the LEASES, which are scheduled
for an objective zone, horizon or formation:

          (1)  which has not been  established  as producible on the LEASE under
               2.18 below; or,

          (2)  which is already  established  as  producible  on the LEASE under
               2.18 below, but such objective zone, horizon or formation will be
               penetrated  at a location  more than 2,000 feet from the  nearest
               bottom  hole  location on the LEASE at which such  objective  has
               been proved  producible,  or such objective is mutually agreed to
               be in a separate fault block.

     2.6  EXPLORATORY WELL. Any well proposed as an EXPLORATORY OPERATION.

     2.7  FACILITIES.  All  lease  equipment  beyond  the  wellhead  connections
acquired pursuant to this Agreement including any platform(s) necessary to carry
out the operation.

     2.8 LEASE.  The oil and gas leases  identified in Exhibit "A" and the lands
affected thereby.

     2.9 NON-CONSENT OPERATIONS. DEVELOPMENT or EXPLORATORY OPERATIONS conducted
by fewer than all Parties.

     2.10 NON-CONSENT PLATFORM. A drilling or production platform owned by fewer
than all PARTIES.

     2.11  NON-CONSENT  WELL. A DEVELOPMENT or  EXPLORATORY  WELL owned by fewer
than

                                        2

<PAGE>

all PARTIES.

     2.12 NON-OPERATOR. Any PARTY to the Agreement other than the OPERATOR.

     2.13 NON-PARTICIPATING PARTY. Any PARTY other than a PARTICIPATING PARTY.

     2.14  NON-PARTICIPATING  PARTY'S SHARE. The  PARTICIPATING  INTEREST a NON-
PARTICIPATING  PARTY  would  have had if all  PARTIES  had  participated  in the
operation.

     2.15  OPERATOR.  The PARTY  designated  under this Agreement to conduct all
operations.

     2.16  PARTICIPATING   INTEREST.  A  PARTICIPATING   PARTY'S  percentage  of
participation in an operation conducted pursuant to the Agreement.

     2.17  PARTICIPATING  PARTY.  A PARTY  who joins in an  operation  conducted
pursuant to this agreement.

     2.18 PRODUCIBLE  WELL. A well producing oil or gas, or if not producing oil
or gas,  a well  either  declared  or  capable of being  declared  producing  in
accordance  with any applicable  government  authority or by agreement of all of
the Parties.

     2.19 WORKING INTEREST.  The ownership of each PARTY in and to the LEASES as
set forth in Exhibit "A".

                                   ARTICLE III

                                    EXHIBITS

     3.1  EXHIBITS.  Attached  hereto  are  the  following  exhibits  which  are
incorporated herein by reference:

3.1.1   Exhibit A.   Description of Leases and Working Interest
3.1.2   Exhibit B.   Insurance Provision
3.1.3   Exhibit C.   Accounting Procedure
3.1.4   Exhibit D.   Nondiscrimination Provision
3.1.5   Exhibit E.   Gas Balancing Agreement

                                   ARTICLE IV

                                    OPERATOR

     4.1 OPERATOR. Gryphon Exploration Company is hereby designated as OPERATOR.
OPERATOR  shall not have the right to assign or transfer  any rights,  duties or
obligations  of  OPERATOR  to  another  PARTY  except  in  accordance  with  the
provisions herein.

     4.2  RESIGNATION.  OPERATOR may resign at any time by giving  notice to the
PARTIES.  Such resignation  shall become effective at 7:00 a.m. on the first day
of the month following a period of ninety (90) days after said notice,  unless a
successor OPERATOR has assumed the duties of OPERATOR prior to that date.

     4.3 REMOVAL OF OPERATOR.  OPERATOR  may be removed if (1) OPERATOR  becomes
insolvent or unable to pay its debts as they mature or makes an  assignment  for
the benefit of creditors or commits any act of  bankruptcy or seeks relief under
laws  providing  for the relief of debtors;  or (2) a receiver is appointed  for
OPERATOR  or for  substantially  all  of its  property  and/or  affairs;  or (3)
OPERATOR or its  designee  no longer owns an interest in the  property or divest
itself of more than fifty percent  (50%) or more of the interest  owned by it in
the Lease at the time it was designated OPERATOR;  or (4) OPERATOR has committed
a material  breach of any substantive  provision  hereof or fails to perform its
duties  hereunder in a reasonable and prudent manner,  or failed to rectify such
default within sixty (60)

                                        3

<PAGE>

days after  notice from another  PARTY to do so. The PARTY giving  notice to the
OPERATOR  of a default  shall  also  furnish a copy of such  notice to the other
PARTIES.  In such event,  the OPERATOR may be removed by an affirmative  vote of
two (2) or more  PARTIES  having a combined  WORKING  INTEREST of fifty  percent
(50%) in the LEASE.

     4.4  SELECTION OF SUCCESSOR.  Upon  resignation  or removal of OPERATOR,  a
successor  OPERATOR shall be selected by an affirmative  vote of two (2) or more
PARTIES having a combined WORKING  INTEREST of fifty-one  percent (51%) or more;
however,  if the  removed or  resigned  OPERATOR  fails to vote or votes only to
succeed itself,  the successor OPERATOR shall be selected by an affirmative vote
of the PARTIES having a combined WORKING INTEREST of fifty-one  percent (51%) or
more of the remaining  WORKING  INTEREST after excluding the WORKING INTEREST of
the removed or resigned OPERATOR.

     4.5 DELIVERY OF PROPERTY.  Prior to the effective  date of  resignation  or
removal, OPERATOR shall deliver promptly to successor OPERATOR the possession of
everything owned by the PARTIES pursuant to this Agreement.

                                    ARTICLE V

                        AUTHORITY AND DUTIES OF OPERATOR

     5.1 EXCLUSIVE RIGHT TO OPERATE.  Unless otherwise provided herein, OPERATOR
shall have the exclusive  right and duty to conduct all  operations  pursuant to
the Agreement.

     5.2  WORKMANLIKE  CONDUCT.  OPERATOR shall conduct all operations in a good
and workmanlike  manner,  as would a prudent  OPERATOR under the same or similar
circumstances.  OPERATOR shall not be liable to the PARTIES for losses sustained
or liabilities  incurred except such as may result from its gross  negligence or
willful misconduct.  Unless otherwise provided,  OPERATOR shall consult with the
PARTIES and keep them informed of all important matters.

     5.3 LIENS AND  ENCUMBRANCES.  OPERATOR shall endeavor to keep the LEASE and
equipment  free  from  all  liens  and  encumbrances  occasioned  by  operations
hereunder, except those provided for in Section 8.5.

     5.4 EMPLOYEES.  OPERATOR shall select employees and determine their number,
hours of labor and compensation. Such employees shall be employees of OPERATOR.

     5.5 RECORDS.  OPERATOR shall keep accurate  books,  accounts and records of
operations  hereunder which,  unless  otherwise  provided for in this Agreement,
shall be  available  to  NON-OPERATOR  pursuant to the  provisions  contained in
Exhibit "C".

     5.6  COMPLIANCE.  OPERATOR  shall  comply  with and  require all agents and
contractors to comply with all applicable laws, rules, regulations and orders of
any governmental agency having jurisdiction.

     5.7  DRILLING.  OPERATOR  shall have all drilling  operations  conducted by
qualified and responsible  independent  contractors under competitive contracts.
However,  OPERATOR may employ its equipment and personnel in the conduct of such
operations,  but its charges therefor shall not exceed the then prevailing rates
in the area and such work shall be  performed  pursuant  to a written  agreement
among the PARTICIPATING PARTIES.

     5.8 REPORTS.  OPERATOR shall make reports to governmental  authorities that
it has a duty to make as OPERATOR  and shall  furnish  copies of such reports to
the PARTIES.  OPERATOR  shall give timely  written  notice to the PARTIES of all
litigation and hearings affecting the LEASES or operations hereunder.

                                       4

<PAGE>

     5.9  INFORMATION  TO  PARTICIPATING  PARTIES.  OPERATOR  shall  furnish all
PARTICIPATING PARTIES hereto the following  information  pertaining to each well
being drilled:

          (a)  copy of  application  for  permit  to  drill  and all  amendments
               thereto;

          (b)  daily drilling reports by facsimile or e-mail;

          (c)  complete report of all core analyses;

          (d)  two (2) copies of any logs or surveys as run;

          (e)  two (2)  copies of any well test  results,  bottom-hole  pressure
               surveys, gas and condensate analyses or similar information;

          (f)  one (1) copy of reports made to regulatory agencies; and

          (g)  twenty-four  (24) hour  notice of  logging,  coring  and  testing
               operations;

          (h)  upon request prior to resumption of drilling operations,  samples
               of cuttings  and cores  marked as to depth,  to be  packaged  and
               shipped to the requesting PARTY at their expense.

          (i)  all  other   reasonable   information,   available  to  OPERATOR,
               pertaining to any well drilled pursuant to this Agreement.

                                   ARTICLE VI

                          VOTING AND VOTING PROCEDURES

     6.1   DESIGNATION   OF   REPRESENTATIVE.   The  name  and  address  of  the
representative  and  alternate  authorized  to represent and bind each PARTY for
operations  provided  in  Article  IX,  shall be as shown on  Exhibit  "A".  The
designated  representative  or alternate may be changed by written notice to the
other PARTIES.

     6.2 VOTING  PROCEDURES.  Unless  otherwise  provided,  any matter requiring
approval of the PARTIES shall be determined as follows:

          6.2.1 Voting  Interest.  Each PARTY shall have a voting interest equal
to its WORKING INTEREST or its PARTICIPATING INTEREST as applicable.

          6.2.2 Vote Required.  Except as may be specifically provided elsewhere
herein,  if there are three or more  Parties  to this  agreement,  any  proposal
requiring approval of the PARTIES shall be decided by an affirmative vote of two
(2) or more PARTIES having a combined voting interest of fifty-one percent (51%)
or more. If there are only two parties to this agreement, any proposal requiring
approval of the Parties,  other than the proposals described in Article 12.7 and
Article 13.1, shall be decided by an affirmative vote of one (1) or more Parties
having a combined voting interest of fifty-one percent (51%) or more.

          6.2.3 Votes. The PARTIES may vote at meetings, by telephone, confirmed
in writing to OPERATOR; or by letter, telegram,  e-mail or telecopies.  However,
any PARTY not  attending a meeting must vote prior to the meeting in order to be
counted.  Provided,  however,  no vote  shall be taken in a meeting in which all
Parties are not present unless such vote was  specifically set out in the formal
agenda.  OPERATOR shall give prompt notice of the results of such voting to each
PARTY.

          6.2.4 Meetings. Meetings of the PARTIES may be called by OPERATOR upon
its own motion or at the  request of one (1) or more  PARTIES  having a combined
voting  interest  of not less  than ten  percent  (10%).  Except  in the case of
emergency or except when agreed by unanimous consent, no meeting shall be called
on less than five (5)

                                       5

<PAGE>

days  advance  written  notice,  (including  the agenda for such  meeting).  The
OPERATOR shall be chairman of each meeting.

                                   ARTICLE VII

                                     ACCESS

     7.1 ACCESS TO LEASE.  Each PARTY shall have access to the LEASE as its sole
risk and expense at all reasonable  times to inspect  operations and records and
data pertaining thereto.

     7.2 REPORTS.  OPERATOR shall furnish to a requesting  PARTY any information
to which such PARTY is entitled hereunder. The costs of gathering and furnishing
information  not  otherwise  furnished  under  Article V shall be charged to the
requesting PARTY.

     7.3  CONFIDENTIALITY.  Except as  provided  in  Section  7.4 and except for
necessary  disclosures  to  governmental  agencies,  no PARTY shall  release any
geological,  geophysical or reservoir  information or any logs, surveys or other
information  pertaining to the progress,  tests or results of any well or status
of the LEASE unless agreed to by the PARTICIPATING  PARTIES. At such time as the
PARTIES mutually agree such information is non-confidential,  it may be publicly
released.  Unless otherwise provided,  OPERATOR shall initially release the same
subsequent  to approval of its content by the PARTIES.  OPERATOR  shall have the
exclusive  right to  designate  certain  wells  as  "tite"  for the  competitive
protection of the PARTIES.

     7.4 LIMITED  DISCLOSURE.  Any PARTY may make confidential data available to
affiliates,  to reputable  engineering firms and gas transmission  companies for
hydrocarbon  reserve and other  technical  evaluations,  to reputable  financial
institutions  for study prior to commitment of funds and to bonafide  purchasers
of all of a PARTY'S interest in the LEASE. Any third party permitted such access
shall first agree in writing  neither to disclose such data to others nor to use
such data except for the purpose for which it is disclosed.  Each PARTY shall be
furnished with copies of third parties execution of the same. Any Party may make
limited releases of confidential data to the Offshore Oil Scouts  Association to
the extent and only to the extent such data  satisfies the minimum  requirements
for membership in the Offshore Oil Scouts Association.

                                  ARTICLE VIII

                                  EXPENDITURES

     8.1 BASIS OF CHARGE TO THE  PARTIES.  Subject to other  provisions  of this
Agreement,  OPERATOR shall pay all costs and each PARTY shall reimburse OPERATOR
in proportion to the PARTICIPATING INTEREST. All charges, credits and accounting
for expenditures  shall be pursuant to the Accounting  Procedure attached hereto
as Exhibit "C". The provisions of this  Agreement  shall prevail in the event of
conflict with Exhibit "C".

     8.2  AUTHORIZATION.  OPERATOR shall neither make any single expenditure nor
undertake  any  project  costing  in excess  of  Seventy-five  Thousand  Dollars
($75,000.00)  without prior  approval of the PARTIES.  OPERATOR  shall furnish a
written AFE, for information  purposes only, to the PARTIES on any  expenditures
in  excess  of  Twenty-five  Thousand  Dollars  ($25,000.00).   When  costs  are
anticipated to exceed 120% of a previously  approved AFE, OPERATOR shall issue a
Supplemental AFE for information  purposes only Subject to any election provided
in Article X and XI, approval of a well operation shall include  approval of all
necessary  expenditures through installation of the wellhead. In the event of an
emergency, OPERATOR may immediately make such expenditures as in its opinion are

                                       6

<PAGE>

required to deal with the emergency.  OPERATOR  shall report to the PARTIES,  as
promptly as possible, the nature of the emergency and action taken.

     8.3 ADVANCE  BILLINGS.  OPERATOR shall have the right to require each PARTY
to advance its respective  share of estimated  expenditures  pursuant to Exhibit
"C". As to any party who fails to pay its share of said advance  payment  within
fifteen (15) days after  receipt of such  statement  and invoice,  Operator will
notify such  affected  party of its default by certified  mail,  return  receipt
requested and if such party fails to cure the default  within ten (10) days from
the date of receipt of Operator's  Notice, by payment in full of the outstanding
invoices for advance payment, at Operator's  election,  the affected Party shall
be deemed non-consent as to the proposed operation attributable thereto.

     8.4  COMMINGLING OF FUNDS.  Funds received by OPERATOR under this Agreement
may be commingled with its own funds.

     8.5 SECURITY RIGHTS.  In addition to any other security rights and remedies
provided by law with  respect to services  rendered or materials  and  equipment
furnished  under  this  Agreement,  OPERATOR  shall  have a first lien upon each
PARTY'S  PARTICIPATING  and/or  WORKING  INTEREST,  including the production and
equipment  credited thereto,  in order to secure payment of charges against such
PARTY,  together with  interest  thereon at the rate set forth in Exhibit "C" or
the maximum rate allowed by law,  whichever is less, plus attorneys' fees, court
costs and other related collection costs. If any PARTY does not pay such charges
when due, OPERATOR shall have the additional right to collect from the purchaser
the proceeds from the sale of such PARTY'S share of production  until the amount
owed has been paid.  Each  purchaser  shall be  entitled  to rely on  OPERATOR'S
statement  concerning the amount owed. Each  NON-OPERATOR  shall have comparable
security rights on OPERATOR'S PARTICIPATING and/or WORKING INTEREST. Such offset
rights shall not apply to amounts owing that are in dispute.

     8.6 UNPAID  CHARGES.  If any PARTY fails to pay the charges due  hereunder,
including  billings under Section 8.3,  within thirty (30) days after payment is
due,  the  PARTICIPATING  PARTIES  shall have the  obligation,  upon  OPERATOR'S
request, to pay the unpaid amount in proportion to their interest. Each PARTY so
paying its share of the unpaid amount shall be subrogated to OPERATOR'S security
rights to the extent of such payment.

     8.7  DEFAULT.  If any PARTY does not pay its share of the charges when due,
or prior to  commencement  of the  approved  operation  for which it is  billed,
whichever  is the  earlier,  OPERATOR  may give such PARTY  notice  that  unless
payment is made within  fifteen (15) DAYS,  such PARTY shall be in default.  Any
PARTY in default shall have no further access to the maps, cores, logs, surveys,
records, data,  interpretations or other information obtained in connection with
said operation.  A defaulting  PARTY shall not be entitled to vote on any matter
until such time as PARTY'S  payments  are current.  The voting  interest of each
non-defaulting PARTY shall be in the proportion its PARTICIPATING INTEREST bears
to the total non-defaulting PARTICIPATING INTEREST. As to any operation approved
or commenced  during the time a PARTY is in default,  such PARTY shall be deemed
to be a NON-PARTICIPATING PARTY.

     8.8 CARVED-OUT  INTERESTS.  Subject to the  reservations set out in Article
16.1, any overriding royalty, production payment, net proceeds interest, carried
interest or any other interest  carved-out of the WORKING INTEREST in the LEASES
after the effective date of this Agreement shall be subject to the rights of the
PARTIES to this Agreement, and any PARTY whose WORKING INTEREST is so encumbered
shall be responsible therefor. If a

                                        7

<PAGE>

PARTY  does not pay its  share of  expenses  and the  proceeds  from the sale of
production  under Section 8.5 are  insufficient  for that purpose,  the security
rights provided for therein may be applied against the carved-out interests with
which such WORKING INTEREST is burdened.  In such event, the rights of the owner
of such carved-out interest shall be subordinated to the security rights granted
by Section 8.5.

                                   ARTICLE IX

                                    NOTICES

     9.1 GIVING AND  RECEIVING  NOTICES.  All  notices  shall be in writing  and
delivered in person or by mail,  telex,  telegraph,  TWX,  telecopier  or cable;
however,  if a drilling  rig is on  location  at time of  proposal  and  standby
charges  are  accumulating,  such  notices  shall  be  given  by  telephone  and
immediately  confirmed  in  writing.  Notice  shall be  deemed  given  only when
received by the PARTY to whom such notice is directed, except that any notice by
certified mail or equivalent, telegraph or cable properly addressed, pursuant to
Section  6.1,  and with all postage and charges  prepaid  shall be deemed  given
seventy-two (72) hours after such notice is deposited in the mail or twenty-four
(24) hours after such notice is sent by facsimile (receipt  confirmed),  or when
filed with an operating, telegraph or cable company for immediate transmission.

     9.2 CONTENT OF NOTICE.  Any notice which requires a response shall indicate
the maximum  response  time  specified in Section 9.3. If a proposal  involves a
Platform or Facility,  the notice shall contain a description of same, including
location  and  the   estimated   costs  of   fabrication,   transportation   and
installation.  If a proposal involves a well operation, the notice shall include
the estimated commencement date, the proposed depth, the objective zone or zones
to be tested,  the surface and bottom-hole  locations and the estimated costs of
the operation including all necessary  expenditures  through installation of the
wellhead.

     9.3 RESPONSE TO NOTICES.  Each PARTY'S  response to a proposal  shall be in
writing to OPERATOR,  with copies to the other PARTIES. Except for those notices
in Articles X, XI, XV and XVI, the maximum response time shall be as follows:

          9.3.1 Platform Construction. When any proposal for operations involves
the  construction of a platform,  the maximum  response time shall be forty-five
(45) days,

          9.3.2 Proposal Without Platform. When any proposal for operations does
not require  construction of a platform,  maximum  response time shall be thirty
(30) days;  however,  if a drilling rig is on location  and standby  charges are
accumulating, the maximum response time shall be forty-eight (48) hours.

          9.3.3 Other  Matters.  For all other  matters  requiring  notice,  the
maximum response time shall be thirty (30) days.

     9.4 FAILURE TO RESPOND.  Failure of any PARTY to respond to a notice within
the required period shall be deemed to be a negative response.

     9.5 RESTRICTIONS ON MULTIPLE WELL PROPOSALS. Unless otherwise agreed by the
PARTIES,  no more than one well shall be drilling or completing  for the account
of the  Parties on the Lease at the same  time.  Well  proposals  made under the
terms hereof shall be limited to one well each and except as provided  below, no
PARTY shall be required to make an election under more than one well proposal at
the same time or while a well is

                                        8

<PAGE>

drilling or completing.  This paragraph  shall not limit the right of a PARTY to
propose a well while  another is drilling or  completing,  however,  the time to
elect under such a proposal  shall be deferred  until (a) thirty (30) days after
the previous well has been completed or plugged and abandoned or (b) twenty-four
(24) hours from receipt of notification  that the drilling rig has been moved to
the new  location  and  standby  charges  are being  accumulated,  whichever  is
earlier.

                                    ARTICLE X

                               EXPLORATORY WELLS

     10.1 OPERATIONS BY ALL PARTIES.  Any PARTY may propose an EXPLORATORY  WELL
by notifying  the other  PARTIES.  If all the PARTIES  agree to  participate  in
drilling the  proposed  well,  OPERATOR  shall drill same for the benefit of all
PARTIES.

     10.2 SECOND OPPORTUNITY TO PARTICIPATE.  If fewer than all PARTIES elect to
participate,  OPERATOR shall inform all PARTIES of the elections made, whereupon
any PARTY  originally  electing not to participate may then elect to participate
by notifying the OPERATOR  within  forty-eight  (48) hours after receipt of such
information.

     10.3 OPERATIONS BY FEWER THAN ALL PARTIES. If fewer than all but one (1) or
more PARTIES owning not less than forty percent (40%) WORKING  INTEREST elect to
participate  in and  agree to bear the cost and risk of  drilling  the  proposed
well,  OPERATOR,  even if OPERATOR is a NON-PARTICIPATING  PARTY, shall have the
option of drilling such well for the PARTICIPATING PARTIES under this Agreement.
OPERATOR,  immediately after expiration of the applicable  notice period,  shall
advise  the  PARTICIPATING  PARTIES  of (a) the total  interest  of the  PARTIES
approving  such  operation,  and  (b)  its  recommendation  as  to  whether  the
PARTICIPATING  PARTIES  should  proceed with the  operation  as  proposed.  Each
PARTICIPATING  PARTY,  within  forty-eight  (48) hours  (inclusive  of Saturday,
Sunday or legal  holidays)  after  receipt  of such  notice,  shall  advise  the
proposing  PARTY  of its  desire  to (a)  limit  participation  to such  PARTY'S
interest  as shown on  Exhibit  "A",  or (b)  carry  its  proportionate  part of
NON-PARTICIPATING PARTIES' interest, or (c) participate with a lesser percentage
than its proportionate  part of the  NON-PARTICIPATING  PARTIES'  interest.  The
proposing  PARTY,  at its  election,  may  withdraw  such  proposal  if there is
insufficient  participation  and  shall  promptly  notify  all  PARTIES  of such
decision. If the well is commenced within ninety (90) days after the date of the
last applicable election date and is drilled as proposed in accordance with this
Agreement,  any  PARTY  electing  not to  participate  shall be  deemed  to have
relinquished its operating rights in such well as if it were a NON-CONSENT WELL.
However,  in the situation in which a rig is on location and standby charges are
accumulating,  thus  precipitating a forty-eight (48) hour response period,  the
well must be commenced  within  fifteen (15) days.  If no  operations  are begun
within such time  period,  the effect  shall be as if the  proposal had not been
made.  Operations shall be deemed to have commenced (a) on the date the contract
for a new platform is let, if the notice  indicated the need for such  platform;
or (b) the date rigging-up  operations on the well are commenced.  Recoupment of
costs shall be  determined by Sections  12.2 and 12.5,  if  applicable,  and the
drilling of such well shall be governed by Article XII as  applicable;  however,
percentages under Section 12.2 shall be as follows:

12.2.1a)   Eight hundred percent (800%)
12.2.1b)   Three hundred percent (300%)
12.2.1c)   One hundred percent (100%)
12.2.1d)   One hundred percent (100%)

                                       9

<PAGE>

Provided however,  if the proposed  EXPLORATORY WELL is the initial well drilled
by the PARTIES on the LEASE, then any NON-PARTICIPATING  PARTY shall permanently
assign its entire  interest  in the LEASE to the  PARTICIPATING  PARTIES and the
recoupment  of cost  provision  of this Article and Article XII shall not apply,
but the NON-PARTICIPATING PARTY shall not be relieved of any obligation accruing
prior to such assignment.

     10.4 COURSE OF ACTION AFTER DRILLING TO INITIAL OBJECTIVE DEPTH

          10.4.1  Casing  Point  Election.  After an  Exploratory  Well has been
drilled for all Parties to the objective depth,  and all authorized  logging and
testing has been  completed,  OPERATOR shall  immediately  notify the PARTIES of
OPERATOR'S proposal to either;

               (a)  further log or test the well,

               (b)  complete the well as originally planned,

               (c)  plug-back and complete the well in a shallower zone in
                    ascending order,

               (d)  deepen the well within a previously approved objective zone,
                    in descending order,

               (e)  deepen the well below the deepest approved objective zone or
                    zones,

               (f)  sidetrack the well to a new bottom hole location within the
                    approved objective zone,

               (g)  other operations in the well, or

               (h)  plug and abandon the well.

Within  forty-eight (48) hours after receipt of OPERATOR'S  proposal,  the other
PARTIES   shall   respond   thereto   by  either   approving   it  or  making  a
counter-proposal.  If a  counter-proposal  is made,  the  PARTIES  shall have an
additional  forty-eight (48) hours to respond thereto.  If all PARTIES approve a
proposal  or  counter-proposal,  OPERATOR  shall  conduct the  operation  at the
PARTICIPATING  PARTIES  cost  and  risk.  A  proposal  to  complete,  rework  or
recomplete a well at a particular  depth will take  precedence  over proposal to
complete, rework or recomplete the well above such depth, with a deeper proposal
for  such  operations  always  taking  precedence  over  a  shallower  proposal.
Proposals for such  operations at any depth will take  precedence over proposals
to deepen the well below its originally proposed total depth or to sidetrack the
well once it has reached  such depth.  Proposals of the same type shall be given
precedence in the order in which they are made. No action shall be required on a
proposal while there is pending a proposal,  with  precedence  being on the same
well on  which  the  parties  have  not  acted  or on  which  work  has not been
completed.  If fewer  than all,  but one (1) or more,  Parties  having a Working
Interest  of 25% or more  approve a  proposal  or  counter-proposal  made  under
Section 10.4 and agree to bear the cost and risk thereof, Operator shall conduct
the same pursuant to Article 12.

                                   ARTICLE XI

                             DEVELOPMENT OPERATIONS

     11.1  OPERATIONS  BY ALL  PARTIES.  Any  PARTY may  propose  a  DEVELOPMENT
OPERATION,  including any platform required by such operations, by notifying the
other PARTIES.  If all PARTIES elect to  participate in the proposed  operation,
OPERATOR  shall  conduct such  operation for the benefit of the PARTIES at their
cost and risk.

     11.2 SECOND OPPORTUNITY TO PARTICIPATE.  If fewer than all PARTIES elect to
participate,  the  OPERATOR  shall  inform the  PARTIES of the  elections  made,
whereupon any PARTY  originally  electing not to  participate  may then elect to
participate  by  notifying  the  OPERATOR  within  forty-eight  (48) hours after
receipt of such  information.  Thereafter,  if fewer than all  PARTIES  elect to
participate, the PARTICIPATING PARTIES shall be afforded the alternatives as set
out under Article 10.3.

                                     10

<PAGE>

     11.3 OPERATIONS BY FEWER THAN ALL PARTIES. Except for a DEVELOPMENT WELL(S)
under  Section  12.7,  if fewer than all  PARTIES,  but one (1) or more  PARTIES
having NOT LESS THAN forty percent (40%) WORKING INTEREST approves a DEVELOPMENT
OPERATION;  OPERATOR  shall conduct such  operation  pursuant to Article XII. If
such  operations are to be conducted from an existing  platform,  the operations
participated in by all of the PARTIES shall have  preference,  unless  otherwise
agreed to by the PARTIES hereto.

     11.4 TIMELY  OPERATIONS.  Operations  shall be commenced within ninety (90)
days following the date upon which the last applicable  election may be made. If
no operations  are begun within such time period,  the effect shall be as if the
proposal had not been made.  Operations shall be deemed to have commenced (a) on
the date the  contract for a new  platform is let, if the notice  indicated  the
need for such platform;  or (b) on the date rigging-up  operations are commenced
on an existing platform.

     11.5 COURSE OF ACTION AFTER DRILLING TO INITIAL OBJECTIVE DEPTH.  After any
DEVELOPMENT WELL has reached its objective  depth, the identical  procedures and
alternatives provided under Article 10.4 shall apply.

     11.6 DEEPER DRILLING. If a well is proposed to be drilled below the deepest
producible zone penetrated by a PRODUCIBLE WELL on the LEASE any PARTY may elect
to  participate  either in the well as  proposed  or to the base of the  deepest
producible  zone. A PARTY  electing to  participate  in such well to the base of
said zone shall bear its proportionate  part of the cost and risk of drilling to
said zone including completion or abandonment. All operations below the depth to
which such PARTY agreed to participate shall be governed by Article X.

                                   ARTICLE XII

                             NON-CONSENT OPERATIONS

     12.1 NON-CONSENT OPERATIONS.  OPERATOR shall conduct NON-CONSENT OPERATIONS
at the sole risk and expense of the  PARTICIPATING  PARTIES,  in accordance with
the following provisions;

          12.1.1  Non-Interference.  NON-CONSENT  OPERATIONS shall not interfere
unreasonably with operations being conducted by all PARTIES.

          12.1.2 Multiple Completion  Limitation.  NON-CONSENT  OPERATIONS shall
not  be  conducted  in a well  having  multiple  completions  unless:  (a)  each
completion is owned by the same PARTIES in the same proportions; (b) the well is
incapable  of  producing  from  any  of its  current  completions;  or  (c)  all
PARTICIPATING PARTIES in the well consent to such operations.

          12.1.3  Metering.  In NON-CONSENT  OPERATIONS,  production need not be
separately metered but may be determined on the basis of well test.

          12.1.4  Liens.   In  the  conduct  of  NON-CONSENT   OPERATIONS,   the
PARTICIPATING  PARTIES  shall  keep  the  LEASE  free and  clear  of  liens  and
encumbrances.

          12.1.5 Non-Consent Well. Operations on a NON-CONSENT WELL shall not be
conducted  in any  producible  zone  penetrated  by a  PRODUCIBLE  WELL  without
approval of each  NON-PARTICIPATING  PARTY unless; (a) such zone shall have been
designated in the notice as a completion  zone;  (b)  completion of such well in
said  zone will not  increase  the well  density  governmentally  prescribed  or
approved for such zone; and (c) the horizontal

                                       11

<PAGE>

distance  between the vertical  projections  of the midpoint of the zone in such
well and any existing well in the same zone will be a least one thousand (1,000)
feet if an  oil-well  completion  or two  thousand  (2,000)  feet if a  gas-well
completion.  Subject to the  foregoing  provisions  of this  Article,  until the
PARTICIPATING  PARTIES in a  NON-CONSENT  WELL have recouped the amount to which
they are entitled  hereunder,  they may conduct any reworking  operation on such
well which they may desire, including plugging back to a shallower zone but only
if such  shallower  zone is subject to  NON-CONSENT  elections  in the  original
proposal.  In this event, the cost of such reworking  operation shall be subject
to the penalty provisions of Section 12.2.1.

          12.1.6  Cost-Information.  OPERATOR  shall,  within one hundred twenty
(120) days after  completion  of a  NON-CONSENT  WELL,  furnish  the  PARTIES an
inventory  and an  itemized  statement  of the cost of such  well and  equipment
pertaining  thereto.  OPERATOR shall furnish to the PARTIES a monthly  statement
showing operating expenses and the proceeds from the sale of production from the
well for the preceding month.

          12.1.7 Completions. For the purposes of determinations hereunder, each
completion shall be considered a separate well.

     12.2   RELINQUISHMENT   OF  INTEREST.   Upon  commencement  of  NON-CONSENT
OPERATIONS,  each  NON-PARTICIPATING  PARTY'S  interest and leasehold  operating
rights in the NON-CONSENT  OPERATION and title to production there from shall be
owned  by  and  vested  in  each  PARTICIPATING   PARTY  in  proportion  to  its
PARTICIPATING  INTEREST for as long as the  operations  originally  proposed are
being  conducted  or  production  is  obtained,  subject to Sections  12.2.1 and
12.2.2.

          12.2.1 Production  Reversion  Penalties.  Except as to such operations
conducted  pursuant to Section  12.7 or for the  initial  EXPLORATORY  WELL,  or
subsequent  EXPLORATORY WELL referred to in Section 10.3, such interest,  rights
and title shall revert to each  NON-PARTICIPATING  PARTY when the  PARTICIPATING
PARTIES have  recouped out of the proceeds of production  from such  NON-CONSENT
OPERATIONS an amount equal to the sum of the following:

               (a)  Six  hundred   percent  (600%)  of  the  cost  of  drilling,
                    completing, recompleting, sidetracking, deepening, deviating
                    or plugging  back each  NON-CONSENT  WELL and  equipping  it
                    through   the   wellhead   connections,   reduced   by   any
                    contribution received under Section 21.1; plus,

               (b)  Three  hundred  percent  (300%)  of the  cost of  FACILITIES
                    necessary to carry out the operation; plus,

               (c)  One  hundred  percent  (100%)  of  the  cost  of  using  any
                    FACILITIES already installed  determined pursuant to Section
                    12.6 below; plus,

               (d)  One  hundred   percent  (100%)  of  the  cost  of  operating
                    expenses, royalties and severance, gathering, production and
                    windfall  profit taxes.

Recoupment of costs shall be in the order listed above.  Upon the  recoupment of
such costs, a NON-PARTICIPATING PARTY shall become a PARTICIPATING PARTY in such
operations.

          12.2.2 Non-Production  Reversion.  If such NON-CONSENT OPERATIONS fail
to obtain  production or such operations result in production which ceases prior
to recoupment by the PARTICIPATING  PARTIES of the penalties provided for above,
such operating rights shall revert to each  NON-PARTICIPATING  PARTY except that
all  NON-CONSENT  wells,  platforms  and  FACILITIES  shall remain vested in the
PARTICIPATING PARTIES; however, any salvage in excess of the sum remaining under
Section 12.2.1 shall be credited to all PARTIES.

     12.3 DEEPENING OR SIDETRACKING OF NON-CONSENT WELL. If any PARTICIPATING

                                     12

<PAGE>

PARTY  proposes to deepen or sidetrack a NON-CONSENT  WELL, a  NON-PARTICIPATING
PARTY may  participate by notifying the OPERATOR  within fifteen (15) days after
receiving  the proposal (48 hours if a rig is on location)  that it will join in
the (deepening or sidetracking)  operations,  and by paying to the PARTICIPATING
PARTIES an amount equal to such  NON-PARTICIPATING  PARTY'S  share of the actual
costs of drilling  and casing such well to the point at which such  deepening or
sidetracking operation is commenced. The PARTICIPATING PARTIES shall continue to
be entitled to recoup the full sum specified in Section 12.2.1 applicable to the
NON-CONSENT  WELL, less the amount paid under this section,  out of the proceeds
of production from the NON-CONSENT portion of the well.

     12.4 OPERATIONS FROM  NON-CONSENT  PLATFORMS.  Subject to the following,  a
PARTY which did not originally  participate in a platform  proposed  pursuant to
the terms herein, shall be a NON-PARTICIPATING PARTY as to ownership therein and
all operations thereon until the PARTICIPATING  PARTIES as to such platform have
recouped the full sum specified in Section 12.2.1 applicable to such NON-CONSENT
PLATFORM and the  NON-CONSENT  OPERATIONS  which resulted in the setting of such
PLATFORM and other  NON-CONSENT  OPERATIONS  thereon or therefrom.  However,  an
original  NON-PARTICIPATING  PARTY may participate in additional operations from
such PLATFORM by notifying the OPERATOR  within thirty (30) days after receiving
a proposal for  operations  from such PLATFORM (48 hours if a rig is on location
and standby rig charges are being  incurred)  that it will join in such proposed
operations  by paying to the  PARTICIPATING  PARTIES in such  PLATFORM an amount
equal to 300% of such NON-PARTICIPATING PARTY'S share of the actual cost of such
PLATFORM,  less any recoupment therefor previously  obtained.  Thereafter,  such
original  NON-PARTICIPATING  PARTY in the PLATFORM  shall own its  proportionate
share thereof.  The  PARTICIPATING  PARTIES in such  NON-CONSENT  PLATFORM shall
continue  to be  entitled  to recoup the full sum  specified  in Section  12.2.1
applicable to any other NON-CONSENT OPERATIONS thereon or therefrom.

     12.5  DISCOVERY OR EXTENSION  FROM MOBILE  DRILLING  OPERATIONS.  If a NON-
CONSENT  WELL drilled from a mobile  drilling  rig or floating  drilling  vessel
results in the  discovery or extension of productive  formations  and, if within
one (1) year from the date the drilling  equipment  is  released,  a platform or
other  fixed  structure  is ordered and if its  location is within one  thousand
(1,000) feet from an oil well or three  thousand  (3,000) feet if gas,  from the
vertical projection of the bottom-hole location of any such well (unless limited
by surface  restrictions),  the  recoupment  of amounts  applicable to such well
under  Section  12.2.1 shall be out of such original  NON-PARTICIPATING  PARTY'S
SHARE of all production from such  NON-CONSENT WELL and one-half of its share of
production from all other wells on the platform or other fixed structure drilled
to develop  reserves  resulting  from the  discovery or extension of  productive
formations in said NON-CONSENT WELL in which the NON-PARTICIPATING PARTY in such
NON-CONSENT WELL has a PARTICIPATING INTEREST.

     12.6  ALLOCATION OF PLATFORM COSTS TO NON-CONSENT  OPERATIONS.  NON-CONSENT
OPERATIONS shall be subject to further conditions as follows:

          12.6.1 Charges. If a NON-CONSENT WELL is drilled from a platform (and
is producible or the slot is otherwise rendered unusable), the PARTICIPATING
PARTIES in such well shall pay to the OPERATOR for credit to the owners of such
platform a charge (due upon completion of operations for such NON-CONSENT WELL)
for the right to use the platform and its FACILITIES as follows:

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<PAGE>

               (a)  Such  PARTICIPATING  PARTIES  shall  pay a sum equal to that
                    portion of the total cost of the  platform  (including,  but
                    not  by way  of  limitation,  costs  of  design,  materials,
                    fabrication,  transportation,  installation  and other costs
                    associated  therewith,  plus  any  repairs  and  maintenance
                    expense  resulting  from  the  drilling  of  such  well  not
                    provided in Section  12.6.2),  which one platform slot bears
                    to  the  total  number  of  slots  on the  platform.  If the
                    NON-CONSENT   WELL   is   abandoned,   the   right   of  the
                    PARTICIPATING  PARTIES  to  use  that  platform  slot  shall
                    terminate unless such PARTIES commence drilling a substitute
                    well  from the same  slot  within  ninety  (90)  days  after
                    abandonment.

               (b)  If  the  NON-CONSENT  WELL  production  is  handled  through
                    existing FACILITIES, the PARTICIPATING PARTIES shall pay the
                    owners of the  facilities a sum equal to that portion of the
                    total   cost  of  such   FACILITIES   which  the  number  of
                    completions  in said  NON-CONSENT  WELL  bears to the  total
                    number of completions utilizing the FACILITIES.

          12.6.2 Operating and Maintenance  Charges.  The PARTICIPATING  PARTIES
shall pay all costs  necessary to connect a NON-CONSENT  WELL to the  FACILITIES
and that  proportionate  part of the expense of operating  and  maintaining  the
platform and other FACILITIES  applicable to the NON-CONSENT WELL, including the
cost of  insurance  thereon or in  connection  therewith,  whether by  insurance
policy of  self-insurance  by each PARTY for its interest or by OPERATOR for the
joint account.  Platform  operating and maintenance  expenses shall be allocated
equally to all completions served and operating and maintenance expenses for the
other FACILITIES shall be allocated equally to producing completions.

          12.6.3 Payments.  Payments of sums pursuant to Section 12.6.1 is not a
purchase of an  additional  interest in the platform or other  FACILITIES.  Such
payments shall be included in the total amount, which the PARTICIPATING  PARTIES
are entitled to recoup out of production from the NON-CONSENT WELL.

          12.7  NON-CONSENT  DRILLING TO  MAINTAIN  LEASE.  A lease  maintenance
operation  is defined for the  purposes  of this  paragraph  as one  required to
maintain  the  joint  LEASE or a  portion  thereof,  at its  expiration  date or
otherwise.  This shall include, but not be limited to, a well proposed to be and
actually  commenced and drilled  during the last year of the primary term of the
LEASE, or subsequent thereto,  when: (a) the LEASE, or affected portion thereof,
is not  otherwise  being held by  operations  or  production;  (b) a  PRODUCIBLE
WELL(S) thereon has not established  sufficient  reserves,  as determined by one
(1) or more PARTICIPATING PARTIES owning fifty percent (50%) working interest in
the  well,  to  justify  a  platform;  or (c)  any  governmental  agency  having
jurisdiction requires the same to avoid loss or forfeiture of all or any portion
of the LEASE. Any PARTY may propose and carry out a lease maintenance  operation
and any PARTY(S) electing not to participate in such an operation will assign to
the PARTICIPATING  PARTIES in the proportions in which they participate therein,
all of its rights,  titles and  interest in such LEASE  block,  or the  affected
portion  thereof,  free and clear of any  burdens  thereon  occurring  since the
effective date of this Agreement as provided  herein,  retaining,  however,  its
interest in previously completed wells which are

                                       14

<PAGE>

producing,  shut-in or temporarily  abandoned.  Such assignment,  effective upon
commencement  of lease  maintenance  operations,  will be promptly signed before
witnesses,  acknowledged and delivered to the PARTICIPATING  PARTIES.  If only a
portion of the LEASE is involved,  the  PARTICIPATING  PARTIES at their election
may require an assignment of operating  rights in lieu of the  assignment of all
interest. Upon acceptance by assignees, the assigning PARTY will thereupon cease
to be a PARTY hereto as to the assigned  interest,  subject to final  accounting
between the PARTIES.  If such assignment is not accepted by the Assignees,  they
shall promptly prepare a release of such affected LEASE or portion thereof which
shall be executed by all PARTIES.  However,  nothing  herein  contained  will be
construed to permit any PARTY to refuse to pay in cash its share of the cost and
expense of any operation required on the joint LEASE block by final order of any
governmental authority or court having jurisdiction.

          12.7.1  Retention of Lease by Non-Consent  Well. If a NON-CONSENT WELL
is the only well on the  LEASE(S)  and is serving to  perpetuate  the  LEASE(S),
within  thirty (30) days after  expiration of the LEASE(S)  primary  term,  each
NON-PARTICIPATING PARTY shall elect one of the following;

               (a)  Immediately  assign its entire  interest in the  LEASE(S) to
                    the  PARTICIPATING  PARTIES in the  proportions in which the
                    NON-CONSENT OPERATION was conducted; or

               (b)  Immediately  pay to the  PARTICIPATING  PARTIES its share of
                    all costs  associated  with such well,  less any  recoupment
                    therefore previously  obtained,  such payment to be credited
                    against the total amount to be recovered out of its share of
                    production by the PARTICIPATING  PARTIES pursuant to Article
                    X or XII, whichever is applicable.

     12.8 ALLOCATION OF COSTS (SINGLE COMPLETION). For the purpose of allocating
costs on any well in which the  ownership is not the same for the entire  depth,
the cost of drilling,  completing  or equipping  such well shall be allocated on
the following basis:

          (a)  Intangible  drilling,  completion and material  costs  (including
               casing and tubing  costs) from the surface to a depth one hundred
               (100) feet below the base of the completed  zone shal1 be charged
               to the owners or the PARTIES participating in that zone.

          (b)  Intangible  drilling,  completion,  casing  string  and  material
               costs,  other than tubing  costs,  from a depth one hundred (100)
               feet below the base of the completed zone to total depth shall be
               charged to the owners or the PARTIES  participating  in the costs
               to total depth.

     12.9  ALLOCATION  OF  COSTS  (MULTIPLE  COMPLETIONS).  For the  purpose  of
allocating  costs on any well  completed in dual or multiple  zones in which the
ownership is not the same for the entire depth or the completions  thereof,  the
cost of drilling,  completing  and equipping such well shall be allocated on the
following basis:

          (a)  Intangible drilling,  completion  (including wellhead equipment),
               casing string and material costs,  other than tubing costs,  from
               the surface to a depth one  hundred  (100) feet below the base of
               the upper  completed  zone shall be divided  equally  between the
               completed  zones and charged to the owners thereof or the PARTIES
               participating in such zone.

                                       15

<PAGE>

          (b)  Intangible  drilling,  completion,  casing  string  and  material
               costs,  other than tubing  costs,  from a depth one hundred (100)
               feet  below the base of the upper  completed  zone to a depth one
               hundred  (100) feet below the base of the second  completed  zone
               shall be divided  equally  between  the second and any other zone
               completed  below such depth and charged to the owners  thereof or
               to the  PARTIES  participating  in  each  zone.  If the  well  is
               completed in additional  zones, the costs applicable to each such
               zone shall be determined and charged to the owners thereof in the
               same manner as prescribed by the dual zones completion.

          (c)  Intangible  drilling,  completion,  casing  string  and  material
               costs,  other than tubing  costs,  from a depth one hundred (100)
               feet below the base of the lower  completed  zone to total  depth
               shall be charged to the owners or the  PARTIES  participating  in
               the costs to total depth.

          (d)  Costs of tubing  strings  serving  each  separate  zone  shall be
               charged to the owners or the PARTIES participating in each zone.

          (e)  For the  purposes of  allocating  tangible and  intangible  costs
               between  zones  that  occur at less than one  hundred  (100) foot
               intervals,  the costs for the  distance  between  the base of the
               upper zone to the top of the next  lower zone shall be  allocated
               equally between zones.

     12.10  ALLOCATION OF COSTS (DRY HOLE).  For the purpose of allocating costs
on any well  determined to be a dry hole, in which the ownership is not the same
for the entire depth or the completion thereof,  the cost of drilling,  plugging
and abandoning such well shall be allocated on the following basis:

          (a)  Costs to drill,  plug and abandon a well proposed for  completion
               in  single,  dual,  or  multiple  zones  shall be  charged to the
               PARTICIPATING  PARTIES  in the same  manner  as if the well  were
               completed as a producing well in all zones as proposed.

          (b)  Plugging and  abandoning  of any well  following  any  deepening,
               completion  attempt or other  operation shall be at the sole risk
               and  expense  of the  PARTICIPATING  PARTIES  in such  operation,
               subject however to the provisions of Section 10.4.

     12.11 INTANGIBLE  DRILLING AND COMPLETION  ALLOCATIONS.  For the purpose of
calculations  hereunder,  intangible  drilling and completion  costs,  including
non-controllable material costs, shall be allocated between zones, including the
interval from the lower  completed zones to total depth, on a drilling day ratio
basis beginning on the day the rig arrives on location and terminating  when the
rig is released.

     12.12 OPERATED WELLS. The designated  OPERATOR  hereunder shall operate all
wells drilled pursuant to the NON-CONSENT provision of this Agreement.  However,
notwithstanding  anything  herein to the contrary,  if the  NON-CONSENT  WELL is
drilled  from  a  mobile  drilling  rig  and  if the  designated  OPERATOR  is a
NON-PARTICIPATING  PARTY  therein,  the  PARTICIPATING  PARTY owning the largest
PARTICIPATING  INTEREST  shall serve as Operator for the drilling and completion
of such well, unless the PARTICIPATING PARTIES agree otherwise.  Upon completion
of any such well as a productive  well  (completion  through the wellhead),  the
well shall be turned over to the designated OPERATOR for further operations.

                                       16

<PAGE>

                                  ARTICLE XIII

                                   FACILITIES

     13.1  APPROVAL.  Any PARTY may propose the  installation  of  FACILITIES by
notice to the other PARTIES with  information  adequate to describe the proposed
FACILITIES  and the estimated  costs.  The  affirmative  vote of one (1) or more
PARTIES having a combined  PARTICIPATING INTEREST of forty percent (40%) or more
in the  wells to be served  shall be  required  before  such  FACILITIES  may be
installed.  If such required  approval is obtained,  the  PARTICIPATING  PARTIES
therein shall  proceed with the  installation  of such  FACILITIES at their sole
cost,  risk and expense  and the  NON-PARTICIPATING  PARTIES in such  FACILITIES
shall have no rights with respect thereto,  subject to recoupment of amounts set
forth under Article 12.2.1 from the  completions  served  thereby.  Each PARTY'S
share shall be calculated by  multiplying  the total cost of the FACILITIES by a
fraction,  the  numerator of which is that  PARTY'S  number of  PRODUCIBLE  WELL
completions  served by the FACILITIES and the  denominator of which is the total
number  of  PRODUCIBLE  WELL  completions  served  by  the  FACILITIES.  Nothing
hereunder  shall limit a PARTY'S  rights under  Section 22.1;  however,  a PARTY
acting thereunder shall not be required to pay for joint account FACILITIES that
duplicate its FACILITIES constructed pursuant to Section 22.1

                                   ARTICLE XIV

                             ABANDONMENT AND SALVAGE

     14.1 PLATFORM SALVAGE AND REMOVAL COSTS. When the PARTIES owning FACILITIES
consisting of a platform, mutually agree to dispose of such platform it shall be
disposed of by the OPERATOR as approved by such  PARTIES.  The costs,  risks and
net proceeds,  if any,  resulting from such disposition  shall be shared by such
PARTIES in proportion to their PARTICIPATING INTEREST.

     14.2 PURCHASE OF SALVAGE MATERIALS. OPERATOR shall give all PARTIES written
notice  when it is  determined  under  Section  14.1  that  FACILITIES  or other
materials are not needed for further operations and may be moved from the LEASE.
Within  fifteen  (15) days after  receipt of such  notice any PARTY  desiring to
acquire such materials shall give OPERATOR  written notice of such fact. If more
than one PARTY desires to acquire such  materials,  OPERATOR  shall  designate a
time and place at which each PARTY may submit  written bids for such  materials.
If only one PARTY desires to acquire such  materials,  it may do so on the basis
of the value thereof as determined in accordance  with the provisions of Exhibit
"C", with  prefabricated  materials  being valued on the basis of cost including
but not limited to cost of  fabrication.  All  materials  removed from the LEASE
shall be removed at the expense of the PARTIES unless purchased hereunder,  then
at the expense of the acquiring PARTY. In the event no PARTY desires to purchase
said  materials,  the  materials  shall be  disposed of in  accordance  with the
provisions of Exhibit "C".

     14.3  ABANDONMENT OF PRODUCING  WELL. Any PARTY may propose the abandonment
of a well by  notifying  the other  PARTIES,  who shall have the time period set
forth in Section  9.3.2 from receipt  thereof  within which to respond.  No well
shall be abandoned without the mutual consent of the PARTICIPATING  PARTIES. The
PARTICIPATING  PARTIES  not  consenting  to the  abandonment  shall  pay to each
PARTICIPATING  PARTY  desiring to abandon its share of the current  value of the
well's salvageable material and equipment as determined

                                       17

<PAGE>

pursuant to Exhibit "C", less the estimated  current costs of salvaging same and
of plugging and abandoning the well as determined by the PARTICIPATING  PARTIES.
Provided,  however,  if such salvage value is less than such  estimated  current
costs, then each  PARTICIPATING  PARTY desiring to abandon shall pay to OPERATOR
for the benefit of the PARTICIPATING PARTIES not consenting to abandonment a sum
equal to its share of such deficiency.

     14.4 ASSIGNMENT OF INTEREST. Each PARTICIPATING PARTY desiring to abandon a
well pursuant to Section 14.3 shall assign  effective as of the last  applicable
election  date,  to  the   non-abandoning   PARTIES,   in  proportion  to  their
PARTICIPATING INTERESTS, its interest in such well and the equipment therein and
its ownership in the  production of such well.  Any PARTY so assigning  shall be
relieved from any further  liability  with respect to said well except as to any
accrued liability.

     14.5 ABANDONMENT  OPERATIONS REQUIRED BY GOVERNMENTAL  AUTHORITY.  Any well
abandonment or platform  removal  required by a governmental  authority shall be
accomplished by OPERATOR with the costs,  risks and net proceeds,  if any, to be
shared by the  PARTIES  owning  such well or  platform  in  proportion  to their
PARTICIPATING INTEREST.

                                   ARTICLE XV

                                   WITHDRAWAL

     15.1 WITHDRAWAL.  Any PARTY may withdraw from this Agreement and thereby be
relieved of all  responsibilities  with respect to the LEASE by giving notice to
the other PARTIES of such desire  together with an offer to convey at no cost by
a recordable instrument,  without warranty,  express or implied,  except for its
own acts,  all of its  interest  in and to the LEASE,  the oil and gas,  and the
property and equipment owned hereunder.  Any such conveyance or assignment shall
be free and clear of any  overriding  royalties,  production  payments  or other
burdens on production  created after the  effective  date of this  Agreement and
shall be subject to the LEASE provisions and to the rules and regulations of the
lessor.  If any  PARTY(S)  desires to acquire  such  interest  and to assume the
obligations  of the  assigning  PARTY under this  Agreement  and the LEASE,  the
withdrawing  PARTY shall deliver such  conveyance  or assignment  ratably to the
acquiring  PARTIES,  unless the acquiring  PARTIES agree otherwise.  If no PARTY
desires to acquire such interest,  the PARTY desiring to withdraw may do so only
by paying to those  PARTIES not desiring to withdraw  its pro-rata  share of the
estimated  costs of  plugging  and  abandoning  all  wells  and  removal  of all
platforms,  structures and other equipment on the LEASE,  less any salvage value
approved under the voting procedure  hereof,  and such  withdrawing  PARTY shall
remain liable for any costs,  expenses or damages theretofore accrued or arising
out of any event occurring  prior to such PARTY'S  withdrawal.  Thereafter,  the
withdrawing  PARTY shall  assign its entire  interest  ratably to the  remaining
PARTIES.  If the  remaining  PARTIES do not wish to continue  operations  on the
LEASE, all PARTIES shall proceed with abandoning and surrendering the same.

     15.2  LIMITATIONS  ON  WITHDRAWAL.  No  PARTY  shall  be  relieved  of  its
obligations hereunder during a well or platform fire, blowout or other emergency
thereon,  but  may  withdraw  from  this  Agreement  and  be  relieved  of  such
obligations  after  termination of such emergency,  provided such PARTY shall be
and remain liable for its full share of all costs arising out of said emergency,
including  without  limitation,  the drilling of a relief well,  containment and
cleanup of oil spill and pollution and all costs of platform debris removal made
necessary by the emergency.

                                       18

<PAGE>

                                   ARTICLE XVI

                      RENTALS, ROYALTIES AND OTHER PAYMENTS

     16.1 CREATION OF OVERRIDING  ROYALTY.  If after the effective  date of this
Agreement, any PARTY creates any overriding royalty, production payment or other
burden payable out of production  attributable to such PARTY'S WORKING  INTEREST
in the LEASE owned and if any other PARTY(S)  becomes  entitled to an assignment
pursuant to the provisions of this Agreement (except for Paragraph 26.2) or as a
result of  NON-CONSENT  OPERATIONS  hereunder  becomes  entitled  to receive the
WORKING  INTEREST  otherwise  belonging  to a  NON-PARTICIPATING  PARTY  in such
operations,  the PARTY  entitled to receive the  assignment  from or the WORKING
INTEREST production of such NON-PARTICIPATING  PARTY shall receive same free and
clear of such burdens,  and the  NON-PARTICIPATING  PARTY  creating such burdens
shall save the  PARTICIPATING  PARTIES  harmless  with respect to the receipt of
such assigned interest or such WORKING INTEREST production.  Notwithstanding the
provisions  herein, the Parties agree to bear their  proportionate  share of the
overriding royalty interests set out on Exhibit "A".

     16.2  PAYMENT OF RENTALS  AND  MINIMUM  ROYALTIES.  OPERATOR  shall pay all
rentals,  minimum royalties, or similar payments accruing under the terms of the
LEASE and submit  evidence of such payment to the PARTIES.  As to any production
delivered in kind by OPERATOR to any  NON-OPERATOR or to another for the account
of such NON-OPERATOR,  said NON-OPERATOR shall provide OPERATOR with information
as to the  proceeds or value of such  production  in order that the OPERATOR may
make  payment of any minimum  royalty  due. The amount of such payment for which
each PARTY is  responsible  shall be charged by the  OPERATOR  to such  PARTIES.
OPERATOR shall diligently attempt to make proper payment,  but shall not be held
liable to the PARTIES in damages  for the loss of any LEASE or interest  therein
of through  mistake or oversight  any rental or minimum  royalty  payment is not
paid for or is erroneously paid. The loss of any LEASE or interest therein which
results  from a failure  to pay or an  erroneous  payment  of rental or  minimum
royalty shall be a joint loss and there shall be no readjustment of interest.

     16.3  NON-CONCURRENCE  IN  PAYMENTS.  Should any PARTY(S) not concur in the
payment of any rental,  minimum royalty or similar payment,  such PARTY(S) shall
notify  OPERATOR  and all other owners in writing at least sixty (60) days prior
to the date on which such payment is due or accrues; and, in this event OPERATOR
shall make such payment for the benefit of all concurring PARTIES. In such event
the  non-concurring  PARTY(s)  shall,  upon request of any  concurring  PARTIES,
assign to the  concurring  PARTIES  in the ratio  that each  concurring  PARTY'S
interest  at the time bears to the total  interest  of all  concurring  PARTIES,
without warranty,  except for its own acts, such portions of its interest in and
to the LEASE or portion thereof involved as would be maintained by such payment.
That assignment shall be free and clear of any overriding royalties,  production
payments or other burdens on production created after the effective date hereof.
Thereafter,  the LEASE, or portion thereof,  involved shall no longer be subject
to this  Agreement.  The PARTIES then owning such LEASE or portion thereof agree
to operate said LEASE or portion thereof under a separate  agreement in the same
form as this Agreement.

                                       19

<PAGE>

     16.4 ROYALTY PAYMENTS. Each PARTY shall pay, deliver or cause to be paid or
delivered its pro-rata share of LEASE royalties,  overriding royalties, payments
out of production or other amounts or charges which may be or become payable out
of its share of  production  and  shall  hold the  other  PARTIES  free from any
liability therefore. Each Party, electing to pay his share of royalties pursuant
to the terms of the Lease,  shall promptly  notify Operator of said election and
shall thereafter  provide to Operator a detailed  accounting of revenue received
and value paid to the  Lessor for such  Party's  share of  production  produced,
marketed  and sold.  Monthly  reports  shall be  submitted  to  Operator  within
forty-five days of actual receipt of the previous  month's  production  revenue.
During any time in which  PARTICIPATING  PARTIES in a NON-CONSENT  OPERATION are
entitled  to  receive  a  NON-PARTICIPATING  PARTY'S  share of  production,  the
PARTICIPATING  PARTIES  shall bear the LEASE  royalty  due with  respect to such
share of production and shall hold the  NON-PARTICIPATING  PARTIES harmless from
liability in connection therewith.  Any PARTY acting under the provisions of the
Article  shall  never be liable for a standard  of  performance  in making  such
payments or  deliveries  in excess of a good faith effort to pay or deliver same
prior to the due date and no liability (other than the liability to correct such
payment)  shall be  incurred  for  failure  through  error or  omissions  of the
employees of any such PARTY to make payment or delivery  within the time, in the
manner and for the amounts due.

     16.5  FEDERAL  OFFSHORE OIL  POLLUTION  COMPENSATION  FUND FEE.  Each PARTY
agrees to pay and bear the Federal Offshore Oil Pollution  Compensation Fund Fee
payable on its share of oil produced,  such fee being required by Section 302 of
the Outer  Continental  Shelf  Lands Act  Amendment  of 1978 and any  regulation
lawfully promulgated pursuant thereto;  provided,  however, should the oil owned
by a PARTY be  reported by another  PARTY,  it shall be the  obligation  of such
reporting PARTY and such reporting PARTY is specifically authorized to an agrees
to pay the Federal Offshore Oil Pollution Compensation Fund Fee on those volumes
which it reports for the benefit of the non-reporting  PARTY, and such reporting
PARTY may charge such non-reporting PARTY for the payments so made.

                                  ARTICLE XVII

                                      TAXES

     17.1  PROPERTY  TAXES.  OPERATOR  shall  render  property  covered  by this
Agreement as may be subject to ad valorem  taxation and shall pay such  property
taxes for the benefit of each PARTY.  OPERATOR shall charge each PARTY its share
of such tax  payments.  If the OPERATOR is required  hereunder to pay ad valorem
taxes based in whole or in part upon separate  valuation of each PARTY'S WORKING
INTEREST,  then notwithstanding  anything to the contrary herein, charges to the
Joint  Account shall be made and paid by the PARTIES  hereto in accordance  with
the percentage of tax value generated by each PARTY'S WORKING INTEREST.

     17.2  CONTEST  OF  PROPERTY  TAX  VALUATION.   OPERATOR  shall  timely  and
diligently protest to a final determination any valuation it deems unreasonable.
Pending such determination,  OPERATOR may elect to pay under protest. Upon final
determination,  OPERATOR  shall pay the taxes and any interest,  penalty or cost
accrued as a result of such protest. In either event, OPERATOR shall charge each
PARTY its share.

     17.3 PRODUCTION AND SEVERANCE  TAXES.  Each PARTY shall pay, or cause to be
paid, all production,  severance and other taxes due on any production, which it
received pursuant to the terms of this Agreement.

                                       20

<PAGE>

     17.4 OTHER TAXES AND ASSESSMENTS. OPERATOR shall pay other applicable taxes
or assessments and charge each PARTY its share.

                                  ARTICLE XVIII

                                    INSURANCE

     18.1 INSURANCE. OPERATOR shall obtain the insurance provided in Exhibit "B"
and charge each PARTICIPATING  PARTY its proportionate share of the cost of such
coverage.

                                   ARTICLE XIX

                         LIABILITY, CLAIMS AND LAWSUITS

     19.1 INDIVIDUAL OBLIGATIONS. The obligations, duties and liabilities of the
PARTIES  shall be several and not joint or  collective;  and  nothing  contained
herein  shall ever be  construed as creating a  partnership  of any kind,  joint
venture,  association or other character of business entity  recognizable in law
for any purpose. Each PARTY shall hold all the other PARTIES harmless from liens
and encumbrances on the LEASE arising as a result of its acts.

     19.2 NOTICE OF CLAIM OR LAWSUIT. If a claim is made against any PARTY or if
any PARTY is sued on account of any matter  arising from  operations  hereunder,
such PARTY shall give prompt written notice to the other PARTIES.

     19.3  SETTLEMENTS.  OPERATOR  may settle any  single  damage  claim or suit
involving  operations  hereunder if the expenditure does not exceed Ten Thousand
Dollars ($10,000.00),  if the claim is not  covered by Exhibit  "B" and if the
payment is in complete settlement of such claim or suit.

     19.4  LEGAL  EXPENSE.  Legal  Expenses  shall be  handled  pursuant  to the
provisions of Exhibit "C".

     19.5 LIABILITY FOR LOSSES,  DAMAGES, INJURY OR DEATH. Liability for losses,
damages,  injury or death arising from operations  under this Agreement shall be
borne by the  PARTIES in  proportion  to their  PARTICIPATING  INTERESTS  in the
operations  out of which  such  liability  arises,  except  when such  liability
results from the gross  negligence or willful  misconduct of any party, in which
case such PARTY shall be liable.

     19.6  INDEMNIFICATION.  The  PARTICIPATING  PARTIES  agree to hold the NON-
PARTICIPATING  PARTIES  harmless and to  indemnify  and protect them against all
claims,  demands,  liabilities and liens for property damage or personal injury,
including death,  caused by or otherwise arising out of NON-CONSENT  OPERATIONS,
and any loss and costs  suffered by any  NON-PARTICIPATING  PARTY as an incident
thereof.

                                   ARTICLE XX

                           INTERNAL REVENUE PROVISION

     20.1 INTERNAL REVENUE PROVISION. Notwithstanding any provisions herein that
the rights and liabilities  hereunder are several and not joint or collective or
that  this  Agreement  and the  operations  hereunder  shall  not  constitute  a
partnership,  if  for  Federal  Income  Tax  purposes  this  Agreement  and  the
operations hereunder are regarded as a partnership,  then for Federal Income Tax
purposes  each  PARTY  elects to be  excluded  from the  application  of all the
provisions of  Subchapter  K, Chapter 1,  Subtitle A,  Internal  Revenue Code of
1986, as permitted and authorized by

                                       21

<PAGE>

Section 761 of said Code and the regulations promulgated thereunder. OPERATOR is
hereby  authorized and directed to execute on behalf of each PARTY such evidence
of this  election as may be required by the  Federal  Internal  Revenue  Service
including  specifically,  but  not  by way of  limitation,  all of the  returns,
statements and data required by Federal Regulations 1.761.2. Should there be any
requirement that each PARTY further evidence this election, each PARTY agrees to
execute such documents and furnish such other evidence as may be required by the
Federal  Internal  Revenue  Service.  Each PARTY further  agrees not to give any
notices or take any other action  inconsistent with the election made hereby. If
any  present or future  income  tax law of the  United  States of America or any
state contains provisions similar to those contained in Subchapter K, Chapter 1,
Subtitle A of the Internal Revenue Code of 1986, under which an election similar
to that provided by Section 761 of said  Subchapter K is  permitted,  each PARTY
makes such  election or agrees to make such election as may be permitted by such
laws. In making this  election,  each PARTY states that the income derived by it
from the operations  under this Agreement can be adequately  determined  without
the computation of partnership taxable income.

                                  ARTICLE XXI

                                 CONTRIBUTIONS

     21.1 NOTICE OF  CONTRIBUTIONS  OTHER THAN ADVANCES FOR SALE OF  PRODUCTION.
Each PARTY shall promptly notify the other PARTIES of all  contributions,  which
it may obtain,  or is attempting to obtain,  concerning the drilling of any well
on the LEASE.  Payments  received as consideration  for entering into a contract
for sale of production from the LEASE,  loans and other  financing  arrangements
shall not be considered  contributions for the purposes of the Article. No PARTY
shall  release  or  obligate  itself or  release  information  in  return  for a
contribution  from an outside  party toward the drilling of a well without prior
written consent of the other PARTICIPATING PARTIES therein.

     21.2 CASH CONTRIBUTIONS.  In the event a PARTY receives a cash contribution
toward the drilling of a well, said cash contribution  shall be paid to OPERATOR
and OPERATOR  shall credit the amount  thereof to the PARTIES in  proportion  to
their PARTICIPATING INTEREST.

     21.3  ACREAGE  CONTRIBUTIONS.  In the  event a PARTY  receives  an  acreage
contribution  toward the drilling of a well, said acreage  contribution shall be
shared  by  each   PARTICIPATING   PARTY  who  accepts  in   proportion  to  its
PARTICIPATING INTEREST in the well.

                                  ARTICLE XXII

                           DISPOSITION OF PRODUCTION

     22.1  FACILITIES  TO TAKE IN KIND.  Any PARTY shall have the right,  at its
sole  risk  and  expense,  to  construct  FACILITIES  for  taking  its  share of
production in kind, provided that such FACILITIES at the time of installation do
not interfere  with  continuing  operations  on the LEASE and adequate  space is
available therefore.

     22.2 RIGHT TO TAKE IN KIND. Each PARTY shall have the right to take in kind
or  separately  dispose of its share of the oil and gas  produced and saved from
the LEASE.

     22.3 FAILURE TO TAKE IN KIND. If any Party fails to take in kind or dispose
of its share of the gas, oil and/or condensate produced from a Prospect Area, at
the request of such Party, the Operator will market that Party's share of

                                       22

<PAGE>

production  from the Contract Area ratably with  Operator's  own production in a
manner  maintaining  as near as  practicable  a zero gas imbalance at the end of
each production month. With regard to oil and/or condensate, Operator may either
(a)  purchase  the  non-taking  Party's  share  of  the  oil  and/or  condensate
production at the Operator's, or a third party's posted price or, in the absence
of a posted price or a disagreement as to Operator's or the third party's posted
price, at the price no less than the price prevailing in the area for oil and/or
condensate of similar kind subject to adjustments for gravity, quality, and less
transportation  to market,  or, with regard to gas, oil and/or  condensate,  (b)
sell  such gas,  oil  and/or  condensate  to  others  under  the same  terms and
conditions  as Operator is selling its own share of  production  (including  any
applicable  taxes,  fees and costs  deducted by the purchaser or  transporter or
paid to third parties for marketing  arrangements  and  consultation),  provided
that if the  production  is sold to an affiliate of Operator the price  received
shall  not be less  than the  price  prevailing  in the area  for gas,  oil,  or
condensate  of the same kind,  gravity and  quality.  All  contracts  of sale by
Operator of any Party's share of gas, oil, or condensate  shall be only for such
reasonable  periods  of time as are  consistent  with the  minimum  needs of the
industry  under the  circumstances,  but in no event shall any contract be for a
period in excess of three (3)  months.  Proceeds  of all sales made by  Operator
pursuant to this Section shall be paid to the Parties entitled thereto.

     22.4  EXPENSES  OF  DELIVERY  IN KIND.  Any third  party cost  incurred  by
OPERATOR in making delivery of any PARTY'S share of gas, oil and condensate,  or
disposing of same pursuant to Section 22.3, shall be borne by such PARTY.

     22.5 GAS BALANCING PROVISIONS. Attached hereto is Exhibit "E" entitled "Gas
Balancing  Agreement",   containing  an  agreement  of  the  PARTIES,  which  is
incorporated into this Agreement as if copied at length herein.

                                  ARTICLE XXIII

                                 APPLICABLE LAW

     23.1 APPLICABLE  LAW. This Agreement shall be interpreted  according to the
laws  of  the   State   of   Texas.

                                  ARTICLE XXIV

                    LAWS, REGULATIONS AND NON-DISCRIMINATION

     24.1 LAWS AND  REGULATIONS.  This  Agreement and  operations  hereunder are
subject to all applicable laws, rules, regulations and orders, and any provision
of the  Agreement  found to be  contrary to or  inconsistent  with any such law,
rule, regulation or order shall be deemed modified accordingly.

     24.2  NON-DISCRIMINATION.  In the  performance of work under the Agreement,
the  PARTIES  agree to comply,  and  OPERATOR  shall  require  each  independent
contractor to comply,  with the  governmental  requirements set forth in Exhibit
"D" and with all of the  provisions  of  Section  202(1) to (7),  inclusive,  of
Executive Order No. 11246, as amended.

                                  ARTICLE XXV

                                 FORCE MAJEURE

     25.1 NOTICE.  If any PARTY is rendered unable,  wholly or in part, by force
majeure  to carry out its  obligations  under  this  Agreement,  other  than the
obligation  to make money  payments,  that PARTY shall give to all other PARTIES
prompt  written  notice of the force majeure with  reasonably  full  particulars
concerning it; thereupon, the obligations of the PARTY giving the notice, so far
as they are affected by the force  majeure,  shall be suspended  during,  but no
longer than, the continuance of the force majeure.  The affected PARTY shall use
reasonable diligence to remove the force majeure as quickly as possible.

                                       23

<PAGE>

     25.2 STRIKES. The requirement that any force majeure shall be remedied with
all reasonable dispatch shall not require the settlement of strikes.

     25.3 FORCE MAJEURE.  The term "force majeure" as herein employed shall mean
an act of God,  strike,  lockout,  or other industrial  disturbance,  act of the
public  enemy,  war,  blockade,  public riot,  lightning,  fire,  storm,  flood,
explosion,  governmental  restraint,  unavailability  of equipment and any other
cause, whether of the kind specifically enumerated above or otherwise,  which is
not reasonably within the control of the PARTY claiming suspension.

                                  ARTICLE XXVI

                             SUCCESSORS AND ASSIGNS

     26.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to  the  benefit  of  the  PARTIES  and  their  respective  heirs,   successors,
representatives  and assigns and shall  constitute  a covenant  running with the
LEASE.

     26.2  NOTICE OF  TRANSFER.  Should  any PARTY  desire to sell,  farmout  or
otherwise  dispose al all or any part of its Working  Interest in the Lease,  it
shall  promptly  give  written  notice  to the  other  PARTIES  giving  complete
information relative to the proposed  disposition.  The other PARTIES shall have
the right for a period of  fifteen  (15) days  after  receipt  of the  notice to
attempt to purchase or acquire the interest,  which the PARTY  proposes to sell,
farmout or otherwise  dispose. A transfer of interest hereunder shall not become
effective as to the PARTIES until the first day of the month following  delivery
to OPERATOR of an original (or copies thereof)  instrument of transfer  approved
by the proper governmental  authority and conforming to the requirements of this
Section.   No  such  transfer  shall  relieve  the  transferring  PARTY  of  any
obligations or liabilities accrued hereunder prior to such effective date.

     26.2.1 The Provisions of this Section 26.2 shall not, however, apply to and
it shall not be necessary to obtain the consent of any Party in connection with;

               (a)  Any mortgage or other pledge,  including without  limitation
                    the  granting  of any  lien  or  security  interest  and any
                    assignment  of production  executed as further  security for
                    the debt secured by any such mortgage or pledge,  by a Party
                    hereto of its interest or any portion  thereof in the Lease,
                    or the Agreement, or any judicial,  trustee's or other sales
                    to foreclose the same;

               (b)  Any  transfer  or  disposition  of the  interest  of a PARTY
                    hereto by corporate  merger or  consolidation or by any sale
                    or sales of substantially all of its oil and gas properties;
                    or

               (c)  Any sale, merger, consolidation or other transfer by a PARTY
                    hereto  of  any  part  of  its   interest  to  or  with  any
                    "affiliate" (as such term is defined in Regulation C, issued
                    under the Securities Act of 1933).

               (d)  Any mortgage,  pledge,  transfer,  sale, merger or any other
                    disposition  enumerated in subparagraphs  (a), (b) or (c) of
                    this  Paragraph  shall  be made  expressly  subject  to this
                    Agreement.

     26.3  RIGHT TO  TRANSFER.  Subject to the terms and  conditions  of Section
26.2,  a PARTY may sell,  transfer or assign all or any part of its  interest in
the property or this Agreement without the consent of any other PARTY

                                       24

<PAGE>

hereto, provided that:

          (a)  Any such sale,  transfer  or  assignment  shall be made only to a
               financially responsible PARTY or PARTIES.

          (b)  If the original  interest of any PARTY is at any time transferred
               to two (2) or more transferees,  OPERATOR may, at its discretion,
               require such  transferees  to appoint a single  trustee with full
               authority to receive notices and payments,  approve  expenditures
               and pay the share of costs,  which are  chargeable  against  such
               transferees.

     26.4  ASSIGNMENTS.  Each PARTY shall  incorporate  in any  assignment of an
interest  in the LEASE a  provision  that such  assignment  is  subject  to this
Agreement.  Any assignment,  vesting or  relinquishment  of interest between the
PARTIES  shall be with  special  warranty  of title  by,  through  and under the
assignor, but not otherwise, and shall be subject to the terms and conditions of
Section 16.1. Any assignment to a Third Party of a Working Interest herein shall
not be  effective as to the Parties  until the first day of the month  following
the  delivery  to Operator of a copy of the  instrument  evidencing  the sale or
assignment, approved by the proper governmental authority, and conforming to the
requirements of this Article.

                                  ARTICLE XXVII

                                      TERM

     27.1 TERM. This Agreement may be amended only in writing and only by mutual
consent of all  PARTIES.  This  Agreement  shall remain in effect so long as the
LEASE shall remain in effect and thereafter  until all claims,  liabilities  and
obligations  incurred in operations  hereunder have been settled;  however,  all
property  belonging  to the PARTIES  shall be  disposed of and final  settlement
shall be made under this Agreement.

                                 ARTICLE XXVIII

                            AREA OF MUTUAL INTEREST

     28.1 AREA OF MUTUAL  INTEREST.  The PARTIES hereby create an Area of Mutual
Interest  ("AMI")  identified on Exhibit "A-l"  attached  hereto and made a part
hereof.  This AMI shall  remain in force and effect as long as any leases  lying
within the AMI are being  maintained by the parties  hereto.  Any acquisition of
any right,  title or interest  acquired in, to and under any oil or gas lease or
any other interest in oil or gas,  including,  without  limitation,  contractual
rights,  which confer on the holder  thereof the right to share,  or acquire the
right to share,  in the  production or the proceeds of production of oil and gas
within the AMI (the  "Acquisition")  by a PARTY  herein  shall be for the mutual
benefit of the PARTIES.  Each PARTY shall have the right to  participate  in any
such  Acquisition in the same proportion as such PARTY'S WORKING INTEREST in and
to the LEASE as set forth in Exhibit "A". The PARTY making the Acquisition  (the
"Acquiring  Party")  shall  notify each of the other  PARTIES in writing  within
thirty (30) days of such  Acquisition  and shall  furnish a copy of all executed
agreements  pertaining thereto and such title information as the Acquiring PARTY
has,  stating  the cost of such  acquisition  or the  obligations  that  must be
assumed in connection  therewith.  Each of the other PARTIES shall have a period
of fifteen (15) working days (48 hours exclusive of Saturdays, Sundays and legal
holidays in the event that a well is being drilled within the AMI) after receipt
of such notice within

                                       25

<PAGE>

which to elect and  notify  the  Acquiring  PARTY  whether  or not it desires to
participate  in such  Acquisition. Failure to timely  respond to the  Acquiring
PARTY'S notice or reimburse the Acquiring PARTY for the  proportionate  share of
the acquired  interest shall be deemed an election not to acquire such interest.
Upon  election and payment to the  Acquiring  PARTY of a  non-acquiring  PARTY'S
share  of the  cost of such  acquisition,  such  non-acquiring  PARTY  shall  be
entitled to an assignment of its  proportionate  share in such  Acquisition.

     If fewer than all PARTIES elect to  participate in the  Acquisition  within
the AMI,  the  Acquiring  PARTY shall  inform all  PARTIES  who have  elected to
participate in the  Acquisition,  in writing,  of the elections made. Each PARTY
receiving notice,  within forty-eight (48) hours (inclusive of Saturday,  Sunday
or legal  holidays)  after  receipt of such notice,  shall advise the  Acquiring
PARTY of its desire to (a) limit  participation to its WORKING INTEREST,  or (b)
acquire  its  proportionate  share  of the  interest  of  the  non-participating
PARTY(IES),  or  (c)  participate  for a  percentage  of  the  interest  of  the
non-participating   PARTY(IES).

     The  interest  of any PARTY who elects to  participate  in any  acquisition
within the AMI shall be subject to and be burdened by the  obligations set forth
on Exhibit "A" with respect to the leases.

                                  ARTICLE XXIX

                             HEADINGS AND EXECUTION

     29.1 TOPICAL HEADINGS. The topical headings used herein are for convenience
only and shall not be construed  as having any  substantive  significance  or as
indicating  that all of the provisions of this  Agreement  relating to any topic
are to be found in any particular Section.

     29.2 COUNTERPART EXECUTIONS.  This Agreement may be signed in counterparts,
and shall be binding upon the PARTIES and upon their successors, representatives
and assigns.

                                          GRYPHON EXPLORATION COMPANY

                                          BY: /s/ Charles H. Odom
                                              ----------------------------------
                                              Charles H. Odom
                                              Vice President-Land

                                          RIDGEWOOD ENERGY CORPORATION

                                          BY: [Illegible]
                                              ----------------------------------

                                       26

<PAGE>

STATE OF TEXAS

COUNTY OF HARRIS

ON THIS ___ day of ___________,  2004, before me appeared Charles H. Odom, to me
personally  known,  who,  being  by me duly  sworn,  did say that he is the Vice
President - Land  for  Gryphon  Exploration  Company  and  that  the  foregoing
instrument was signed in behalf of said corporation by authority of its Board of
Directors,  and said Charles H. Odom  acknowledges  said instrument to be a free
act and deed of said corporation.

                                     -------------------------------------------
                                     Notary Public in and for the State of Texas

STATE OF TEXAS
COUNTY OF
         -------

ON THIS____ day of _____________, 2004, before me, to me personally known, who,
being by me duty sworn, did say that he is the _____________ of _____________
and that the foregoing instrument was signed in behalf of said corporation, and
said acknowledges said instrument to be a free act and deed of said corporation.

                                     -------------------------------------------
                                     Notary Public in and for the State of Texas

Notary  page to Joint  Operating  Agreement  dated May 25,  2004  covering  West
Cameron Area, Block 103.

                                       27

<PAGE>

                                   EXHIBIT "A"

   Attached to and made a part of that certain Joint Operating Agreement dated
effective May 25, 2004 by and between GRYPHON EXPLORATION COMPANY, as Operator,
                and RIDGEWOOD ENERGY CORPORATION, as Non-Operator

OIL AND GAS LEASE:

Oil and Gas Lease dated May 1, 2001,  from the United  States  Department of the
Interior, Minerals Management Service, as Lessor, to Samson Offshore Company and
Gryphon Exploration Company, as Lessees, covering all of Block 103, West Cameron
Area,  OCS Leasing Map,  Louisiana  Map No. 1,  containing  approximately  5,000
acres, more or less, and bearing Serial Number OCS-G 22511.

PARTICIPANTS AND ADDRESSES:

Gryphon Exploration Company
1200 Smith Street, Suite 1740
Houston, TX 77002
Attn: Mr. Bob Kelsey
Phone: (713) 756-2400
Fax: (713) 756-2500

Ridgewood Energy Corporation
5300 Memorial Drive, Suite 1070
Houston, Texas 77007
Attn: Mr. Greg Tabor
Phone: (713) 862-9856
Fax: (713) 802-9734

WORKING INTEREST

                               To Casing Point*   At Casing Point*
                               ----------------   ----------------
Gryphon Exploration Company           20%                40%
Ridgewood Energy Corporation          80%                60%
                                     ---                ---
                                     100%               100%

* As more specifically set forth in that certain  Participation  Agreement dated
May  25,  2004  between  Gryphon   Exploration   Company  and  Ridgewood  Energy
Corporation

The lease above is burdened by the following overriding royalty interest:

Fairfield                     2% of 8/8ths

Gryphon Exploration Company   2% of 8/8ths

                                       28

<PAGE>

                                  EXHIBIT "A-1"

   Attached to and made a part of that certain Joint Operating Agreement dated
effective May 25, 2004 by and between GRYPHON EXPLORATION COMPANY, as Operator,
                and RIDGEWOOD ENERGY CORPORATION, as Non-Operator

The Area of Mutual  Interest  is  comprised  of all of Blocks 103 and 104,  West
Cameron Area.

                                       29

<PAGE>

                                   EXHIBIT "B"
                                    INSURANCE

   Attached to and made a part of that certain Joint Operating Agreement dated
effective May 25, 2004 by and between GRYPHON EXPLORATION COMPANY, as Operator,
                and RIDGEWOOD ENERGY CORPORATION, as Non-Operator

Operator  shall, at all times while  conducting  operations on the Contract Area
and/or  Assigned  Premises,  carry  or  cause to be  carried  insurance  for the
following coverage's and in at least the minimum amounts noted.

     1.   Workers' Compensation and Occupational Disease insurance in accordance
          with the  statutory  requirements  of the state in which work is to be
          performed,  the state in which the Operator,  herein "Contractor",  or
          any of Operator's contractor(s) or sub-contractor(s), employees reside
          and the  state  in  which  the  Contractor  is  domiciled;  Employer's
          Liability  insurance  with limits of not less than  $1,000,000.  These
          coverage's shall include:

          a.   Protection for liabilities under the Federal Longshoremen's and
               Harbor Worker's Compensation Act and the Outer Continental Shelf
               Lands Act.

          b.   Coverage for  liability  under the  Merchant  Marine Act of 1920,
               commonly known as the Jones Act; the Admiralty Act; and the Death
               on the High Seas Act with limits of not less than  $1,000,000 per
               accident.

          c.   Protection    against    liability   of   employer   to   provide
               transportation, wages, maintenance and cure to maritime employees
               and a Voluntary Compensation Endorsement.

          d.   Coverage  amended to provide that a claim In Rem shall be treated
               as a claim against the employer.

          e.   Territorial extension shall cover all work areas.

     2.   Comprehensive  General Liability insurance,  written on any occurrence
          reported basis with limits of $1,000,000 per occurrence  Bodily Injury
          and Property Damage, combined single limits, an annual aggregate of no
          less  than  $2,000,000  (if   applicable),   including  the  following
          coverage's:

          a.   Premises and Operations coverage's.

          b.   Independent Contractor's Contingent coverage.

          c.   Contractual  Liability  covering  liabilities  assumed under this
               Contract.

          d.   Products and Completed Operations coverage.

          e.   Coverage for explosion,  collapse and  underground  resources and
               property  damage under both  Premises/Operations  and Contractual
               Liability coverage parts, where applicable.

          f.   Broad Form Property Damage Liability endorsement.

          g.   Personal Injury Liability.

          h.   In Rem endorsement.

          i.   Territorial extension shall cover all work areas.

          j.   Where  applicable,  coverage  for  liability  resulting  from the
               consumption   of  food   prepared  or  served  by  contractor  or
               subcontractor.

          k.   Watercraft  exclusion deleted or Protection & Indemnity  provided
               as per 4.B.

          l.   Coverage is provided for "Action Over" suits.

          m.   Coverage is silent as respects Punitive Damages.

     3.   Automobile  Liability  insurance  covering owned,  hired and non-owned
          vehicles with limits of $1,000,000  per  occurrence  Bodily Injury and
          Property Damage combined single limits.

                                       30

<PAGE>

TRANSITION ENERGY, LLC             3% WI BPO   2.4% WI APO
952 Echo Lane - Suite 420
Houston, TX 77024
Attn: Jeffrey W. Wheelock
Tax ID#
        ------------------------
Telephone: 713-722-8118
Fax:
     ---------------------------
EMAIL: iwheelock@dwlegal.com

LOWE PARTNERS, L.P.                5% WI BPO   4% WI APO
223 W. Wall Street, Suite 900
Midland, Texas 79701
Attn: Joe C. Pulido
Tax ID#
        ------------------------
Telephone: 713-622-5420
Fax:
     ---------------------------
EMAIL: ioepulido@maralo.com

EXCESS ENERGY LTD.                 5% WI BPO   4% WI APO
14825 St. Mary's Lane, Suite 270
Houston, TX 77079
Attn: Norman Rowlinson
Tax ID# 20-0204983
Telephone: 281-679-7601
Fax:
     ---------------------------
EMAIL: nrowlinson@bigcity.net

<PAGE>

     4.   Where the work  described by this Contract  involves the use of marine
          equipment.  Operator  will  require  the  contractor  to  provide  the
          following insurance:

          a.   Full Form Hull and Machinery  insurance,  with coverage  equal to
               that provided by the American  Institute  Hull Clauses  including
               collision liability,  with the sister ship clause unamended, with
               limits  of  liability  at least  equal  to the full  value of the
               vessel and with navigational  limitations adequate for Contractor
               to perform  the  contracted  work.  Where the  vessels  engage in
               towing  operations,  said  insurance  shall  include full tower's
               liability with the sister ship clause unamended.

          b.   Protection and indemnity insurance coverage in an amount at least
               equal  to the  full  value  of each  vessel  employed  under  the
               Contract.  Protection and indemnity  insurance shall include full
               coverage  for all  crew  liabilities  if  coverage  for  maritime
               employees is not provided under  Coverage B, Employers  Liability
               for Admiralty Jurisdiction.

          c.   Excess Protection and Indemnity  insurance,  including  Collision
               and Tower's  (where  applicable)  Liability in an amount at least
               equal  to the  value of each  vessel  covered  or the  difference
               between  the  full  value  of  each  vessel  and  $1,000,000  per
               occurrence.

          d.   Voluntary  Removal  of Wreck  and/or  Debris  insurance  covering
               Contractor's  operations in an amount of not less than $1,000,000
               per occurrence.

     All of the marine  coverage's  cited above shall name  Operator and all its
subsidiary and affiliated  companies as additional  insured's as their interests
may appear,  to the extent of  contractor's  obligations to defend and indemnify
the Parties.

     5.   Aircraft Liability  insurance (for contracts involving use of aircraft
          or  helicopters)  with  combined  single  limit  coverage  for  public
          liability,  passenger  liability and property damage  liability of not
          less than $5,000,000 covering all owned and non-owned aircraft used by
          Contractor in connection with work to be performed.

     6.   Umbrella  Liability  insurance  written on an occurrence basis with no
          claims  made  features  with  a  minimum   combined  single  limit  of
          $15,000,000 each  occurrence/aggregate  where applicable, to be excess
          of the coverage's and limits required in 1, 2, 3,4 and 5 above.

     7.   OPERATOR  shall carry or cause to be carried the following  coverage's
          for the benefit of and at the expense of the Joint  Account,  however,
          proportionate  coverage  may be  carried  individually  by  each  NON-
          OPERATOR,  subject to proper evidence of such  proportionate  coverage
          being  provided  to  Operator  at least  fifteen  (15)  days  prior to
          commencement of operations for the drilling of the initial EXPLORATORY
          WELL.

          a.   Operator's Extra Expense Insurance, including control of well and
               redrilling of the well (full restoration redrill), including, but
               not  limited  to,  Seepage  and  Pollution  and  Containment  and
               Evacuation Expense with a limit of liability of $30,000,000.

          b.   Physical  Damage and  Removal of Wreck  Coverage  for  facilities
               hereunder,  with  limits  not  less  than the  replacement  value
               thereof.  Notwithstanding  the  foregoing,  this  coverage  to be
               provided fifteen(15) days prior to placement of such facilities.

                                       31

<PAGE>

                                                      COPAS - 1986 - OFFSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies

                                   EXHIBIT "C"

   Attached to and made a part of that certain Joint Operating Agreement dated
                  effective May 25, 2004 by and between GRYPHON
                      EXPLORATION COMPANY, as Operator, and
                  RIDGEWOOD ENERGY CORPORATION, as Non-Operator

                              ACCOUNTING PROCEDURE

                            OFFSHORE JOINT OPERATIONS

                              I. GENERAL PROVISIONS

1.   Definitions

     "Joint  Property" shall mean the real and personal  property subject to the
     agreement to which this Accounting Procedure is attached.

     "Joint  Operations"  shall mean all operations  necessary or proper for the
     development, operation, protection and maintenance of the Joint Property.

     "Joint Account" shall mean the account showing the charges paid and credits
     received in the conduct of the Joint  Operations and which are to be shared
     by the Parties.

     "Operator" shall mean the party designated to conduct the Joint Operations.

     "Non-Operators"  shall mean the  Parties of this  agreement  other than the
     Operator.

     "Parties" shall mean Operator and Non-Operators.

     "First Level Supervisors" shall mean those employees whose primary function
     in Joint  Operations is the direct  supervision of other  employees  and/or
     contract labor directly employed on the Joint Property in a field operating
     capacity.

     "Technical Employees" shall mean those employees, professional consultants,
     or contract personnel having, special and specific engineering,  geological
     or  other  professional   skills,  and  whose  primary  function  in  Joint
     Operations is the handling of specific  operating  conditions  and problems
     for the benefit of the Joint Property.

     "Personal  Expenses"  shall mean travel and other  reasonable  reimbursable
     expenses of Operator's employees or professional consultants.

     "Material" shall mean personal property,  equipment or supplies acquired or
     held for use on the Joint Property.

     "Controllable  Material"  shall  mean  Material  which  at the  time  is so
     classified  in  the  Material   Classification   Manual  as  most  recently
     recommended by the Council of Petroleum Accountants Societies.

     "Shore Base Facilities"  shall mean onshore support  facilities that during
     drilling,  development,  maintenance and producing  operations provide such
     services to the Joint  Property as receiving  and  transshipment  point for
     supplies,  materials  and  equipment;  debarkation  point for  drilling and
     production   personnel  and   services;   communication,   scheduling   and
     dispatching  center;   other  associated  functions  benefiting  the  Joint
     Property.

     "Offshore  Facilities" shall mean platforms and support systems such as oil
     and gas handling  facilities,  living  quarters,  offices,  shops,  cranes,
     electrical supply equipment and systems, fuel and water storage and piping,
     heliport,   marine   docking   installations,   communication   facilities,
     navigation aids, and other similar  facilities  necessary in the conduct of
     offshore operations.

2.   Statement and Billings

     Operator shall bill  Non-Operators  on or before the last day of each month
     for their proportionate share of the Joint Account for the preceding month.
     Such bills will be accompanied  by statements  which identify the authority
     for expenditure,  lease or facility, and all charges and credits summarized
     by appropriate  classifications of investment and expense except that items
     of  Controllable   Material  and  unusual  charges  and  credits  shall  be
     separately identified and fully described in detail.

3.   Advances and Payments by Non-Operators

     A.   Unless  otherwise  provided  for in the  agreement,  the  Operator may
          require the  Non-Operators  to advance  their share of estimated  cash
          outlays for the succeeding  month's operation within fifteen (15) days
          after  receipt  of the  billing  or by the  first day of the month for
          which the advance is  required,  whichever  is later.  Operator  shall
          adjust each  monthly  billing to reflect  advances  received  from the
          Non-Operators.

     B.   Each Non-Operator shall pay its proportion of all bills within fifteen
          (15) days after receipt. If payment is not made within such time, the
          unpaid balance shall bear interest monthly at the prime rate in effect
          at Bank One, Texas, Houston, Texas on the first day of the month in
          which delinquency occurs plus 1% or the maximum contract rate
          permitted by the applicable usury laws of the jurisdiction in which in
          the Joint Property is located, whichever is the lesser, plus
          attorney's fees, court costs, and other costs in connection with the
          collection of unpaid amounts.

4.   Adjustments

     Payment of any such bills shall not prejudice the right of any Non-Operator
     to protest or question the  correctness  thereof;  provided,  however,  all
     bills and  statements  rendered to  Non-Operators  by  Operator  during any
     calendar year shall  conclusively  be presumed to be true and correct after
     twenty-four (24) months following the end of any such calendar year, unless
     within the said twenty-four (24) month period a Non-Operator  takes written
     exception thereto and makes claim on

                                        1

<PAGE>

     Operator for adjustment.  No adjustment favorable to Operator shall be made
     unless it is made within the same prescribed period. The provisions of this
     paragraph shall not prevent adjustments resulting from a physical inventory
     of Controllable Material as provided for in Section V.

5.   Audits

     A.   A  Non-Operator,  upon  notice in  writing to  Operator  and all other
          Non-Operators,  shall have the right to audit Operator's  accounts and
          records relating to the Joint Account for any calendar year within the
          twenty-four (24, month period following the end of such calendar year;
          provided,  however,  the making of an audit  shall not extend the time
          for the taking of written exception to and the adjustments of accounts
          as provided  for in Paragraph 4 of this Section I. Where there are two
          or more  Non-Operators,  the Non-Operators shall make every reasonable
          effort to conduct a joint  audit in a manner  which  will  result in a
          minimum  of  inconvenience  to the  Operator.  Operator  shall bear no
          portion of the Non-Operators' audit cost incurred under this paragraph
          unless  agreed to by the  Operator.  The audits shall not be conducted
          more than once each year without  prior  approval of Operator,  except
          upon the resignation or removal of the Operator,  and shall be made at
          the expense of those Non-Operators approving such audit.

     B.   The Operator shall reply in writing to an audit report within 180 days
          after receipt of such report.

6.   Approval By Non-Operators

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

                               II. DIRECT CHARGES

Operator shall charge the Joint Account with the following items:

1.   Rentals and Royalties

     Lease rentals and royalties paid by Operator for the Joint Operations.

2.   Labor

     A.   (1)  Salaries and wages of  Operator's  field  employees  and contract
               personnel  directly employed on the Joint Property in the conduct
               of Joint Operations.

          (2)  Salaries and wages of Operator's  employees or contract personnel
               directly  employed  on Shore Base  Facilities  or other  Offshore
               Facilities  serving the Joint  Property if such costs are charged
               under Paragraph 7 of this Section II.

          (3)  Salaries of First Level Supervisors in the field.

          (4)  Salaries   and  wages  and  fees  of   Technical   Employees   or
               professional  consultants directly employed on the Joint Property
               if such charges are excluded from the overhead rates.

          (5)  Salaries and wages of Technical  Employees either  temporarily or
               permanently assigned to and directly employed in the operation of
               the Joint Property if such charges are excluded from the overhead
               rates.

     B.   Operator's cost of holiday, vacation, sickness and disability benefits
          and other  customary  allowances  paid to employees whose salaries and
          wages are  chargeable to the Joint Account under  Paragraph 2A of this
          Section  II. Such costs  under this  Paragraph  2B may be charged on a
          "when and as paid basis" or by  "percentage  assessment" on the amount
          of salaries and wages  chargeable to the Joint Account under Paragraph
          2A of this  Section II. If  percentage  assessment  is used,  the rate
          shall be based on the Operator's cost experience.

     C.   Expenditures or contributions made pursuant to assessments  imposed by
          governmental  authority  which  are  applicable  to  Operator's  costs
          chargeable  to the Joint  Account  under  Paragraphs 2A and 2B of this
          Section II.

     D.   Personal  Expenses of those  employees  whose  salaries  and wages are
          chargeable to the Joint Account under Paragraph 2A of this Section II.

3.   Employee Benefits

     Operator's  current costs of established  plans for  employees'  group life
     insurance,  hospitalization,  pension,  retirement, stock purchase, thrift,
     bonus,  and other benefit plans of a like nature,  applicable to Operator's
     labor cost  chargeable to the Joint  Account under  Paragraphs 2A and 2B of
     this Section II shall be  Operator's  actual cost not to exceed the percent
     most recommended by the Council of Petroleum Accountants Societies.

4.   Material

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

5.   Transportation

     Transportation of employees and Material necessary for the Joint Operations
     but subject to the following limitations:

     A.   If  Material  is  moved to the  Joint  Property  from  the  Operator's
          warehouse  or other  properties,  no charge shall be made to the Joint
          Account  for a distance  greater  than the  distance  from the nearest
          reliable  supply  store where like  material is normally  available or
          railway receiving point nearest the Joint Property unless agreed to by
          the Parties.

     B.   If surplus Material is moved to Operator's  warehouse or other storage
          point,  no charge  shall be made to the Joint  Account  for a distance
          greater than the distance to the nearest  reliable  supply store where
          like  material  is  normally  available,  or railway  receiving  point
          nearest the Joint Property unless agreed to by the Parties.  No charge
          shall  be made to the  Joint  Account  for  moving  Material  to other
          properties belonging to the Operator, unless agreed to by the Parties.

                                        2

<PAGE>

     C.   In the  application  of  subparagraphs  A and B above,  the  option to
          equalize or charge actual  trucking cost is available  when the actual
          charge is $400 or less excluding accessorial charges. The $400 will be
          adjusted to the amount  most  recently  recommended  by the Council of
          Petroleum Accountants Societies.

6.   Services

     The cost of contract services,  equipment and utilities provided by outside
     sources,  except  services  excluded  by  Paragraph  9 of  Section  II  and
     Paragraph  i, ii,  and  iii,  of  Section  III.  The  cost of  professional
     consultant  services and contract services of technical  personnel directly
     engaged  on the  Joint  Property  if such  charges  are  excluded  from the
     overhead rates.  The cost of professional  consultant  services or contract
     services of technical  personnel  directly  engaged in the operation of the
     Joint  Property  shall be charged to the Joint  Account if such charges are
     excluded from the overhead rates.

7.   Equipment and Facilities Furnished By Operator

     A.   Operator shall charge the Joint Account for use of Operator-owned
          equipment and facilities, including Shore Base and/or Offshore
          Facilities, at rates commensurate with costs of ownership and
          operation. Such rates may include labor, maintenance, repairs, other
          operating expense, insurance, taxes, depreciation, and interest on
          gross investment less accumulated depreciation not to exceed Ten
          percent (10%) per annum. In addition, for platforms only, the rate may
          include an element of the estimated cost of platform dismantlement.
          Such rates shall not exceed average commercial rates currently
          prevailing in the immediate area of the Joint Property.

     B.   In lieu of charges in  paragraph  7A above,  Operator may elect to use
          average commercial rates prevailing in the immediate area of the Joint
          Property.  For automotive  equipment,  Operator may elect to use rates
          published by the Petroleum Motor Transport Association.

8.   Damages and Losses to Joint Property

     All costs or  expenses  necessary  for the repair or  replacement  of Joint
     Property  made  necessary  because of damages or losses  incurred  by fire,
     flood, storm, theft,  accident, or other cause, except those resulting from
     Operator's gross negligence or willful  misconduct.  Operator shall furnish
     Non-Operator  written  notice  of  damages  or losses  incurred  as soon as
     practicable after a report thereof has been received by Operator.

9.   Legal Expense

     Expense of  handling,  investigating  and  settling  litigation  or claims,
     discharging  of  liens,   payments  of  judgements  and  amounts  paid  for
     settlement of claims  incurred in or resulting  from  operations  under the
     agreement  or necessary  to protect or recover the Joint  Property,  except
     that no charge for services of Operator's legal staff or fees or expense of
     outside attorneys shall be made unless previously agreed to by the Parties.
     All other  legal  expense  is  considered  to be  covered  by the  overhead
     provisions of Section III unless otherwise agreed to by the Parties, except
     as provided in Section I, Paragraph 3.

10.  Taxes

     All taxes of every kind and nature assessed or levied upon or in connection
     with  the  Joint  Property,   the  operation  thereof,  or  the  production
     therefrom,  and which taxes have been paid by the  Operator for the benefit
     of the Parties.  If the ad valorem taxes are based in whole or in part upon
     separate valuations of each party's working interest,  then notwithstanding
     anything to the contrary herein, charges to the Joint Account shall be made
     and paid by the Parties hereto in accordance  with the tax value  generated
     by each party's working interest.

11.  Insurance

     Net  premiums  paid for  insurance  required  to be  carried  for the Joint
     Operations for the protection of the Parties. In the event Joint Operations
     are  conducted  at  offshore   locations  in  which  Operator  may  act  as
     self-insurer for Workers' Compensation and Employers'  Liability,  Operator
     may include the risk under its self-insurance program in providing coverage
     under State and  Federal  laws and charge the Joint  Account at  Operator's
     cost not to exceed manual rates.

12.  Communications

     Costs  of  acquiring,   leasing,  installing,   operating,   repairing  and
     maintaining communication systems, including radio and microwave facilities
     between the Joint Property and the Operator's  nearest Shore Base Facility.
     In the event  communication  facilities  systems serving the Joint Property
     are Operator-owned,  charges to the Joint Account shall be made as provided
     in Paragraph 7 of this Section II.

13.  Ecological and Environmental

     Costs incurred on the Joint  Property as a result of statutory  regulations
     for archaeological  and geophysical  surveys relative to identification and
     protection of cultural  resources and/or other  environmental or ecological
     surveys  as may be  required  by the  Bureau  of Land  Management  or other
     regulatory  authority.  Also, costs to provide or have available  pollution
     containment and removal  equipment plus costs of actual control and cleanup
     and resulting responsibilities of oil spills as required by applicable laws
     and regulations.

14.  Abandonment and Reclamation

     Costs  incurred for  abandonment  of the Joint  Property,  including  costs
     required by governmental or other regulatory authority.

15.  Other Expenditures

     Any other expenditure not covered or dealt with in the foregoing provisions
     of this Section II, or in Section III and which is of direct benefit to the
     Joint Property and is, incurred by the Operator in the necessary and proper
     conduct of the Joint Operations.

                                        3

<PAGE>

                                    III. OVERHEAD

     As  compensation  for  administrative,  supervision,  office  services  and
     warehousing  costs,  Operator  shall charge the Joint Account in accordance
     with this Section III.

     Unless otherwise agreed to by the Parties, such charge shall be in lieu of
     costs and expenses of all offices and salaries or wages plus applicable
     burdens and expenses of all personnel, except those directly chargeable
     under Section II. The cost and expense of services from outside sources in
     connection with matters of taxation, traffic, accounting or matters before
     or involving governmental agencies shall be considered as included in the
     overhead rates provided for in this Section III unless such cost and
     expense are agreed to by the Parties as a direct charge to the Joint
     Account. Costs and fees associated with representation on matters before or
     involving governmental affairs shall be a direct charge to the Joint
     Account. Costs and fees associated with representation on matters before or
     involving governmental affairs shall be a direct charge to the Joint
     Account

     i.   Except as  otherwise  provided in Paragraph 2 of this Section III, the
          salaries,  wages and Personal  Expenses of Technical  Employees and/or
          the cost of professional  consultant services and contract services of
          technical personnel directly employed on the Joint Property:

          |_|  shall be covered by the overhead rates.

          |X|  shall not be covered by the overhead rates,

     ii.  Except as  otherwise  provided in Paragraph 2 of this Section III, the
          salaries,  wages and Personal  Expenses of Technical  Employees and/or
          the costs of professional consultant services and contract services of
          technical personnel either temporarily or permanently  assigned to and
          directly employed in the operation of the Joint Property:

          |X|  shall be covered by the overhead rates.

          |_|  shall not be covered by the overhead rates.

I.   Overhead - Drilling and Producing Operations

     As  compensation  for overhead  incurred in  connection  with  drilling and
     producing properties, Operator shall charge on either:

          |X|  Fixed Rate Basis, Paragraph 1A, or

          |_|  Percentage Basis, Paragraph 1B

     A. Overhead - Fixed Rate Basis

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

               Drilling Well Rate $31,960 (Prorated for less than a full month)

               Producing Well Rate $3,196

          (2)  Application of Overhead - Fixed Rate Basis for Drilling Well Rate
               shall be as follows:

               (a)  Charges  for  drilling  wells  shall  begin on the date when
                    drilling or  completion  equipment  arrives on location  and
                    terminate on the date the drilling or  completion  equipment
                    moves off  location  or rig is  released,  whichever  occurs
                    first, except that no charge shall be made during suspension
                    of drilling  operations for fifteen (15) or more consecutive
                    calendar days.

               (b)  Charges  for  wells  undergoing  any  type  of  workover  or
                    recompletion  for a period of four (4) consecutive work days
                    or more  shall  be  made at the  drilling  well  rate.  Such
                    charges  shall be applied for the period from date  workover
                    operations,  with  rig or  other  units  used  in  workover,
                    commence  through date of rig or other unit release,  except
                    that no charge shall be made during suspension of operations
                    for fifteen (15) or more consecutive calendar days.

          (3)  Application  of  Overhead - Fixed Rate Basis for  Producing  Well
               Rate shall be as follows:

               (a)  An active  well either  produced  or  injected  into for any
                    portion  of the  month  shall be  considered  as a  one-well
                    charge for the entire month.

               (b)  Each active  completion in a  multi-completed  well in which
                    production is not  commingled  down hole shall be considered
                    as a one-well charge providing each completion is considered
                    a separate well by the governing regulatory authority.

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

               (d)  A  one-well  charge  shall  be made  for the  month in which
                    plugging and  abandonment  operations  are  completed on any
                    well.  This one-well charge shall be made whether or not the
                    well has produced except when drilling well rate applies.

               (e)  All other  inactive  wells  (including  but not  limited  to
                    inactive wells covered by unit allowable,  lease  allowable,
                    transferred  allowable,  etc.)  shall  not  qualify  for  an
                    overhead charge.

          (4)  The well  rates  shall be  adjusted  as of the first day of April
               each year  following the effective date of the agreement to which
               this Accounting  Procedure is attached.  The adjustment  shall be
               computed  by  multiplying  the  rate  currently  in  use  by  the
               percentage increase or decrease in the average weekly earnings of
               Crude Petroleum and Gas Production  Workers for the last calendar
               year  compared to the  calendar  year  preceding  as shown by the
               index of  average  weekly  earnings  of Crude  Petroleum  and Gas
               Production  Workers as published by the United States  Department
               of Labor, Bureau of Labor Statistics,  or the equivalent Canadian
               index as published  by  Statistics  Canada,  as  applicable.  The
               adjusted rates shall be the rates currently in use, plus or minus
               the computed adjustment.

                                       4

<PAGE>

B.   Overhead - Percentage Basis

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

               (a)  Development

               ___________  Percent  (____%) of the cost of  Development  of the
               Joint Property  exclusive of costs provided under  Paragraph 9 of
               Section II and all salvage credits.

               (b)  Operating

               ___________________ Percent (_____%) of the cost of Operating the
               Joint Property exclusive of costs provided under Paragraphs 1 and
               9 of  Section  II, all  salvage  credits,  the value of  injected
               substances  purchased  for  secondary  recovery and all taxes and
               assessments which are levied,  assessed and paid upon the mineral
               interest in and to the Joint Property.

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

               For the  purpose of  determining  charges on a  percentage  basis
               under Paragraph 1B of this Section III, development shall include
               all costs in connection with drilling,  redrilling,  deepening of
               any or all wells, and shall also include any remedial  operations
               requiring a period of five (5)  consecutive  work days or more on
               any or all wells;  also,  preliminary  expenditures  necessary in
               preparation for drilling and expenditures  incurred in abandoning
               when the well is not completed as a producer,  and original costs
               of construction or installation of fixed assets, the expansion of
               fixed assets and any other project clearly discernible as a fixed
               asset,  except  Major  Construction  as defined in Paragraph 2 of
               this  Section  III.  All  other  costs  shall  be  considered  as
               Operating  except  that  catastrophe   costs  shall  be  assessed
               overhead as provided in Section III, Paragraph 3.

2.   Overhead - Major Construction

     To compensate  Operator for overhead costs incurred in the construction and
     installation of fixed assets,  the expansion of fixed assets, and any other
     project  clearly  discernible as a fixed asset required for the development
     and operation of the Joint Property,  or in the dismantling for abandonment
     of  platforms  and related  production  facilities,  Operator  shall either
     negotiate a rate prior to the  beginning of  construction,  or shall charge
     the Joint Account for overhead  based on the following  rates for any Major
     Construction project in excess of $25,000.00

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

          (1)  6% of total costs if such costs are more than $25,000.00 but less
               than $100,000; plus

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

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

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

          (1)  3% of total costs if such costs are more than $25,000.00 but less
               than $100,000; plus

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

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

     Total cost shall mean the gross cost of any one project. For the purpose of
     this  paragraph,  the  component  parts of a single  project  shall  not be
     treated  separately  and the  cost  of  drilling  and  workover  wells  and
     artificial lift equipment shall be excluded.

     On each project,  Operator shall advise Non-Operator(s) in advance which of
     the above  options  shall apply.  In the event of any conflict  between the
     provisions  of this  paragraph  and  those  provisions  under  Section  II,
     Paragraph 2 or Paragraph 6, the provisions of this paragraph shall govern.

3.   Catastrophe Overhead

     To  compensate  Operator  for  overhead  costs  incurred  in the  event  of
     expenditures  resulting from a single occurrence due to oil spill, blowout,
     explosion,  fire, storm,  hurricane,  or other catastrophes as agreed to by
     the  Parties,  which are  necessary  to restore  the Joint  Property to the
     equivalent   condition   that  existed  prior  to  the  event  causing  the
     expenditures,  Operator shall either negotiate a rate prior to charging the
     Joint Account or shall charge the Joint  Account for overhead  based on the
     following rates:

          (1)  3% of total costs through $100,000; plus

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

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

     Expenditures  subject  to  the  overheads  above  will  not be  reduced  by
     insurance recoveries,  and no other overhead provisions of this Section III
     shall apply.

4.   Amendment of Rates

     The  overhead  rates  provided  for in this Section III may be amended from
     time to time only by mutual  agreement  between the  Parties  hereto if, in
     practice, the rates are found to be insufficient or excessive.

     IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS

Operator is  responsible  for Joint  Account  Material and shall make proper and
timely  charges and  credits  for all  Material  movements  affecting  the Joint
Property.  Operator  shall  provide all Material for use on the Joint  Property;
however,   at  Operator's   option,   such  Material  may  be  supplied  by  the
Non-Operator.  Operator  shall make timely  disposition  of idle and/or  surplus
Material,   such  disposal  being  made  either  through  sale  to  Operator  or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall

                                       5

<PAGE>

be under  no  obligation  to  purchase,  interest of  Non-Operators  in  surplus
condition A or B  Material.  The disposal of surplus  Controllable  Material not
purchased by the Operator shall be agreed to by the Parties.

1.   Purchases

     Material  purchased  shall be charged at the price paid by  Operator  after
     deduction  of all  discounts  received.  In case of  Material  found  to be
     defective  or returned  to vendor for any other  reasons,  credit  shall be
     passed  to the Joint  Account  when  adjustment  has been  received  by the
     Operator.

2.   Transfers and Dispositions

     Material furnished to the Joint Property and Material  transferred from the
     Joint Property or disposed of by the Operator unless otherwise agreed to by
     the  Parties,  shall be priced on the  following  basis  exclusive  of cash
     discounts:

     A.   New Material (Condition A)

          (1)  Tubular Goods Other than Line Pipe

               (a)  Tubular goods, sized 2-3/8 inches OD and larger, except line
                    pipe,  shall be priced at current new prices effective as of
                    date of movement plus  transportation  cost using the 80,000
                    pound carload weight basis to the railway receiving point or
                    shore based facilities  nearest the Joint Property for which
                    published rail rates for tubular goods exist.  If the 80,000
                    pound rail rate is not  offered,  the 70,000 pound or 90,000
                    pound rail rate may be used.

               (b)  For grades which are special to one mill only,  prices shall
                    be   computed   at  the  mill   base  of  that   mill   plus
                    transportation  cost from that mill to the railway receiving
                    point or shore based  facilities  nearest the Joint Property
                    as provided above in Paragraph 2.A.(l)(a).

               (c)  Special  end  finish  tubular  goods  shall be priced at the
                    lowest published out-of-stock price, f.o.b. Houston,  Texas,
                    plus   transportation   cost,   using  Oil   Field   Haulers
                    Association  interstate  30,000  pound  truck  rate,  to the
                    railway  receiving point or shore based  facilities  nearest
                    the Joint Property.

               (d)  Macaroni  tubing  (size  less than  2-3/8  inch OD) shall be
                    priced at the lowest  published  out-of-stock  prices f.o.b.
                    the supplier plus transportation  costs, using the Oil Field
                    Haulers  Association  interstate  truck  rate per  weight of
                    tubing transferred,  to the railway receiving point or shore
                    based facilities nearest the Joint Property.

          (2)  Line Pipe

               (a)  Line pipe movements  (except size 24 inch OD and larger with
                    walls 3/4 inch and  over)  30,000  pounds  or more  shall be
                    priced  under   provisions   of  tubular  goods  pricing  in
                    Paragraph A.(l)(a) as provided above.

               (b)  Line pipe movements  (except size 24 inch OD and larger with
                    walls 3/4 inch and over) less than  30,000  pounds  shall be
                    priced  at  current  new  prices  effective  as of  date  of
                    shipment plus 20 percent, plus transportation costs based on
                    freight rates as set forth under provisions of tubular goods
                    pricing in Paragraph A.(l)(a) as provided above.

               (c)  Line pipe 24 inch OD and over and 3/4 inch  wall and  larger
                    shall be priced f.o.b.  the point of  manufacture at current
                    CEPS  prices  plus   transportation   cost  to  the  railway
                    receiving point nearest the Joint Property.

               (d)  Line pipe,  including  fabricated line pipe,  drive pipe and
                    conduit not listed on published  price lists shall be priced
                    at quoted prices plus freight to the railway receiving point
                    or shore based  facilities  nearest the Joint Property or at
                    prices agreed to by the Parties.

     (3)  Other Material shall be priced at the current new price,  in effect at
          date of movement,  as listed by a reliable  supply  store  nearest the
          Joint Property, or point of manufacture, plus transportation costs, if
          applicable,  to the railway  receiving point or shore based facilities
          nearest the Joint Property.

     (4)  Unused  new  Material,  except  tubular  goods,  moved  from the Joint
          Property  shall be priced at the current new price,  in effect on date
          of movement,  as listed by a reliable  supply store  nearest the Joint
          Property,  or point of  manufacture,  plus  transportation  costs,  if
          applicable,  to the railway  receiving point or shore based facilities
          nearest  the Joint  Property.  Unused new  tubulars  will be priced as
          provided above in Paragraph 2.A.(l)and(2).

     B.   Good Used Material (Condition B)

          Material in sound and  serviceable  condition  and  suitable for reuse
          without reconditioning:

          (1)  Material  moved to the Joint  Property

               At seventy-five  percent (75%) of current new price as determined
               by Paragraph A.

          (2)  Material used on and moved from the Joint Property

               (a)  At  seventy-five  percent  (75%)  of  current  new  price as
                    determined  by  Paragraph  A., if  Material  was  originally
                    charged to the Joint Account as new Material or

               (b)  At  sixty-five   percent  (65%)  of  current  new  price  as
                    determined  by  Paragraph  A., if  Material  was  originally
                    charged to the Joint Account as used Material.

          (3)  Material  not  used on and  moved  from  the  Joint  Property

               At seventy-five  percent (75%) of current new price as determined
               by Paragraph A.

          The  cost  of  reconditioning,  if  any,  shall  be  absorbed  by  the
          transferring property.

     C.   Other Used Material

          (1)  Condition C

               Material which is not in sound and serviceable  condition and not
               suitable for its  original  function  until after  reconditioning
               shall be priced at fifty  percent  (50%) of current  new price as
               determined  by Paragraph A. The cost of  reconditioning  shall be
               charged to the  receiving  property,  provided  Condition C value
               plus cost of reconditioning does not exceed Condition B value.

                                       6

<PAGE>

          (2)  Condition D

               Material,  excluding  junk,  no longer  suitable for its original
               purpose,  but usable for some other  purpose shall be priced on a
               basis   commensurate  with  its  use.  Operator  may  dispose  of
               Condition D Material under  procedures  normally used by Operator
               without prior approval of Non-Operators.

               (a)  Casing,  tubing,  or drill pipe used as line pipe  shall  be
                    priced as Grade A and B  seamless  line  pipe of  comparable
                    size and weight. Used casing,  tubing or drill pipe utilized
                    as line pipe shall be priced at used line pipe prices.

               (b)  Casing, tubing or drill pipe used as higher pressure service
                    lines than standard line pipe,  e.g. power oil lines,  shall
                    be  priced  under  normal  pricing  procedures  for  casing,
                    tubing,  or drill pipe.  Upset tubular goods shall be priced
                    on a non-upset basis.

          (3)  Condition E

               Junk shall be priced at prevailing  prices.  Operator may dispose
               of Condition E Material  under  procedures  normally  utilized by
               Operator without prior approval of Non-Operators.

     D.   Obsolete Material

          Material which is serviceable and usable for its original function but
          condition  and/or  value of such  Material is not  equivalent  to that
          which would justify a price as provided above may be specially  priced
          as agreed to by the  Parties.  Such price  should  result in the Joint
          Account being  charged with the value of the service  rendered by such
          Material.

     E.   Pricing Conditions

          (1)  Loading or unloading costs may be charged to the Joint Account at
               the rate of  twenty-five  (25CENTS)  per  hundred  weight  on all
               tubular goods  movements,  in lieu of actual loading or unloading
               costs  sustained at the stocking  point.  The above rate shall be
               adjusted as of the first day of April each year following January
               1,  1985 by the same  percentage  increase  or  decrease  used to
               adjust  overhead rates in Section III,  Paragraph 1 .A.(4).  Each
               year,  the rate  calculated  shall be rounded to the nearest cent
               and shall be the rate in effect until the first day of April next
               year.  Such rate shall be  published  each year by the Council of
               Petroleum Accountants Societies.

          (2)  Material  involving erection costs shall be charged at applicable
               percentage of the current knocked-down price of new Material.

3.   PremiumPrices

     Whenever  Material is not readily  obtainable at published or listed prices
     because of national emergencies, strikes or other unusual causes over which
     the Operator has no control,  the Operator may charge the Joint Account for
     the required  Material at the Operator's  actual cost incurred in providing
     such  Material,  in making it suitable  for use, and in moving to the Joint
     Property;  provided notice in writing is furnished to  Non-Operators of the
     proposed  charge prior to billing  Non-Operators  for such  Material.  Each
     Non-Operator  shall have the right,  by so electing and notifying  Operator
     within ten days after  receiving  notice from Operator,  to furnish in kind
     all or part of his share of such Material  suitable for use and  acceptable
     to Operator.

4.   Warranty of Material Furnished By Operator

     Operator  does not warrant the  Material  furnished.  In case of  defective
     Material,  credit shall not be passed to the Joint Account until adjustment
     has been received by Operator from the manufacturers or their agents.

                                 V. INVENTORIES

The Operator shall maintain detailed reports of Controllable Material.

1.   Periodic Inventories, Notice and Representation

     At  reasonable  intervals,  inventories  shall be taken by  Operator of the
     Joint Account  Controllable  Material.  Written notice of intention to take
     inventory  shall be given by Operator at least  thirty (30) days before any
     inventory is to begin so that  Non-Operators  may be  represented  when any
     inventory  is taken.  Failure  of  Non-Operators  to be  represented  at an
     inventory  shall  bind  Non-Operators  to  accept  the  inventory  taken by
     Operator.

2.   Reconciliation and Adjustment of Inventories

     Adjustments  to the Joint Account  resulting from the  reconciliation  of a
     physical  inventory shall be made within six months following the taking of
     the inventory. Inventory adjustments shall be made by Operator to the Joint
     Account for overages and shortages, but, Operator shall be held accountable
     only for shortages due to lack of reasonable diligence.

3.   Special Inventories

     Special  inventories  may be taken  whenever  there is any sale,  change of
     interest, or change of Operator in the Joint Property. It shall be the duty
     of the party  selling  to notify all other  Parties as quickly as  possible
     after the transfer of interest takes place. In such cases,  both the seller
     and the purchaser shall be governed by such inventory. In cases involving a
     change of Operator, all Parties shall be governed by such inventory.

4.   Expense of Conducting Inventories

     A.   The expense of conducting periodic inventories shall not be charged to
          the Joint Account unless agreed to by the Parties.

     B.   The expense of conducting special  inventories shall be charged to the
          Parties requesting such inventories,  except inventories  required due
          to change of Operator shall be charged to the Joint Account.

                                        7

<PAGE>

                                   EXHIBIT "D"

           Attached to and made a part of that certain Joint Operating
              Agreement dated effective May 25, 2004 by and between
                  GRYPHON EXPLORATION COMPANY, as Operator, and
                  RIDGEWOOD ENERGY CORPORATION, as Non-Operator

                    CERTIFICATION OF NONSEGREGATED FACILITIES

Contractor  certifies that it does not maintain or provide for its employees any
segregated  facilities at any of its  establishments and that it does not permit
its  employees to perform  their  services at any  location,  under its control,
where segregated facilities are maintained. Contractor certifies further that it
will not maintain or provide for its employees any segregated  facilities at any
of its establishments and that it will not permit its employees to perform their
services at any location,  under its control,  where  segregated  facilities are
maintained. Contractor agrees that a breach of this certification is a violation
of the Equal Opportunity  Clause in any Government  contract between  Contractor
and Corporation. As used in this certification, the term "segregated facilities"
means any waiting rooms, work areas, rest rooms and wash rooms,  restaurants and
other  eating  areas,  time clocks,  locker rooms and other  storage or dressing
areas,  parking lots,  drinking  fountains,  recreation or entertainment  areas,
transportation,   and  housing  facilities  provided  for  employees  which  are
segregated by explicit directive or are in fact segregated on the basis of race,
color,  religion,  or  national  origin,  because  of habit,  local  customs  or
otherwise.  Contractor further agrees that (except where it has obtain identical
certifications  from proposed  subcontractors for specific time periods) it will
obtain identical  certifications from proposed subcontractors prior to the award
of  subcontracts  exceeding  $10,000 which are not exempt from the provisions of
the Equal  Opportunity  Clause;  that it will retain such  certifications in its
files;  and  that  it  will  forward  the  following  notice  to  such  proposed
subcontractors   (except  where  the  proposed   subcontractors  have  submitted
identical certifications for specific time periods):

NOTICE TO  PROSPECTIVE  SUBCONTRACTORS  OF  REQUIREMENT  FOR  CERTIFICATIONS  OF
NONSEGREGATED  FACILITIES.  A Certification  of  Non-segregated  Facilities,  as
required by the May 9, 1967, order on Elimination of Segregated  Facilities,  by
the Secretary of Labor (32 Fed.  Reg.  7439,  May 19,  1967),  must be submitted
prior to the award of a subcontract exceeding $10,000,  which is not exempt from
the  provisions  of the  Equal  Opportunity  Clause.  The  certification  may be
submitted either for each  subcontract or for all  subcontracts  during a period
(i.e., quarterly, semi-annually or annually). (1968 MAR.) (Note: The penalty for
making false statements in offers is prescribed in 18 U.S.C. 1001.)

Whenever used in the foregoing  Section,  the term  "contractor"  refers to each
party to this agreement.

                                       32

<PAGE>

                                   Exhibit "E"

                             GAS BALANCING AGREEMENT

           Attached to and made a part of that certain Joint Operating
              Agreement dated effective May 25, 2004 by and between
                  GRYPHON EXPLORATION COMPANY, as Operator, and
                  RIDGEWOOD ENERGY CORPORATION, as Non-Operator

I.   Definitions

     A.   "Agreement" shall mean this Gas Balancing Agreement.

     B.   "Balanced"  is that  condition  which  occurs when a party  hereto has
          taken the same  percentage of the cumulative  volume of Gas production
          it is  entitled  to  take  pursuant  to the  terms  of  the  Operating
          Agreement.

     C.   "Gas" includes natural gas produced from a Well that produces Gas Well
          Gas, including all constituent parts of such natural gas except liquid
          hydrocarbons and condensate recovered by primary separation equipment.

     D.   "Gas Well Gas" is gas produced from a Well classified as a gas well by
          the regulatory body having jurisdiction.

     E.   "Overproduced"  is the  status of a party when the  percentage  of the
          cumulative  volume of Gas taken by that  party  exceeds  that  party's
          percentage  interest of the volume of cumulative Gas production of all
          parties to the Operating  Agreement under and pursuant to the terms of
          the Operating Agreement.

     F.   "Underproduced"  is the  status  of a party  when  the  percentage  of
          cumulative volume of Gas taken by that party is less than that party's
          percentage  interest of the volume of cumulative Gas production of all
          parties to the Operating  Agreement under and pursuant to the terms of
          said Operating Agreement.

     G.   "Well" is defined as each well subject to the Operating Agreement that
          produces  Gas Well Gas. If a single Well is  completed  in two or more
          reservoirs, such Well shall be considered a separate Well with respect
          to,  but only with  respect  to,  each  reservoir  from  which the Gas
          produced is not commingled in the well bore.

II.  Application of this Agreement

     The  parties  to the  Operating  Agreement  own the  working  or  operating
     interests in the Gas  underlying the Contract Area covered by the Operating
     Agreement and are entitled to share in the  percentages  therein  stated in
     the Operating Agreement.

     In  accordance  with the terms of the  Operating  Agreement,  each party is
     responsible  for marketing  it's share and shall take its full share of Gas
     produced from the Contract Area and market or otherwise dispose of same. In
     the event a party  hereto  elects in writing  not to take in kind or market
     its full share of Gas or has  contracted  to sell its share of Gas produced
     from  the  Contract  Area to a  purchaser  which,  at any time  while  this
     Agreement is in effect,  fails to take the share of Gas attributable to the
     interest of such party,  the terms of this  Agreement  shall  automatically
     become effective.

     The Operator is responsible  for  administering  the provisions of this Gas
     Balancing Agreement and as such shall have the sole option of administering
     all  reporting  of the same for the Parties or  retaining  the  services of
     third party  professionals  for this  specific  purpose.  The costs of such
     third party  services by Operator  shall be  considered  as included in the
     overhead rates.  The Operator shall cause  deliveries to be made to the Gas
     purchasers  at such rates as may be  required  to give effect to the extent
     practicable, to be or become Balanced.

     The  provisions of this  agreement  shall be applied to the Contract  Area,
     regardless of the number of wells.

III. Storing and Making Up Gas Production

     A.   Right to Take and Market Gas

          During any periods or periods when any party hereto does not take, has
          no market  for,  or the market of a party is not  sufficient  to take,
          that party's  full share of the Gas produced  from any Well located on
          the Contract Area, or such party's  purchaser  otherwise fails to take
          such party's  share of Gas produced  from any such Well located on the
          Contract Area,  resulting in such party becoming  Underproduced  (such
          party being herein referred to as an "Underproduced Party"), the other
          party or parties shall be entitled,  but not required, to produce from
          said  Well  on the  Contract  Area  (and  take  or  deliver  to  their
          respective purchaser(s)),  each month all or a part of that portion of
          the allowable Gas  production  assigned to such Well by the regulatory
          body having jurisdiction.  Any party so taking or delivering Gas which
          results in such party becoming  Overproduced  is herein referred to as
          an "Overproduced Party".

                                       33

<PAGE>

          Those parties which are capable of taking and/or marketing  quantities
          of Gas  allocable  to an  Underproduced  Party,  in the absence of any
          other  agreement  between  them,  shall  each  take a share of the Gas
          attributed  to the  Underproduced  Party  or  Parties  in  the  direct
          proportion that their respective  interests bear to the total interest
          of all parties taking Gas which are also considered Overproduced.

          All  parties  hereto  shall  share in and own the liquid  hydrocarbons
          recovered from such Gas by primary separation  equipment in accordance
          with  their  respective  interests  and  subject  to the  terms of the
          above-described  Operating Agreement,  whether or not such parties are
          actually taking and/or marketing Gas at such time.

     B.   Making Up Underproduction

          Any Underproduced Party shall endeavor to bring its taking of Gas into
          a Balanced  condition.  Upon thirty (30) days prior written  notice to
          the Operator,  any Underproduced  Party may thereafter begin taking or
          delivering  to its purchaser its full share of the Gas produced from a
          Well (less any used in operations,  vented or lost).  To allow for the
          recovery  of Gas in  storage  and to  balance  the Gas  account of the
          parties in accordance with their respective  interests,  Underproduced
          Party shall be  entitled  to take or deliver to a  purchaser  its full
          share of Gas  produced  from such Well  (less any used in  operations,
          vented or lost) plus, (i) for the months of March,  April,  May, June,
          July,  August,  September and October only of any calendar year during
          which this  agreement  may be in place,  an amount up to an additional
          fifty percent (50%) of the monthly quantity of Gas attributable to the
          Overproduced  Party or  Parties,  or (ii) for the months of  November,
          December,  January and  February  only of any  calendar  year or years
          during  which  this  agreement  may be in  place,  an  amount up to an
          additional  twenty-five  percent (25%) of the monthly  quantity of Gas
          attributable to the  Overproduced  Party or Parties.  If more than one
          Underproduced  Party is entitled to take  additional  Gas,  they shall
          divide  the   additional   Gas  in  proportion  to  their   respective
          Underproduced  accounts.  The first Gas made up shall be assumed to be
          the first Gas Underproduced.

     C.   Gas Balance Reporting

          Each party  taking  will  promptly  provide to the  Operator  any data
          required by the Operator for  preparation of the  statements  required
          hereunder. Operator shall not be required to adjust its Gas accounting
          statements reflecting a different Gas purchaser until the first day of
          the month  following the month in which such notice is received by the
          Operator.  The Operator  will  maintain  appropriate  accounting  on a
          monthly and  cumulative  basis of the  quantities of Gas each party is
          entitled to take and/or market and the  quantities of Gas taken and/or
          marketed by each of the parties to their  respective  Gas  purchasers.
          Within  ninety  (90)  days  after the end of each  producing  calendar
          month,  the Operator shall furnish each party a statement  showing the
          status of the Overproduced and Underproduced accounts of all parties.

          To determine respective volumes of Gas taken by separate gas pipelines
          connected  to the  Well,  measurement  of Gas for  overproduction  and
          underproduction shall be accomplished by use of sales meters and lease
          measurement   equipment,   which  shall  be  in  accordance  with  AGA
          requirements.

          Each  party to this  Agreement  agrees  that it will not  utilize  any
          information obtained hereunder for any purpose other than implementing
          or administering the terms of this Agreement.

     D.   Royalty and Production Tax

          At all times  while Gas is produced  from the  Contract  Area,  unless
          otherwise  required by any State or Federal law or  regulations,  each
          party shall pay or cause to be paid all royalty due and payable on the
          actual volumes of gas taken for its account. Each party agrees to hold
          each other party harmless from any and all claims for royalty payments
          asserted by its royalty owners. The term "royalty owner" shall include
          owners of  royalty,  overriding  royalties,  production  payments  and
          similar interests payable out of production.

          Each party  producing or taking or delivering Gas to its Gas purchaser
          shall pay, or cause to be paid, all production and severance taxes due
          on all volumes of Gas actually taken or sold by such party.

IV.  Cash Settlement

     A.   Volume/Value

          If, at the  permanent  termination  of  production  of Gas from a Well
          located on the Contract Area, an imbalance exists between the parties,
          a cash  settlement  of the imbalance  between the parties  relative to
          such Well  shall be made.  The amount of the cash  settlement  will be
          limited to the proceeds actually received by the Overproduced Party or
          Parties  at  the  time  of  overproduction,  less  transportation  and
          applicable treating charges and production and severance taxes paid on
          such overproduction. Royalty shall only be deducted from such proceeds
          attributable to the  overproduction if actually paid to royalty owners
          by the  Overproduced  Party or Parties.  No interest shall be added to
          any cash settlement hereunder.  If there is more than one Overproduced
          Party, the cash settlement shall be based on a weighted average of the
          proceeds  actually  received as above  described  by all  Overproduced
          Parties.

                                       34

<PAGE>

     B.   Collection and Distribution

          Operator shall provide to all parties hereto within sixty (60) days of
          permanent  determination  of Gas production a final  accounting of the
          Gas balance.  Overproduced Parties, within thirty (30) days of receipt
          of the final accounting of the Gas balance, shall pay their respective
          shares of the above  described  cash  settlement to the  Underproduced
          Parties in that proportion that each such Underproduced Party's volume
          of gas in  storage  bears to the total of all  Underproduced  Parties'
          volumes of gas in storage.

V.   Miscellaneous

     A.   Term

          This  Agreement  shall  remain  in  force  and  effect  as long as the
          Operating  Agreement  to which it is  attached  remains  in force  and
          effect,  and  thereafter  until the Gas balance  accounts  between the
          parties are settled in full,  and shall inure to the benefit of and be
          binding  upon the  parties  hereto,  their  heirs,  successors,  legal
          representatives and assigns.

     B.   Expenses

          Nothing herein shall change or affect each party's  obligations to pay
          its  proportionate  share of all costs  and  liabilities  incurred  in
          operations  on the Contract  Area as its share thereof is set forth in
          the Operating Agreement to which this Agreement is attached.

     C.   Well Tests

          Nothing  herein shall be  construed to deny any party the right,  from
          time to time,  to produce and take or deliver to its Gas  purchaser up
          to one  hundred  percent  (100%) of the entire Well stream to meet the
          deliverability test required by its Gas purchaser,  provided that such
          tests are reasonable in light of overall industry standards.

     D.   Monitoring of Takes of Production

          Each party shall,  at all times,  use its best efforts to regulate its
          takes and  deliveries  from each Well on said Contract Area so that no
          Well will be shut-in for overproducing the allowable  assigned thereto
          by the regulatory body having jurisdiction.  Additionally,  each party
          shall communicate, as necessary, the contents of this agreement to its
          respective Gas  purchaser(s) or  transporter(s)  and shall monitor its
          deliveries to its respective Gas purchaser(s) or  transporter(s) so as
          to ensure to the greatest extent practicable that its Gas purchaser(s)
          or  transporter(s)  does  not  take Gas in  excess  of the  quantities
          provided for herein.

     E.   Liquefiable Hydrocarbons Not Covered Under Agreement

          The  parties  shall  share  proportionately  in  and  own  all  liquid
          hydrocarbons  recovered with the gas by lease  equipment in accordance
          with their respective interests.

                                       35

<PAGE>

                             Gryphon Exploration Co.
                             1200 Smith, Suite 1740
                              Houston, Texas 77002
                                 (713) 756-2400

<TABLE>
<S>                                             <C>                                  <C>
                                                                                                      -----------------------
                                                                                                         INITIALS - DATE
                                                                                                         ---------------
                                                                                                      LAND DEPT.  [Illegible]
                                                                                                                  -----------
                                                                                                      FIN. DEPT.  [Illegible]
                                                                                                                  -----------
                                                                                                      LEGAL DEPT.
                                                                                                                  -----------
                                                                                                      EXPL. DEPT. [Illegible]
                                                                                                                  -----------
                EXHIBIT "C"                                                                           ENGR. DEPT. [Illegible]
Attached to and made a part of that certain                                                                       -----------
 Participation Agreement dated May 25, 2004
    by and between Gryphon Exploration                                                                EXEC. DEPT. [Illegible]
 Company and Ridgewood Energy Corporation                                                                         -----------
                                                                                                      -----------------------

-----------------------------------------------------------------------------------------------------------------------------
Operator: Gryphon Exploration Co.               AFE No.: D04003                      Property Number: WC10300001
-----------------------------------------------------------------------------------------------------------------------------
Lease: OCS-G 22511                              Well No.: 1                          Blk/Prospect: West Cameron Block 103
-----------------------------------------------------------------------------------------------------------------------------
PTD: 17,500' TVD/MD                             Field: Wildcat                       Formation Objective: Marg A
-----------------------------------------------------------------------------------------------------------------------------
State: Louisiana                                CO / PH: Federal Offshore            Contractor: TODCO 203
-----------------------------------------------------------------------------------------------------------------------------
Location: PSL: 4,500' FNL & 566' FEL of WC Blk 103 (X= 1,449,918 & Y= 330,258) [Illegible]
-----------------------------------------------------------------------------------------------------------------------------
Remarks:
-----------------------------------------------------------------------------------------------------------------------------

This request for AFE will serve to document the turnkey  costs  required by ADTI to drill a straight hole to 17,500' TVD/ MD.
It is anticipated a 7-5/8" drilling liner will be run before reaching turnkey depth. Completion costs will be presented under
a seperate AFE after final evaluation.

-----------------------------------------------------------------------------------------------------------------------------
                                                   Intangible Drilling Cost
-----------------------------------------------------------------------------------------------------------------------------
Acct   Line                                                                           Drilling    Pre-Completion   Total Well
Code   Item                                                     Rate   Days   Days      Cost           Cost           Cost
-----------------------------------------------------------------------------------------------------------------------------
215     101   Location Permit & Surveys                                              $   10,000                    $   10,000
-----------------------------------------------------------------------------------------------------------------------------
215     103   Cuttings Disposal, Boat Cleaning                                                                     $        0
-----------------------------------------------------------------------------------------------------------------------------
215     201   Rig Move (Demobilization only)                                         $  150,000                    $  150,000
-----------------------------------------------------------------------------------------------------------------------------
215     301   Drilling Rig (Daywork, Labor, Meals, etc)                  0                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
215     304   Primary Turnkey to 17,500' TVD/MD                                      $6,934,000                    $6,934,000
-----------------------------------------------------------------------------------------------------------------------------
215     304   Run 7-5/8" drilling liner before reaching PTD                          $  985,000                    $  985,000
-----------------------------------------------------------------------------------------------------------------------------
215     401   Fuel, Lubes and Water                                      0                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
215     404   Cementing (Materials, Equip & Personnel)                                                             $        0
-----------------------------------------------------------------------------------------------------------------------------
        404   P&A Cement (Materials, Equip & Personnel)                              $  303,000                    $  303,000
-----------------------------------------------------------------------------------------------------------------------------
215     405   Open Hole Cement Plugs                                                                               $        0
-----------------------------------------------------------------------------------------------------------------------------
215     406   Bits, Stabilizers, Reamers                                                                           $        0
-----------------------------------------------------------------------------------------------------------------------------
215     407   Misc. Materials & Supplies                                                                           $        0
-----------------------------------------------------------------------------------------------------------------------------
215     501   Marine Transportation (Crew & Supply Boats)                0                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
215     502   Air Transportation                                                                                   $        0
-----------------------------------------------------------------------------------------------------------------------------
215     503   Land Transportation                                        0                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
215     504   Diving Services                                                                                      $        0
-----------------------------------------------------------------------------------------------------------------------------
215     507   Optional Open Hole Logging Services                                                                  $        0
-----------------------------------------------------------------------------------------------------------------------------
        507   LWD Formation Evaluation                                                                             $        0
-----------------------------------------------------------------------------------------------------------------------------
215     508   Mud Logging Services                                       0                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
215     509   Correction Runs @ $152,000                                             $  152,000                    $  152,000
-----------------------------------------------------------------------------------------------------------------------------
215     510   Fishing Tools & Pipe Recovery                                                                        $        0
-----------------------------------------------------------------------------------------------------------------------------
        510   Coil Tbg & Nitrogen Services                                                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
        510   Pipe Cutting for P&A                                                                                 $        0
-----------------------------------------------------------------------------------------------------------------------------
215     511   Rental Equipment                                           0                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
215     512   Surface Well Test Equipment & Personnel                                                              $        0
-----------------------------------------------------------------------------------------------------------------------------
        512   Sub-Surface Well Test Equipment & Personnel                                                          $        0
-----------------------------------------------------------------------------------------------------------------------------
215     513   Pipe Inspection (Casing, Drill Pipe, BHA's)                                                          $        0
-----------------------------------------------------------------------------------------------------------------------------
215     514   Casing Tools & Hammer Services                                                                       $        0
-----------------------------------------------------------------------------------------------------------------------------
215     515   Contract Labor                                                                                       $        0
-----------------------------------------------------------------------------------------------------------------------------
215     516   Shorebase & Dock Facilities                                0                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
215     517   Communications                                                         $   23,000                    $   23,000
-----------------------------------------------------------------------------------------------------------------------------
215     518   Well Control Insurance @ $20.40 /ft @ 50%                              $  179,000                    $  179,000
-----------------------------------------------------------------------------------------------------------------------------
215     602   Engineering / On Site Logging                                                                        $        0
-----------------------------------------------------------------------------------------------------------------------------
215     603   Well Site Supervision Services                    $900    75           $   67,500                    $   67,500
-----------------------------------------------------------------------------------------------------------------------------
        603   Dispatching Services                                       0                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
215     701   Overhead (COPAS)                                                       $   75,000                    $   75,000
-----------------------------------------------------------------------------------------------------------------------------
215                                                                                                                $        0
-----------------------------------------------------------------------------------------------------------------------------
215     999   Contingency (10.0% of IDC's)                                           $  888,000                    $  888,000
-----------------------------------------------------------------------------------------------------------------------------
       Subtotal - Intangible Drilling Cost                                           $9,766,500         $0         $9,766,500
-----------------------------------------------------------------------------------------------------------------------------
                                                    Tangible Drilling Cost
-----------------------------------------------------------------------------------------------------------------------------
                                                                          Csg Cost
                                                                Footage    ($/ft)
-----------------------------------------------------------------------------------------------------------------------------
225     801   Drive Pipe: 30" x 1"                                  340     $0.00                                  $        0
-----------------------------------------------------------------------------------------------------------------------------
225     802   Conductor Casing: 18-5/8"                             800     $0.00                                  $        0
-----------------------------------------------------------------------------------------------------------------------------
225     803   Surface Casing: 13-3/8"                             4,500     $0.00                                  $        0
-----------------------------------------------------------------------------------------------------------------------------
225     804   Intermediate Casing: 9-5/8"                        13,800     $0.00                                  $        0
-----------------------------------------------------------------------------------------------------------------------------
225     805   Drilling Liner: 7-5/8"                             16,000     $0.00                                  $        0
-----------------------------------------------------------------------------------------------------------------------------
225     805   Drilling Liner:                                                                                      $        0
-----------------------------------------------------------------------------------------------------------------------------
225     808   Liner Hanger & Liner Top Packers                                                                     $        0
-----------------------------------------------------------------------------------------------------------------------------
225     901   Casing Head, Hanger & Valves                                                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
        901   Casing Spool(s), Hanger(s) & Valves(s)                                                               $        0
-----------------------------------------------------------------------------------------------------------------------------
225     902   Mudline Suspension Equipment                                                                         $        0
-----------------------------------------------------------------------------------------------------------------------------
225     904   Access Equip (Nav-Aids, Boat Landing, etc)                                                           $        0
-----------------------------------------------------------------------------------------------------------------------------
225           P/F Conductor Guide for 30"                                                                          $        0
-----------------------------------------------------------------------------------------------------------------------------
225     999   Contingency (15% of TDC's)                                                                           $        0
-----------------------------------------------------------------------------------------------------------------------------
       Subtotal - Tangible Drilling Cost                                             $        0         $0         $        0
-----------------------------------------------------------------------------------------------------------------------------
       Total Dry Hole Cost (Tangible & Intangible)                                   $9,766,500         $0         $9,766,500
-----------------------------------------------------------------------------------------------------------------------------
                                                   Working Interest                       Working Interest Owner Share
                                              -------------------------------------------------------------------------------
Working Interest Owner                        Dry Hole (BCP)   Completion (ACP)     Dry Hole      Completion   Total Producer
-----------------------------------------------------------------------------------------------------------------------------
Gryphon Exploration                              20.00000%        40.00000%       $1,953,300.00      $0.00      $1,953,300.00
-----------------------------------------------------------------------------------------------------------------------------
Ridgewood Energy Corporation                     80.00000%        60.00000%       $7,813,200.00      $0.00      $7,813,200.00
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                                $        0.00
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                                $        0.00
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                                $        0.00
-----------------------------------------------------------------------------------------------------------------------------
Prepared                             Jack D. Shelledy                                 Joint Interest Approval

   By /s/ Jack D. Shelledy            Date: 6/7/2004   Company:
      ---------------------------
-----------------------------------------------------------------------------------------------------------------------------
Approved                                               Approved

   By /s/ [Illegible]                 Date: 6/7/2004      By
      ---------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

Note: It is recognized  that the amounts  herein are estimated only and approval
      of  the  authorization  shall  extend  to the  actual  costs  incurred  in
      conducting the operations specified, whether more or less than that herein
      set out.

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00083-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00083-of-00352.parquet"}]]