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                                                                   EXHIBIT 10.23

                        FARMOUT AND EXPLORATION AGREEMENT

                KNIGHTS LANDING STARKEY SAND DEVELOPMENT PROGRAM

         THIS FARMOUT AND EXPLORATION AGREEMENT ("Agreement") is made and
entered into as of the Effective Date (February 17, 2004) by and between THE
NAHABEDIAN EXPLORATION GROUP, LLC ("NEG") and IVANHOE ENERGY (USA) INC. dba USA
IVANHOE ENERGY, INC., in California ("Ivanhoe"), sometimes referred to
individually as a "Party" or collectively as the "Parties."

                              W I T N E S S E T H:

         WHEREAS, NEG, claims, without warranty of title of any kind, to be the
owner of NEG Leases as set forth on Exhibit "A", attached hereto and
incorporated herein by this reference; and holds certain other lands under
Lease, as identified in Exhibits "B-1", "B-2" and "B-3"within the AMI formed
hereby, which said Exhibit "B-3" lands are specifically excluded from this
Agreement,

         WHEREAS, NEG has previously drilled and completed a number of gas
wells, producing and shut-in, on the NEG Lands, as further described herein, and

         WHEREAS, NEG and Ivanhoe desire to construct a gas gathering system,
together with surface treatment facilities to connect NEG's existing shut-in
wells to the regional Calpine gas sales line, and, in addition, Ivanhoe desires
to acquire an interest in said shut-in wells and the gas gathering system, and;

         WHEREAS, Ivanhoe desires to earn an interest in the NEG Leases, subject
to the conditions hereof and the requirements and obligations to be performed by
Ivanhoe as hereinafter contained; and,

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         WHEREAS, the Parties desire to further explore and develop the NEG
Leases and the associated AMI Lands to the base of the Starkey Sand
stratigraphic level (as further described herein) which collectively comprise
the Knights Landing Starkey Sand Development Project, for the production of oil
and/or gas and other hydrocarbon substances, and:

         WHEREAS, Ivanhoe may desire to earn additional rights or interests in
the NEG Leases, below the Starkey Sand stratigraphic level; and,

         WHEREAS, the Parties will enter into a JOA, designating NEG as
Operator.

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, it is understood and agreed by and
between the Parties, as follows:

                                    ARTICLE 1

                                   DEFINITIONS

1.1      Actual Drilling Operations - shall be deemed to have been commenced
when a derrick, a rig, and machinery capable of drilling to a depth sufficient
to test a prospective oil and/or gas horizon have been erected, and when such
well has been spudded in and the rotary bit is rotating under power.

1.2      Affiliate - shall mean any company or other entity which (i) controls,
(ii) is controlled by or (iii) is under common control with one of the Parties.
For the purpose of this definition, control shall mean the ownership, directly
or indirectly, of Fifty Percent (50%) or more of the stock or other units of
ownership having the right to vote for the election of directors of such company
or other entity.

1.3      Area of Mutual Interest or AMI - shall have the meaning given in
Article III, 3.1

1.4      Casing Point- that point in time after which time Contract Depth has
been reached in a Test Well, logs have been run, and NEG as Operator shall make
a recommendation whether to complete said well as a producer, or abandon same as
a dry hole: at such

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time, Ivanhoe shall make an election whether or not to join in the completion
attempt of the said Test Well.

1.5      Contract Area - shall refer to the lands comprising the NEG Leases and
is shown outlined in red on the plat attached hereto and made a part hereof as
Exhibit "B-1."

1.6      Contract Depth - shall mean in the Mandatory Test Wells and the
Optional Test Wells, Three Thousand Five Hundred Feet (3,500') or a depth
sufficient to adequately test the Starkey Equivalent Sands (defined as that
interval found in the Hamar Associates "Giusti" 1 well in Section 25, T12N, R2E
MDB&M, between the drilled depths of 2200 to 3400 feet; the Base of the Starkey
Sands herein defined at 3400 feet. Contract Depth for the Deeper Exploration
Well will be total depth of 9500 feet or the Top of Basement, whichever is the
shallower.

1.7      Deeper Exploration Well - shall mean the exploration well that may be
drilled pursuant to Article IX of this Agreement.

1.8      Drillsite Spacing Unit- shall mean a 40 acre area in the shape of a
rectangle or square having as its center point the wellbore penetration at the
uppermost Starkey Sand in the subsurface, and extending vertically from the
surface of the ground to the base of the Starkey Sands.

1.9      NEG Overriding Royalty (ORR) - The NEG Leases and additional Leases
within the AMI shall be burdened with an overriding royalty to NEG or its
designees, proportionately reduced to the mineral interest leased. The NEG ORR
shall be borne in proportion to the working interest owned by the Parties. The
NEG ORR shall be as set forth on Exhibit A attached hereto, and shall apply to
all new Leases, extensions and renewals of the Leases in the Contract Area and
the AMI.

1.10     Effective Date - shall mean the effective date of this Agreement, being
the date of its signature by the Parties, viz., 1:00 p.m., Pacific Standard
Time, February 17, 2004.

1.11     Mandatory Test Well - shall mean any one of the ten mandatory Test
Wells to be drilled pursuant to Article VI of this Agreement.

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1.12     NEG Leases - shall mean those Leases listed on Exhibit "A" attached
hereto and made a part hereof and includes only those geographic portions
thereof located within the confines of the Contract Area.

1.13     Optional Test Well - shall mean one of the optional test wells drilled
pursuant to Article VII of this Agreement.

1.14     Payout - As to all Test Wells drilled hereunder, Payout shall be
computed on a well-by-well basis, and shall be that point in time when the value
(as hereinafter defined) of the oil, gas, and other hydrocarbons produced,
saved, and marketed from a well received by the Parties equals the cost of (a)
drilling, testing, completing, fracing, plugging back, reworking, and equipping
the well into the tanks or a purchaser's gas sales line; (b) the cost of
operating the Test Well up to the date of Payout; (c) severance, production,
and/or mineral ad valorem taxes measured by production from the well; (d)
royalty to the landowner/Lessor(s) under the Lease(s); (e) NEG ORR, and all
other costs chargeable to the drilling and operation of a well under the JOA,
including the Accounting Procedure attached thereto. The costs of a Substitute
Well, if drilled, shall be included with those costs of the Test Well in
determining Payout.

         Value shall be determined by the net proceeds (exclusive of taxes based
upon income) realized by the Parties from the sale of such production, or the
fair market value thereof at the wellhead if not sold but taken by either Party
for its own use and not used in operations within the Contract Area. Costs shall
be in accordance with the form of Accounting Procedure attached to the JOA
attached hereto as Exhibit "C".

         With respect to the gas pipeline which will be constructed to the
Project Gas Wells, Payout shall mean that point in time at which Ivanhoe has
recovered from gas and oil sales from the Project Gas Wells, Ivanhoe's actual
cost share (exclusive of any item of Ivanhoe's general and administrative costs)
of the construction of the gas gathering system, plus the purchase price for its
interests in the Project Gas Wells paid from the collective production stream
from all of the Project Gas Wells, net of operating costs, workover costs, ad
valorem taxes and other chargeable expenses under the JOA.

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1.15     Project Gas Wells - shall mean the four (4) gas wells within the
Contract Area, to wit: Hamar Associates "Mary's Lake" 5-19 (Section 19, 11N/3E),
"Armour Road" 1-7 (Section 7, 11N/3E), "MacKert" 1-1 (Section 1, 11N/2E) and
"MacKert" 1-31Section 31, 12N/3E).

1.16     Joint Operating Agreement or JOA - shall mean the Joint Operating
Agreement referred to in Article VIII, a form of which is attached hereto and
made a part hereof as Exhibit " C".

1.17     Jointly Acquired Lease(s) - shall mean Leases acquired by the Parties
pursuant to the AMI provisions of this Agreement.

1.18     Lease - shall mean and include any oil, gas, and mineral lease, mineral
interest, or any other instrument granting the right to explore for, drill, and
take oil, gas, and other minerals.

1.19     Paying Quantities - shall mean production of hydrocarbon substances in
quantities sufficient to yield a reasonable return in excess of producing and
operating a well over and above all payable royalties, overriding royalties, and
payments out of production (other than those created by a party which are not
specifically described in this agreement).

1.20     Test Well - shall mean any one of the Initial Test Well, Mandatory Test
Wells, Optional Test Wells or Deeper Exploration Well. A Substitute Well for any
of the foregoing shall be deemed to be part of the well for which it is a
substitute.

                                   ARTICLE II

                                    EXHIBITS

2.1      Exhibits - The following exhibits, attached hereto, are incorporated
herein and made a part hereof for all purposes, to-wit:

        Exhibit "A"     NEG Leases
        Exhibit "B-1"   Map showing the Contract Area
        Exhibit "B-2"   Map showing the AMI

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        Exhibit "B-3"   Map and list showing NEG Leases excluded from Agreement.
        Exhibit "C"     JOA Form
        Exhibit "D"     Geological Requirements
        Exhibit "E"     Well Program and AFE
        Exhibit "F"     List of Mandatory Test Wells

                                   ARTICLE III

                             AREA OF MUTUAL INTEREST

3.1      Area of Mutual Interest (AMI) - NEG and Ivanhoe by execution hereof
establish an Area of Mutual Interest covering the Contract Area and additional
lands located within the area outlined in red on the plat attached hereto and
made a part hereof as Exhibit "B-2". The AMI specifically excludes NEG's
currently producing wells, their drillsites and pooled producing units, as set
forth on Exhibit "B-3" hereto, except as otherwise provided herein. The AMI
shall continue in effect as long as the Parties jointly own Leases within the
AMI and shall continue in effect under the JOA until the JOA terminates. The
participation interest of each Party in the AMI shall be NEG, Fifty Percent
(50%) and Ivanhoe Fifty Percent (50%).

3.2      Acquisition/Option - Should any Party acquire, directly or indirectly,
a Lease covering any lands located, fully or partially, within the AMI, and
outside the Contract Area, such Party (the "Acquiring Party") shall immediately
give written notice thereof to the other Party (the "Non-Acquiring Party"),
together with all pertinent details and information, including copies of all
instruments of conveyance (including but not limited to, copies of Leases,
assignments, subleases, farmouts, and other contracts affecting the Lease
acquired), copies of paid drafts or checks and itemized invoices of the actual
costs incurred by the Acquiring Party, including any bonus, administrative fees,
brokerage, legal and recording costs, and any other direct costs (said actual
costs are referred to as "Acquisition Costs"). The Non-Acquiring Party shall
have Thirty (30) Days, or Forty-Eight (48) Hours if a rig capable of performing
an operation is on location, from receipt of such notice to elect in writing to
acquire its proportionate interest in the Lease by paying its proportionate
share of the Acquisition Costs and assuming its proportionate share of the Lease
obligations. Failure to respond by the deadlines stated herein shall be deemed
an election not to participate in the acquisition as described in

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said notice. Failure to pay said proportionate share of Acquisition Costs within
Thirty (30) Days following an election to participate shall result in a
forfeiture of the Non-Acquiring Party's interest with the same effect as if said
Party had initially elected not to participate. If less than all Parties elect
to participate in said acquisition, the lands and/or depths covered by any such
Lease acquired shall be excluded from the AMI and the Lease acquired shall not
be subject to this Agreement. Ivanhoe agrees it shall not acquire any interests
within the Contract Area, except by assignment from NEG under this Agreement,
until after it has satisfied and fulfilled the earning requirements hereunder.

3.3      Payment/Assignment - If the Non Acquiring Party elects to participate
in such Lease acquisition it shall pay to the Acquiring Party its proportionate
share of the Acquisition Costs for such interest, within Thirty (30) Days after
receipt of an invoice for said costs. Upon receipt of said payment, the
Acquiring Party shall execute and deliver to the Non-Acquiring Party an
assignment of the interest due the Non-Acquiring Party, pursuant to which the
Non-Acquiring Party shall bear and assume its proportionate share of all
obligations, covenants, conditions, requirements, and terms associated with the
acquisition. The preceding sentence is solely for the benefit of the Parties to
this Agreement and does not benefit any third party and shall not apply to any
obligations, covenants, conditions, requirements or terms which were known to
the Acquiring Party and not disclosed to the Non-Acquiring Party.

3.4      Encumbrances - Any assignment made pursuant to this Article III shall
be free and clear of any encumbrances placed on the assigned Lease in favor of
or by the Acquiring Party, except for the NEG ORR, but otherwise shall be made
without warranty of title, either express or implied, except by, through, and
under the Acquiring Party. The assignment shall be made and accepted subject to,
and assignee shall expressly assume its proportionate share of all of the
obligations of the assignor pertaining to the assigned Lease, including the NEG
ORR.

3.5      Merger - The provisions of this Article III shall not be applicable to
acquisitions of leases resulting from mergers, consolidations or reorganizations
involving all or substantially all of the properties or assets of the Party.

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3.6      NEG Leases - NEG has acquired certain oil and gas Leases within the AMI
and these are identified on Exhibit "A." The lands covered by the NEG Leases
together comprise the Contract Area.

3.7      Prospect Fee- Ivanhoe shall pay to NEG the sum of One Hundred
Twenty-Five Thousand Dollars ($125,000) as a Prospect Generation Fee, which
shall be inclusive of all land costs incurred with respect to the Contract Area
to January 1, 2004. The entire Prospect Generation Fee shall be paid to NEG upon
execution hereof.

3.8      Performance Requirement- Notwithstanding any other provision herein,
neither Party may propose the drilling of a well on the AMI Lands outside of the
Contract Area until such time as Ivanhoe has completed the Mandatory Well
Drilling Program as described in Article VI hereof.

                                   ARTICLE IV

                    CONSTRUCTION OF THE GAS GATHERING SYSTEM

4.1      Existing Shut-in Gas Wells- NEG has previously drilled, completed and
tested the Project Gas Wells that are currently shut-in without hook-up to a gas
sales outlet. NEG has obtained permits and rights-of ways for the construction
of a gas sales line system, together with surface treatment facilities and
meters, to connect said wells to the Calpine gas gathering system. The Estimated
Cost of the new gas line and facilities is Six Hundred Thousand Dollars
($600,000). Ivanhoe hereby agrees to fund the construction of said system, up to
a maximum cost of Six Hundred Thousand ($600,000). Any costs in excess of Six
Hundred Thousand Dollars ($600,000) shall be borne by Ivanhoe as to 50% and NEG
as to 50%. Upon execution hereof, Ivanhoe shall pay to NEG the sum of Three
Hundred Thousand Dollars ($300,000) as a first installment towards its cost
share of the system. NEG shall provide copies of its bids for such construction
and copies of the contracts signed for the performance of such work. NEG shall
then promptly begin purchase of materials and contract the construction thereof.
From time to time, NEG shall Invoice Ivanhoe for the remaining funds necessary
to complete construction and testing of the system, and Ivanhoe shall, within
Ten (10) Business Days from receipt of said invoices, pay said sums to NEG.
Ivanhoe's costs shall be limited to actual costs incurred by NEG; NEG shall
receive no cost compensation for its services related to the

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construction thereof, and NEG shall provide Ivanhoe with suitable accounting,
including copies of third party invoices, to verify said costs.

4.2      Recoupment of Costs- Upon completion of the gas gathering system and
commencement of gas sales from the Project Gas Wells, Ivanhoe shall be entitled
to receive from gas sales revenues an amount equal to Sixty-Five Percent (65%)
of the net working interest revenue (defined as that revenue remaining after
deduction of landowner's and overriding royalties totaling Twenty-Five Percent
(25%), operating costs, workover and redrill costs, and provision for severance,
production and/or ad valorem taxes) from each of said wells, until Ivanhoe shall
have received reimbursement of its full costs incurred in Article 4.1 above,
plus One Million Dollars ($1,000,000) as recoupment of Ivanhoe's purchase price
for a working interest in the Project Gas Wells as set forth in Article 5.1
below, but in no case shall Ivanhoe's recoupment prior to Payout be greater than
One Million Six Hundred Thousand Dollars ($1,600,000). Ivanhoe shall bear
Sixty-Five Percent (65%) of operating costs, recompletion,and workover costs
prior to Payout. Upon Payout, Ivanhoe shall be assigned a Fifty Percent (50%)
working interest in and to each of the Project Gas Wells that are, at that time,
still capable of production, together with their Drillsite Spacing Units,
limited in depth to the base of the Starkey Sands, as herein defined. Ivanhoe
shall additionally be assigned at that time a Fifty Percent (50%) ownership
interest in and to the new gas pipeline system and facilities which are
connected to the Project Gas Wells. Ivanhoe's interests shall be subject to the
terms and conditions of the JOA, attached hereto as Exhibit"C".

                                    ARTICLE V

                 PURCHASE OF INTEREST IN FOUR SHUT-IN GAS WELLS

5.1      Ivanhoe shall, upon execution hereof, pay to NEG, in addition to other
payments required hereunder, the sum of One Million Dollars ($1,000,000) to
purchase a Fifty Percent (50%) working interest in and to each of the four
Project Gas Wells described in Section 4.1 above, together with their respective
Drillsite Spacing Units. Said interest shall bear its proportionate share of
landowners and overriding royalties totaling Twenty-Five Percent (25%),
including the NEG ORR Said interest shall be subject to the terms and conditions
of the JOA, attached hereto as Exhibit "C". Notwithstanding the foregoing, prior
to Payout, Ivanhoe shall be entitled to receive Sixty-Five Percent (65%) of

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the net working interest proceeds from oil and gas sales from the Project Gas
Wells, as set forth in Section 4.2 above.

                                   ARTICLE VI

                    MANDATORY TEN TEST WELL DRILLING PROGRAM

6.1      Initial Test Well - On or before May 1, 2004, and subject to rig
availability and weather conditions, the securing of all requisite permits and
any necessary consents of third Parties, NEG, as Operator, shall commence or
cause to be commenced, Actual Drilling Operations (as herein defined), of a well
("Initial Test Well") at a legal location, such location shall be mutually
agreed upon by the Parties hereto. The Initial Test Well shall be drilled to the
Contract Depth. Such Initial Test Well shall be drilled at the Parties' joint
cost, risk, and expense as set forth herein with due diligence and in a good,
continuous, and workmanlike manner. At such time as the Initial Test Well shall
have reached Contract Depth and all logs, surveys, and other tests have been run
and made, the Parties shall complete the well as a producer of hydrocarbons or
plug and abandon same as a dry hole. The initial cost sharing of the Parties
shall be as follows:

         To Casing Point (or through abandonment, including site restoration,)
if dry:

                            Ivanhoe         One Hundred Percent (100%)

         After Casing Point:

                            Ivanhoe         One Hundred  Percent (100%)

Prior to commencement of Actual Drilling Operations on the Initial Test Well,
Ivanhoe shall pay to NEG One Hundred Percent (100%) of the estimated costs of
drilling the Initial Test Well to Casing Point, as set forth on the Well Program
and AFE, attached hereto and made a part hereof, as Exhibit "E".

At Casing Point on the Initial Test Well, NEG shall advise Ivanhoe of its
decision to complete the well as a potential producer, either in the Starkey
Sands as defined, or in a shallower stratigraphic interval, or abandon same as a
dry hole. NEG shall prepare and submit to Ivanhoe for such purpose a completion
program and AFE for the proposed

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operations. Ivanhoe shall, within forty-eight (48) hours, advise NEG in writing
of its intent to join in or not to join in the completion of said well. If, at
Casing Point, Ivanhoe does not elect to join in a completion attempt proposed by
NEG, or fails to timely respond to NEG's completion recommendation, then Ivanhoe
shall have no interest or rights in the Initial Test Well, and its Drillsite
Spacing Unit, and NEG may then elect to complete the well at its sole cost and
risk. In the event NEG elects to complete the well, the Drillsite Spacing Unit
and all production therefrom shall be owned solely by NEG and Ivanhoe shall have
no further interest or rights thereto, and NEG shall be responsible for future
plugging and abandonment of such well. If Ivanhoe shall make a positive
completion election at Casing Point, it shall promptly pay to NEG One Hundred
Percent (100%) of the estimated completion AFE costs. Ivanhoe shall further bear
One Hundred Percent (100%) of the cost of tying said well into a gas sales line,
including surface facilities.

6.2      Additional Mandatory Test Wells- Immediately after the Initial Test
Well is drilled and completed or abandoned as a dry hole, as the case may be,
NEG shall commence or cause to be commenced the drilling, in seriatim, of nine
(9) additional Mandatory Test Wells, to test the Starkey Sands at locations
mutually agreeable to NEG and Ivanhoe, in the Contract Area. Cost sharing for
the nine Mandatory Test Wells shall be the same as the Initial Test Well,
including gas sales lines and facilities. The nine (9) Mandatory Test Wells
shall be drilled in seriatim, using one (1) string of tools, and Ivanhoe shall
make a separate completion election at Casing Point for each of said wells. The
rights and obligations of each Party with respect to the completion elections
and their interests and cost sharing shall be the same for each of the Mandatory
Test Wells as for the Initial Test Well. NEG shall invoice Ivanhoe for its full
cost share to Casing Point of each of the Mandatory Test Wells at such time as
required under the operative drilling contract and, furthermore, as each
Mandatory Test Well reaches Casing Point NEG shall invoice Ivanhoe by AFE for
its share of completions costs. Ivanhoe shall promptly pay in full each of said
invoices to NEG. Upon reaching Casing Point on each Mandatory Test Well, Ivanhoe
shall make a completion election and payment as in the Initial Test Well, based
on AFE's prepared by NEG and the rights and obligations of each of Ivanhoe and
NEG with respect thereto, shall be the same as for the Initial Test Well as set
forth above. It is understood by both Parties that promptly after completion of
each AFE, NEG will provide Ivanhoe with an accounting of costs incurred for each
Mandatory Test Well as required

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by Exhibit "C" of the JOA and that NEG will either invoice Ivanhoe for costs
incurred in excess of the approved AFE amount or refund to Ivanhoe those amounts
advanced by Ivanhoe and not spent on the AFE.

6.3      Substitute Test Well - If, because of encountering impenetrable
substances or because of other conditions making further drilling impracticable
NEG discontinues drilling any Mandatory Test Well before the Contract Depth
requirement therefor is satisfied, NEG and Ivanhoe shall mutually agree to drill
a Substitute Well, at any legal location selected by NEG and Ivanhoe within the
Contract Area, provided the actual drilling of said Substitute Well is commenced
no later than Thirty (30) Days after the abandonment of the Mandatory Test Well
(or such later date, not to exceed Ninety (90) Days, as NEG, acting with
reasonable diligence and prudence is able to secure a rig and all necessary
permits and consents). In such case, Ivanhoe shall have the right to participate
in the drilling of the Substitute Well, and each said additional Substitute
Well, paying the same share of costs and bearing the same risk as in the
Mandatory Test Well; provided, however, Ivanhoe shall not be obligated to
participate in drilling more than one Substitute Well with respect to any
Mandatory Test Well. Such Substitute Well shall be drilled in a manner and to
the Contract Depth specified for the Mandatory Test Well. If a Substitute Well
is commenced and drilled, as herein provided, and Ivanhoe shall have
participated in each said Mandatory Test Well and Substitute Well, then Ivanhoe
shall have complied with this Agreement with respect to that well, to the same
extent as if the Mandatory Test Well had been commenced and drilled in
accordance herewith. Each reference herein to a Test Well shall include any
Substitute Well therefor. If the first Substitute Well is discontinued because
of encountering impenetrable substance or because of other conditions making
further drilling impracticable, NEG and Ivanhoe shall mutually agree to drill a
second and subsequent Substitute Well and Ivanhoe shall have the right to
participate therein under the same terms and conditions as provided herein. Each
reference herein to a Mandatory Test Well shall include any Substitute Well
therefor.

6.4      Completion of the Mandatory Test Well Program- Upon completion or
abandonment of the tenth (10th) Mandatory Test Well, provided Ivanhoe shall have
made all positive elections and payments theretofore required hereunder, Ivanhoe
shall be deemed to have earned its interests, as further set forth in Article
VIII, in and to each

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Mandatory Test Well drilled and completed as a producer of oil and/or gas in
paying quantities, together with its Drillsite Spacing Unit; and shall have
earned the right to make an election to participate in the Optional Test Well
Program Should Ivanhoe fail, for any reason, to complete its obligations with
respect to the Mandatory Test Well Program, it shall not earn any interest in
any of the Mandatory Test Wells theretofore drilled, their Drillsite Spacing
Units, or the Contract Area and the NEG leaseholds, except that Ivanhoe shall
retain its interests in the gas pipeline and four Project Gas Wells and their
spacing units as described in Articles 4.1 and 5.1 hereof. In such case, Ivanhoe
shall have no further rights to drill within the Contract Area, to participate
in the Optional Test Well Program, or to participate in a Deeper Exploration
Well. Ivanhoe shall, however, retain its full interests and rights with respect
to its other interests within the AMI, outside of the Contract Area.

                                   ARTICLE VII

                         TEN OPTIONAL TEST WELL PROGRAM

7.1      Optional Test Wells- When the Mandatory Ten Test Well Program has been
completed and Ivanhoe has completed all of its obligations relative thereto (but
in no event later than Thirty (30) Days subsequent to the cementing of casing or
abandonment of the last well drilled thereunder), Ivanhoe shall make an election
in writing whether or not to participate in the Optional Test Well Program. In
the event Ivanhoe shall make a positive election, it shall be bound to
participate in the drilling of each of the ten Optional Test Wells to Casing
Point, and to pay its proportional cost shares thereof as shown below, based on
AFEs prepared and submitted by NEG for each well, and NEG, as Operator, shall
commence or cause to be commenced the drilling in seriatim of said Optional Test
Wells, using one (1) string of tools, at mutually agreeable locations in the
Contract Area, to depths sufficient to test the Starkey sands (Contract Depth)
as previously defined herein. NEG shall invoice Ivanhoe for Ivanhoe's full cost
share of the Optional Test Wells and Ivanhoe shall pay its full cost share, in
the same manner as for the Mandatory Test Wells. The cost and risk sharing of
the Optional Test Wells to the Parties shall be as follows:

  To Casing Point

                 NEG         Thirty-Three and One- third Percent (33-1/3%)
               Ivanhoe       Sixty-Six and Two-Thirds Percent (66-2/3%)

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After Casing Point:

                 NEG         Thirty-Three and one Third Percent (33-13%)
               Ivanhoe       Sixty-Six and Two Thirds Percent  (66-2/3%)

Upon reaching Casing Point on each of said Optional Test Wells, NEG as Operator
shall advise Ivanhoe of its recommendation to plug and abandon or complete same
as a potential producer. Each Party shall, within forty-eight (48) hours, make
its separate completion election in writing. In the event one Party elects to
complete and the other party does not, then the Completing Party shall assume
the full cost and risk of the completion attempt including abandonment of the
well and site clean-up and/or installation of a gas sales line and surface
facilities appurtenant thereto. In such case, the Completing Party shall own the
well and its Drillsite Spacing Unit, gas sales line, and the production
therefrom, and the non-participating Party shall have no further ownership,
rights or interests therein or thereto. NEG shall prepare an AFE and invoice for
any proposed completion, and, if Ivanhoe shall make a positive completion
election, it shall promptly pay to NEG its full cost share of the invoiced
completion costs. Cost sharing of gas pipelines and facilities for each of the
Optional Test Wells, which are completed by both Parties, shall be shared NEG as
to Thirty-Three and One-Third Percent (33-1/3%) and Ivanhoe Sixty-Six and
Two-Thirds Percent (66-2/3%). It is understood by both Parties that promptly
after completion of each AFE, NEG will provide Ivanhoe with an accounting of
costs incurred for each Optional Test Well as required by Exhibit "C" of the JOA
and that NEG will either invoice Ivanhoe for costs incurred in excess of the
approved AFE amount or refund to Ivanhoe those amounts advanced by Ivanhoe and
not spent on the AFE.

If Ivanhoe does not join in the drilling of any Optional Test Well for any
reason, or fails to timely pay its proportionate cost share thereof if it joins
in the completion of the well, Ivanhoe shall have no rights or interest in and
to the Contract Area, the NEG Lands or other Leases within the Contract Area, or
any wells or Drillsite Spacing Units, other than the interests (i) previously
earned by Ivanhoe in each of the Mandatory Test Wells, as set forth in Article
VII hereof and (ii) the Project Gas Wells set forth in Article IV hereof.

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                                  ARTICLE VIII

                               EARNING CONDITIONS

8.1      Interests earned For Each of the Mandatory Test Wells - If, (a) after
NEG, as Operator, has drilled a Mandatory Test Well to Contract Depth, and (b)
Ivanhoe has paid its full share of well costs of said well to Casing Point, and
(c) if Ivanhoe shall at Casing Point have made an election to complete same as a
potential producer, and (d) Ivanhoe has subsequently paid its full share of
costs incurred in the completion and testing of the Mandatory Test Well, and (e)
if NEG, as Operator, completes the well as a well capable of producing
hydrocarbons in paying quantities (at Contract Depth or a lesser depth), then
Ivanhoe shall earn an assignment of its interests hereunder from NEG. Ivanhoe's
assignment shall be a Sixty Percent (60%) Working Interest in the Mandatory Test
Well and Leases attributable to its Drillsite Spacing Unit. Upon Payout of each
of the ten (10) Mandatory Test Wells, Ivanhoe's interest in each Mandatory Test
Well and its Drillsite Spacing Unit and the gas sales line and facilities shall
be reduced to Fifty Percent (50%). In the event a Mandatory Test Well is
abandoned as a dry hole, Ivanhoe shall have earned no interest in that Mandatory
Test Well or its Drillsite Spacing Unit. In the event Ivanhoe shall earn an
interest in the Contract Area, NEG shall retain all rights of drill through and
pass through and shall retain full and unrestricted ownership of mineral rights
not earned by and assigned to Ivanhoe, and shall retain surface and subsurface
usage rights to drill for and produce oil and gas from the Contract Area and
adjacent lands. When all ten Mandatory Test Wells have been drilled and
completed, or abandoned as the case may be, NEG shall prepare and deliver to
Ivanhoe an assignment of its interests previously earned.

8.2      Interests earned in Optional Test Wells - If Ivanhoe has made a
positive election to participate in the Optional Test Well Program and made all
necessary subsequent positive elections, including completion elections, and
paid all amounts due to NEG for each of the additional Optional Test Wells and
their associated gas sales lines and facilities, Ivanhoe shall be assigned, on a
well by well basis, a Sixty Six and Two-Thirds Percent (66-2/3%) working
interest in each Optional Test Well and the Leases attributable to its Drillsite
Spacing Unit. Upon Payout of each of the Optional Test Wells, Ivanhoe's interest
in said wells, their Drillsite Spacing Unit and the gas sales line and
appurtenant facilities shall be reduced to Fifty Percent (50%).

                                    Page 15
<PAGE>

8.3      Earning for Entire Contract Area- When the last of the Mandatory Test
Wells, and the last of the Optional Test Wells have been drilled and completed
as a producer or abandoned as a dry hole, and provided Ivanhoe has complied with
all requirements hereunder, including timely payment of all sums due hereunder,
Ivanhoe shall be deemed to have earned a Fifty Percent (50%) working interest in
and to the remainder of the Leases within the Contract Area, limited in depth to
the base of the Starkey Sands, (as well as those wells and Drillsite Spacing
Units previously earned) and NEG shall promptly convey to Ivanhoe its assignment
of interests thereto. Should Ivanhoe fail to complete any of its obligations
with respect to the Mandatory Test Wells and all Optional Test Wells, then it
shall not earn interests in the entire Contract area, but its interests shall be
limited in such case to the Test Wells previously drilled and completed, and
their respective Drillsite Spacing Units.

8.4      Subsequent Operations on the AMI Lands- Neither Party may propose the
drilling of a Test Well on the AMI Lands outside of the Contract Area until all
ten Mandatory Test Wells have been drilled and completed or abandoned. In the
event that Ivanhoe shall make a positive election to drill the Optional Test
Wells, no Party shall propose a Test Well on the AMI Lands outside of the
Contract Area until such time as the last of the Optional Test Wells has been
drilled.

8.5      Proportionate Reduction - If any of the Leases subject to or
contributed to this Agreement are less than the full Lessee's interest therein,
then the NEG ORR, and the Working Interests shall be reduced proportionately to
the actual interests owned. In the event any of the Leases cover less than the
entire mineral estate, the NEG ORR, and the Working Interest assigned shall be
reduced proportionately to the actual interest leased under the Leases.

                                   ARTICLE IX

                          DEEPER POOL TEST AND EARNING

9.1      Deeper Exploration Well- When Ivanhoe has completed its obligations
hereunder for completing or abandoning the ten Mandatory Test Wells, and
completed all of its requirements and obligations relative thereto, including
payment of all sums due

                                    Page 16
<PAGE>

hereunder, within Thirty (30) Days, Ivanhoe shall make an election, in writing,
whether or not to participate in the drilling of a Deeper Exploration Well,
which shall be drilled at a legal location in the Southwest Quarter of Section
25, T12N/R2E, M.D.B.&M, to a total depth of 9500 feet or the Top of Basement,
whichever is the shallower. In the event of Ivanhoe's positive election, NEG, as
Operator, will promptly drill or cause to be drilled the subject well, and
Ivanhoe shall in such case bear One Hundred Percent(100%) of the costs and risk
of drilling the well to Casing Point (including the setting of intermediate
casing as necessary). At Casing Point, Ivanhoe shall make an election upon
receiving forty-eight (48) hours notice, whether to complete or abandon same,
pursuant to a recommendation which will be made by NEG. In the event it elects
to complete, Ivanhoe shall bear One Hundred Per Cent (100%) of the cost of
completing, testing and equipping the Deeper Exploration Well, including the gas
sales line and surface facilities appurtenant thereto. In the event the Deeper
Exploration Well is drilled and completed as a producer and Ivanhoe has elected
to complete same and paid all amounts due hereunder, then Ivanhoe shall be
deemed to have earned, and NEG shall promptly assign to Ivanhoe, a Sixty-Six and
Two-Thirds Percent (66-2/3%) interest in and to the well, the Drillsite Spacing
Unit Leases (which in such case shall be a regular 160 acre quarter section,
having the well as its center point, extending vertically from the surface of
the ground to 100 feet below the surface of the Basement Complex) and a 50%
interest in the balance of the Contract Area, limited in depth to those horizons
lying between the base of the Starkey Sands and One Hundred Feet (100') below
the Top of the Basement Complex. Upon Payout of the Deeper Exploration Well, as
hereinabove defined, NEG and Ivanhoe will each own a Fifty Percent (50%)
interest in and to the well and its Drillsite Spacing Unit Leases. In the event
Ivanhoe shall either (a) elect not to drill the Deeper Exploration Well, or (b)
elect to drill said well, but having drilled said well but subsequently fails to
join in a proposed completion attempt, if so recommended by NEG; then in such
case, Ivanhoe shall have no interest or rights with respect to the Contract
Area, except as to those shallow rights previously earned hereunder.

                                    Page 17
<PAGE>

                                    ARTICLE X

                             ASSIGNMENT OF INTERESTS

10.1     Delivery of Assignment - Unless otherwise provided herein, any
assignment due either Party, shall be delivered in a form suitable for recording
within Fifteen (15) Days of the occurrence of any earning event.

                                   ARTICLE XII

                                  DELAY RENTALS

11.1     Rentals due under Contract Area- Notwithstanding any other provision
herein, Ivanhoe shall bear, and reimburse NEG, as rentals become due, Fifty
Percent (50%) of all NEG Lease rentals accruing from the January 1, 2004, which
share shall not exceed Fifteen Thousand Dollars ($15,000) per month. NEG shall
furnish Ivanhoe with a monthly invoice, with copies of rental checks paid to
lessors. Ivanhoe shall also bear Fifty Percent (50%) of all costs of renewals
and rentals throughout the term of this Agreement, until such time as it has
earned its full interests hereunder.

11.2     Payment of Delay Rentals - Subject to the terms and provisions of this
Agreement, the Party who contributed a Lease (e.g., NEG, in the case of the NEG
Leases, and the Acquiring Party, in the case of the Lease acquired pursuant to
the AMI) (hereinafter the "Administering Party") shall be responsible for and
shall make a diligent effort to pay each delay rental or other Lease maintenance
payment for such Lease as to the portion thereof within the AMI. The
Administering Party shall not be liable to the other Party for any loss
resulting from an inadvertent failure to timely make said payments. After such
time as Ivanhoe has earned the right to receive an assignable interest
hereunder, which is subject to the terms of this Agreement and the terms of the
JOA, in the case of a conflict between the JOA and this Article, the terms of
the JOA shall prevail.

                                    Page 18
<PAGE>

11.3     Other Party Elections - The other Party shall have Fourteen (14) Days
after receipt of an invoice from the Administering Party of a delay rental or
other Lease maintenance payment, or a notice of a delay rental or other Lease
maintenance payment coming due within which to notify the Administering Party,
in writing, of its election to pay its share of such payment. If it elects to
pay its share, the other Party shall pay the Administering Party its share of
such payment within Thirty (30) Days after the Administering Party's receipt of
such election. In the event the other Party elects not to pay its share and the
Administering Party makes the payment, the other Party shall, upon the written
request of the Administering Party, assign to the Administering Party such
portions of the other Party's interest in the Lease as would be maintained by
such payment.

11.4     Administering Party's Election not to Pay - Should the Administering
Party elect not to pay its share of any delay rental or other Lease maintenance
payment, such Party shall notify the other Party at least Thirty (30) Days prior
to the date on which such payment is due. The other Party shall have Fourteen
(14) Days after receipt of said notice within which to notify the Administering
Party of its election to pay the full amount of such payment. In the event the
other Party elects to make the full payment, unless otherwise agreed, the
Administering Party shall make the payment on behalf of the other Party, and the
other Party shall reimburse the Administering Party and the Administering Party
shall assign to the other Party such portion of the Administering Party's
interest in the Lease as would be maintained by such payment. Failure to make an
election shall be an election to agree to not pay.

                                   ARTICLE XII

                            JOINT OPERATING AGREEMENT

12.1     Operations - Except as otherwise provided herein, or in the JOA, the
costs, risk, and expenses shall be based on each Party's Working Interest. All
operations hereunder shall be governed in accordance with the terms and
conditions of the JOA attached hereto as Exhibit "C" and made a part hereof. The
Parties shall execute the JOA simultaneously with the execution hereof. NEG
shall be designated Operator under the

                                    Page 19
<PAGE>

JOA. In the event of a conflict between the terms and conditions of this
Agreement and the JOA, the terms and conditions of this Agreement shall prevail.

                                  ARTICLE XIII

                         INFORMATION, TESTS, AND NOTICES

13.1     Furnishing of Data - Ivanhoe's authorized representatives shall, at all
times, and at its sole risk, have full and free access to the rig floor. NEG
shall obtain and furnish to Ivanhoe all information on the each Test Well,
consistent with common industry practice. NEG, with the consent of Ivanhoe,
shall, at its discretion, test any oil and/or gas shows encountered which they
jointly judge warrant testing. NEG shall keep an accurate and detailed log of
each well drilled hereunder, and shall comply with all the requirements set out
in Exhibit "E", entitled "Geological Requirements", attached hereto. In
addition, Ivanhoe shall have access to NEG's seismic data in NEG's office
covering the AMI.

                                   ARTICLE XIV

                        CONDUCT OF OPERATIONS/ABANDONMENT

14.1     Diligent Operations and Abandonment - For any Test Well, NEG shall
conduct all operations hereunder at the Parties' joint cost, risk, and expense
in the proportions provided herein. All such operations shall be prosecuted with
due diligence, in a good and workmanlike manner, and without unreasonable
delays. When the Test Well reaches the Contract Depth and has been tested as
herein provided, NEG, as Operator, shall either complete the same as a producer,
or plug and abandon the same, in accordance with all applicable laws and
regulations and the provisions of this Agreement; provided however, that if NEG
desires to abandon any well as a dry hole, NEG shall so notify Ivanhoe and
Ivanhoe shall then have forty-eight (48) hours to elect to take over such well
and attempt to complete it at Ivanhoe's sole cost, risk, and expense. Should
Ivanhoe take over the well, NEG shall relinquish all rights thereto, including
the materials and equipment used in connection therewith, free and clear of all
liens and encumbrances not existing as of the date of this Agreement. Ivanhoe
shall pay to NEG the fair market value of such material and of the salvageable
in-hole equipment, less the estimated cost of salvage (only in the event NEG has
paid for any part of the well), and Ivanhoe shall

                                    Page 20
<PAGE>

become responsible for the rig time costs. Upon any such takeover, all rights
and ownership of NEG pertaining to the well and its Drillsite Spacing Unit
(limited to those depths lying above the deepest producing interval open in the
well) shall automatically terminate and Ivanhoe shall be solely responsible for
the completion and abandonment of the well and shall indemnify and hold NEG
harmless from any cost or loss relating thereto. The conditions described
hereinabove shall also apply to NEG if it desires to take over a well that
Ivanhoe desires to abandon.

                                   ARTICLE XV

                                 TITLE WARRANTY

15.1     Titles and Curative Work - NEG does not warrant title of any kind,
express or implied, with respect to the NEG Leases and NEG shall not be
obligated to perform any curative work, or to furnish any materials with respect
thereto, other than copies of such title opinions and other relevant documents
as Ivanhoe may have in its possession. Nevertheless, during the term of this
Agreement or the JOA, any curative work by NEG or Ivanhoe shall inure to the
benefit of the other Party who shall be promptly furnished with copies of all
opinions and curative instruments pertaining to the Leases. NEG shall make
available to Ivanhoe, upon request, all of NEG's records and Lease files
pertaining to the Leases. To the extent that title to one or more of the Leases
included in the Drillsite Spacing Unit for well, is such that a reasonable and
prudent Operator would require curative action to be taken, NEG may undertake
such curative action, in which case, the time in which NEG has to commence the
drilling of a well shall be extended by the period of time necessary for NEG to
complete such curative work.

                                   ARTICLE XVI

                              RELATIONSHIP/TAXATION

16.1     Relationship of the Parties - This Agreement does not create, and shall
not be construed to create, a partnership, association, joint venture or
fiduciary relationship of any kind or character between the Parties, and shall
not be construed to impose any duty, obligation or liability arising from such a
relationship by or with respect to any Party. Notwithstanding any provisions
herein that the rights and liabilities hereunder are several and not joint or

                                    Page 21
<PAGE>

collective or that the Agreement and the operations hereunder shall not
constitute a partnership, each Party elects to be excluded from the application
of all or any part of the provisions of Subchapter "K", Chapter 1, Subtitle "A",
Internal Revenue Code of 1986, as amended, or similar provisions of applicable
state laws.

                                  ARTICLE XVII

                                  FORCE MAJEURE

17.1     Force Majeure - If either Party is rendered unable, wholly or in part,
by Force Majeure, to carry out its obligations under this Agreement, other than
the obligations to pay money, that Party shall give the other Party 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 the continuance of the
Force Majeure, and such additional time thereafter as the affected Party
reasonably requires under the circumstances to carry out its obligations. The
affected Party shall use all reasonable diligence to remove the Force Majeure
situation and resume the performance of its obligations as quickly as
practicable. The requirement that any Force Majeure shall be remedied with all
reasonable dispatch shall not require the settlement of strikes, lockouts, or
other labor difficulty by the Parties involved, contrary to its wishes; how all
such difficulties shall be handled shall be entirely within the discretion of
the Party concerned.

         The term "Force Majeure" 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 delay, restraint or
inaction, unavailability of equipment, terrorist acts, 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.

                                    Page 22
<PAGE>

                                  ARTICLE XVIII

                                   ASSIGNMENTS

18.1     Right to Assign Agreement - Neither NEG nor Ivanhoe shall have the
         right to assign part or all of its rights, interests, and obligations
         under this Agreement without the written consent of the other Party.
         The terms, covenants, and conditions of this Agreement shall be binding
         upon, and shall inure to the benefit of the Parties hereto and their
         respective heirs, successors, and permitted assigns; and said terms,
         covenants, and conditions shall be covenants running with the lands
         covered hereby and the leasehold estates therein, and with each
         transfer or assignment of said lands or leasehold estates. NEG or
         Ivanhoe shall assign no rights hereunder without the prior written
         consent of the other Party, promptly notifying the other Party of the
         assignment, the name and address of such assignee and the contact
         person of such assignee, which consent shall not be unreasonably
         delayed or withheld. NEG or Ivanhoe may delegate any of its duties, or
         assign any of its interests under this Agreement to one or more of its
         Affiliates, including the right to delegate to an Affiliate the
         Operatorship under this Agreement and the JOA. Ivanhoe will provide NEG
         with a recordable acquittance of any rights of Ivanhoe hereunder, which
         have lapsed or terminated, within 5 days after NEG's therefor.

                                   ARTICLE XIX

                                    INSURANCE

19.1     Insurance Requirements - Before commencing any operations within the
         Contract Area, pursuant to this Agreement, NEG shall procure and shall
         thereafter maintain in force during the term of this Agreement, at the
         Operator's expense, the insurance hereinafter described, covering all
         of the operations to be performed hereunder by NEG:

                                    Page 23
<PAGE>

         (a)      Workers' Compensation and Occupational Disease Insurance,
         satisfying the legal requirements of the State of California and
         Employers Liability Insurance with a minimum of at least One Million
         Dollars ($1,000,000) per occurrence.

         No other insurance shall be carried by Operator for the benefit of the
         Joint Account; however, the Operator and each Non-Operator shall
         provide and maintain in force the following minimum limits of
         insurance, at its sole expense and for its own benefit, covering
         operations on lands subject to this Agreement.

         (b)      Commercial General Liability Insurance, including sudden and
         accidental pollution liability and personal injury blanket contractual
         liability and property damage, with coverage of at least One Million
         Dollars ($1,000,000) combined single limit or the equivalent;
         Comprehensive Automobile Liability Insurance, including personal injury
         and property damage, with coverage of at least One Million Dollars
         ($1,000,000) combined single limit or equivalent; and Products
         Liability and Completed Operations coverage of at least One Million
         Dollars ($1,000,000) combined single limit or the equivalent.

         (c)      Umbrella Liability Insurance, with at least Ten Million
         Dollars ($10,000.000) combined and single limit per occurrence.

         (d)      Control of well seepage and pollution, and well
         Restoration/Redrill Insurance with a combined single limit of at least
         Three Million Dollars ($3,000,000) per occurrence for each of the
         Mandatory Test Well and Optional Test Wells and $Five Million Dollars
         ($5,000,000) for the Deeper Exploration Well.

         (e)      Each and every Policy required in (b), (c) and (d) above shall
         name the other Party as an additional insured with a waiver of
         subrogation to the extent permitted by the issuer.

                  Before commencing any work hereunder, each Party shall furnish
         to the other Party Certificates of Insurance evidencing the issuance of
         the policies of insurance providing the types of coverage and limits of
         liability prescribed above,

                                    Page 24
<PAGE>

         and certifying that the other Party shall be given not less than Thirty
         (30) Days written notice prior to any material change, substitution or
         cancellation prior to the normal expiration dates. Both Parties agree
         to mutually waive subrogation in favor of each other on all insurances
         carried by each Party and/or obtain such waiver from the insurance
         carrier if so required by the insurance contract. If such waiver is not
         obtained, the Party failing to do so shall indemnify the other Party
         for any claim by an insurance carrier arising out of subrogation.
         (O.K.)

                  NEG shall require all contractors and subcontractors working
         or performing services hereunder to comply with the Worker's
         Compensation and Employer's Liability laws, both State and Federal, and
         to carry Commercial General Liability and such other insurance in
         accordance with industry standards.

                                    ARTCLE XX

                                     DEFAULT

20.1     Failure to Comply - If Ivanhoe or NEG, as the case may be, fails to
comply with any of the provisions of this Agreement, the other Party at its
option, may terminate this Agreement by giving the defaulting Party Fifteen (15)
Days written notice specifying in detail the cause for termination, in which
case the defaulting Party may within Ten (10) Days of its actual receipt of such
notice commence to cure the cause or causes specified in the notice. If the
defaulting Party , acting with reasonable prudence and dispatch cures the cause
or causes, this Agreement shall not terminate. If the defaulting Party does not
commence and actually cure such cause, this Agreement shall terminate; provided
that in so doing, the non-defaulting Party shall not waive or otherwise be
precluded from exercising any other rights or remedies, at law or in equity,
which it may have for breach of this Agreement, or failure to perform this
Agreement in whole or in part.

                                   ARTICLE XXI

                                     NOTICES

21.1     Notices - All notices between the Parties authorized or required by any
of the provisions of this Agreement, unless otherwise specifically provided,
shall be given in writing and delivered in person, by mail, e-mail, courier
service or telegram, postage or

                                    Page 25
<PAGE>

charges prepaid or by telex or telecopier and addressed to the Party to whom the
notice is given as follows.

         NEG:                       THE NAHABEDIAN EXPLORATION GROUP, LLC

         Street Address:            214 West Aliso Street
                                    Ojai, CA 93023

         Attention:                 Mark Nahabedian

         Telephone:                 805-646-4276

         Facsimile:                 805-646-3476

         IVANHOE:                   IVANHOE ENERGY (USA) INC.

         Street Address:            1200 Discovery Drive, Suite 301
                                    Bakersfield, CA 93309

         Mailing Address:           P.O. Box 9279
                                    Bakersfield, CA 93389-9279

         Attention:                 Michael Stark
                                    Exploration Department

         Telephone:                 661-869-8312

         Facsimile:                 661-325-2961

         E-mail:                    mstark@ivanhoeenergy.com

         The originating notice given under any provision hereof shall be deemed
given only when received by the Party to whom such notice is directed, and the
time for such Party to give any notice in response thereto shall run from the
date the originating notice is received. The second or any responsive notice
shall be deemed given when deposited in the mail or with the courier service,
with postage or charges prepaid, or upon transmission by facsimile or
telecopier. Each Party shall have the right to change its address at any time,
and from time to time by giving written notice thereof to the other Party.

                                    Page 26
<PAGE>

                                  ARTICLE XXII

                   ADDITIONAL TERMS, PROVISIONS, AND COVENANTS

22.1     Time and Specific Performance of Essence - Time and specific
performance are of the essence of this Agreement. Where this Agreement provides
that certain periods of time are to commence upon the completion or abandonment
of a well, such completion or abandonment shall be deemed to occur when the rig
then on such well is released therefrom.

22.2     Laws and Regulations; Applicable Law - NEG shall comply with and
conduct its operations hereunder in accordance with all applicable laws,
ordinances, rules, and regulations. This Agreement shall be construed and
interpreted under and in accordance with the laws of the State of California.

22.3     Headings - The underlined headings used throughout this Agreement are
for administrative convenience only and shall be disregarded for purposes of
construing this Agreement.

22.4     Waiver - Any of the terms, provisions, covenants, representations or
conditions hereof may be waived only by a written instrument executed by the
Party waiving compliance. The failure of any Party at any time or times to
require performance of any provisions hereof shall in no manner affect the right
to enforce the same. No waiver by any Party of any condition or of the breach of
any term, provision, covenant, representation or warranty contained in this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be or construed as a further or continuing waiver of any such
condition or breach, or a waiver of any other condition or of the breach of any
other term, provision, covenant, representation or warranty.

22.5     Press Releases - No Party shall distribute any information or
photographs concerning operations hereunder to the press or other media without
the approval of the other Party. In the event of a requirement by a regulatory
agency [including the Securities Exchange Commission of the U.S. or regulatory
authorities of Canada, or any stock exchange on which the securities of a Party
or its Affiliate (to the extent the Affiliate either owns a majority interest in
a Party, or a Party owns a majority interest in

                                    Page 27
<PAGE>

the Affiliate) are listed, or of an emergency involving extensive property
damage, operations failure, loss of human life or other clear emergency, the
Parties are deemed authorized to furnish such minimum, strictly factual
information as is necessary to satisfy requirements of appropriate regulatory
authorities, or the legitimate public interest on the part of the press, other
media, and duly constituted authorities if time does not permit the obtaining of
prior approval by the other Party, but the Party furnishing such information
shall promptly advise the other Party of the information so furnished.

22.6     Amendments - This Agreement may be amended, modified, changed, altered
or supplemented only by written instrument duly executed by the Parties
specifically for such purpose and which specifically refers to this Agreement.

22.7     Conflicts - In the event of a conflict between provisions of this
Agreement and those contained in any of the agreements attached hereto, the
provisions of this Agreement shall prevail.

22.8     Arbitration - Any disputes, claims or controversies connected with,
arising out of or related to this Agreement and the rights and obligations
created herein, or the breach, validity, existence or termination hereof, which
cannot be resolved amicably, shall be settled by binding Arbitration to be
conducted in accordance with the Commercial Rules of Arbitration of the American
Arbitration Association, except as such Commercial Rules may be changed by the
Section 9.14. The disputes, claims or controversies shall be decided by three
(3) independent arbitrators (that is, arbitrators having no substantial economic
or other material relationship with the Parties), one (1) to be appointed by
each of the Parties hereto within Fourteen (14) Days following the date that one
Party notifies the other Party in writing that it is electing to commence
arbitration proceedings, and the third to be appointed by the two (2) so
appointed within Five (5) Days following the appointment of such two (2)
arbitrators. Should either Party refuse or neglect to join in the timely
appointment of the arbitrators, the other Party shall be entitled to select both
arbitrators. The arbitrators shall have Ninety (90) Days after the selection of
the third arbitrator within which to allow discovery, hear evidence, and issue
their decision or award and shall in good faith attempt to comply with such time
limits; provided, however, if two (2) of the three (3) arbitrators believe
additional time is necessary to reach a

                                    Page 28
<PAGE>

decision, they may notify the Parties and extend the time to reach a decision in
thirty (30) Day increments, but in no event to exceed an additional Ninety (90)
Days. The decision or award of the arbitrators shall be in writing and shall
state their detailed reasoning for the award. Discovery of evidence shall be
conducted expeditiously by the Parties, bearing in mind the Parties desire to
limit discovery and to expedite the decision or award of the arbitrators at the
most reasonable cost and expense of the Parties. Judgment upon an award rendered
pursuant to such Arbitration may be entered in any court having jurisdiction or
application may be made to such court for a judicial acceptance of the award,
and an order of enforcement, as the case may be. The place of Arbitration shall
be Bakersfield, California. All questions arising out of this Agreement and
their rights and obligations created herein, or its validity, existence,
interpretation, performance or breach shall be governed by the laws of the State
of California, without regard to conflict of laws principles. The arbitrators
shall not award consequential or punitive damages to either Party. The costs and
expenses of the arbitration proceeding, including the fees of the arbitrators
and all costs and expenses, including legal fees and witness fees, incurred by
the prevailing Party, shall be borne by the losing Party.

22.9     Limitations On Liability - In no event will any Party be liable to the
other Party for any indirect, consequential, exemplary or punitive damages.

22.10    Entire Agreement - When executed by the duly authorized representatives
of NEG and Ivanhoe this Agreement shall constitute the entire agreement between
the Parties regarding the drilling of the test wells, the NEG Leases, and the
Area of Mutual Interest and shall supersede and replace any and all other
writings, understandings or memoranda of understanding entered into or discussed
prior to the execution date hereof.

22.11    Savings Clause - If any part or portion of this Agreement is held to be
invalid, such invalidity of any such part or portion shall not affect any
remaining part or portion hereof.

22.12    Corporate Authority - The Parties represent that, as of the date of the
execution hereof, they are corporations or limited liability companies duly
authorized, validly existing, and in good standing under the laws of the states
of their incorporation and are

                                    Page 29

<PAGE>

qualified and authorized to do business in the State of California and that all
requisite corporate power and authority to execute, deliver, and effectuate this
Agreement have been duly obtained.

22.13    Further Assurances - Each Party shall promptly execute, acknowledge,
and deliver to the other Party such other instruments and take such other action
as may be necessary or convenient in order to effect the transactions
contemplated in this Agreement.

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement to be
effective as of the Effective Date.

                                   IVANHOE ENERGY (USA) INC.

                                   BY: /s/ Michael P. Stark
                                       ----------------------------------------
                                           Michael P. Stark
                                           Vice President, Exploration and Land

                                   THE NAHABEDIAN EXPLORATION
                                   GROUP, LLC

                                   BY: /s/ Mark A. Nahabedian
                                      -----------------------------------------
                                            Mark A. Nahabedian
                                            Managing Member

                                    Page 30
<PAGE>

                                   EXHIBIT "A"

         TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17,
2004 MAD BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP LCC AND IVANHOE ENERGY
(USA) INC. DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                TERM/
              LESSOR               LESSEE LEASE NO. LEASE DATE   YRS   LOR  RECORDING INFO.  COUNTY  EXPIRES
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>    <C>       <C>         <C>    <C>  <C>              <C>     <C>      <C>
    Ray Massoni & Marie Estelle    Hamar    SU-1      5/10/01     3    20%  7/24/01 #13084   Sutter  5/10/04
 Massoni, as Trustees of the Ray
  and Marie Massoni Family Trust
        dated July 24,1990
------------------------------------------------------------------------------------------------------------------------------------
 Heidrick & McGinnis Properties,   Hamar    SU-2      5/10/01     3    20%  7/24/01 #13093   Sutter  5/10/04
    L.P. a California Limited
Partnership, By Edith I. Heidrick
 and Gloria J. McGinnis, Trustees
 of the Gloria J. McGinnis Trust,
       its General Partner
------------------------------------------------------------------------------------------------------------------------------------
 William P. Dougherty & Carol D.   Hamar    SU-3a     4/03/01     5    1/5  7/24/01 #13079   Sutter  4/3/06    the SE4NE4 and the
   Doughterty, Trustees of the                                                                                   NE4SW4 of Sec.
William P. and Carol D. Dougherty                                                                               31-12N-3E will be
  Trust dated November 30. 1993                                                                                burdened with a 25%
                                                                                                               total royalty, the
                                                                                                              balance of the acreage
                                                                                                              will be burdened with
                                                                                                               a 23% total royalty
------------------------------------------------------------------------------------------------------------------------------------
John B, Gorin, Joseph P. Gorin, &  Hamar    SU-3b     3/12/01     5    1/5  7/24/01 #13080   Sutter  3/12/06    the SE4NE4 and the
  Mary Amelia Gorin, Mary Amelia                                                                                  NE4SW4 of Sec.
  Gorin, as Trustee of the Mary                                                                                  31-12N-3E will be
    Amelia Gorin Skip Trust as                                                                                  burdened with a 25%
  established under the Joan D.                                                                                 total royalty, the
   Gorin 1991 Trust, Joseph P.                                                                                balance of the acreage
 Gorin, as Trustee of the Joseph                                                                               will be burdened with
      P. Gorin Skip Trust as                                                                                    a 23% total royalty
  established under the Joan D.
  Gorin 1991 Trust, Mary Amelia
    Gorin, as Trustee of Mary
  Amelia's Skip Trust under the
Will of Henry J. Gorin, deceased,
 Joseph P. Gorin, as Trustee of
 Joseph's Skip Trust under the
    Will of Henry J. Gorin,
    deceased,John B. Gorin, as
Trustee of the John B. Gorin Skip
  Trust as established under the
  Joan D. Gorin 1991 Trust, and
  John B.. Gorin, as Trustee of
   John's Skip Trust under the
 Will of Henry J. Gorin, deceased
------------------------------------------------------------------------------------------------------------------------------------
 Jeffrey S. Norton, as Trustee of  Hamar    SU-4      5/10/01     3    20%  7/24/01 #13094   Sutter  5/10/04
 the Jeffrey S. Norton Revocable
    Trust dated April 8, 1996
------------------------------------------------------------------------------------------------------------------------------------
  David L Richter. & Kimberly M.   Hamar    SU-5      5/16/01     3    1/5  7/24/01 #13085   Sutter  5/16/04
         Richter
------------------------------------------------------------------------------------------------------------------------------------
    Bryan Fairlee and Marjorie     Hamar    SU-6      3/16/01     5    1/6  7/24/01 #13078   Sutter  3/16/06
 Fairlee as Trustees of the Brian
and Marjorie Fairlee Trust, dated
      October 21, 1986
------------------------------------------------------------------------------------------------------------------------------------
  Dougherty Bros., a partnership   Hamar    SU-7      5/10/01     3    1/5  7/24/01 #13086   Sutter  5/10/04
------------------------------------------------------------------------------------------------------------------------------------
Joe's Girls, a California Limited  Hamar    SU-8      5/10/01     3    1/5  7/24/01 #13087   Sutter  5/10/04
      Partnership, Joseph J.
 Schreiner and Cleo N. Schreiner
   as Trustees of the Restated
  Schreiner Family Trust, dated
       April 13,1989
------------------------------------------------------------------------------------------------------------------------------------
 Bernard Furlan and Sandra         Hamar    SU-9      6/11/01     5    1/5  7/24/01 #13099   Sutter  6/11/06
          Furlan
------------------------------------------------------------------------------------------------------------------------------------
    Bryan Fairlee and Marjorie     Hamar    SU-12     4/30/01     5    1/6  7/24/01 #13082   Sutter  4/30/06
 Fairlee as Trustees of the Brian
and Marjorie Fairlee Trust, dated
October 21, 1986 as subsequently
  restated on April 27, 1993
------------------------------------------------------------------------------------------------------------------------------------
Fairlee Family Ranch,a California  Hamar    SU-13     4/05/01     5    1/6  7/24/01 #13083   Sutter  4/5/06      25% total royalty
Limited Partnership                                                                                                   burden
------------------------------------------------------------------------------------------------------------------------------------
 Elizabeth A. Hatcher, Trustee of  Hamar    SU-14      6/5/01     5    1/6  7/24/01 #13096   Sutter  6/5/06
  the Elizabeth A. Hatcher 1989
        Irrevocable Trust
------------------------------------------------------------------------------------------------------------------------------------
 Mary Margaret Simonson,           Hamar    SU-14     12/7/01                1/9/02 #00598
         Trustee
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                   Page 1 of 5
<PAGE>

                                   EXHIBIT "A"

         TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17,
2004 MAD BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP LCC AND IVANHOE ENERGY
(USA) INC. DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                TERM/
              LESSOR               LESSEE LEASE NO. LEASE DATE   YRS   LOR  RECORDING INFO.  COUNTY  EXPIRES
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>    <C>       <C>         <C>    <C>  <C>              <C>     <C>        <C>
 Mark H. Richter, Marie P. Gogin,  Hamar    SU-15     5/16/01     3     1/5  7/24/01 #13102  Sutter  5/16/04     25% total royalty
  Jane Richter Rozof, John L.               SU-16                             thru #13107                             burden
  Richter, David Lee Richter,
Marilee Marsh, Carol Cunningham,
     and Paula Susan Cornia
------------------------------------------------------------------------------------------------------------------------------------
Henry D. Richter Jr. and Amelia    Hamar    SU-17     5/16/01     3     1/5  7/24/01 #13091  Sutter  5/16/04
Richter, Lee W. Richter and Mary
       Ruth Richter
------------------------------------------------------------------------------------------------------------------------------------
      Jane Shelley Bennett         Hamar    SU-18a    9/19/01     5     1/5  10/18/01 #19105 Sutter  9/19/06
------------------------------------------------------------------------------------------------------------------------------------
       Michael J. Shelley          Hamar    SU-18b     9/7/01     5     1/5  10/18/01 #19106 Sutter  9/7/06
------------------------------------------------------------------------------------------------------------------------------------
 Transamerica Minerals             Hamar    SU-19     4/11/01     3    17-23 7/24/01 #13081  Sutter  4/11/04
        Company
------------------------------------------------------------------------------------------------------------------------------------
 Norma A. Giusti, as Trustee of    Hamar    SU-21a    6/12/01     5     1/5  7/24/01 #13100  Sutter  6/12/06
  the Guisti Family Revocable
   Trust, Norma A. Giusti, as
  Trustee of the Guisti Family
  Residual Trust, and Norma A.
Giusti, as Trustee of the Guisti
      Family Marital Trust
------------------------------------------------------------------------------------------------------------------------------------
Richard Giusti and Sandra Giusti   Hamar    SU-21b    10/22/01    5     1/5  12/4/01 #22242  Sutter  10/22/06
------------------------------------------------------------------------------------------------------------------------------------
      Linda Guisti Delbar          Hamar    SU-21c    10/15/01    5     1/5  12/4/01 #22243  Sutter  10/15/06
------------------------------------------------------------------------------------------------------------------------------------
Henry D. Richter Jr. and Amelia    Hamar    SU-22    5/16/01      3     1/5  7/24/01 #13098  Sutter  5-16-04
Richter, Lee W. Richter and Mary
       Ruth Richter
------------------------------------------------------------------------------------------------------------------------------------
Henry D. Richter Jr. and Amelia    Hamar    SU-25    5/16/01      3     20%  7/24/01 #13095  Sutter  5/16/04
Richter, Lee W. Richter and Mary
       Ruth Richter
------------------------------------------------------------------------------------------------------------------------------------
Heidrick & McGinnis Properties,    Hamar    SU-26     6/5/01      3     20%  7/24/01 #13092  Sutter  6/5/04      present 25% total
   L.P. a California Limited                                                                                   royalty burden will
Partnership, By Edith I. Heidrick                                                                                 be reduced to 23%
and Gloria J. McGinnis, Trustees
of the Gloria J. McGinnis Trust,
      its General Partner
------------------------------------------------------------------------------------------------------------------------------------
Bernard Furlan and Sandra Furlan   Hamar    SU-27    7/10/01      5     1/5  8/21/01 #15218  Sutter  7/10/06
------------------------------------------------------------------------------------------------------------------------------------
Richard Giusti and Sandra Giusti   Hamar    SU-29    6/27/01      5     1/5  8/21/01 #15219  Sutter  6/27/06
  Trustees of the Richard and
Sandra Giusti Family Trust dated
      August 3, 1990
------------------------------------------------------------------------------------------------------------------------------------
 Ralph H. White and Mildred L.     Hamar    SU-30    9/24/01      5     1/5  10/18/01 #19085 Sutter  9/24/06
     White 1991 Trust
------------------------------------------------------------------------------------------------------------------------------------
Richard Giusti and Sandra Giusti   Hamar    SU-31    6/27/01      5     1/5  8/21/01 #15220  Sutter  6/27/06
  Trustees of the Richard and
Sandra Giusti Family Trust dated
       August 3, 1990
------------------------------------------------------------------------------------------------------------------------------------
  The Merle Anderson Revocable     Hamar    SU-32    9/15/01      4     1/5  12/4/01 #22244  Sutter  9/15/06
  Living Trust dated 10/25/88
------------------------------------------------------------------------------------------------------------------------------------
Jane Osborne, as Trustee of the    Hamar    SU-33    8/21/01      5     1/5  10/2/01 #17833  Sutter  8-21-06
  Jane Osborne Revocable Trust
    pursuant to that certain
  Amendment and Restatement of
Declaration of Trust dated June
 29, 1999 and Anna C. Byrd, as
Trustee of the Anna C. Byrd Trust
 under Declaration of Trust dated
          October 1,1997
------------------------------------------------------------------------------------------------------------------------------------
  Jack E. Hansen, The Jerry and    Hamar    SU-34    6/26/01      5     1/5  8/21/01 #15221  Sutter  6/26/06
 Deanna Hansen Trust dated May 3,
2000 and The Michael Hansen Trust
        dated July 5, 2000
------------------------------------------------------------------------------------------------------------------------------------
    Acorn Farms, a California      Hamar    SU-35    6/19/01      5     1/5  7/24/01 #13101  Sutter  6/19/06
          Corporation
------------------------------------------------------------------------------------------------------------------------------------
  The Wagener Bypass Trust dated   Hamar    SU-36    7/26/01      5     1/5  10/2/01 #17834  Sutter  7-26-06
       October 6, 1979
------------------------------------------------------------------------------------------------------------------------------------
    Tom E.Schwarzgruber, John      Hamar    SU-37    7/27/01      5     1/6  10/2/01 #17836  Sutter  7-27-06
   C.Schwarzgruber, and Sue Ann                                                 #17837
          Schwarzgruber
------------------------------------------------------------------------------------------------------------------------------------
  Edward Beall and Lou Ann Beall   Hamar    SU-44    7/17/01      5     1/5  9/10/01 #16440  Sutter  7-17-06
------------------------------------------------------------------------------------------------------------------------------------
  Richard D. Huston and Nancy J.   Hamar    SU-47    7/12/01      5     1/6  8/21/01 #15223  Sutter  7/12/06
  Huston, Trustees of the Huston
 Living Trust dated June 11, 1991
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                   Page 2 of 5
<PAGE>

                                  EXHIBIT "A"

 TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE
 BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)
                                    INC. DBA
                    USA IVANHOE ENERGY, INC., IN CALIFORNIA

<TABLE>
<CAPTION>
                                                                        TERM/
              LESSOR                      LESSEE  LEASE NO.  LEASE DATE  YRS   LOR   RECORDING INFO.  COUNTY  EXPIRES
---------------------------------------   ------  ---------  ---------- -----  ---   ---------------  ------  -------
<S>                                       <C>     <C>        <C>        <C>    <C>   <C>              <C>     <C>       <C>
 William P. Lockett and Jean B. Lockett
      1998 Family Revocable Trust          Hamar    SU-52     7/18/01     5    1/5    9/10/01 #16442  Sutter   7-18-06

   Daniel P. Wagener, Trustee of the
   Daniel P. Wagener Childrens Trust
           dated June 28, 1978             Hamar    SU-53     7/26/01     5    1/5    10/2/01 #17835  Sutter   7-26-06

 James H. Akin and Aldean Akin Trustees
 of the Jim and Aldean Akin Family Trust
 dated 12/4/99, James H. Akin and Aldean
  Akin, James R. Akin, Susan E. Akin,
      Greg Abbott and Mary C. Akin         Hamar    SU-54      8/8/01     5    1/5     1/9/02 #00592  Sutter   8/8/06

          Holland Family Ranch             Hamar    SU-55     8/25/01     5    1/5    10/2/01 #17838  Sutter   8-25-06

 Sutter County Waterworks District No.1    Hamar    SU-56     7/16/03     3    1/6                    Sutter   7/16/06

   Ricci Farms, a General Partnership      Hamar    SU-57    10/19/01     5    1/5    12/4/01 #22245  Sutter  10/19/06

The Arthur C. and Mette K. James Family
  Revocable Trust dated August 2, 1990     Hamar    SU-58     7/18/01     5    1/6    9/10/01 #16443  Sutter   7-18-06

    The Giusti Family Residual Trust       Hamar    SU-59     7/17/01     5    1/5    8/21/01 #15215  Sutter   7/17/06

    The Giusti Family Marital Trust        Hamar    SU-60     7/17/01     5    1/5    8/21/01 #15216  Sutter   7/17/06

 Richard and Sandra Guisti Family Trust    Hamar    SU-61     7/17/01     5    1/5    9/10/01 #16437  Sutter   7-17-06

Roberta M. Schreiner, Trustee under the
 Will of William L. Schreiner, deceased
        and Roberta M. Schreiner           Hamar    SU-62     8/26/01     5    1/6   10/18/01 #19112  Sutter   8/26/06

Roberta M. Schreiner, Trustee under the
 Will of William L. Schreiner, deceased
        and Roberta M. Schreiner           Hamar   SU-62.1    8/26/01     5    1/6    12/4/01 #22248  Sutter   8/26/06
   Richter Bros., Inc., a California
              Corporation                  Hamar    SU-63     7/11/01     3    1/5    9/10/01 #16444  Sutter   7-11-04  25% total
                                                                                                                         royalty
                                                                                                                         burden
          Quad-H Ranches, Inc.             Hamar    SU-64     7/20/01     5    1/5    9/10/01 #16436  Sutter   7-20-06

The Emile and Simone Furlan Family Trust
           dated June 6, 1996              Hamar    SU-65     7/16/01     5    1/5    8/21/01 #15226  Sutter   7/16/06

  The Restated  Schreiner Family Trust
          dated April 13, 1989             Hamar    SU-66     7/24/01     5    1/5    9/10/01 #16445  Sutter   7-24-06

  John A. Driver and Clare M. Driver,
   Trustees of the John A. Driver and
    Clare M. Driver Family Revocable
      Trust dated August 31, 1994          Hamar    SU-67     8/20/01     3    1/5    10/2/01 #17839  Sutter   8-20-04

 Richard and Sandra Guisti Family Trust    Hamar    SU-68     7/17/01     5    1/5    9/10/01 #16435  Sutter   7-17-06

   Robert F. Stickel and Lorraine G.
                Stickel                    Hamar    SU-69      8/8/01     5    1/5    10/2/01 #17840  Sutter    8-8-06

 Richard and Sandra Guisti Family Trust    Hamar    SU-70     7/17/01     5    1/5    9/10/01 #16446  Sutter   7-17-06

Arnold Hoffart, as Successor Trustee of
 the Elizabeth Riehl and Suzanne Jones
   Remainder Trusts under the Adam J.
   Richter Trust, Arnold Hoffart, as
   Successor Trustee of the Kimberly
 Barnett Remainder Trust under the Adam
 J. Richter Trust, and Arnold Hoffart,
 as Successor Trustee of the Remainder
         Trust Adam J. Richter             Hamar    SU-72     7/25/01     5    1/5    9/10/01 #16448  Sutter   7-25-06

Arnold Hoffart, as Successor Trustee of
 the Elizabeth Riehl and Suzanne Jones
   Remainder Trusts under the Adam J.
             Richter Trust                 Hamar    SU-73     7/25/01     5    1/5    9/10/01 #16449  Sutter   7-25-06

Arnold Hoffart, as Successor Trustee of
  the Kimberly Barnett Remainder Trust
    under the Adam J. Richter Trust        Hamar    SU-74     7/25/01     5    1/5    9/10/01 #16450  Sutter   7-25-06
</TABLE>

                                  Page 3 of 5
<PAGE>

                                  EXHIBIT "A"

 TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE
 BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)
                                    INC. DBA
                    USA IVANHOE ENERGY, INC., IN CALIFORNIA

<TABLE>
<CAPTION>
                                                                      TERM/
              LESSOR                      LESSEE LEASE NO. LEASE DATE  YRS   LOR   RECORDING INFO.  COUNTY  EXPIRES
----------------------------------------  ------ --------- ---------- -----  ---   ---------------  ------  -------
<S>                                       <C>    <C>       <C>        <C>    <C>   <C>              <C>     <C>        <C>
Henry D. Richter Jr. and Amelia Richter,
  Lee W. Richter and Mary Ruth Richter     Hamar    SU-75   8/23/01     3    1/5    10/2/01 #17841  Sutter    8-23-04

            Mark H. Richter                Hamar    SU-76   8/23/01     3    1/5    10/2/01 #17842  Sutter    8-23-04

           Mary Ruth Richter               Hamar    SU-77   8/23/01     3    1/5    10/2/01 #17843  Sutter    8-23-04

             Amelia Richter                Hamar    SU-78   8/23/01     3    1/5    10/2/01 #17844  Sutter    8-23-04

Henry D. Richter Jr. and Amelia Richter,
 Lee W. Richter and Mary Ruth Richter,
   Mark H. Richter, Susan E. Richter,
  David Lee Richter, Kimberly Richter      Hamar    SU-78A  8/27/01     3    1/5   10/18/01 #19113  Sutter    8/27-04

Henry D. Richter Jr. and Amelia Richter,
 Lee W. Richter and Mary Ruth Richter,
 Marilyn Knox Larson, Carolyn Knox Green
  Caroline Persis Dixon Zlotnich, and
  Charles Leonard Dixon as Trustees of
 the Testimentary Trust of the Last Will
 and Testament of Helen Knox Dixon also
     known as Helen Caroline Dixon,
 Deceased, filed in the Superior Court
    of the County of Santa Clara, CA
    Probate Case No. 1-96-PR-137266        Hamar    SU-79   8/23/01     3    1/5   10/18/01 #19114  Sutter    8/23/04

Henry D. Richter Jr. and Amelia Richter,
  Lee W. Richter and Mary Ruth Richter     Hamar    SU-80   8/23/01     3    1/5    10/2/01 #17845  Sutter    8-23-04

Henry D. Richter Jr. and Amelia Richter,
  Lee W. Richter and Mary Ruth Richter     Hamar   SU-80A   8/30/01     3    1/5   11/16/01 #21149  Sutter    8/30/04

     Transamerica Minerals Company         Hamar    SU-81    7/2/01     3  17-23%   9/10/01 #16451  Sutter    7-2-04
                                                   SU-82b

  The Restated Schreiner Family Trust
          dated April 13, 1989             Hamar   SU-82a   7/24/01     5    1/5    9/10/01 #16452  Sutter    7-24-06
                                                   SU-83

           Edward J. Shelley               Hamar   SU-84a   8/15/01     5    1/6    10/2/01 #17846  Sutter    8-15-06

           Michael J. Shelley              Hamar   SU-84b   8/16/01     5    1/5    10/2/01 #17847  Sutter    8-16-06

          Jane Shelley Bennett             Hamar   SU-85a   9/19/01     5    1/5    10/18/01#19115  Sutter    9-19-06

           Michael J. Shelley              Hamar   SU-85b   8/16/01     5    1/5    10/18/01#19116  Sutter    8-16-06

Lela Driver, Trustee of the  Lela Driver
      Revocable Living Trust under
declaration of Trust dated July 15, 1991   Hamar   SU-86    8/23/01     5    1/5    10/2/01 #17848  Sutter    8-23-06

 Roger L. Matteoli and Beverly Matteoli    Hamar   SU-91a   9/12/01     5    1/5   10/18/01 #19117  Sutter    9/12/06

              Marie Martin                 Hamar   SU-91b  10/15/01     5    1/5    12/4/01 #22251  Sutter   10/15/06

 Thomas Adney Butler And Janet Carolyn
      Butler 1995 Revocable Trust          Hamar   SU-92    8/20/01     5    1/5    10/2/01 #17851  Sutter    8-20-06

   Norma A. Giusti, as Trustee of the
      Guisti Family Marital Trust          Hamar   SU-94a   8/23/01     5    1/5    10/2/01 #17852  Sutter    8-23-06

              Linda Guisti                 Hamar   SU-94b   8/26/01     5    1/5    10/2/01 #17853  Sutter    8-26-06

    Richard Giusti and Sandra Giusti       Hamar   SU-94c   8/23/01     5    1/5    10/2/01 #17854  Sutter    8-23-06

       B.E.Giovannetti, a widower          Hamar   SU-95   10/17/01     4    1/5    12/4/01 #22252  Sutter   10/17/05

      Angelo and Elva Guisti Trust         Hamar   SU-96   10/29/01     5    1/5    12/4/01 #22253  Sutter   10/29/06

  Marietta G. Leiser, and  Marietta G.
   Leiser Trustee of the Testimentary
   Trust of Phil K. Leiser, deceased       Hamar   SU-97a    9/4/01     5    1/5    2/25/02 #03665  Sutter     9/4/06
                                                   SU-98a

 Daniel P. Wagener, as Trustee of the
 Wagener Bypass Trust dated October 6,
                  1978                     Hamar  SU-98.1    9/9/01     5    1/5   10/18/01 #19121  Sutter     9/9/06

B.E.Giovannetti and Sons, a partnership    Hamar  SU-98.2  10/17/01     4    1/5    12/4/01 #22254  Sutter   10/17/05

    Richard Giusti and Sandra Giusti       Hamar  SU-98.3  10/22/01     5    1/5    12/4/01 #22255  Sutter   10/22/06

  Arnold Hoffart, as Successor Trustee     Hamar  SU-98.6    9/3/02          1/5                    Sutter

             Mette K. James                Hamar   SU-99    8-27-01     5    1/6    10/2/01 #17856  Sutter    8-27-06
</TABLE>

                                  Page 4 of 5
<PAGE>

                                  EXHIBIT "A"

 TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE
 BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)
                                    INC. DBA
                    USA IVANHOE ENERGY, INC., IN CALIFORNIA

<TABLE>
<CAPTION>
                                                                     TERM/
               LESSOR                    LESSEE LEASE NO. LEASE DATE  YRS     LOR   RECORDING INFO.  COUNTY  EXPIRES
---------------------------------------- ------ --------- ---------- ----     ---   ---------------  ------  -------
<S>                                      <C>    <C>       <C>        <C>      <C>   <C>              <C>     <C>        <C>
 Heidrick & McGinnis Properties, L.P. a
  California Limited Partnership, By
    Edith I. Heidrick and Gloria J.
  McGinnis, Trustees of the Gloria J.
  McGinnis Trust, its General Partner     Hamar   SU-101    12/12/01   3      1/5    1/24/02 #01591  Sutter   12/12/04

          William Ashley Payne            Hamar SU-102.1a   10/13/01   5      1/5    12/4/01 #22256  Sutter   10/13/06

            Robert B. Payne               Hamar SU-102.1b   10/13/01   5      1/5    12/4/01 #22257  Sutter   10/13/06

  John B. Anderson, dba Anderson Farms
     Company, a sole proprietorship       Hamar  SU-105a     2/11/02   5      1/5     5/9/02 #09160  Sutter    2/11/07

  Davis C. Bundock, Jr. and Nurene E.
 Bundock, Trustees of the Bundock Family
      Trust dated January 14,1991         Hamar  SU-106d   11/8/2001   5      1/5     1/9/02 #00593  Sutter    11/8/06

           Beatrice Ann Huber             Hamar  SU-106e     11/8/01   5      1/5     1/9/02 #00594  Sutter    11/8/06

            Dolores Azevedo               Hamar  SU-107a    10/29/01   5      1/5     1/9/02 #00595  Sutter   10/29/06

              Mary Baldwin                Hamar  SU-107b    11/11/01   5      1/5     1/9/02 #00596  Sutter   11/11/06

 James F. Waters and Bernice E. Waters,
 as Trustees of the Waters Family Trust
    under Declaration of Trust dated
            October 23, 1996              Hamar   SU-108    10/26/01   5      1/5    12/4/01 #22258  Sutter   10/26/06

  Richard Raymond and Maria E. Raymond    Hamar   SU-109    10/29/01   5      1/5    12/4/01 #22259  Sutter   10/19/06

 Irene J. Meckfessel, Trustee under the
 Will of Alexander F. Johnson, deceased   Hamar   SU-112     1/28/02   5      1/5     5/9/02 #09161  Sutter    1/28/07

  Jane Osborne, as Trustee of the Jane
  Osborne Revocable Trust pursuant to
 that certain Amendment and Restatement
 of Declaration of Trust dated June 29,
                  1999                    Hamar  SU-113a     1/14/02   5      1/5                    Sutter    1/14/07

Anna C. Byrd, as Trustee of the Anna C.
 Byrd Trust under Declaration of Trust
          dated October 1,1997            Hamar  SU-113b     1/14/02   5      1/5                    Sutter    1/14/07

   Norma A. Giusti, as Trustee of the
 Guisti Family Revocable Trust, Norma A.
 Giusti, as Trustee of the Guisti Family
 Residual Trust, and Norma A. Giusti, as
  Trustee of the Guisti Family Marital
                 Trust                    Hamar   SU-114      2/4/02   5      1/5     5/9/02 #09162  Sutter     2/4/07

  Frank Giusti and Sons, a partnership    Hamar   SU-115      2/4/02   5      1/5     5/9/02 #09163  Sutter     2/4/07

            Hust Bros., Inc.              Hamar   SU-117     2/25/02   5      1/6     5/9/02 #09164  Sutter    2/25/07

  Timothy W. Cusick and Gayle A Cusick    Hamar   SU-118      7/1/03   5      1/6                    Sutter     7/1/08

             Mette K. James               Hamar   SU-119      7/1/03   5      1/6                    Sutter     7/1/08

     County of Sutter, a political
 subdivision of the State of California   Hamar   SU-120     7/16/03   3      1/6                    Sutter    7/16/06

William A. Driver, Paula D. Shimada and
           Mary A. McDermott              Hamar   KYO-4   10/02/2001   3      1/5   1/11/02 #001600   Yolo   10/2/2004

 Irene J. Meckfessel, Trustee under the
 Will of Alexander F. Johnson, deceased   Hamar   KYO-6   02/11/2002   5      1/5   5/9/02 #0019753   Yolo   2/11/2007

   Mary Margaret Simonson , Successor
  Trustee of the Elizabeth A. Hatcher
          Trust dated 8/15/89             Hamar   SUN-81  12/07/2001   3      1/5     1/9/02 #00585  Sutter  12/7/2004

 Edith I. Heidrick,Successor Trustee of
 the Joe  A. Heidrick Family Trust dated
 April 8,1987, and Ray Leo Massoni and
 Marie Estelle Massoni as Trustees of the
   Ray and Marie Massoni Family Trust
          dated July 24, 1990             NEG      MU-2     10/01/93   3      1/5     10/26/93 Book  Sutter     HBP     27.4861%
                                                                                      1596 Page 436                      total
                                                                                                                         royalty
                                                                                                                         burden
</TABLE>

**Note: Only the portions of these leases lying within the boundary of the AMI
are included in this Agreement. All leases are burdened by a 2% ORR payable to
Martin I. Smith et al. The NEG royalty shall be a positive number equal to 23%
less (LOR+2%). Leases and units holding wells yet to be put on production
already have 25% total royalties assigned (see above list). MU leases are
burdened by an existing 27.4861% royalty burden.

                                  Page 5 of 5
<PAGE>
                                  EXHIBIT "B-1"

 To that certain Farmout and Exploration Agreement dated February 17, 2004 made
  by and between The Nahabedian Exploration Group LLC and Ivanhoe Energy (USA)
                                      Inc.
                  dba USA Ivanhoe Energy, Inc., in California

         CONTRACT AREA (SHOWN IN YELLOW), SACRAMENTO VALLEY, CALIFORNIA

                                     (MAP)

                By ___________________________________________
                   Michael Stark for Ivanhoe Energy (USA) Inc

                By ___________________________________________
                           Mark A. Nahabedian for NEG
<PAGE>
                                  EXHIBIT "B-2"

 To that certain Farmout and Exploration Agreement dated February 17, 2004 made
  by and between The Nahabedian Exploration Group LLC and Ivanhoe Energy (USA)
                                      Inc.
                   dba USA Ivanhoe Energy, Inc., in Califonria

     OUTER BOUNDARY OF THE AMI (SHOWN IN RED), SACRAMENTO VALLEY, CALIFORNIA

                                     (MAP)

                By ___________________________________________
                   Michael Stark for Ivanhoe Energy (USA) Inc

                By ___________________________________________
                           Mark A. Nahabedian for NEG
<PAGE>
                                  EXHIBIT "B-3"

 To that certain Farmout and Exploration Agreement dated February 17, 2004 made
  by and between The Nahabedian Exploration Group LLC and Ivanhoe Energy (USA)
                                      Inc.
                 dba USA Ivanhoe Energy, Inc., in California

          EXCLUDED AREA (SHOWN IN GRAY), SACRAMENTO VALLEY, CALIFORNIA

                                      (MAP)

                By ___________________________________________
                   Michael Stark for Ivanhoe Energy (USA) Inc

                By ___________________________________________
                           Mark A. Nahabedian for NEG
<PAGE>

                             EXHIBIT B-3 (CONTINUED)

 LIST OF EXCLUDED LEASES TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT MADE
    FEBRUARY 17, 2004 BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP LLC AND
      IVANHOE ENERGY (USA) INC. DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA

<TABLE>
<CAPTION>
           LESSOR                LESSEE  LEASE NO.  LEASE DATE  TERM/YRS  LOR   RECORDING INFO.  COUNTY  EXPIRES
           ------                ------  ---------  ----------  --------  ---   ---------------  ------  -------
<S>                              <C>     <C>        <C>         <C>       <C>   <C>              <C>     <C>
   Henry D. Richter Jr. and       NEG      MU-1      12/15/88       3     1/4       2/15/89      Sutter    HBP
    Amelia Richter, Lee W.                                                         Book 1289
 Richter and Mary Ruth Richter                                                     Page 423

Michael James Mullen Successor    NEG      MU-3      11/11/88       5     1/6      12/27/88      Sutter    HBP
 Trustee under the Dorothy E.                                                      Book 1283
 Mullen Revocable Trust dated                                                      Page 425
           12/14/90

      Kenneth L. Wallace         Hamar     SU-10      5/10/01       3     1/5       7/24/01      Sutter    HBP
                                                                                   #13088
                                                                                 Amend.9/10/01
                                                                                   #16453

    Richter Bros., Inc., a       Hamar    SU-11.1     5/17/01       3     1/5       7/24/01      Sutter    HBP
    California Corporation                                                          #13089
                                                                                 Amend.9/10/01
                                                                                    #16454

    Richter Bros., Inc., a       Hamar    SU-11.2     5/17/01       3     1/5       7/24/01      Sutter    HBP
    California Corporation                                                          #13090
                                                                                 Amend.9/10/01
                                                                                    #16455

 Jane Osborne, as Trustee of     Hamar     SU-20      7/10/01       5     1/5       8/21/01      Sutter    HBP
  the Jane Osborne Revocable                                                        #15217
Trust pursuant to that certain
 Amendment and Restatement of
Declaration of Trust dated June
29, 1999 and  Anna C. Byrd, as
  Trustee of the Anna C. Byrd
  Trust under Declaration of
  Trust dated October 1, 1997

 Sutter Basin Corporation,Lltd   Hamar     SU-23       6/7/01       5     1/5       7/24/01      Sutter    HBP
         a corporation                                                              #13097

    Sutter Basin Corp., LTD      Hamar     SU-71      7/20/01       5     1/5       9/10/01      Sutter    HBP
                                                                                    #16447
</TABLE>

                                   Page 1 of 1
<PAGE>

                                   EXHIBIT "C"

ATTACHED TO AND MADE A PART OF THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT
DATED FEBRUARY 17, 2004, BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC
(NEG), AS OPERATOR, AND IVANHOE ENERGY (USA) INC. DBA USA IVANHOE ENERGY, INC.,
IN CALIFORNIA (IVANHOE), AS NON-OPERATOR.

                            A.A.P.L. FORM 610 - 1989

                         MODEL FORM OPERATING AGREEMENT

                               OPERATING AGREEMENT

                                      DATED

                               FEBRUARY 17, 2004,
                                            -----
                                            Year

OPERATOR THE NAHABEDIAN EXPLORATION GROUP, LLC

CONTRACT AREA SEE FARMOUT AND EXPLORATION AGREEMENT THIS OPERATING

                  AGREEMENT IS ATTACHED AND MADE A PART THEREOF

COUNTY OR PARISH OF SUTTER, STATE OF CALIFORNIA

                                    COPYRIGHT 1989 - ALL RIGHTS RESERVED
                                    AMERICAN ASSOCIATION OF PETROLEUM
                                    LANDMEN, 4100 FOSSIL CREEK BLVD.
                                    FORT WORTH, TEXAS, 76137, APPROVED FORM.

                                              A.A.P.L. NO. 610 - 1989

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
Article                               Title                                        Page
-------                               -----                                        ----
<S>      <C>                                                                       <C>
   I.    DEFINITIONS............................................................     1
  II.    EXHIBITS...............................................................     1
 III.    INTERESTS OF PARTIES...................................................     2
         A. OIL AND GAS INTERESTS: .............................................     2
         B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:.......................     2
         C. SUBSEQUENTLY CREATED INTERESTS: ....................................     2
  IV.    TITLES.................................................................     2
         A. TITLE EXAMINATION:..................................................     2
         B. LOSS OR FAILURE OF TITLE:...........................................     3
               1. Failure of Title..............................................     3
               2. Loss by Non-Payment or Erroneous Payment of Amount Due........     3
               3. Other Losses..................................................     3
               4. Curing Title..................................................     3
   V.    OPERATOR...............................................................     4
         A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:.......................     4
         B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:......     4
               1. Resignation or Removal of Operator............................     4
               2. Selection of Successor Operator...............................     4
               3. Effect of Bankruptcy..........................................     4
         C.  EMPLOYEES AND CONTRACTORS: ........................................     4
         D.  RIGHTS AND DUTIES OF OPERATOR: ....................................     4
               1. Competitive Rates and Use of Affiliates.......................     4
               2. Discharge of Joint Account Obligations........................     4
               3. Protection from Liens.........................................     4
               4. Custody of Funds..............................................     5
               5. Access to Contract Area and Records...........................     5
               6. Filing and Furnishing Governmental Reports....................     5
               7. Drilling and Testing Operations...............................     5
               8. Cost Estimates................................................     5
               9. Insurance.....................................................     5
  VI.    DRILLING AND DEVELOPMENT...............................................     5
         A. INITIAL WELL:.......................................................     5
         B. SUBSEQUENT OPERATIONS: .............................................     5
               1. Proposed Operations...........................................     5
               2. Operations by Less Than All Parties...........................     6
               3. Stand-By Costs................................................     7
               4. Deepening.....................................................     8
               5. Sidetracking..................................................     8
               6. Order of Preference of Operations.............................     8
               7. Conformity to Spacing Pattern.................................     9
               8. Paying Wells..................................................     9
         C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:...................     9
               1. Completion....................................................     9
               2. Rework, Recomplete or Plug Back...............................     9
         D. OTHER OPERATIONS:...................................................     9
         E. ABANDONMENT OF WELLS:...............................................     9
               1. Abandonment of Dry Holes......................................     9
               2. Abandonment of Wells That Have Produced.......................    10
               3. Abandonment of Non-Consent Operations.........................    10
         F. TERMINATION OF OPERATIONS:..........................................    10
         G. TAKING PRODUCTION IN KIND:..........................................    10
               (Option 1) Gas Balancing Agreement...............................    10
               (Option 2) No Gas Balancing Agreement............................    11
 VII.    EXPENDITURES AND LIABILITY OF PARTIES..................................    11
         A. LIABILITY OF PARTIES: ..............................................    11
         B. LIENS AND SECURITY INTERESTS:.......................................    12
         C. ADVANCES:...........................................................    12
         D. DEFAULTS AND REMEDIES:..............................................    12
               1. Suspension of Rights..........................................    13
               2. Suit for Damages..............................................    13
               3. Deemed Non-Consent............................................    13
               4. Advance Payment...............................................    13
               5. Costs and Attorneys' Fees.....................................    13
         E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:...............    13
         F. TAXES:..............................................................    13
VIII.    ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST.......................    14
         A. SURRENDER OF LEASES:................................................    14
         B. RENEWAL OR EXTENSION OF LEASES:.....................................    14
         C. ACREAGE OR CASH CONTRIBUTIONS:......................................    14
</TABLE>

                                        i

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                TABLE OF CONTENTS

<TABLE>
<S>      <C>                                                                        <C>
         D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: .......................    15
         E. WAIVER OF RIGHTS TO PARTITION:......................................    15
         F. PREFERENTIAL RIGHT TO PURCHASE:.....................................    15
  IX.    INTERNAL REVENUE CODE ELECTION.........................................    15
   X.    CLAIMS AND LAWSUITS....................................................    15
  XI.    FORCE MAJEURE..........................................................    16
 XII.    NOTICES................................................................    16
XIII.    TERM OF AGREEMENT......................................................    16
 XIV.    COMPLIANCE WITH LAWS AND REGULATIONS...................................    16
         A. LAWS, REGULATIONS AND ORDERS:.......................................    16
         B. GOVERNING LAW:......................................................    16
         C. REGULATORY AGENCIES: ...............................................    16
  XV.    MISCELLANEOUS..........................................................    17
         A. EXECUTION:..........................................................    17
         B. SUCCESSORS AND ASSIGNS:.............................................    17
         C. COUNTERPARTS:.......................................................    17
         D. SEVERABILITY........................................................    17
 XVI.    OTHER PROVISIONS.......................................................    17
</TABLE>

                                       ii

<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                               OPERATING AGREEMENT

         THIS AGREEMENT, entered into by and between THE NAHABEDIAN EXPLORATION
GROUP, LLC , hereinafter designated and referred to as "Operator," and the
signatory party or parties other than Operator, sometimes hereinafter referred
to individually as "Non-Operator," and collectively as "Non-Operators."

                                   WITNESSETH:

         WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A," and the
parties hereto have reached an agreement to explore and develop these Leases
and/or Oil and Gas Interests for the production of Oil and Gas to the extent and
as hereinafter provided,

         NOW, THEREFORE, it is agreed as follows:

                                   ARTICLE I.
                                   DEFINITIONS

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

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

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

         C. The term "Contract Area" shall mean all of the lands, Oil and Gas
Leases and/or Oil and Gas Interests intended to be developed and operated for
Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and
Oil and Gas Interests are described in Exhibit "A."

         D. The term "Deepen" shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated AFE,
whichever is the lesser.

         E. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this agreement.

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

         G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.

         H. The term "Initial Well" shall mean the well required to be drilled
by the parties hereto as provided in Article VI.A.

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

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

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

         L. The term "Oil and Gas Interests" or "Interests" shall mean unleased
fee and mineral interests in Oil and Gas in tracts of land lying within the
Contract Area which are owned by parties to this agreement.

         M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean
the oil and gas leases or interests therein covering tracts of land lying within
the Contract Area which are owned by the parties to this agreement.

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

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

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

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

         R. The term "Zone" shall mean a stratum of earth containing or thought
to contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.

         Unless the context otherwise clearly indicates, words used in the
singular include the plural, the word "person" includes natural and artificial
persons, the plural includes the singular, and any gender includes the
masculine, feminine, and neuter.

                                   ARTICLE II.
                                    EXHIBITS

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

   [X]   A. Exhibit "A," shall include the following information:

            (1) Description of lands subject to this agreement,

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

            (3) Parties to agreement with addresses and telephone numbers for
                notice purposes,

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

            (5) Oil and Gas Leases and/or Oil and Gas Interests subject to this
                agreement,

   [X]   A-1 AREA OF MUTUAL INTEREST

   [X]   B. Exhibit "B," Form of Lease.

   [X]   C. Exhibit "C," Accounting Procedure.

   [X]   D. Exhibit "D," Insurance.

   [X]   E. Exhibit "E," Gas Balancing Agreement.

   [X]   F. Exhibit "F," Non-Discrimination and Certification of Non-Segregated
            Facilities.

   [X]   H. Other: Memorandum of Operating Agreement

                                      - 1 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.

                                  ARTICLE III.
                              INTERESTS OF PARTIES

B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:

         Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A." In the same manner, the
parties shall also own all production of Oil and Gas from the Contract Area
subject, however, to the payment of royalties and other burdens on production as
described hereafter.

         Regardless of which party has contributed any Oil and Gas Lease or Oil
and Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, Operator shall pay or deliver,
or cause to be paid or delivered, all burdens on its share of the production
from the Contract Area and shall indemnify, defend and hold the other parties
free from any liability therefor.

         Nothing contained in this Article III.B. shall be deemed an assignment
or cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.

C. SUBSEQUENTLY CREATED INTERESTS:

         If any party has contributed hereto a Lease or Interest that is
burdened with an assignment of production given as security for the payment of
money, or if, after the date of this agreement, any party creates an overriding
royalty, production payment, net profits interest, assignment of production or
other burden payable out of production attributable to its working interest
hereunder, such burden shall be deemed a "Subsequently Created Interest."
Further, if any party has contributed hereto a Lease or Interest burdened with
an overriding royalty, production payment, net profits interests, or other
burden payable out of production created prior to the date of this agreement,
and such burden is not shown on Exhibit "A," such burden also shall be deemed a
Subsequently Created Interest to the extent such burden causes the burdens on
such party's Lease or Interest to exceed the amount stipulated in Article III.B.
above.

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

                                   ARTICLE IV.
                                     TITLES

A. TITLE EXAMINATION:

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

         Operator shall be responsible for securing all required curative
matters for the preparation and recording of pooling designations or
declarations and communitization agreements as well as the conduct of hearings
before governmental agencies for the securing of spacing or pooling orders or
any other orders necessary or appropriate to the conduct of operations
hereunder. This shall not prevent any party from appearing on its own behalf at
such hearings. Costs incurred by Operator, including fees paid to outside
attorneys, which are associated with hearings before governmental agencies, and
which costs are necessary and proper for the activities contemplated under this
agreement, shall be direct charges to the joint account and shall not be covered
by the administrative overhead charges as provided in Exhibit "C."

                                      - 2 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                      - 2 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

Operator shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.

         No well shall be drilled on the Contract Area until after (1) the title
to the Drillsite or Drilling Unit, if appropriate, has been examined as above
provided, and (2) the title has been approved by the examining attorney or title
has been accepted by all of the Drilling Parties in such well.

         2. Loss by Non-Payment or Erroneous Payment of Amount Due: If, through
mistake or oversight, any rental, shut-in well payment, minimum royalty or
royalty payment, or other payment necessary to maintain all or a portion of an
Oil and Gas Lease or interest is not paid or is erroneously paid, and as a
result a Lease or Interest terminates, there shall be no monetary liability
against the party who failed to make such payment.

         3. Other Losses: All losses of Leases or Interests committed to this
agreement, shall be joint losses and shall be borne by all parties in proportion
to their interests shown on Exhibit "A." This shall include but not be limited
to the loss of any Lease or Interest through failure to develop or because
express or implied covenants have not been performed (other than performance
which requires only the payment of money), and the loss of any Lease by
expiration at the end of its primary term if it is not renewed or extended.
There shall be no readjustment of interests in the remaining portion of the
Contract Area on account of any joint loss.

                                     - 3 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                   ARTICLE V.
                                    OPERATOR

A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:

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

B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:

         1. Resignation or Removal of Operator: Operator may resign at any time
by giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, no longer owns an interest hereunder in the Contract Area, or
is no longer capable of serving as Operator, Operator shall be deemed to have
resigned without any action by Non-Operators, except the selection of a
successor. Operator may be removed only for good cause by the affirmative vote
of Non-Operators owning a majority interest based on ownership as shown on
Exhibit "A" remaining after excluding the voting interest of Operator; such vote
shall not be deemed effective until a written notice has been delivered to the
Operator by a Non-Operator detailing the alleged default and Operator has failed
to cure the default within thirty (30) days from its receipt of the notice or,
if the default concerns an operation then being conducted, within forty-eight
(48) hours of its receipt of the notice. For purposes hereof, "good cause" shall
mean not only gross negligence or willful misconduct but also the material
breach of or inability to meet the standards of operation contained in Article
V.A. or material failure or inability to perform its obligations under this
agreement.

         Subject to Article VII.D.1., such resignation or removal shall not
become effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator. A change of a corporate
name or structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator.

         2. Selection of Successor Operator: Upon the resignation or removal of
Operator under any provision of this agreement, a successor Operator shall be
selected by the parties. The successor Operator shall be selected from the
parties owning an interest in the Contract Area at the time such successor
Operator is selected. The successor Operator shall be selected by the
affirmative vote of two (2) or more parties owning a majority interest based on
ownership as shown on Exhibit "A"; provided, however, if an Operator which has
been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative vote
of the party or parties owning a majority interest based on ownership as shown
on Exhibit "A" remaining after excluding the voting interest of the Operator
that was removed or resigned. The former Operator shall promptly deliver to the
successor Operator all records and data relating to the operations conducted by
the former Operator to the extent such records and data are not already in the
possession of the successor operator. Any cost of obtaining or copying the
former Operator's records and data shall be charged to the joint account.

         3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any action
by Non-Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit "A."
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit "A."

C. EMPLOYEES AND CONTRACTORS:

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

D. RIGHTS AND DUTIES OF OPERATOR:

         1. Competitive Rates and Use of Affiliates: All wells drilled on the
Contract Area shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall not
exceed the prevailing rates in the area and the rate of such charges shall be
agreed upon by the parties in writing before drilling operations are commenced,
and such work shall be performed by Operator under the same terms and conditions
as are customary and usual in the area in contracts of independent contractors
who are doing work of a similar nature. All work performed or materials supplied
by affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with customs
and standards prevailing in the industry.

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

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

                                     - 4 -
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

liens and encumbrances resulting therefrom except for those resulting from a
bona fide dispute as to services rendered or materials supplied.

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

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

         6. Filing and Furnishing Governmental Reports: Operator will file, and
upon written request promptly furnish copies to each requesting Non-Operator not
in default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies or
authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.

         7. Drilling and Testing Operations: The following provisions shall
apply to each well drilled hereunder, including but not limited to the Initial
Well:

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

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

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

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

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

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

                                   ARTICLE VI.
                            DRILLING AND DEVELOPMENT

A. INITIAL WELL:

         AS SOON AS PRACTICABLE, Operator shall commence the drilling of the
Initial Well at the following location:

         AS PROVIDED IN THE FARMOUT AND EXPLORATION AGREEMENT TO WHICH THIS
OPERATING AGREEMENT IS ATTACHED AS EXHIBIT "C".

and shall thereafter continue the drilling of the well with due diligence, AS
PROVIDED IN THE FARMOUT AND EXPLORATION AGREEMENT TO WHICH THIS OPERATING
AGREEMENT IS ATTACHED AS EXHIBIT "C".

The drilling of the Initial Well and the participation therein by all parties is
obligatory, subject to Article VI.C.1. as to participation in Completion
operations and Article VI.F. as to termination of operations and Article XI as
to occurrence of force majeure.

B. SUBSEQUENT OPERATIONS:

         1. Proposed Operations: If any party hereto should desire to drill any
well on the Contract Area other than the Initial Well, or if any party should
desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a
well no longer capable of producing in paying quantities in which such party has
not otherwise relinquished its interest in the proposed objective Zone under
this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Recomplete or Plug Back such a well shall give written notice of the proposed
operation to the parties who have not otherwise relinquished their interest in
such objective Zone

                                     - 5 -
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective Zone and the estimated cost of the operation. The
parties to whom such a notice is delivered shall have thirty (30) days after
receipt of the notice within which to notify the party proposing to do the work
whether they elect to participate in the cost of the proposed operation. If a
drilling rig is on location, notice of a proposal to Rework, Sidetrack,
Recomplete, Plug Back or Deepen may be given by telephone and the response
period shall be limited to forty- eight (48) hours, exclusive of Saturday,
Sunday and legal holidays. Failure of a party to whom such notice is delivered
to reply within the period above fixed shall constitute an election by that
party not to participate in the cost of the proposed operation. Any proposal by
a party to conduct an operation conflicting with the operation initially
proposed shall be delivered to all parties within the time and in the manner
provided in Article VI.B.6.

         If all parties to whom such notice is delivered elect to participate in
such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced within the time
period hereafter set forth, and Operator shall, no later than ninety (90) days
after expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the forty-eight (48) hour period when a
drilling rig is on location, as the case may be), actually commence the proposed
operation and thereafter complete it with due diligence at the risk and expense
of the parties participating therein; provided, however, said commencement date
may be extended upon written notice of same by Operator to the other parties,
for a period of up to thirty (30) additional days if, in the sole opinion of
Operator, such additional time is reasonably necessary to obtain permits from
governmental authorities, surface rights (including rights-of- way) or
appropriate drilling equipment, or to complete title examination or curative
matter required for title approval or acceptance. If the actual operation has
not been commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior proposal had been made. Those parties that did not participate in
the drilling of a well for which a proposal to Deepen or Sidetrack is made
hereunder shall, if such parties desire to participate in the proposed Deepening
or Sidetracking operation, reimburse the Drilling Parties in accordance with
Article VI.B.4. in the event of a Deepening operation and in accordance with
Article VI.B.5. in the event of a Sidetracking operation.

         2. Operations by Less Than All Parties:

           (a) Determination of Participation. If any party to whom such notice
is delivered as provided in Article VI.B.1. or VI.C.1. (Option No. 2) elects not
to participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as practicable after the expiration of the forty-eight (48) hour
period when a drilling rig is on location, as the case may be) actually commence
the proposed operation and complete it with due diligence. Operator shall
perform all work for the account of the Consenting Parties; provided, however,
if no drilling rig or other equipment is on location, and if Operator is a
Non-Consenting Party, the Consenting Parties shall either: (i) request Operator
to perform the work required by such proposed operation for the account of the
Consenting Parties, or (ii) designate one of the Consenting Parties as Operator
to perform such work. The rights and duties granted to and imposed upon the
Operator under this agreement are granted to and imposed upon the party
designated as Operator for an operation in which the original Operator is a
Non-Consenting Party. Consenting Parties, when conducting operations on the
Contract Area pursuant to this Article VI.B.2., shall comply with all terms and
conditions of this agreement.

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

           (b) Relinquishment of Interest for Non-Participation. The entire cost
and risk of conducting such operations shall be borne by the Consenting Parties
in the proportions they have elected to bear same under the terms of the
preceding paragraph. Consenting Parties shall keep the leasehold estates
involved in such operations free and clear of all liens and encumbrances of
every kind created by or arising from the operations of the Consenting Parties.
If such an operation results in a dry hole, then subject to Articles VI.B.6. and
VI.E.3., the Consenting Parties shall plug and abandon the well and restore the
surface location at their sole cost, risk and expense; provided, however, that
those Non-Consenting Parties that participated in the drilling, Deepening or
Sidetracking of the well shall remain liable for, and shall pay, their
proportionate shares of the cost of plugging and abandoning the well and
restoring the surface location insofar only as those costs were not increased by
the subsequent operations of the Consenting Parties. If any well drilled,
Reworked, Sidetracked, Deepened, Recompleted or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or Gas
in paying quantities, the Consenting Parties shall Complete and equip the well
to produce at their sole cost and risk, and the well shall then be turned over
to Operator (if the Operator did not conduct the operation) and shall be
operated by it at the expense and for the account of the Consenting Parties.
Upon commencement of operations for the drilling, Reworking, Sidetracking,
Recompleting, Deepening or Plugging Back of any such well by Consenting Parties
in accordance with the provisions of this Article, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties, and the Consenting
Parties shall own and be entitled to receive, in proportion to their respective
interests, all of such Non- Consenting Party's interest in the well and
production therefrom and the drilling unit thereof or, in the case of a
Reworking, Sidetracking,

                                     - 6 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
VI.C.1. Option No. 2, all of such Non- Consenting Party's interest in THE WELL,
ITS DRILLING UNIT AND IN the production obtained from the operation in which the
Non-Consenting Party did not elect to participate. Such relinquishment shall be
effective until the proceeds of the sale of such share, calculated at the well,
or market value thereof if such share is not sold (after deducting applicable ad
valorem, production, severance, and excise taxes, royalty, overriding royalty
and other interests not excepted by Article III.C. payable out of or measured by
the production from such well accruing with respect to such interest until it
reverts), shall equal the total of the following:

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

         (ii) 300% of (a) that portion of the costs and expenses of drilling,
Reworking, Sidetracking, Deepening, Plugging Back, testing, Completing, and
Recompleting, after deducting any cash contributions received under Article
VIII.C., and of (b) that portion of the cost of newly acquired equipment in the
well (to and including the wellhead connections), which would have been
chargeable to such Non-Consenting Party if it had participated therein.

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

         (c) Reworking, Recompleting or Plugging Back. An election not to
participate in the drilling, Sidetracking or Deepening of a well shall be deemed
an election not to participate in any Reworking or Plugging Back operation
proposed in such a well, or portion thereof, to which the initial non-consent
election applied that is conducted at any time prior to full recovery by the
Consenting Parties of the Non-Consenting Party's recoupment amount. Similarly,
an election not to participate in the Completing or Recompleting of a well shall
be deemed an election not to participate in any Reworking operation proposed in
such a well, or portion thereof, to which the initial non-consent election
applied that is conducted at any time prior to full recovery by the Consenting
Parties of the Non-Consenting Party's recoupment amount. Any such Reworking,
Recompleting or Plugging Back operation conducted during the recoupment period
shall be deemed part of the cost of operation of said well and there shall be
added to the sums to be recouped by the Consenting Parties ___300____% of that
portion of the costs of the Reworking, Recompleting or Plugging Back operation
which would have been chargeable to such Non-Consenting Party had it
participated therein. If such a Reworking, Recompleting or Plugging Back
operation is proposed during such recoupment period, the provisions of this
Article VI.B. shall be applicable as between said Consenting Parties in said
well.

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

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

         Within ninety (90) days after the completion of any operation under
this Article, the party conducting the operations for the Consenting Parties
shall furnish each Non-Consenting Party with an inventory of the equipment in
and connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
the operations for the Consenting Parties shall furnish the Non-Consenting
Parties with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the well's
working interest production during the preceding month. In determining the
quantity of Oil and Gas produced during any month, Consenting Parties shall use
industry accepted methods such as but not limited to metering or periodic well
tests. Any amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned by a
Non-Consenting Party had it participated therein shall be credited against the
total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such Non-
Consenting Party.

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

         3. Stand-By Costs: When a well which has been drilled or Deepened has
reached its authorized depth and all tests have been completed and the results
thereof furnished to the parties, or when operations on the well have been
otherwise terminated pursuant to Article VI.F., stand-by costs incurred pending
response to a party's notice proposing a Reworking,

                                     - 7 -
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation in
such a well (including the period required under Article VI.B.6. to resolve
competing proposals) shall be charged and borne as part of the drilling or
Deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2. (a), shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest as shown on Exhibit
"A" bears to the total interest as shown on Exhibit "A" of all Consenting
Parties.

         In the event that notice for a Sidetracking operation is given while
the drilling rig to be utilized is on location, any party may request and
receive up to five (5) additional days after expiration of the forty-eight hour
response period specified in Article VI.B.1. within which to respond by paying
for all stand-by costs and other costs incurred during such extended response
period; Operator may require such party to pay the estimated stand-by time in
advance as a condition to extending the response period. If more than one party
elects to take such additional time to respond to the notice, standby costs
shall be allocated between the parties taking additional time to respond on a
day-to-day basis in the proportion each electing party's interest as shown on
Exhibit "A" bears to the total interest as shown on Exhibit "A" of all the
electing parties.

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

         In the event any Consenting Party desires to drill or Deepen a
Non-Consent Well to a depth below the Initial Objective, such party shall give
notice thereof, complying with the requirements of Article VI.B.1., to all
parties (including Non- Consenting Parties). Thereupon, Articles VI.B.1. and 2.
shall apply and all parties receiving such notice shall have the right to
participate or not participate in the Deepening of such well pursuant to said
Articles VI.B.1. and 2. If a Deepening operation is approved pursuant to such
provisions, and if any Non-Consenting Party elects to participate in the
Deepening operation, such Non-Consenting party shall pay or make reimbursement
(as the case may be) of the following costs and expenses.

         (a) If the proposal to Deepen is made prior to the Completion of such
well as a well capable of producing in paying quantities, such Non-Consenting
Party shall pay (or reimburse Consenting Parties for, as the case may be) that
share of costs and expenses incurred in connection with the drilling of said
well from the surface to the Initial Objective which Non- Consenting Party would
have paid had such Non-Consenting Party agreed to participate therein, plus the
Non-Consenting Party's share of the cost of Deepening and of participating in
any further operations on the well in accordance with the other provisions of
this Agreement; provided, however, all costs for testing and Completion or
attempted Completion of the well incurred by Consenting Parties prior to the
point of actual operations to Deepen beyond the Initial Objective shall be for
the sole account of Consenting Parties.

         (b) If the proposal is made for a Non-Consent Well that has been
previously Completed as a well capable of producing in paying quantities, but is
no longer capable of producing in paying quantities, such Non-Consenting Party
shall pay (or reimburse Consenting Parties for, as the case may be) its
proportionate share of all costs of drilling, Completing, and equipping said
well from the surface to the Initial Objective, calculated in the manner
provided in paragraph (a) above, less those costs recouped by the Consenting
Parties from the sale of production from the well. The Non-Consenting Party
shall also pay its proportionate share of all costs of re-entering said well.
The Non-Consenting Parties' proportionate part (based on the percentage of such
well Non-Consenting Party would have owned had it previously participated in
such Non-Consent Well) of the costs of salvable materials and equipment
remaining in the hole and salvable surface equipment used in connection with
such well shall be determined in accordance with Exhibit "C." If the Consenting
Parties have recouped the cost of drilling, Completing, and equipping the well
at the time such Deepening operation is conducted, then a Non- Consenting Party
may participate in the Deepening of the well with no payment for costs incurred
prior to re-entering the well for Deepening

         The foregoing shall not imply a right of any Consenting Party to
propose any Deepening for a Non-Consent Well prior to the drilling of such well
to its Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.

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

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

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

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

                                     - 8 -
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

initial proposal shall prevail. Operator shall deliver notice of such result to
all parties entitled to participate in the operation within five (5) days after
expiration of the election period (or within twenty-four (24) hours, exclusive
of Saturday, Sunday and legal holidays, if a drilling rig is on location). Each
party shall then have two (2) days (or twenty-four (24) hours if a rig is on
location) from receipt of such notice to elect by delivery of notice to Operator
to participate in such operation or to relinquish interest in the affected well
pursuant to the provisions of Article VI.B.2.; failure by a party to deliver
notice within such period shall be deemed an election not to participate in the
prevailing proposal.

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

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

C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:

         1. Completion: Without the consent of all parties, no well shall be
drilled, Deepened or Sidetracked, except any well drilled, Deepened or
Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.
Consent to the drilling, Deepening or Sidetracking shall include:

     [X] Option No. 2: All necessary expenditures for the drilling, Deepening or
         Sidetracking and testing of the well. When such well has reached its
         authorized depth, and all logs, cores and other tests have been
         completed, and the results thereof furnished to the parties, Operator
         shall give immediate notice to the Non-Operators having the right to
         participate in a Completion attempt whether or not Operator recommends
         attempting to Complete the well, together with Operator's AFE for
         Completion costs if not previously provided. The parties receiving such
         notice shall have forty-eight (48) hours (exclusive of Saturday, Sunday
         and legal holidays) in which to elect by delivery of notice to Operator
         to participate in a recommended Completion attempt or to make a
         Completion proposal with an accompanying AFE. Operator shall deliver
         any such Completion proposal, or any Completion proposal conflicting
         with Operator's proposal, to the other parties entitled to participate
         in such Completion in accordance with the procedures specified in
         Article VI.B.6. Election to participate in a Completion attempt shall
         include consent to all necessary expenditures for the Completing and
         equipping of such well, including necessary tankage and/or surface
         facilities but excluding any stimulation operation not contained on the
         Completion AFE. Failure of any party receiving such notice to reply
         within the period above fixed shall constitute an election by that
         party not to participate in the cost of the Completion attempt;
         provided, that Article VI.B.6. shall control in the case of conflicting
         Completion proposals. If one or more, but less than all of the parties,
         elect to attempt a Completion, the provision of Article VI.B.2. hereof
         (the phrase "Reworking, Sidetracking, Deepening, Recompleting or
         Plugging Back" as contained in Article VI.B.2. shall be deemed to
         include "Completing") shall apply to the operations thereafter
         conducted by less than all parties; provided, however, that Article
         VI.B.2. shall apply separately to each separate Completion or
         Recompletion attempt undertaken hereunder, and an election to become a
         Non-Consenting Party as to one Completion or Recompletion attempt shall
         not prevent a party from becoming a Consenting Party in subsequent
         Completion or Recompletion attempts regardless whether the Consenting
         Parties as to earlier Completions or Recompletion have recouped their
         costs pursuant to Article VI.B.2.; provided further, that any
         recoupment of costs by a Consenting Party shall be made solely from the
         production attributable to the Zone in which the Completion attempt is
         made. Election by a previous Non-Consenting party to participate in a
         subsequent Completion or Recompletion attempt shall require such party
         to pay its proportionate share of the cost of salvable materials and
         equipment installed in the well pursuant to the previous Completion or
         Recompletion attempt, insofar and only insofar as such materials and
         equipment benefit the Zone in which such party participates in a
         Completion attempt.

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

D. OTHER OPERATIONS:

         Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Twenty-Five Thousand Dollars ($25,000)
except in connection with the drilling, Sidetracking, Reworking, Deepening,
Completing, Recompleting or Plugging Back of a well that has been previously
authorized by or pursuant to this agreement; provided, however, that, in case of
explosion, fire, flood or other sudden emergency, whether of the same or
different nature, Operator may take such steps and incur such expenses as in its
opinion are required to deal with the emergency to safeguard life and property
but Operator, as promptly as possible, shall report the emergency to the other
parties. If Operator prepares an AFE for its own use, Operator shall furnish any
Non-Operator so requesting an information copy thereof for any single project
costing in excess of Twenty-Five Thousand Dollars ($25,000). Any party who has
not relinquished its interest in a well shall have the right to propose that
Operator perform repair work or undertake the installation of artificial lift
equipment or ancillary production facilities such as salt water disposal wells
or to conduct additional work with respect to a well drilled hereunder or other
similar project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed
exclusively be those Articles). Operator shall deliver such proposal to all
parties entitled to participate therein.

E. ABANDONMENT OF WELLS:

     1. Abandonment of Dry Holes: Except for any well drilled or Deepened
pursuant to Article VI.B.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be

                                     - 9 -
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

plugged and abandoned without the consent of all parties. Should Operator, after
diligent effort, be unable to contact any party, or should any party fail to
reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after delivery of notice of the proposal to plug and abandon such
well, such party shall be deemed to have consented to the proposed abandonment.
All such wells shall be plugged and abandoned in accordance with applicable
regulations and at the cost, risk and expense of the parties who participated in
the cost of drilling or Deepening such well. Any party who objects to plugging
and abandoning such well by notice delivered to Operator within forty-eight (48)
hours (exclusive of Saturday, Sunday and legal holidays) after delivery of
notice of the proposed plugging shall take over the well as of the end of such
forty-eight (48) hour notice period and conduct further operations in search of
Oil and/or Gas subject to the provisions of Article VI.B.; failure of such party
to provide proof reasonably satisfactory to Operator of its financial capability
to conduct such operations or to take over the well within such period or
thereafter to conduct operations on such well or plug and abandon such well
shall entitle Operator to retain or take possession of the well and plug and
abandon the well. The party taking over the well shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations conducted on such well except for the costs
of plugging and abandoning the well and restoring the surface, for which the
abandoning parties shall remain proportionately liable.

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

         Parties taking over a well as provided herein shall tender to each of
the other parties its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of Exhibit
"C," less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface; provided, however, that in the event the
estimated plugging and abandoning and surface restoration costs and the
estimated cost of salvaging are higher than the value of the well's salvable
material and equipment, each of the abandoning parties shall tender to the
parties continuing operations their proportionate shares of the estimated excess
cost. Each abandoning party shall assign to the non-abandoning parties, without
warranty, express or implied, as to title or as to quantity, or fitness for use
of the equipment and material, all of its interest in the wellbore of the well
and related equipment, together with its interest in the DRILLING UNIT Leasehold
insofar and only insofar as such DRILLING UNIT Leasehold covers the right to
obtain production from that wellbore in the Zone then open to production. The
assignments or leases so limited shall encompass the Drilling Unit upon which
the well is located. The payments by, and the assignments or leases to, the
assignees shall be in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all assignees. There shall
be no readjustment of interests in the remaining portions of the Contract Area.

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

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

F. TERMINATION OF OPERATIONS:

         Upon the commencement of an operation for the drilling, Reworking,
Sidetracking, Plugging Back, Deepening, testing, Completion or plugging of a
well, including but not limited to the Initial Well, such operation shall not be
terminated without consent of parties bearing 100% of the costs of such
operation; provided, however, that in the event granite or other practically
impenetrable substance or condition in the hole is encountered which renders
further operations impractical, Operator may discontinue operations and give
notice of such condition in the manner provided in Article VI.B.1, and the
provisions of Article VI.B. or VI.E. shall thereafter apply to such operation,
as appropriate.

G. TAKING PRODUCTION IN KIND:

   [X] OPTION NO. 1: GAS BALANCING AGREEMENT ATTACHED

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

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

                                     - 10 -
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

       directly from the purchaser thereof for its share of all production.

         If any party fails to make the arrangements necessary to take in kind
       or separately dispose of its proportionate share of the Oil OR GAS
       produced from the Contract Area, Operator shall have the right, subject
       to the revocation at will by the party owning it, but not the obligation,
       to purchase such Oil OR GAS or sell it to others at any time and from
       time to time, for the account of the non-taking party. Any such purchase
       or sale by Operator may be terminated by Operator upon at least ten (10)
       days written notice to the owner of said production and shall be subject
       always to the right of the owner of the production upon at least ten (10)
       days written notice to Operator to exercise at any time its right to take
       in kind, or separately dispose of, its share of all Oil not previously
       delivered to a purchaser. Any purchase or sale by Operator of any other
       party's share of Oil shall be only for such reasonable periods of time as
       are consistent with the minimum needs of the industry under the
       particular circumstances, but in no event for a period in excess of one
       (1) year.

         Any such sale by Operator shall be in a manner commercially reasonable
       under the circumstances AND FOR ECONOMIC TERMS NO LESS FAVORABLE THAN
       THAT OBTAINED BY THE OPERATOR FOR ITS SHARE OF OIL AND GAS, The sale or
       delivery by Operator of a non-taking party's share of Oil under the terms
       of any existing contract of Operator shall not give the non-taking party
       any interest in or make the non-taking party a party to said contract. No
       purchase shall be made by Operator without first giving the non-taking
       party at least ten (10) days written notice of such intended purchase and
       the price to be paid or the pricing basis to be used.

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

         In the event one or more parties' separate disposition of its share of
       the Gas causes split-stream deliveries to separate pipelines and/or
       deliveries which on a day-to-day basis for any reason are not exactly
       equal to a party's respective proportion- ate share of total Gas sales to
       be allocated to it, the balancing or accounting between the parties shall
       be in accordance with any Gas balancing agreement between the parties
       hereto, whether such an agreement is attached as Exhibit "E" or is a
       separate agreement. Operator shall give notice to all parties of the
       first sales of Gas from any well under this agreement.

                                  ARTICLE VII.
                      EXPENDITURES AND LIABILITY OF PARTIES

A. LIABILITY OF PARTIES:

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

                                     - 11 -
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

B. LIENS AND SECURITY INTERESTS:

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

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

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

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

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

     Each party agrees that the other parties shall be entitled to utilize the
provisions of Oil and Gas lien law or other lien law of any state in which the
Contract Area is situated to enforce the obligations of each party hereunder.
Without limiting the generality of the foregoing, to the extent permitted by
applicable law, Non-Operators agree that Operator may invoke or utilize the
mechanics' or materialmen's lien law of the state in which the Contract Area is
situated in order to secure the payment to Operator of any sum due hereunder for
services performed or materials supplied by Operator.

C. ADVANCES:

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

D. DEFAULTS AND REMEDIES:

     If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C. or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the remedies
provided in Article VII.B. or elsewhere in this agreement, the remedies
specified below shall be applicable. For purposes of this Article VII.D., all
notices and elections shall be delivered

                                     - 12 -
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

only by Operator, except that Operator shall deliver any such notice and
election requested by a non-defaulting Non-Operator, and when Operator is the
party in default, the applicable notices and elections can be delivered by any
Non-Operator. Election of any one or more of the following remedies shall not
preclude the subsequent use of any other remedy specified below or otherwise
available to a non-defaulting party.

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

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

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

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

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

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

E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:

     Rentals, shut-in well payments and minimum royalties which may be required
under the terms of any lease shall be paid by the OPERATOR AND CHARGED TO THE
JOINT ACCOUNT. In the event two or more parties own and have contributed
interests in the same lease to this agreement, such parties may designate one of
such parties to make said payments for and on behalf of all such parties. Any
party may request, and shall be entitled to receive, proper evidence of all such
payments. In the event of failure to make proper payment of any rental, shut-in
well payment or minimum royalty through mistake or oversight where such payment
is required to continue the lease in force, any loss which results from such
non-payment shall be borne in accordance with the provisions of Article IV.B.2.

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

F. TAXES:

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

                                     - 13 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

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

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

                                  ARTICLE VIII.
                ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

A. SURRENDER OF LEASES:

     The Leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.

     However, should any party desire to surrender its interest in any Lease or
in any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute a consent to the surrender of the Leases described in the
notice. If all parties do not agree or consent thereto, the party desiring to
surrender shall assign, without express or implied warranty of title, all of its
interest in such Lease, or portion thereof, and any well, AND DRILLING UNIT
THEREOF, material and equipment which may be located thereon and any rights in
production thereafter secured, to the parties not consenting to such surrender.
Upon such assignment or lease, the assigning party shall be relieved from all
obligations thereafter accruing, but not theretofore accrued, with respect to
the interest assigned or leased and the operation of any well attributable
thereto, and the assigning party shall have no further interest in the assigned
or leased premises and its equipment and production other than the royalties
retained in any lease made under the terms of this Article. The party assignee
or lessee shall pay to the party assignor or lessor the reasonable salvage value
of the latter's interest in any well's salvable materials and equipment
attributable to the assigned or leased acreage. The value of all salvable
materials and equipment shall be determined in accordance with the provisions of
Exhibit "C," less the estimated cost of salvaging and the estimated cost of
plugging and abandoning and restoring the surface. If such value is less than
such costs, then the party assignor or lessor shall pay to the party assignee or
lessee the amount of such deficit. If the assignment or lease is in favor of
more than one party, the interest shall be shared by such parties in the
proportions that the interest of each bears to the total interest of all such
parties. If the interest of the parties to whom the assignment is to be made
varies according to depth, then the interest assigned shall similarly reflect
such variances.

     Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as it
was immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement .

B. RENEWAL OR EXTENSION OF LEASES:

     If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interest
held at that time by the parties in the Contract Area. Each party who
participates in the purchase of a renewal or replacement Lease shall be given an
assignment of its proportionate interest therein by the acquiring party.

     If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties who
elect to participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate of
the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated in
Exhibit "A," but any renewal or replacement Lease in which less than all parties
elect to participate shall not be subject to this agreement but shall be deemed
subject to a separate Operating Agreement in the form of this agreement.

     If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or replacement
Leases and their right to receive an assignment of interest shall also reflect
such depth variances.

     The provisions of this Article shall apply to renewal or replacement Leases
whether they are for the entire interest covered by the expiring Lease or cover
only a portion of its area or an interest therein. Any renewal or replacement
Lease taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.

     The provisions in this Article shall also be applicable to extensions of
Oil and Gas Leases.

C. ACREAGE OR CASH CONTRIBUTIONS:

     While this agreement is in force, if any party contracts for, OR RECEIVES a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost of
such drilling or other operation. If the contribution be in the form of acreage,
the party to whom the contribution is made shall promptly tender an assignment
of the acreage, without warranty of title, to the Drilling Parties in the
proportions said Drilling Parties shared the cost of drilling the well. Such
acreage shall become a separate Contract Area and, to the extent possible, be
governed by provisions identical to this agreement. Each party shall promptly
notify all other parties of any acreage or cash contributions it may obtain in
support of any well or any other operation on the Contract Area. The above
provisions shall also be applicable to optional rights to earn acreage outside
the Contract Area which are in support of well drilled inside Contract Area.

                                     - 14 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

     If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.

D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:

     For the purpose of maintaining uniformity of ownership in the Contract Area
in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production covered by this agreement no party shall sell, encumber, transfer or
make other disposition of its interest in the Oil and Gas Leases and Oil and Gas
Interests embraced within the Contract Area or in wells, equipment and
production unless such disposition covers either:

     1. the entire interest of the party in all Oil and Gas Leases, Oil and Gas
Interests, wells, equipment and production; or

     2. an equal undivided percent of the party's present interest in all Oil
and Gas Leases, Oil and Gas Interests, wells, equipment and production in the
Contract Area.

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

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

E. WAIVER OF RIGHTS TO PARTITION:

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

F. PREFERENTIAL RIGHT TO PURCHASE:

[ ]  (Optional; Check if applicable.)

     Should any party desire to sell all or any part of its interests under this
agreement, or its rights and interests in the Contract Area, it shall promptly
give written notice to the other parties, with full information concerning its
proposed disposition, which shall include the name and address of the
prospective transferee (who must be ready, willing and able to purchase), the
purchase price, a legal description sufficient to identify the property, and all
other terms of the offer. The other parties shall then have an optional prior
right, for a period of ten (10) days after the notice is delivered, to purchase
for the stated consideration on the same terms and conditions the interest which
the other party proposes to sell; and, if this optional right is exercised, the
purchasing parties shall share the purchased interest in the proportions that
the interest of each bears to the total interest of all purchasing parties.
However, there shall be no preferential right to purchase in those cases where
any party wishes to mortgage its interests, or to transfer title to its
interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage
of its interests, or to dispose of its interests by merger, reorganization,
consolidation, or by sale of all or substantially all of its Oil and Gas assets
to any party, or by transfer of its interests to a subsidiary or parent company
or to a subsidiary of a parent company, or to any company in which such party
owns a majority of the stock.

                                   ARTICLE IX.
                         INTERNAL REVENUE CODE ELECTION

     If, for federal income tax purposes, this agreement and the operations
hereunder are regarded as a partnership, and if the parties have not otherwise
agreed to form a tax partnership pursuant to Exhibit "G" or other agreement
between them, each party thereby affected elects to be excluded from the
application of all of the provisions of Subchapter "K," Chapter 1, Subtitle "A,"
of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and
authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to execute on behalf of each
party hereby affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States or the Federal Internal Revenue
Service, including specifically, but not by way of limitation, all of the
returns, statements, and the data required by Treasury Regulation Section 1.761.
Should there be any requirement that each party hereby affected give further
evidence of this election, each such party shall execute such documents and
furnish such other evidence as may be required by the Federal Internal Revenue
Service or as may be necessary to evidence this election. No such party shall
give any notices or take any other action inconsistent with the election made
hereby. If any present or future income tax laws of the state or states in which
the Contract Area is located or any future income tax laws of the United States
contain provisions similar to those in Subchapter "K," Chapter 1, Subtitle "A,"
of the Code, under which an election similar to that provided by Section 761 of
the Code is permitted, each party hereby affected shall make such election as
may be permitted or required by such laws. In making the foregoing election,
each such party states that the income derived by such party from operations
hereunder can be adequately determined without the computation of partnership
taxable income.

                                   ARTICLE X.
                               CLAIMS AND LAWSUITS

     Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed Ten
Thousand Dollars ($10,000) and if the payment is in complete settlement of such
claim or suit. If the amount required for settlement exceeds the above amount,
the parties hereto shall assume and take over the further handling of the claim
or suit, unless such authority is delegated to Operator. All costs and expenses
of handling settling, or otherwise discharging such claim or suit shall be a the
joint expense of the parties participating in the operation from which the claim
or suit arises. If a claim is made against any party or if any party is sued on
account of any matter arising from operations hereunder over which such
individual has no control because of the rights given Operator by this
agreement, such party shall immediately notify all other parties, and the claim
or suit shall be treated as any other claim or suit involving operations
hereunder.

                                     - 15 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                   ARTICLE XI.
                                  FORCE MAJEURE

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

     The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.

                                  ARTICLE XII.
                                     NOTICES

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

                                  ARTICLE XIII.
                                TERM OF AGREEMENT

     This agreement shall remain in full force and effect as to the Oil and Gas
Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.

     [X] Option No. 1: So long as any of the Oil and Gas Leases subject to this
         agreement remain or are continued in force as to any part of the
         Contract Area, whether by production, extension, renewal or otherwise.

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

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

                                  ARTICLE XIV.
                      COMPLIANCE WITH LAWS AND REGULATIONS

A. LAWS, REGULATIONS AND ORDERS:

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

B. GOVERNING LAW:

     THIS AGREEMENT AND ALL MATTERS PERTAINING HERETO, INCLUDING BUT NOT LIMITED
TO MATTERS OF PERFORMANCE, NON- PERFORMANCE, BREACH, REMEDIES, PROCEDURES,
RIGHTS, DUTIES, AND INTERPRETATION OR CONSTRUCTION, SHALL BE GOVERNED AND
DETERMINED BY THE LAW OF THE STATE IN WHICH THE CONTRACT AREA IS LOCATED. IF THE
CONTRACT AREA IS IN TWO OR MORE STATES, THE LAW OF THE STATE OF CALIFORNIA SHALL
GOVERN.

C. REGULATORY AGENCIES:

     Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or

                                     - 16 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on tracts
offsetting or adjacent to the Contract Area.

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

                                   ARTICLE XV.
                                  MISCELLANEOUS

A. EXECUTION:

     This agreement shall be binding upon each Non-Operator when this agreement
or a counterpart thereof has been executed by such Non-Operator and Operator
notwithstanding that this agreement is not then or thereafter executed by all of
the parties to which it is tendered or which are listed on Exhibit "A" as owning
an interest in the Contract Area or which own, in fact, an interest in the
Contract Area. Operator may, however, by written notice to all Non-Operators who
have become bound by this agreement as aforesaid, given at any time prior to the
actual spud date of the Initial Well but in no event later than five days prior
to the date specified in Article VI.A. for commencement of the Initial Well,
terminate this agreement if Operator in its sole discretion determines that
there is insufficient participation to justify commencement of drilling
operations. In the event of such a termination by Operator, all further
obligations of the parties hereunder shall cease as of such termination. In the
event any Non-Operator has advanced or prepaid any share of drilling or other
costs hereunder, all sums so advanced shall be returned to such Non-Operator
without interest. In the event Operator proceeds with drilling operations for
the Initial Well without the execution hereof by all persons listed on Exhibit
"A" as having a current working interest in such well, Operator shall indemnify
Non-Operators with respect to all costs incurred for the Initial Well which
would have been charged to such person under this agreement if such person had
executed the same and Operator shall receive all revenues which would have been
received by such person under this agreement if such person had executed the
same.

B. SUCCESSORS AND ASSIGNS:

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

C. COUNTERPARTS:

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

D. SEVERABILITY:

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

                                  ARTICLE XVI.
                                OTHER PROVISIONS

A.   Except as otherwise agreed in writing, a Drilling Unit for purposes of
     non-consent operations shall be Eighty (80) acres drawn as nearly as is
     practicable in the form of a rectangle square with the appropriate well
     being the center of the square.

B.   Should any party wish to acquire or acquires any proprietary geophysical
     data within the Contract Area, it shall give written notice of same to the
     non-acquiring party, who shall have Twenty (20) days within which to elect
     whether or not to participate in said acquisition in proportion to its
     working interest herein as described in Exhibit "A". Failure to respond in
     said Twenty (20) day period shall be deemed to be an election not to
     participate in said acquisition. If any party does not agree to participate
     in the geophysical data acquisition, then said data shall be excluded from
     this Agreement and the non-acquiring party shall have no ownership rights
     in said geophysical data.

C.   All liability hereunder shall be several and not joint or collective. It is
     not the purpose of this Agreement, nor the intent of the parties, to create
     a partnership, partnership for specific purpose, joint venture, or any
     relationship which would render the parties liable as partners, associates
     or joint ventures.

D.   Subject to Article VII.E., Operator shall pay all delay rentals, shut-in
     royalties, and/or minimum royalties which may be required by the terms of
     any lease within the Contract Area and subject to this Agreement.
     Non-Operators shall promptly reimburse Operator for its share of any such
     payment, in accordance with its working interest percentage as set out in
     Exhibit "A".

E.   Where a well, authorized under the terms of this Agreement, has been
     drilled to the Contract Depth, and if within Twenty-Four (24) hours of
     delivery of the initially proposed further operation, the parties
     participating in the well cannot agree on the sequence and timing of
     further operations regarding such well, the following elections shall
     control in the order enumerated below:

     1.   An election to do additional logging, coring or testing;

     2.   An election to attempt to complete the well at either the authorized
          depth or objective formation.

     3.   An election to deepen the well;

     4.   An election to plug back and attempt to complete the well;

     5.   An election to sidetrack the well;

     6.   Plugging and abandonment.

     If at any time while the parties are considering the above election, the
     hole is in such condition that a reasonably prudent Operator would not
     conduct operations contemplated by the particular election involved for
     fear of placing the hole in jeopardy or losing the same prior to completing
     the well, such election shall not be given the priority hereinabove set
     forth. In such event, the operation which is less likely to jeopardize the
     well will be conducted.

F.   The terms, covenants and conditions of the Agreement shall be covenants
     running with the lands and leasehold estates covered hereby and with each
     transfer or assignment of said lands or leasehold estates, each party
     making an assignment or transfer of any lands or leasehold estates cover
     hereby shall state that such assignment or transfer is subject to all the
     terms, covenants and conditions hereof. Notice of any such assignment or
     transfer shall promptly be given to the Operator.

G.   Except as otherwise provided below and except for the necessary disclosures
     to appropriate court and governmental agencies, no party to this Agreement
     shall release any "Confidential Data" which shall include, but be limited
     to any geological, geophysical, reservoir, engineering, production or
     technical information or any logs, maps, reports, interpretations, records,
     data or other information pertaining to proposed operations, the progress,
     tests, or results of any well unless agreed to, in writing, by all the
     participating parties. Any party who transfers an interest hereunder to any
     third party shall, along with any such third party assignee, remain subject
     to all the terms and conditions set forth herein. Any party may make
     Confidential Data available to affiliates, prospective purchasers of all or
     a portion of its interest, reputable consulting firms, and gas transmission
     companies for hydrocarbon reserve and other technical evaluation, and to
     reputable financial institutions for study prior to commitment of funds.
     Any third party permitted such access shall first agree in writing to be
     bound by the confidentiality provisions of this Agreement, and under no
     circumstances shall such third party be allowed to utilize such data for
     its personal advantage or any other purposes not related to this Agreement.
     It shall not be a breach of this provision if a party provides such data
     pursuant to a valid order of a Federal or State Court or regulatory agency,
     and the party makes a provision for an appropriate protective order, if
     available. Release to news media, industry journals, or any other published
     or broadcast medium concerning any operations or other matters related to
     this Agreement are prohibited unless such proposed release is agreed to in
     advance in writing by all parties entitled to the information concerning
     any such operations or other matters pursuant to the terms of this
     Agreement. It is agreed between the parties hereto and their successors and
     assigns that the terms of this provision shall be limited to the data
     acquired pursuant to and subject to this Agreement.

H.   If, following the granting of relief under the Bankruptcy Code to any party
     or debtor thereunder, this Agreement should be held to be an executory
     contract within the meaning of the 11 U.S.C. Section 365, then the
     Operator, or (if the Operator is the debtor in bankruptcy) any other party
     hereto, shall be entitled to receive a determination by debtor, or any
     trustee for debtor, within Thirty (30) days from the date an order for
     relief is entered under the Bankruptcy Code of such debtor or trustee's
     rejection or assumption of this Operating Agreement. In the event of an
     assumption, Operator of said other party shall be entitled to receive
     adequate assurances from such debtor or trustee as to the future
     performance of debtor's obligation hereunder and the protection of the
     interest of all other parties hereto.

                                     - 17 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

I.   Area of Mutual Interest

     1.   An Area of Mutual Interest (AMI) covering the lands set forth in
          Exhibit "A-1", attached hereto is hereby established between the
          parties hereto to become effective as of the date of this Operating
          Agreement, and shall remain in full force and effect pursuant to
          Article XIII herein.

     2.   Should any party subject hereto acquire an interest within the AMI by
          lease, purchase, farm-in, or otherwise, including, but not limited to,
          leasehold interests, royalty interests, overriding royalty interests,
          mineral fee interests, and non-participating royalty interests, the
          acquiring party shall give, within Thirty (30) days after acquiring
          such interest, written notice to the non-acquiring party, setting
          forth a description of the acquired interest and the consideration
          paid therefore. The non-acquiring party shall make its election, in
          writing, within Fifteen (15) days after its receipt of said notice,
          whether or not to reimburse the acquiring party for its proportionate
          share of acquisition costs. An election to so reimburse the acquiring
          party shall entitle the non-acquiring party to a recordable assignment
          of its proportionate working interest in the acquired interest as soon
          as possible after said reimbursement. Failure by the non-acquiring
          party to make an election within Fifteen (15) days of receipt of said
          notice shall constitute an election on its part not to reimburse the
          acquiring party and shall not entitle the non-acquiring party to an
          assignment of such non-acquired interest.

J.   Conflict of Terms

     This Operating Agreement is made expressly subject to that certain Farmout
     And Exploration Agreement, by and between The Nahabedian Exploration Group,
     Inc. and Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc., in
     California, and the parties hereto shall be bound by the terms and
     conditions contained in said Agreement. In the event that any of the terms
     of this Operating Agreement conflict with the terms of the Farmout And
     Exploration Agreement, the parties hereto agree that the terms of the
     Farmout And Exploration Agreement shall prevail.

                                     - 17 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

         IN WITNESS WHEREOF, this agreement shall be effective as of the 17TH
day of FEBRUARY, 2004.

IVANHOE ENERGY (USA) DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA, who has
prepared and circulated this form for execution, represents and warrants that
the form was printed from and, with the exception(s) listed below, is identical
to the AAPL Form 610-1989 Model Form Operating Agreement, as published in
computerized form by Forms On-A-Disk, Inc. No changes, alterations, or
modifications, other than those made by strikethrough and/or insertion and that
are clearly recognizable as changes have been made to the form.

ATTEST OR WITNESS:                         OPERATOR

                                           THE NAHABEDIAN EXPLORATION GROUP, LLC

                                        By /s/ Mark A. Nahabedian
__________________________________         _____________________________________

__________________________________         MARK A. NAHABEDIAN
                                           Type or print name

                                           Title PRESIDENT

                                           Date  2/17/04

                                           Tax ID or S.S. No. 77-0473871

                                           NON-OPERATORS

                                           IVANHOE ENERGY (USA) INC. DBA
                                           USA IVANHOE ENERGY, INC.

                                        By /s/ Michael P. Stark
__________________________________         _____________________________________

__________________________________         MICHAEL P. STARK
                                           Type or print name

                                           Title VICE PRESIDENT, EXPLORATION AND
                                                 LAND

                                           Date 2/17/04

                                           Tax ID or S.S. No.  77-0492835

                                           _____________________________________

__________________________________      By _____________________________________

__________________________________         _____________________________________
                                           Type or print name

                                           Title _______________________________

                                           Date ________________________________

                                           Tax ID or S.S. No. __________________

                                           _____________________________________

__________________________________      By _____________________________________

__________________________________         _____________________________________
                                           Type or print name

                                           Title _______________________________

                                           Date ________________________________

                                           Tax ID or S.S. No. __________________

                                     - 18 -
<PAGE>

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

                                 ACKNOWLEDGMENTS

         Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts.

The validity and effect of these forms in any state will depend upon the
statutes of that state.

Individual acknowledgment:

State of___________________)

                           ) ss.

County of__________________)

         This instrument was acknowledged before me on

_______________________________________ by _____________________________________

(Seal, if any)                             _____________________________________

                                           Title (and Rank)_____________________

                                           My commission expires:_______________

Acknowledgment in representative capacity:

State of___________________)

                           ) ss.

County of__________________)

         This instrument was acknowledged before me on

________________________________________ by _________________________________ as

_________________ of _________________________________________________________ .

(Seal, if any)                             _____________________________________

                                           Title (and Rank)_____________________

                                           My commission expires:_______________

                                     - 19 -
<PAGE>

                                   EXHIBIT "A"

Attached to and made a part of that certain Operating Agreement dated February
17, 2004, by and between The Nahabedian Exploration Group, LLC, as Operator, and
Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc., in California, as
Non-Operator.

1.       Description of lands subject to this agreement:

         The lands subject to this agreement are the same lands lying within the
         Area of Mutual Interest depicted on the map attached as Exhibit "B-2"
         to the Farmout and Exploration Agreement effective February 17, 2004,
         to which this agreement is attached.

2.       Restriction as to depths:

         Limited in depth from the surface of the ground to the base of the
         geologic formation the Test Well is drilled into, pursuant to the
         Farmout and Exploration Agreement, effective February 17, 2004, to
         which this agreement is attached.

3.       Parties to this agreement with addresses and telephone numbers for
         notice purposes:

         NEG:                  THE NAHABEDIAN EXPLORATION GROUP, LLC

         Mailing Address:      214 West Aliso Street
                               Ojai, California 93025

         Street Address:       Same as above

         Attention:            Mark Nahabedian
         Telephone:            805-646-4276
         Facsimile:            805-646-3476
         E-mail:               neg_hamar@sbcglobal.net

         IVANHOE:              IVANHOE ENERGY (USA) INC.

         Mailing Address:      P.O. Box 9279
                               Bakersfield, California 93389-9279

         Street Address:       1200 Discovery Drive, Suite 301
                               Bakersfield, California 93389

         Attention:            Michael Stark
         Telephone:            661-869-8312
         Facsimile:            661-325-2961
         E-mail:               mstark@ivanhoeenergy.com

4.       Decimal interests of the parties to this agreement:

         Pursuant to the Farmout And Exploration Agreement, effective February
         17, 2004, to which this Agreement is attached.

5.       Oil and Gas Leases subject to this agreement:

         The oil and gas leases subject to this agreement are the same oil and
         gas leases described in Exhibits "A" and "B-1" to the Farmout and
         Exploration Agreement effective February 17, 2004, to which this
         agreement is attached.

<PAGE>

                                  EXHIBIT "A-1"

Attached to and made a part of that certain Operating Agreement dated February
17, 2004, by and between The Nahabedian Exploration Group, LLC, as Operator, and
Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc., in California, as
Non-Operator.

         Per Exhibit "B-1" of the Farmout and Exploration Agreement dated
         February 17, 2004, by and between The Nahabedian Exploration Group,
         LLC, (NEG), and Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc.,
         in California, (Ivanhoe), entitled Outer Boundary of AMI Area.

<PAGE>

                                   EXHIBIT "B"

Attached to and made a part of that certain Operating Agreement dated February
17, 2004, by and between The Nahabedian Exploration Group, LLC, as Operator, and
Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc., in California, as
Non-Operator.

                                 Not Applicable
<PAGE>

                                                      COPAS 1984 ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies
                                                      [COPAS LOGO]

                                  EXHIBIT "C"

Attached to and made a part of that certain Operating Agreement dated February
17, 2004, by and between The Nahabedian Exploration Group, LLC, as Operator, and
Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc., in California, as
Non-Operator

                              ACCOUNTING PROCEDURE

                                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 to 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 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.

         "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 or Petroleum Accountants Societies.

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 outlay 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 ANNOUNCED prime rate in effect at BANK OF AMERICA on the
                  first day of the month in which delinquency occurs plus 1% or
                  the maximum contract rate permitted by the applicable usury
                  laws in the state in which 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
         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.

      COPYRIGHT (C) 1985 BY THE COUNCIL OF PETROLEUM ACCOUNTANTS SOCIETIES.

                                     - 1 -
<PAGE>

                                                      COPAS 1984 ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies
                                                      [COPAS LOGO]

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.       ECOLOGICAL AND ENVIRONMENTAL

         Costs incurred for the benefit of the Joint Property as a result of
         governmental or regulatory requirements to satisfy environmental
         considerations applicable to the Joint Operations. Such costs may
         include surveys of an ecological or archaeological nature and pollution
         control procedures as required by applicable laws and regulations.

2.       RENTALS AND ROYALTIES

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

3.       LABOR

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

                  (2)      Salaries of First level Supervisors in the field.

                  (3)      Salaries and wages of Technical Employees directly
                           employed on the Joint Property if such charges are
                           excluded from the overhead rates.

                  (4)      Salaries and wages of Technical Employees either
                           temporarily or permanently assigned to and directly
                           employed in the operation or 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 3A of this Section II. Such costs under this
                  Paragraph 3B 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 3A 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 3A and 3B of this Section II.

         D.       Personal Expenses of those employees whose salaries and wages
                  are chargeable to the Joint Account under Paragraphs 3A and 3B
                  of this Section II.

4.       EMPLOYEE BENEFITS

         Operator's current costs or 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
         3A and 3B of this Section II shall be Operator's actual cost not to
         exceed the percent most recently recommended by the Council of
         Petroleum Accountants Societies.

                                     - 2 -
<PAGE>

                                                      COPAS 1984 ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies
                                                      [COPAS LOGO]

5.       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.

6.       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 Operator, unless agreed to by the
                  Parties.

         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.

7.       SERVICES

         The cost of contract services, equipment and utilities provided by
         outside sources, except services excluded by Paragraph 10 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 not directly engaged on the
         Joint Property shall not be charged to the Joint Account unless
         previously agreed to by the Parties.

8.       EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR

         A.       Operator shall charge the Joint Account for use of Operator
                  owned equipment and facilities at rates commensurate with
                  costs of ownership and operation. Such rates shall include
                  costs of maintenance, repairs, other operating expense,
                  insurance, taxes, depreciation, and interest on gross
                  investment less accumulated depreciation not to exceed nine
                  percent (9%) per annum. 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 8A above, Operator may elect
                  to use average commercial rates prevailing in the immediate
                  area of the Joint Property less 20%. For automotive equipment,
                  Operator may elect to use rates published by the Petroleum
                  Motor Transport Association.

9.       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.

10.      LEGAL EXPENSE

         Expense of handling, investigating and settling litigation or claims,
         discharging of liens, payment of judgments 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.

11.      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.

                                     - 3 -
<PAGE>

                                                      COPAS 1984 ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies
                                                      [COPAS LOGO]

12.      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 in a state in which Operator may act as
         self-insurer for Worker's Compensation and/or Employers Liability under
         the respective state's laws, Operator may, at its election, include the
         risk under its self- insurance program and in that event, Operator
         shall include a charge at Operator's cost not to exceed manual rates.

13.      ABANDONMENT AND RECLAMATION

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

14.      COMMUNICATIONS

         Cost of acquiring, leasing, installing, operating, repairing and
         maintaining communication systems, including radio and microwave
         facilities directly serving the Joint Property. 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 8 of this Section II.

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.

                                  III. OVERHEAD

1.       OVERHEAD - DRILLING AND PRODUCING OPERATIONS

         i.       As compensation for administrative, supervision, office
                  services and warehousing costs, Operator shall charge drilling
                  and producing operations on either:

                  ( X ) Fixed Rate Basis, Paragraph 1A, or

                  (   ) Percentage Basis, Paragraph 1B

                  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 Paragraph
                  3A, 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 the above selected Paragraph of this Section
                  III unless such cost and expense are agreed to by the Parties
                  as a direct charge to the Joint Account.

         ii.      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, or

                  ( X ) shall not be covered by the overhead rates.

         iii.     The salaries, wages and Personal Expenses of Technical
                  Employees and/or 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:

                  (   ) shall be covered by the overhead rates, or

                  ( X ) shall not be covered by the overhead rates.

         A.                Overhead - Fixed Rate Basis

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

                           Drilling Well Rate $5,000.00
                                   (Prorated for less than a full month)

                           Producing Well Rate $500.00

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

                           (a)      Drilling Well Rate

                                    (1)      Charges for drilling wells shall
                                             begin on the date the well is
                                             spudded and terminate on the date
                                             the drilling rig, completion rig,
                                             or other units used in completion
                                             of the well is released, whichever

                                     - 4 -
<PAGE>

                                                      COPAS 1984 ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies
                                                      [COPAS LOGO]

                                             is later, except that no charge
                                             shall be made during suspension of
                                             drilling or completion operations
                                             for fifteen (15) or more
                                             consecutive calendar days.

                                    (2)      Charges for wells undergoing any
                                             type of workover or recompletion
                                             for a period of five (5)
                                             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.

                           (b)      Producing Well Rates

                                    (1)      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.

                                    (2)      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.

                                    (3)      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.

                                    (4)      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.

                                    (5)      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.

                  (3)      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.

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, Operator shall either
         negotiate a rate prior to the beginning of construction, or shall
         charge the Joint

                                     - 5 -
<PAGE>

                                                      COPAS 1984 ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies
                                                      [COPAS LOGO]

         Account for overhead based on the following rates for any Major
         Construction project in excess of $_______________________________:

         A.       5% of first $100,000 or total cost if less, plus

         B.       3% of costs in excess of $100,000 but less than $1,000,000,
                  plus

         C.       1% of 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.

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:

         A.       5% of total costs through $100,000; plus

         B.       3% of total costs in excess of $100,000 but less than
                  $1,000,000; plus

         C.       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 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
                                    Eastern mill published carload base prices
                                    effective as of date of movement plus
                                    transportation cost using the 80,000 pound
                                    carload weight basis to the railway
                                    receiving point 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. Freight charges
                                    for tubing will be calculated from Lorain,
                                    Ohio and casing from Youngstown, Ohio.

                           (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 nearest the Joint Property as provided
                                    above in Paragraph 2.A.(1)(a). For
                                    transportation cost from points other than
                                    Eastern mills, the 30,000

                                     - 6 -
<PAGE>

                                                      COPAS 1984 ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies
                                                      [COPAS LOGO]

                                    pound Oil Field Haulers Association
                                    interstate truck rate shall be used.

                           (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 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 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.
                                    Freight charges shall be calculated from
                                    Lorain, Ohio.

                           (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
                                    Eastern mill published carload base 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. Freight charges
                                    shall be calculated from Lorain, Ohio.

                           (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 new
                                    published 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 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 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 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.

                                     - 7 -
<PAGE>

                                                      COPAS 1984 ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies
                                                      [COPAS LOGO]

                           (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
                                    cents (25 cents) 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.(3). 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 it 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 records 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

                                     - 8 -
<PAGE>

                                                      COPAS 1984 ONSHORE
                                                      Recommended by the Council
                                                      of Petroleum Accountants
                                                      Societies
                                                      [COPAS LOGO]

         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.

                                     - 9 -
<PAGE>

                                   EXHIBIT "D"

Attached to and made a part of that certain Operating Agreement dated February
17,2004, by and between The Nahabedian Exploration Group, LLC, as Operator, and
Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc., in California, as
Non-Operator.

                                    INSURANCE

1.       At all times during the conduct of operations hereunder, Operator shall
         maintain in force the following minimum limits of insurance at the
         expense of, and for the benefit of, the joint Account:

         Pursuant to Insurance Requirements, as provided under Article XV of the
         Farmout And Exploration Agreement, to which this Operating Agreement is
         attached to and made a part hereof.

<PAGE>

                                   EXHIBIT "E"
                      GAS BALANCING AGREEMENT ("AGREEMENT")
                    ATTACHED TO AND MADE PART OF THAT CERTAIN
                  OPERATING AGREEMENT DATED FEBRUARY 17, 2004,
        BY AND BETWEEN The Nahabedian Exploration Group, LLC, AS OPERATOR
    and Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc., in California
   ("OPERATING AGREEMENT") RELATING TO THE Knights Landing Starkey Development
            Program AREA, Sutter_COUNTY/PARISH, STATE OF California.

1.       DEFINITIONS

         The following definitions shall apply to this Agreement:

         1.01     "Arm's Length Agreement" shall mean any gas sales agreement
                  with an unaffiliated purchaser or any gas sales agreement with
                  an affiliated purchaser where the sales price and delivery
                  conditions under such agreement are representative of prices
                  and delivery conditions existing under other similar
                  agreements in the area between unaffiliated parties at the
                  same time for natural gas of comparable quality and quantity.

         1.02     "Balancing Area" shall mean (select one):

                  [X] each well subject to the Operating Agreement that produces
                  Gas or is allocated a share of Gas production. If a single
                  well is completed in two or more producing intervals, each
                  producing interval from which the Gas production is not
                  commingled in the wellbore shall be considered a separate
                  well.

                  [ ] all of the acreage and depths subject to the Operating
                      Agreement.

                  [ ] __________________________________________________________
                      __________________________________________________________
                      __________________________________________________________
                      __________________________________________________________

         1.03     "Full Share of Current Production" shall mean the Percentage
                  Interest of each Party in the Gas actually produced from the
                  Balancing Area during each month.

         1.04     "Gas" shall mean all hydrocarbons produced or producible from
                  the Balancing Area, whether from a well classified as an oil
                  well or gas well by the regulatory agency having jurisdiction
                  in such matters, which are or may be made available for sale
                  or separate disposition by the Parties, excluding oil,
                  condensate and other liquids recovered by field equipment
                  operated for the joint account. "Gas" does not include gas
                  used in joint operations, such as for fuel, recycling or
                  reinjection, or which is vented or lost prior to its sale or
                  delivery from the Balancing Area.

         1.05     "Makeup Gas" shall mean any Gas taken by an Underproduced
                  Party from the Balancing Area in excess of its Full Share of
                  Current Production, whether pursuant to Section 3.3 or Section
                  4.1 hereof.

         1.06     "Mcf" shall mean one thousand cubic feet. A cubic foot of Gas
                  shall mean the volume of gas contained in one cubic foot of
                  space at a standard pressure base and at a standard
                  temperature base.

         1.07     "MMBtu" shall mean one million British Thermal Units. A
                  British Thermal Unit shall mean the quantity of heat required
                  to raise one pound avoirdupois of pure water from 58.5 degrees
                  Fahrenheit to 59.5 degrees Fahrenheit at a constant pressure
                  of 14.73 pounds per square inch absolute.

         1.08     "Operator" shall mean the individual or entity designated
                  under the terms of the Operating Agreement or, in the event
                  this Agreement is not employed in connection with an operating
                  agreement, the individual or entity designated as the operator
                  of the well(s) located in the Balancing Area.

         1.09     "Overproduced Party" shall mean any Party having taken a
                  greater quantity of Gas from the Balancing Area than the
                  Percentage Interest of such Party in the cumulative quantity
                  of all Gas produced from the Balancing Area.

         1.10     "Overproduction" shall mean the cumulative quantity of Gas
                  taken by a Party in excess of its Percentage Interest in the
                  cumulative quantity of all Gas produced from the Balancing
                  Area.

         1.11     "Party" shall mean those individuals or entities subject to
                  this Agreement, and their respective heirs, successors,
                  transferees and assigns.

         1.12     "Percentage Interest" shall mean the percentage or decimal
                  interest of each Party in the Gas produced from the Balancing
                  Area pursuant to the Operating Agreement covering the
                  Balancing Area.

         1.13     "Royalty" shall mean payments on production of Gas from the
                  Balancing Area to all owners of royalties, overriding
                  royalties, production payments or similar interests.

         1.14     "Underproduced Party" shall mean any Party having taken a
                  lesser quantity of Gas from the Balancing Area than the
                  Percentage Interest of such Party in the cumulative quantity
                  of all Gas produced from the Balancing Area.

         1.15     "Underproduction" shall mean the deficiency between the
                  cumulative quantity of Gas taken by a Party and its Percentage
                  Interest in the cumulative quantity of all Gas produced from
                  the Balancing area.

2.       BALANCING AREA

         2.1      If this Agreement covers more than one Balancing Area, it
shall be applied as if each Balancing Area were covered by separate by identical
agreements. All balancing hereunder shall be on the basis of Gas taken from the
Balancing Area measured in (Alternative 1) [ ] Mcfs or (Alternative 2) [ ]
MMBtus.

         2.2      In the event that all or part of the Gas deliverable from a
Balancing Area is or becomes subject to one or more maximum lawful process, any
Gas not subject to price controls shall be considered as produced from a single
Balancing Area and Gas subject to each maximum lawful price category shall be
considered produced from a separate Balancing Area.

3.       RIGHT OF PARTIES TO TAKE GAS

         3.1      Each Party desiring to take Gas will notify the Operator, or
cause the Operator to be notified of the volumes nominated, the name of the
transporting pipeline and the pipeline contract number (if available) and meter
station relating to such delivery, sufficiently in advance for the Operator,
acting with reasonable diligence, to meet all nomination and other requirements.
Operator is authorized to deliver the volumes so nominated and confirmed (if
confirmation is required) to the transporting pipeline in accordance with the
terms of this Agreement.

                                     - 1 -
<PAGE>

         3.2      Each Party shall make a reasonable, good faith effort to take
its Full Share of Current Production each month, to the extent that such
production is required to maintain leases in effect, to protect the producing
capacity of a well or reservoir, to preserve correlative rights, or to maintain
oil production.

         3.3      When a Party fails for any reason to take its Full Share of
Current Production (as such Share maybe reduced by the right of the other
Parties to make up for Underproduction as provided herein), the other Parties
shall be entitled to take any Gas which such Party fails to take. To the extent
practicable, such Gas shall be made available initially to each Underproduced
Party in the proportion that its Percentage Interest in the Balancing Area bears
to the total Percentage Interests of all Underproduced Parties desiring to take
such Gas. If all such Gas is not taken by the Underproduced Parties, the portion
not taken shall then be made available to the other Parties in the proportion
that their respective Percentage Interests in the Balancing Area bear to the
total Percentage Interests of such Parties.

         3.4      All Gas taken by a Party in accordance with the provisions of
this Agreement, regardless of whether such Party is underproduced or
overproduced, shall be regarded as Gas taken for its own account with title
thereto being in such taking Party.

         3.5      Notwithstanding the provisions of Section 3.3 hereof, no
Overproduced Party shall be entitled in any month to take any Gas in excess of
three hundred percent (300%) of its Percentage Interest of the Balancing Area's
then-current Maximum Monthly Availability; provided, however, that this
limitation shall not apply to the extent that it would preclude production that
is required to maintain leases in effect, to protect the producing capacity of a
well or reservoir, to preserve correlative rights, or to maintain oil
production. "Maximum Monthly Availability" shall mean the maximum average
monthly rate of production at which Gas can be delivered from the Balancing
Area, as determined by the Operator, considering the maximum efficient well rate
for each well within the Balancing Area, the maximum allowable(s) set by the
appropriate regulatory agency, mode of operation, production facility
capabilities and pipeline pressures.

         3.6      In the event that a party fails to make arrangements to take
its Full Share of Current Production required to be produced to maintain leases
in effect, to protect the producing capacity of a well or reservoir, to preserve
correlative rights, or to maintain oil production, the Operator may sell any
part of such Party's Full Share of Current Production that such Party fails to
take for the account of such Party and render to such Party, on a current basis,
the full proceeds of the sale, less any reasonable marketing, compression,
treating, gathering or transportation costs incurred directly in connection with
the sale of such Full Share of Current Production. In making the sale
contemplated herein, the Operator shall be obligated only to obtain such price
and conditions for the sale as are reasonable under the circumstances and shall
not be obligated to share any of its markets. Any such sale by Operator under
the terms hereof shall be only for such reasonable periods of time as are
consistent with the minimum needs of the industry under the particular
circumstances, but in no event for a period in excess of one year.
Notwithstanding the provisions of Article 3.4 hereof, Gas sold by Operator for a
Party under the provisions hereof shall be deemed to be Gas taken for the
account of such Party.

4.       IN-KIND BALANCING

         4.1      Effective the first day of any calendar month following at
least sixty days (60) days' prior written notice to the Operator, any
Underproduced Party may begin taking, in addition to its Full Share of Current
Production and any Makeup Gas taken pursuant to Section 3.3 of this Agreement, a
share of current production determined by multiplying twenty-five percent (25%)
of the Full Shares of Current Production of all Overproduced Parties by a
fraction, the numerator of which is the Percentage Interest of such
Underproduced Party and the denominator of which is the total of the Percentage
Interests of all Underproduced Parties desiring to take Makeup Gas. In no event
will an Overproduced Party be required to provide more than twenty-five_percent
(25%) of its Full Share of Current Production for Makeup Gas. The Operator will
promptly notify all Overproduced Parties of the election of an Underproduced
Party to begin taking Makeup Gas.

         4.3      [x] (Optional) Notwithstanding any other provision of this
Agreement, at such time and for so long as Operator, or (insofar as concerns
production by the Operator) any Underproduced Party, determines in good faith
that an Overproduced Party has produced all of its share of the ultimately
recoverable reserves in the Balancing Area, such Overproduced Party may be
required to make available for Makeup Gas, upon the demand of the Operator or
any Underproduced Party, up to one hundred percent (100%) of such Overproduced
Party's Full Share of Current Production.

5.       STATEMENT OF GAS BALANCES

         5.1      The Operator will maintain appropriate accounting on a monthly
and cumulative basis of the volumes of Gas that each Party is entitled to
receive and the volumes of Gas actually taken or sold for each Party's account.
Within forty-five (45) days after the month of production, the Operator will
furnish a statement for such month showing (1) each Party's Full Share of
Current Production, (2) the total volume of Gas actually taken or sold for each
Party's account, (3) the difference between the volume taken by each Party and
that Party's Full Share of Current Production, (4) the Overproduction or
Underproduction of each Party, and (5) other data as recommended by the
provisions of the Council of Petroleum Accountants Societies Bulletin No. 24, as
amended or supplemented hereafter. Each Party taking Gas will promptly provide
to the Operator any data required by the Operator for preparation of the
statements required hereunder.

         5.2      If any Party fails to provide the data required herein for
four (4) consecutive production months, the Operator, or where the Operator has
failed to provide data, another Party, may audit the production and Gas sales
and transportation volumes of the no-reporting Party to provide the required
data. Such audit shall be conducted only after reasonable notice and during
normal business hours in the office of the Party whose records are being
audited. All costs associated with such audit will be charged to the account of
the Party failing to provide the required data.

6.       PAYMENTS ON PRODUCTION

                                     - 2 -
<PAGE>

         6.1      Each Party taking Gas shall pay or cause to be paid all
production and severance taxes due on all volumes of gas actually taken by such
Party.

         6.2      [x] (Alternative 2 - Sales) Each Party shall pay or cause to
be paid Royalty due with respect to Royalty owners to whom it is accountable
based on the volume of Gas actually taken for its account.

         6.3      In the event that any governmental authority requires that
Royalty payments be made on any other basis than that provided for in this
Section 6, each Party agrees to make such Royalty payments accordingly,
commencing on the effective date required by such governmental authority, and
the method provided for herein shall be thereby superseded.

7.       CASH SETTLEMENTS

         7.1      Upon the earlier of the plugging and abandonment of the last
producing interval in the Balancing Area, the termination of the Operating
Agreement or any pooling or unit agreement covering the Balancing Area, or at
any time no Gas is taken from the Balancing Area for a period of thirty-six
(36) consecutive months, any Party may give written notice calling for cash
settlement of the Gas production imbalances among the Parties. Such notice shall
be given to all Parties in the Balancing Area.

         7.2      Within sixty (60) days after the notice calling for cash
settlement under Section 7.1, the Operator will distribute to each Party a Final
Gas Settlement Statement detailing the quantity of Overproduction owed by each
Overproduced Party to each Underproduced Party , pursuant to the methodology set
out in Section 7.4.

         7.3      [x] (Alternative 1 - Direct Party-to-Party Settlement) Within
sixty (60) days after receipt of the Final Gas Settlement Statement, each
Overproduced Party will pay to each Underproduced Party entitled to settlement
the appropriate cash settlement, accompanied by appropriate accounting detail.
At the time of payment, the Overproduced Party will notify the Operator of the
Gas imbalance settled by the Overproduced Party's payment.

         7.4      [x] (Alternative 2 - Most Recent Sales Basis) The amount of
the cash settlement will be based on the proceeds received by the Overproduced
Party under an Arm's Length Agreement for the volume of Gas that constituted
Overproduction by the Overproduced Party from the Balancing Area. For the
purpose of implementing the cash settlement provision of the Section 7, an
Overproduced Party will not be considered to have produced any of an
Underproduced Party's share of Gas until the Overproduced Party has produced
cumulatively all of its Percentage Interest share of the Gas ultimately produced
from the Balancing Area.

         7.5      The values used for calculating the cash settlement under
Section 7.4 will include all proceeds received for the sale of the Gas by the
Overproduced Party calculated at the Balancing Area, after deducting any
production or severance taxes paid and any Royalty actually paid by the
Overproduced Party to an Underproduced Party's Royalty owner(s), to the extent
said payments amounted to a discharge of said Underproduced Party's Royalty
obligation, as well as any reasonable marketing, compression, treating,
gathering or transportation costs incurred directly in connection with the sale
of the Overproduction.

         7.5.1    [x] (Optional - For Valuation Under Percentage of Proceeds
Contracts) For Overproduction sold under a gas purchase contract providing for
payment based on a percentage of the proceeds obtained by the purchaser upon
resale of residue gas and liquid hydrocarbons extracted at a gas processing
plant, the values used for calculating bash settlement will include proceeds
received by the Overproduced Party for both the liquid hydrocarbons and the
residue gas attributable to the Overproduction.

                                     - 3 -
<PAGE>

         7.5.2    [x] (Optional - Valuation for Processed Gas - Option 2) For
Overproduction processed for the account of the Overproduced Party at a gas
processing plant for the extraction of liquid hydrocarbons, the values used for
calculating cash settlement will include the proceeds received by the
Overproduced Party for the sale of the liquid hydrocarbons extracted from the
Overproduction, less the actual reasonable costs incurred by the Overproduced
Party to process the Overproduction and to transport, fractionate and handle the
liquid hydrocarbons extracted therefrom prior to sale.

         7.6      To the extent the Overproduced Party did not sell all
Overproduction under an Arm's Length Agreement, the cash settlement will be
based on the weighted average price received by the Overproduced Party for any
gas sold from the Balancing Area under Arm's Length Agreements during the months
to which such Overproduction is attributed. In the event that no sales under
Arm's Length Agreements were made during any such month, the cash settlement for
such month will be based on the spot sales prices published for the applicable
geographic area during such month in a mutually acceptable pricing bulletin.

         7.7      Interest compounded at the rate in effect at Bank of America
on the 1st day of the month plus One Percent per cent (1%) per annum or the
maximum lawful rate of interest applicable to the Balancing Area, whichever is
less, will accrue for all amounts due under Section 7.1, beginning the first day
following the date payment is due pursuant to Section 7.3. Such interest shall
be borne by the Operator or any Overproduced Party in the proportion that their
respective delays beyond the deadlines set out in Sections 7.2 and 7.3
contributed to the accrual of the interest.

         7.8      In lieu of the cash settlement required by Section 7.3, an
Overproduced Party may deliver to the Underproduced Party an offer to settle its
Overproduction in-kind and at such rates, quantities, times and sources as may
be agreed upon by the Underproduced Party. If the Parties are unable to agree
upon the manner in which such in-kind settlement gas will be furnished within
sixty (60) days after the Overproduced Party's offer to settle in kind, which
period may be extended by agreement of said Parties, the Overproduced Party
shall make a cash settlement as provided in section 7.3. The making of an
in-kind settlement offer under this Section 7.8 will not delay the accrual of
interest on the cash settlement should the Parties fail to reach agreement on an
in-kind settlement.

         7.9      [ ] (Optional - for Balancing Areas Subject to Federal Price
Regulation) That portion of any monies collected by an Overproduced Party for
Overproduction which is subject to refund by orders of the Federal Energy
Regulatory Commission or other governmental authority may be withheld by the
Overproduced Party until such prices are fully approved by such governmental
authority, unless the Underproduced Party furnishes a corporate undertaking,
acceptable to the Overproduced Party, agreeing to hold the Overproduced Party
harmless from financial loss due to refund orders by such governmental
authority.

8.       TESTING

         Notwithstanding any provision of this Agreement to the contrary, any
Party shall have the right, from time to time, to produce and take up to one
hundred percent (100%) of a well's entire Gas stream to meet the reasonable
deliverability test(s) required by such Party's Gas purchaser, and the right to
take any Makeup Gas shall be subordinate to the right of any Party to conduct
such tests; provided, however, that such tests shall be conducted in accordance
with prudent operating practices only after thirty (30) days' prior written
notice to the Operator and shall last no longer than seventy-two (72) hours.

9.       OPERATING COSTS

         Nothing in this Agreement shall change or affect any Party's obligation
to pay its proportionate share of all costs and liabilities incurred in
operations on or in connection with the Balancing Area, as its share thereof is
set forth in the Operating Agreement, irrespective of whether any Party is at
any time selling and using Gas or whether such sales or use are in proportion to
its Percentage Interest in the Balancing Area.

10.      LIQUIDS

         The Parties shall share proportionately in and own all liquid
hydrocarbons recovered with Gas by field equipment operated for the joint
account in accordance with their Percentage Interests in the Balancing Area.

11.      AUDIT RIGHTS

         Notwithstanding any provision in this Agreement or any other agreement
between the Parties hereto, and further notwithstanding any termination or
cancellation of this Agreement, for a period of two (2) years from the end of
the calendar year in which any information to be furnished under Section 5 or 7
hereof is supplied, any Party shall have the right to audit the records of any
other Party regarding quantity, including but not limited to information
regarding Btu-content. Any Underproduced Party shall have the right for a period
of two (2) years from the end of the calendar year in which any cash settlement
is received pursuant to section 7 to audit the records of any Overproduced Party
as to all matters concerning values, including but not limited to information
regarding prices and disposition of Gas from the Balancing Area. Any such audit
shall be conducted at the expense of the Party or Parties desiring such audit,
and shall be conducted, after reasonable notice, during normal business hours in
the office of the Party whose records are being audited. Each Party hereto
agrees to maintain records as to the volumes and prices of Gas sold each month
and the volumes of Gas used in its own operations, along with the Royalty paid
on any such Gas used by a Party in its own operations. The audit rights provided
for in this Section 11 shall be in addition to those provided for in Section 5.2
of this Agreement.

12.      MISCELLANEOUS

         12.1 As between the Parties, in the event of any conflict between the
provisions of this Agreement and the provisions of any gas sales contract, or in
the event of any conflict between the provisions of this Agreement and the
provisions of the Operating Agreement, the provisions of this Agreement shall
govern.

         12.2 Each Party agrees to defend, indemnify and hold harmless all other
Parties from and against any and all liability for any claims, which may be
asserted by any third party which now or hereafter stands in a contractual
relationship with such indemnifying Party and which arise out of the operation
of this Agreement or any activities of

                                     - 4 -
<PAGE>

such indemnifying Party under the provisions of this Agreement, and does further
agree to save the other Parties harmless from all judgments or damages sustained
and costs incurred in connection therewith.

         12.3 Except as otherwise provided in this Agreement, Operator is
authorized to administer the provisions of this Agreement, but shall have no
liability to the other Parties for losses sustained or liability incurred which
arise out of or in connection with the performance of Operator's duties
hereunder, except such as may result from Operator's gross negligence or willful
misconduct. Operator shall not be liable to any Underproduced Party for the
failure of any Overproduced Party (other than Operator) to pay any amounts owed
pursuant to the terms hereof.

         12.4 This Agreement shall remain in full force and effect for as long
as the Operating Agreement shall remain in force and effect as to the Balancing
Area, and thereafter until the Gas accounts between the Parties are settled in
full, and shall insure to the benefit of and be binding upon the Parties hereto,
and their respective heirs, successors, legal representatives and assigns, if
any. The parties hereto agree to give notice of the existence of this Agreement
to any successor in interest of any such Party and to provide that any such
successor shall be bound by this Agreement, and shall further make any transfer
of any interest subject to the Operating Agreement, or any part thereof, also
subject to the terms of this Agreement.

         12.5 Unless the context clearly indicates otherwise, words used in the
singular include the plural, the plural includes the singular, and the neuter
gender includes the masculine and the feminine.

         12.6 In the event that any "Optional" provision of this Agreement is
not adopted by the Parties to this Agreement by a typed, printed or handwritten
indication, such provision shall not form a part of this Agreement, and no
inference shall be made concerning the intent of the Parties in such event. In
the event that any "Alternative" provision of this Agreement is not so adopted
by the Parties, Alternative 1 in each such instance shall be deemed to have been
adopted by the Parties as a result of any such omission. In those cases where it
is indicated that an Optional provision may be used only if a specified
Alternative is selected: (i) an election to include said Optional provision
shall not be effective unless the Alternative in question is selected; and (ii)
the election to include said Optional provision must be expressly indicated
hereon, it being understood that the selection of an alternative either
expressly or by default as provided herein shall not, in and of itself,
constitute an election to include an associated Optional provision.

         12.7 This Agreement shall bind the Parties in accordance with the
provisions hereof, and nothing herein shall be construed or interpreted as
creating any rights in any person or entity not a signatory hereto, or as being
a stipulation in favor of any such person or entity.

         12.8 If contemporaneously with this Agreement becoming effective, or
thereafter, any Party requests that any other Party execute an appropriate
memorandum or notice of this Agreement in order to give third parties notice of
record of same and submits same for execution in recordable form, such
memorandum or notice shall be duly executed by the Party to which such request
is made and delivered promptly thereafter to the Party making the request. Upon
receipt, the Party making the request shall cause the memorandum or notice to be
duly recorded in the appropriate real property or other records affecting the
Balancing Area.

         12.9 In the event Internal Revenue Service regulations require a
uniform method of computing taxable income by all Parties, each Party agrees to
compute and report income to the Internal Revenue Service (select one) [ ] as if
such Party were taking its Full Share of Current Production during each relevant
tax period in accordance with such regulations, insofar as same relate to
entitlement method tax computations; or [x] based on the quantity of Gas taken
for its account in accordance with such regulations, insofar as same relate to
sales method tax computations.

13. ASSIGNMENT AND RIGHTS UPON ASSIGNMENT

         13.1 Subject to the provisions of Sections 13.2 (if elected) and 13.3
hereof, and notwithstanding anything in this Agreement or in the Operating
Agreement to the contrary, if any Party assigns (including any sale, exchange or
other transfer) any of its working interest in the Balancing Area when such
Party is an Underproduced or Overproduced Party, the assignment or other act of
transfer shall, insofar as the Parties hereto are concerned, include all
interest of the assigning or transferring Party in the Gas, all rights to
receive or obligations to provide or take Makeup Gas and all rights to receive
or obligations to make any monetary payment which may ultimately be due
hereunder, as applicable. Operator and each of the other Parties hereto shall
thereafter treat the assignment accordingly, and the assigning or transferring
Party shall look solely to its assignee or other transferee for any interest in
the Gas or monetary payment that such Party may have or to which it may be
entitled, and shall cause its assignee or other transferee to assume its
obligations hereunder.

         13.2[x] (Optional - Cash Settlement Upon Assignment) Notwithstanding
anything in this Agreement (including but not limited to the provisions of
Section 13.1 hereof) or in the Operating Agreement to the contrary, and subject
to the provisions of Section 13.3 hereof, in the event an Overproduced Party
intends to sell, assign, exchange or other wise transfer any of its interest in
a Balancing Area, such Overproduced Party shall notify in writing the other
working interest owners who are Parties hereto in such Balancing Area of such
fact at least thirty (30) days prior to closing the transaction. Thereafter, any
Underproduced Party may demand from such Overproduced Party in writing, within
fifteen (15) days after receipt of the Overproduced Party's notice, a cash
settlement of its Underproduction from the Balancing Area. The Operator shall be
notified of any such demand and of any cash settlement pursuant to this Section
13, and the Overproduction and Underproduction of each Party shall be adjusted
accordingly. Any cash settlement pursuant to this Section 13 shall be paid by
the Overproduced Party on or before the earlier to occur (i) of sixty (60) days
after receipt of the Underproduced Party's demand or (ii) at the closing of the
transaction in which the Overproduced Party sells, assigns, exchanges or
otherwise transfers its interest in a Balancing Area on the same basis as
otherwise set forth in Sections 7.3 through 7.6 hereof, and shall bear interest
at the rate set forth in Section 7.7 hereof, beginning sixty (60) days after the
Overproduced Party's sale, assignment, exchange or transfer of its interest in
the Balancing Area for any amounts not paid. Provided, however, if any
Underproduced Party does not so demand such cash settlement of its
Underproduction from the Balancing Area, such Underproduced Party shall look
exclusively to the assignee or other successor in interest of the Overproduced
Party giving notice hereunder for the satisfaction of such Underproduced Party's
Underproduction in accordance with the provisions of Section 13.1 hereof.

         13.3 The provisions of this Section 13 shall not be applicable in the
event any Party mortgages its interest or disposes of its interest by merger,
reorganization, consolidation or sale of substantially all of its assets to a
subsidiary or parent company, or to any company in which any parent or
subsidiary of such Party owns a majority of the stock of such company.

                                      -5-
<PAGE>

14. OTHER PROVISIONS

         Section 4.1: The election of an Underproduced Party to commence taking
makeup gas under the provisions of this paragraph, shall remain in effect until
such Underproduced Party gives Operator Thirty (30) days written notice of its
election to cease taking makeup gas, or until such Party's Underproduction is
eliminated, whichever first occurs. In the event an Underproduced Party provides
written notice to Operator of its intent to cease taking makeup gas, such
Underproduced Party shall not, thereafter, be allowed to request makeup gas
again until One (1) year from the last day of the month in which they last took
makeup gas. Please see Section 4.3 regarding situations where an Overproduced
Party has produced all of its share of the ultimately recoverable reserves in
the Balancing Area.

15. COUNTERPARTS

         This Agreement may be executed in counterparts, each of which when
taken with all other counterparts shall constitute a binding agreement between
the Parties hereto; provided, however, that if a Party or Parties owning a
Percentage Interest in the Balancing area equal to or greater than a
_______N/A_______ percent (_________%) therein fail(s) to execute this Agreement
on or before _________N/A____________, this Agreement shall not be binding upon
any Party and shall be of no further force and effect.

IN WITNESS WHEREOF, this Agreement shall be effective as of the _______________
day of ____________________, 2004.

ATTEST OR WITNESS:                                    OPERATOR

___________________________________
                                       The Nahabedian Exploration Group, LLC

___________________________________

                                       ___________________________________

                                       Type or print name Mark A. Nahabedian

                                       Title Managing Member

                                       Date
___________________________________

                                       Tax ID or S.S. No. 77-0473871

                                       NON-OPERATORS

                                       Ivanhoe Energy (USA) Inc. dba USA
                                       Ivanhoe Energy, Inc., in California

___________________________________    By: ____________________________

___________________________________
                                       Type or print name   Michael Stark

                                       Title Vice president Exploration and Land

                                       Date______________________________

                                       Tax ID or S.S. No. 770492835

                                      -6-
<PAGE>

                                   Exhibit "F"

17, 2004, by and between The Nahabedian Exploration Group, as Operator and
Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc., in California, as
Non-Operator.

                Equal Opportunity & Non-Segregation Of Facilities
                          Certifications and Agreements

This contract shall be performed by Operator in compliance with all applicable
laws, proclaimed, order, rules and regulations, including, without limitation,
the following:

1.       Equal Employment Opportunity

         A.       Equal Opportunity Clause (41 CFR 60-1.4). (Applicable to all
                  contracts for more than $10,000, individually; or if Operator
                  has such contracts or subcontracts with the Government in any
                  12-month period which have an aggregate total value (or can
                  reasonable be expected to have an aggregate total value)
                  exceeding $10,000, the $10,000 or under exemption does not
                  apply, and the contracts are subject to the order and the
                  regulations issued pursuant thereto regardless of whether any
                  single contract exceeds $10,000.)

The equal opportunity clause required by Executive Order 11246 of September 24,
1965, and prescribed in section 60-1.4 of Title 41 of the Code of Federal
Regulations is incorporated by reference (as permitted by section 60-1.4(d) of
said Regulations) as if set out in full at this point.

         B.       Certification of Nonsegregated Facilities (41 CFR 60-1.8).
                  (Applicable only to contracts which are not exempt from the
                  provisions of the Equal Opportunity Clause set out above.)
                  Operator certifies that it does not, and will not, maintain or
                  provide for its employees any segregated facilities at any of
                  its establishments, and that it does not and will not permit
                  its employees to perform their services at any location, under
                  its control, where segregated facilities are maintained.
                  Operator agrees that a breach of this certification is a
                  violation of the Equal Opportunity Clause required by
                  Executive Order 11246 of September 24, 1965.

                  As used in this certification, the term "segregated
                  facilities" means any waiting rooms, work areas, rest rooms
                  and wash room, 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 custom, or otherwise.

                  Operator further agrees that (except where it has obtained
                  identical certifications from proposed subcontractors for
                  specific time periods), it will obtain identical
                  certifications from proposed subcontractors prior to the award
                  of subcontractors exceeding $10,000 which are not exempt from
                  the provisions of the Equal Opportunity Clause; that will
                  forward that following notice to such proposed subcontractors
                  (except where the proposed subcontractors have submitted
                  identical certifications for specific time periods):

NOTICE TO PROSPECTIVE SUBCONTRACTORS OR REQUIREMENT FOR CERTIFICATIONS OF
NONSEGREATED FACILITIES

                  A certificate of Nonsegregated Facilities 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, semiannually, or annually).

         C.       Affirmative Action Compliance Program (41 CFR 60-1.4).
                  (Applicable only if Operator (a) has 50 or more employees, and
                  (b) has a contract for $50,000 or more). If required under
                  Section 60-1.4 of Title 41 of Code of Federal Regulations,
                  Operator certifies that it has developed, or agrees to
                  develop, a written affirmative action program for each of its
                  establishments within 120 days from the effectiveness of this
                  contract or the first of the contracts of sale. Operator shall
                  maintain such program until such time as it is no longer
                  required by law or regulation. Operator shall maintain a copy
                  of separate program for each establishment, including
                  evaluation of utilization of minority group personnel and the
                  job classifications tables, at each local office responsible
                  for the personnel matters of such establishment.

         D.       Employer Information Report (41 CFR 60-1.7). (Applicable only
                  if Operator (a) had 50 or more employees, (b) is non exempt
                  pursuant to 41 CFR 60-1.5 from the requirement for filing
                  Employer Information Report EEO-0, and (c) has a contract or
                  subcontract amounting to $50,000 or more.)

                                     Page 1

<PAGE>

         If required under Section 60-1.7 of Title 41 of the Code of Federal
         Regulations to file, the Employer Information Report, Standard Form 100
         (EEO-0), or such forms as may hereinafter be promulgated in its place,
         in accordance with the applicable instructions and will continue to
         file such report unless and until Operator is not required to so file
         by law or regulation.

2.       AFFIRMATIVE ACTION FOR DISABLED VETERANS AND VERTERANS OF THE VIETNAM
         ERA

         A.       Affirmative Action Clause (41 CFR 60-250.4). (Applicable only
                  to contracts for $10,000 or more.)

                  The affirmative action clause prescribed in Section 60-250.4
                  of the Code of Federal Regulations is incorporated by
                  reference (as permitted by Section 60-250.22 of said
                  Regulations) as if set out in full at this point.

         B.       Affirmative Action Program (41 CFR 60-250.5). (Applicable to
                  contracts for $10,000 or more only if Operator (a) has 50 or
                  more employees and (b) holds a contract of $50,000 or more.)

                  The affirmation action program prescribed in sections
                  60-250.22 of said Regulations) as if set out in full at this
                  point.

3.       AFFIRMATIVE ACTION FOR HANDICAPPED WORKERS

         A.       Affirmative Action Clause (41 CFR 60-741.4). (Applicable to
                  contracts for $2,500 or more.)

                  The affirmative action clause prescribed in Section 60-741.4
                  of Title 41 of the Code of Federal Regulations is incorporated
                  herein by reference (as permitted by Section 60-741.22 of said
                  Regulations) as if set out in full at this point.

         B.       Affirmative Action Program (41 CFR 60-741.5). (Applicable to
                  contracts for $2,500 or more only if Operator (a) has 50 or
                  more employees and (b) holds a contract of $50,000 or more.)

                  The affirmative action program prescribed in Sections 60-741.5
                  and 60-741.6 of Title 41 of the Code of Federal Regulations is
                  incorporated by reference (as permitted by Section 60-741.22
                  of said Regulations) as if set out in full at this point.

4.       MINORITY BUSINESS ENTERPRISES 41 CFR 1-1.13, FEDERAL PROCUREMENT
         REGULATIONS)

         A.       Utilization of Minority Business Enterprises (41 CFR
                  1-131310-2 (a)). (Applicable only to contracts which may
                  exceed $10,000 except those, and all subcontracts thereunder,
                  to be performed entirely outside the United States, its
                  possessions, and Puerto Rico, and those of services of a
                  personal nature.)

                  (1)      It is the policy of the Government that minority
                           business enterprises shall have the maximum
                           practicable opportunity to participate in the
                           performance of Government contracts.

                  (2)      Operator agrees to use its best efforts to carry out
                           this policy in the award of its subcontracts to the
                           fullest extent consistent with the efficient
                           performance of this contract. As used in this
                           contract, the term "minority business enterprises"
                           means a business, at least 50% of which is owned by
                           minority group members or, in case of publicly owned
                           businesses, at least 51 percent of the stock of which
                           is owned by minority group members. For the purposes
                           of this definition, minority group members are
                           Negroes, Spanish speaking American persons,
                           American-Oriental, American-Indians,
                           American-Eskimos, and American-Aleut. Operator may
                           rely on written representation by subcontractors
                           regarding their status as minority business
                           enterprises in lieu of an independent investigation.

         B.       Minority Business Enterprises Subcontracting Program (41 CFR
                  1-131310-2(b)). (Applicable to all contracts which may exceed
                  $500,000 which contain the clause required by 41 CFR
                  1-1.1310-2(a) and which offer substantial subcontracting
                  possibilities.)

                  (1)      Operator agrees to establish and conduct a program
                           which will enable minority business enterprises (as
                           defined in the above clause entitled "Utilization of
                           Minority business enterprises') to be considered
                           fairly as subcontractors and suppliers under this
                           contract. In this connection, Operator shall:

                           (a)      Designate a liaison officer who will
                                    administer Operator's minority business
                                    enterprises program.

                           (b)      Provide adequate and timely consideration of
                                    the potentialities of known minority
                                    business enterprises in all "make-or buy"
                                    decisions.

                                     Page 2

<PAGE>

                           (c)      Assure that known minority business
                                    enterprises will have an equitable
                                    opportunity to compete for subcontracts,
                                    particularly by arranging solicitations,
                                    time for the preparation of bids,
                                    quantities, specification, and delivery
                                    schedules so as to facilitate the
                                    participation of minority business
                                    enterprises.

                           (d)      Maintain records showing (i) procedures
                                    which have been adopted to comply with the
                                    policies set forth in this clause, including
                                    the establishment of a source list of
                                    minority business enterprises, (ii) awards
                                    to minority business enterprises on the
                                    source list, and (iii) specific efforts to
                                    identify and award contracts to minority
                                    business enterprises.

                           (e)      Include the Utilization of Minority Business
                                    Enterprises clause in subcontracts which
                                    offer substantial minority business
                                    enterprises subcontracting opportunities.

                           (f)      Cooperate with the Contracting Officer in
                                    any studies and surveys of Operator's
                                    minority business enterprises procedures and
                                    practices that the Contracting Officer may
                                    from time to time conduct.

                           (g)      Submit periodic reports of subcontracting to
                                    known minority business enterprises with
                                    respect to the records referred to in
                                    subparagraph (d), above, in such form and
                                    manner and at such time (not more often than
                                    quarterly) as the Contracting Officer may
                                    prescribe.

                  (2)      Operator further agrees to insert, in any subcontract
                           hereunder which may exceed $500,000, provisions which
                           shall conform substantially to the language of this
                           clause, including this Paragraph (2), and to notify
                           the Contracting Officer of the names of such
                           subcontractors.

                                     Page 3

<PAGE>

                                   Exhibit "H"

Attached to and made a part of that certain Operating Agreement dated January
15, 2004, by and between The Nahabedian Exploration Group, LLC, as Operator, and
Ivanhoe Energy (USA) Inc. dba USA Ivanhoe Energy, Inc., in California, as
Non-Operator.

                       Model Form Recording Supplement to
                   Operating Agreement and Financing Statement

         THIS AGREEMENT, entered into by and between THE NAHABEDIAN EXPLORATION
GROUP, LLC, hereinafter referred to as "Operator" and the signatory party or
parties other than Operator, hereinafter referred to individually as
"Non-Operator", and collectively as "Non-Operators".

         WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A" (said land,
Leases and Interests being hereinafter called the "Contract Area"), and in any
instance in which the Leases or Interests of a party are not of record, the
record owner and the party hereto that owns the Interest or rights therein are
reflected on Exhibit "A";

         WHEREAS, the parties hereto have executed an Operating Agreement dated
February 17, 2004 (herein the "Operating Agreement"), covering the Contract Area
for the purpose of exploring and developing such lands, Leases and Interests for
Oil and Gas; and

         WHEREAS, the parties hereto have executed this agreement for the
purpose of imparting notice to all persons of the rights and obligations of the
parties under the Operating Agreement and for the further purpose of perfecting
those rights capable of perfection.

         NOW, THEREFORE, in consideration of the mutual rights and obligations
of the parties hereto, it is agreed as follows:

         1.       This agreement supplements the Operating Agreement, which
                  Agreement in its entirety is incorporated herein by reference,
                  and all terms used herein shall have the meaning ascribed to
                  them in the Operating Agreement.

         2.       The parties do hereby agree that:

                  A.       The Oil and Gas Leases and/or Oil and Gas Interests
                           of the parties comprising the Contract Area shall be
                           subject to and burdened with the terms and provisions
                           of this agreement and the Operating Agreement, and
                           the parties do hereby commit such Leases and
                           Interests to the performance thereof.

                  B.       The exploration and development of the Contract Area
                           for Oil and Gas shall be governed by the terms and
                           provisions of the Operating Agreement, as
                           supplemented by this agreement.

                  C.       All costs and liabilities incurred in operations
                           under this agreement and the Operating Agreement
                           shall be borne and paid, and all equipment and
                           materials acquired in operations on the Contract Area
                           shall be owned, by the parties hereto, as provided in
                           the Operating Agreement.

                  D.       Regardless of the record title ownership to the Oil
                           and Gas Leases and/Oil and Gas Interests identified
                           on Ehibit "A", all production of Oil and Gas from the
                           Contract Area shall be owned by the parties as
                           provided in the Operating Agreement; provided nothing
                           contained in this agreement shall be deemed an
                           assignment or cross-assignment of interests covered
                           hereby.

                  E.       Each party shall pa or deliver, or cause to be paid
                           or delivered, all burdens on its share of the
                           production from the Contract Area as provided in the
                           Operating Agreement.

                  F.       An overriding royalty, production payment, net
                           profits interest or other burden payable out of
                           production hereafter created, assignments of
                           production given as security for the payment of money
                           and those overriding royalties, production payments
                           and other burdens payable out of production
                           heretofore created and defined as Subsequently
                           Created Interests in the Operating Agreement shall be
                           (i) borne solely by the party whose interest is
                           burdened therewith, (ii) subject to suspension if a
                           party is required to assign or relinquish to another
                           party an interest which is subject to such burden,
                           and (iii) subject to the lien and security interest
                           hereafter provided if the party subject to such
                           burden fails to pay its share of expenses chargeable
                           hereunder and under the Operating Agreement, all upon
                           the terms and provisions and in the times and manner
                           provided by the Operating Agreement.

                                     Page 1

<PAGE>

                  G.       The Oil and Ga Leases and/or Oil and Gas Interests
                           which are subject hereto may not be assigned or
                           transferred except in accordance with those terms,
                           provisions and restrictions in the Operating
                           Agreement regulating such transfers. This agreement
                           and the Operating Agreement shall be binding upon and
                           shall inure to the benefit of the parties hereto, and
                           their respective heirs, devisees, legal
                           representatives, and assigns, and the terms hereof
                           shall be deemed to run with the leases or interests
                           included within the lease Contract Area.

                  H.       The parties shall have the right to acquire an
                           interest in renewal, extension and replacement
                           leases, leases proposed to be surrendered, wells
                           proposed to be abandoned, and interests to be
                           relinquished as a result of non-participation in
                           subsequent operations, all in accordance with the
                           terms and provisions of the Operating Agreement.

                  I.       The rights and obligations of the parties and the
                           adjustment of interests among them in the event of a
                           failure or loss of title, each party's right to
                           propose operations, obligations with respect to
                           participation in operations on the Contract Area and
                           the consequences of a failure to participate in
                           operations, the rights and obligations of the parties
                           regarding the marketing of production, and the rights
                           and remedies of the parties for failure to comply
                           with financial obligations shall be as provided in
                           the Operating Agreement.

                  J.       Each party's interest under this agreement and under
                           the Operating Agreement shall be subject to
                           relinquishment for its failure to participate in
                           subsequent operations and each party's share of
                           production and costs shall be reallocated on the
                           basis of such relinquishment, all upon the terms and
                           provisions provided in the Operating Agreement.

                  K.       All other matters with respect to exploration and
                           development of the Contract Area and the ownership
                           and transfer of the Oil and Gas Leases and/or Oil and
                           Gas Interest therein shall be governed by the terms
                           and provisions of the Operating Agreement.

         3.       The parties hereby grant reciprocal liens and security
                  interests as follows:

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

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

                  C.       To the extent that the parties have a security
                           interest under the Uniform Commercial Code of the
                           state in which the Contract Area is situated, they
                           shall be entitled to exercise the rights and remedies
                           of a secured party under the Code.

                                     Page 2

<PAGE>

                           The bringing of a suit and the obtaining of judgment
                           by a party for the secured indebtedness shall not be
                           deemed an election of remedies or otherwise affect
                           the lien rights or security interest as security for
                           the payment thereof. In addition, upon default by any
                           party in the payment of its share of expenses,
                           interest or fees, or upon the improper use of funds
                           by the Operator, the other parties shall have the
                           right, without prejudice to other rights or remedies,
                           to collect from the purchaser the proceeds from the
                           sale of such defaulting party's share of Oil and Gas
                           until the amount owned by such party, plus interest,
                           has been received, and shall have the right to offset
                           the amount owned against the proceeds from the sale
                           of such defaulting party or parties stating the
                           amount due as a result of the default, and all
                           parties waive any from the non-defaulting party or
                           parties stating the amount due as a result of the
                           default, and all parties waive any recourse available
                           against purchasers for releasing production proceeds
                           as provided in this paragraph.

                  D.       If any party fails to pay its share of expenses
                           within one hundred-twenty (120) days after rendition
                           of a statement therefore by Operator the
                           non-defaulting parties, including Operator, shall,
                           upon request by Operator, pay the unpaid amount in
                           the proportion that the interest of each such party
                           bears to the interest of all such parties. The amount
                           paid by each party so paying its share of the unpaid
                           amount shall be secured by the liens and security
                           rights described in this Paragraph 3 and in the
                           Operating Agreement, and each paying party may
                           independently pursue any remedy available under the
                           Operating Agreement or otherwise.

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

                  F.       The lien and security interest granted in this
                           Paragraph 3. supplements identical rights granted
                           under the Operating Agreement.

                  G.       To the extent permitted by applicable law,
                           Non-Operators agree that Operator may invoke or
                           utilize the mechanics' or materialmen's lien law of
                           the state in which the Contract Area is situated in
                           order to secure the payment to Operator of any sum
                           due under this agreement and the Operating Agreement
                           for services performed or materials supplied by
                           Operator.

                  H.       The above described security will be financed at the
                           wellhead of the well or wells located on the Contract
                           Area and this Recording Supplement may be filed in
                           the land records in the County or Parish in which the
                           Contract Area is located, and as a financing
                           statement in all recording offices required under the
                           Uniform Commercial Code or other applicable state
                           statutes to perfect the above-described security
                           interest, and any party heretomay file a continuation
                           statement as necessary under the Uniform Commercial
                           Code, or other state laws.

         4.       This agreement shall be effective as of the date of the
                  Operating Agreement as above recited. Upon termination of this
                  agreement and the Operating Agreement and the satisfaction of
                  all obligations thereunder, Operator is authorized to file of
                  record in all necessary recording offices a notice of
                  termination, and each party hereto agrees to execute such a
                  notice of termination as to Operator's interest, upon the
                  request of Operator, if Operator has complied with all of its
                  financial obligations.

         5.       This agreement and the Operating Agreement shall be binding
                  upon and shall inure to the benefit of the parties hereto and
                  their respective heirs, devisees, legal representatives,
                  successors and assigns. No sale, encumbrance, transfer or
                  other disposition shall be made by any party of any interest
                  in the Leases or Interests subject hereto except as expressly
                  permitted under the Operating Agreement and, if permitted,
                  shall be made expressly subject to this agreement and the
                  Operating Agreement and without prejudice to the rights of the
                  other parties. If the transfer is permitted, the assignee of
                  an ownership interest in any Oil and Gas Lease shall be deemed
                  a party to this agreement and the Operating Agreement as to
                  the interest assigned from and after the effective date of the
                  transfer of ownership; provided, however, that the other
                  parties shall not be required to recognize any such sale,

                                     Page 3

<PAGE>

                  encumbrance, transfer or other disposition for any purpose
                  hereunder until thirty (30) days after they have received a
                  copy of the instrument of transfer or other satisfactory
                  evidence thereof in writing from the transferor or transferee.
                  No assignment or other disposition of interest by a party
                  shall relieve such party of obligations previously incurred by
                  such party under this agreement or the Operating Agreement
                  with respect to the interest transferred, including without
                  limitation the obligation of a party to pay all costs
                  attributable to an operation conducted under this agreement
                  and the Operating Agreement in which such party has agreed to
                  participate prior to making such assignment, and the lien and
                  security interest granted by Article VII.B. of the Operating
                  Agreement and hereby shall continue to burden the interest
                  transferred to secure payment of any such obligations.

         6.       In the event of a conflict between the terms and provisions of
                  this agreement and the terms and provisions of the Operating
                  Agreement, then, as between the parties, the terms and
                  provisions of the Operating Agreement shall control.

         7.       This agreement shall be binding upon each Non-Operator when
                  this agreement or a counterpart thereof has been executed by
                  such Non-Operator and Operator notwithstanding that this
                  agreement is not then or thereafter executed by all of the
                  parties to which it is tendered or which are listed on Exhibit
                  "A" as owning an interest in the Contract Area or which own,
                  in fact, an interest in the Contract Area. In the event that
                  any provision herein is illegal or unenforceable, the
                  remaining provisions shall not be affected, and shall be
                  enforced as if the illegal or unenforceable provision did not
                  appear herein. IVANHOE ENERGY (USA, INC. dba USA IVANHOE
                  ENERGY, INC., in California, who has prepared and circulated
                  this form for execution, represents and warrants that the form
                  was printed from and, with the exception(s) listed below, is
                  identical to the AAPL Form 610RS-1989 Model Form Recording
                  Supplement to Operating Agreement and Financing Statement, as
                  published in computerized form by Forms On-A-Disk, Inc. No
                  changes, alterations, or modifications, other than those made
                  by strikethrough and/or insertion and that are clearly
                  recognizable as changes in Articles __________________, have
                  been made to the form.

         IN WITNESS WHEREOF, this Agreement shall be effective as of the 15th
day of January, year: 2004

ATTEST OR WITNESS:                   OPERATOR

                                     THE NAHABEDIAN EXPLORATION GROUP, LLC

________________________________     By:_____________________________________
                                                 Mark A. Nahabedian

                                     Title: President

________________________________     Date:___________________________________

                                     NON-OPERATOR

                                     IVANHOE ENERGY (USA) INC. dba
                                     IVANHOE ENERGY, INC., in California

_________________________________    By:_____________________________________
                                                   Michael P. Stark

                                     Title: Vice President, Exploration and Land

_________________________________    Date:___________________________________

                                     Page 4
<PAGE>

                                   EXHIBIT "D"

 TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE
  BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)
                INC. DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA

                        GUISTI 2-25 GEOLOGIC REQUIREMENTS
                    (same form to be used for each test well)

TD 3500'

         1.)      Mudlogger will be installed after drilling out shoe of surface
                  casing. Continuous mud logging to TD. Instructions per
                  wellsite geologist.

         2.)      At TD, Schlumberger will run Array Induction/SP/BHC
                  Sonic/Caliper/GR at scales per wellsite geologist.

<PAGE>

                                   EXHIBIT "E"

 TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE
  BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)
               INC. DBA USA INVANHOE ENERGY, INC., IN CALIFORNIA

                           DRILLING PROGRAM AND ORDERS
                              HAMAR ASSOCIATES, LLC
                              214 West Aliso Street
                             Ojai, California 93023
                        (805)646-4276/Fax (805)646-3476

HAMAR ASSOCIATES, LLC

GIUSTI 2-25 ( INITIAL TEST WELL)

Location: 600' South and 500' East from the Northwest corner of Section 25,
Township 12N , Range 2E, MDB&M, Sutter County, California.

Elevation: +26' Ground, USGS. +39.5' KB.
Take all measurements from KB.
Keep hole full at all times.
Comply with standing orders attached.

Drilling program

         1.       Drill 12-1/4" hole to fit casing. Cement 8-5/8", 24#, J-55,
                  ST&C casing at 500' with 130 sacks Class G cement premixed
                  3%CaCl2 & 6% gel followed with 75 sacks Class G cement
                  premixed 3%CaCl2 ( 50% excess). Tack weld and Bakerlok bottom
                  4 collars, weld shoe solid. Run insert fillup on top of shoe
                  joint. Run centralizers 15' above shoe. Use top rubber plug
                  only and plug holding head. Pump plug on insert.

         2.       After 2 hours WOC, land casing. Test weld 2000 psig. Install
                  Series 900 Shaffer dual hydralic control gate and Hydril GK.
                  Test according to standing orders. Notify DOG to witness.

         3.       Drill 7-7/8" hole to 3,500'. Run Schlumberger HRI/Sonic/Gamma
                  Ray from 500' to TD

         4.       Install Geolog mud loggers @ shoe. Circulate as necessary for
                  evaluation. Open hole tests will not be run. Fax or Email
                  daily log copies to Hamar and Ivanhoe. Watch pit level monitor
                  closely at all times. Keep 3 spliced log copies in trailer.

                                       1
<PAGE>

                              EXHIBIT "E" CONTINUED

         5.       Mud Program

<TABLE>
<CAPTION>
Depth                      Weight                    Viscosity         Water Loss
---------------------------------------------------------------------------------
<C>                 <C>                              <C>               <C>
0'-500'             To suit contractor
500'-2,000'                67-70                     35-45 sec.        6cc/30 Min.
2,000'-T.D.                70-75                     35-45 sec.        6cc/30 Min.
</TABLE>

                  Have sufficient mud material on location to raise mud weight 5
                  pcf. Adjust mud weight to maintain mud log base line below 30
                  units and to stabilize shale.

         6.       Telephone Numbers:

                  HAMAR ASSOCIATES, LLC
                  214 WEST ALISO STREET
                  OJAI, CA 93023

                                          -Office       805-646-4276
                                          -Fax          805-646-3476
                                          -Email        hamar@jetlink.net
                  Vahagn Nahabedian       -Mobile       805-795-2624
                  Mark Nahabedian         -Mobile       310-948-8185
                  Sam Briglio             -Home         805-640-1487
                  Hacob Mkrtchian         -Mobile       323-376-8437

                  IVANHOE ENERGY (USA) INC.
                  P.O. BOX 9279
                  BAKERSFIELD, CA 93389-9279
                  ATTN: MIKE STARK
                  EXPLORATION DEPARTMENT

                                          -Office       661-325-4026
                                          -Fax          661-325-2961
                  Mike Stark              -Office       661-869-8312
                                          -Fax          661-325-2961
                                          -Email        mstark@ivanhoeenergy.com
                  Roger Narinian          -Office       661-869-8344

               NOTE: THE SAME FORM WILL BE USED FOR EACH TEST WELL

                                       2
<PAGE>

                              EXHIBIT "E" CONTINUED

HAMAR ASSOCIATES, LLC

GIUSTI 2-25 (INITIAL TEST WELL)

Elevation: +26' Ground, USGS. +39.5' KB.

ANTICIPATED FORMATION TOPS VERTICAL DEPTHS (OBJECTIVES IN BOLD TYPE)

<TABLE>
<S>               <C>
HAMILTON          2405'
H&T Shale         2410'
A SAND            2440'
E SAND            2555'
G SAND            2695'
L SAND            2830'
M Sand            2990'
Base Starkey      3465'
Winters           3710'
</TABLE>

                                       3
<PAGE>

                              EXHIBIT "E" CONTINUED

                              HAMAR ASSOCIATES, LLC
                              214 West Aliso Street
                             Ojai, California 93023
                        (805)646-4276/Fax (805)646-3476

STANDING ORDERS, DRILLING AND REMEDIAL OPERATIONS

OPERATOR - HAMAR ASSOCIATES, LLC                     WELL NO. GIUSTI 2-25
CONTRACTOR - PAUL GRAHAM DRILLING COMPANY            RIG NO.  4

         1.       PRIOR TO DRILLING OUT THE SURFACE CASING, THE BLOWOUT
                  PREVENTERS AND ALL ASSOCIATED EQUIPMENT SHALL BE PRESSURE
                  TESTED TO 50% OF THE RATED WORKING PRESSURE (BAG PREVENTER TO
                  40%). EQUIPMENT TO BE TESTED SEPARATELY ARE: PIPE RAMS, BLIND
                  RAMS, BAG PREVENTER, KELLY COCK, STANDPIPE VALVE, KILL LINE
                  (STOP VALVE, CHECK VALVE) AND BLOW DOWN LINE (EACH VALVE,
                  CHOKE AND BEAN). BLOW DOWN MANIFOLD SHALL HAVE AT LEAST ONE
                  OPERATING PRESSURE GAGE OF A RANGE AT LEAST 1000 PSIG HIGHER
                  THAN BLOWOUT PREVENTER RATED WORKING PRESSURE. DOG TO WITNESS.

         2.       BLOWOUT PREVENTERS ON PROTECTION AND PRODUCTION CASING SHALL
                  BE TESTED AS ABOVE TO 70% OF RATED PRESSURE (BAG TO 50%).

         3.       EACH DRILLING CREW IS TO HAVE AT LEAST ONE BLOWOUT DRILL
                  WEEKLY.

         4.       BEFORE TRIPPING, CHECK THE DITCH FOR FLOW WITH PUMPS OFF.

         5.       DAILY RECORD THE ONE-HALF PUMP STROKE STANDPIPE PRESSURE.

         6.       Measure drill pipe on first trip after installing mud loggers.

         7.       All casing run shall be carefully visually inspected for pipe
                  body and thread defects as it is unloaded. Casing shall not be
                  permitted to drop from trucks, roll it off on ramps.

         8.       Protection and production casing shall be run with hydraulic
                  tongs set to the proper torque for the casing being run. Pick
                  up thread protectors shall be used.

         9.       All casing shall have threads "bright" cleaned and a teflon
                  pipe dope (Bakerseal, TF-17) liberally applied.

         10.      Keep hole full at all times.

         11.      CHECK OPERATION OF BOE EACH ROUND TRIP.

         12.      Take all measurements from KB.

         13.      Drilling rig mud pits shall have a calibrated tank to gage mud
                  used to fill the hole on trips.

         Each 60' stand of 4" drill pipe takes 0.38 barrels.

         Items in bold - Shall be entered on tour sheet and signed by person in
         responsible charge.

                                       4
<PAGE>

                              EXHIBIT "E" CONTINUED

HAMAR ASSOCIATES, LLC

GIUSTI 2-25

ADDITIONAL ORDERS

1. Do not run a stabilizer to drill the surface hole. Use Brewster 12-1/4" bit
to drill surface hole.

2. Use the following BHA for drilling out shoe: Bit, 1 DC, stab,1 DC, Stab,
bumper sub, 20 Hw's. Use straight edge stabilizers.

3. Drill out shoe with Hughes MX-1 with 3-10's.

4. Mud weight must be 70 pcf by 2000'. The first three wiper runs should be to
the shoe, after that 10 stands would do. Wipe hole every 4 to 6 hours. Wipe to
shoe every 50 to 60 hours.

5. Survey every 1000' + . If possible coincide surveys with wiper runs.

6. Keep pipe moving at all times.

                                       5

<PAGE>

                             EXHIBIT "E" (CONTINUED)

 TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE
  BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)
                INC. DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA

                           GUISTI 2-25 WELL PROGNOSIS

                          NAHABEDIAN EXPLORATION GROUP
                              214 WEST ALISO STREET
                                 OJAI, CA 93023
                                 (805) 646-4402

OPERATOR: HAMAR ASSOCIATES, LLC                                 NOVEMBER 7, 2003

                                 WELL PROGNOSIS

WELL: GIUSTI "2-25" SECTION 25-T12N/R2E, SUTTER COUNTY, CALIFORNIA

GIUSTI PROSPECT- HAMILTON & STARKEY SAND OBJECTIVES

DISCUSSION:

The prospect test well is programmed to drill to approximately 3,500 feet at a
location 600' South and 500' East from the Northwest corner of Section
25-T12N/R2E.

In 2002, Nahabedian Exploration Group drilled the Robbins "1-26," 26-T12N/R2E,
which encountered gas shows in the Hamilton Sand. Those shows were tested from
2450'-2458' at a rate of 98 mcf/day with several barrels of water per hour. The
gas was 953 BTU +/-. The well was sub-commercial and abandoned.

In June 2003, Nahabedian Exploration Group drilled the Giusti "1-25," as a
follow-up to the Robbins "1-26" well. This well cut an east dipping normal fault
at 3350 feet, below the Starkey objective sands. The objective sands were on the
low, east side of the fault. Good gas shows, ranging from 90-190 units, were
encountered in the objective Starkey sands on the low side of the fault. Logs
indicated two thin zones had free gas saturation but the well was abandoned as a
dry hole.

The Giusti "2-25" location is up-dip from the Robbins "1-26" well in the same
fault block. We expect the Giusti well to be over 50' high on the Hamilton sand
which tested gas and water in the Robbins #1-26 well. The "2-25" should
encounter over 100 feet of net gas sand in multiple Starkey pay zones.

                                       6
<PAGE>

Primary Objectives: Hamilton & Starkey Sands

Potential reserves are estimated at 10-15 Bcf of gas.

SEE WELL PROGRAM FOR ANTICIPATED FORMATION TOPS

Please refer to Well Program and AFE

                                       7

<PAGE>

         EXHIBIT E (CONTINUED) AFE GIUSTI 2-25 WELL (INITIAL TEST WELL)
   To that certain Farmout and Exploration Agreement dated February 17, 2004,
  made by and between The Nahabedian Exploration Group, LLC and Ivanhoe Energy
                                   (USA) Inc.
                          NAHABEDIAN EXPLORATION GROUP
               WELL COST ESTIMATE & AUTHORIZATION FOR EXPENDITURE

<TABLE>
<S>                       <C>                    <C>                    <C>                             <C>
Location: 25-12N/2E MDB&M                        Well Name:Giusti  2-25                                 AFE No.:
Date: November 7, 2003                                      Field/Area: Knights Landing                 Depth: 3,500'
Prepared by: Vahagn Nahabedian                   County/State: Sutter County, California
Location:From the NW Corner of Section 25: 600' South and 500' East
Classification:           Exploration ( X )      Oil (   )              Straight Hole (  )              Dry Weather ( X )
                          Development (   )      Gas ( X )              Directional Hole (  )           Wet Weather (   )
</TABLE>

<TABLE>
<CAPTION>
DRILLING COSTS ESTIMATE                              COST               COMPLETION COSTS ESTIMATE                COST
------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                  <C>                                      <C>
1.  Leasehold Title & Insurance                    $  4,050             1.  Pipe Inspection
2.  Surveying                                      $  1,000             2.  Production Casing & Liner *
3.  Insurance and Bond                             $  8,000             3.  Cement Casing
4.  Permits                                        $    225             4.  Wellhead
5.  Legal                                                               5.  Bits and Scapers
6.  Surface Costs & Damages                        $  2,000             6.  Tubing *
7.  Location, Roads, and Sump                      $  5,000             7.  Packers and DH Equipment
8.  Cellar and Conductor                           $  5,000             8.  Tubing Head and Tree
9.  Gravel                                                              9.  Rental Tools
10. Move in and Rig-up                                                  10. Completion Fluids
11. Pipe Inspection                                                     11. Logs
12. Footage Drilling                                                    12. Perforating
13. Day Work  5 Days @ 9,840 (P.G)                 $163,742             13. Testing Services
14. Surface Casing *                                                    14. Acidizing or other Stimulation
15. Wellhead                                                            15. Supervision
16. BOP Equipment                                                       16. Engineering
17. Surface Bit                                                         17. Surface equipment
18. Cement Surface Pipe                                                 18. Welding
19. Intermediate Casing & Liner *                                       19. Service Rig
20. Welding Services                                                    20. Day Work- Run Casing
21. Drill Pipe Rental                                                   21. Casing Tongs
22. Tool Rental                                                         22. Contingencies
23. Bits
24. Mud and Chemicals
25. Fork lift & Location Maintenance***                                 ***includes Generator & Sanitation
26. Directional Services
27. Fishing Tools and Service
28. Trucking and Hauling
29. Vacuum Truck Service                           $  4,000
30. Engineering
31. Company Supervision
32. Supervision (Expenses)                         $  1,500
33. Mud Logging
34. Electric Logging
35. Cores and Analysis
36. Sidewall Cores
37. Cementing: Plug & Abandon                      $ 10,000
38. Location Clean-up
39. Mud disposal                                   $  5,000
40. Mud Cleanup                                    $  2,000
41. Fuel
42. Water
43. Contingencies (10%)                            $ 21,152
44. Overhead (6%)
Total                                              $232,669                                                      $  -
</TABLE>

<TABLE>
<S>                         <C>            <C>            <C>               <C>                               <C>
Drilling  Item 14*            500          Feet of        8 5/8 in.           24#, J-55, ERW  Casing @        FT
Drilling  Item 19*          3,500          Feet of        4 1/2 In.         10.5#, J-55, ERW  Casing @        FT
Completion Item 2*                         Feet of              In.                           Casing @        FT
Completion Item 6*                         Feet of              In.                           Casing @        FT
</TABLE>

Comments: AFE for initial test well-refer to Paul Graham Turnkey Drilling
Contract for an alternative
________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

Submitted to:                      For Joint Owner Approval
                                   By:                            Date:
Ivanhoe Energy (USA), Inc.         ___________________________          ________

<PAGE>

                                   EXHIBIT "F"

 TO THAT CERTAIN FARMOUT AND EXPLORATION AGREEMENT DATED FEBRUARY 17, 2004 MADE
 BY AND BETWEEN THE NAHABEDIAN EXPLORATION GROUP, LLC AND IVANHOE ENERGY (USA)
               INC., DBA USA IVANHOE ENERGY, INC., IN CALIFORNIA

                              MANDATORY TEST WELLS
       ALL WELLS DRILLED VERTICALLY TO 3500 FEET UNLESS OTHERWISE NOTED.

MARY'S LAKE 7-19: (NE/4SE/4 of Sec 19-11N/3E) Approximately 1000 feet SE of the
Mary's Lake 5-19 producer.

GIUSTI 2-25: (NW/4 NW/4 Sec 25- 12N/2E) Approximately 800 feet east of the
Robbins 1-26 deep test.

MACKERT 3-31: A directional well to the bottom in the SW/4SW/4 of Sec 32-12N/3E;
due east of the Mackert 1-31 producer.

MARCHANT 2-6: (SE/4SE/4 of Sec 6-11N/3E)

FOUR MILE BEND 1-2: In the extreme NW corner of Sec 2-11N/2E (or alternately in
the extreme SE corner of Sec 34-12N/2E); approximately 100 feet due east of the
"RGF" 3 abandoned producer.

BECKER ROAD 3-20: (NW/4SW/4 of Sec 20-11N/3E) Approximately 1000 feet NW of the
Becker Road 1-20 abandoned producer.

MACKERT 2-36: (SW/4SW/4 of Sec 36-12N/2E) Approximately 1000 feet NNW of the
Mackert 1-1 producer.

MACKERT 2-1: (SE/4NW/4 of Sec 1-11N/2E) Approximately 1000 feet SSW of the
Mackert 1-1 producer.

GIUSTI 3-25: (NE/4NW/4 of Sec 25-12N/2E) Approximately 700 feet east of the
Giusti 1-25 dry hole.

RIVERSIDE 1-19: (NW/4SW/4 of Sec 19-11N/3E) Approximately 1000 feet ENE of the
Knights Landing 8-24.03/12/04, 12:20 PM

EXHIBIT 4.2

                           CERTIFICATE OF DESIGNATIONS

                     SERIES D PARTICIPATING PREFERRED STOCK

                                       OF

                      CALIFORNIA WATER SERVICE GROUP, INC.

            (Pursuant to Section 151 of the General Corporation Law
                            of the State of Delaware)

               California Water Service Group, Inc., a corporation organized and
       existing under the General  Corporation Law of the State of Delaware (the
       "Corporation"),  in  accordance  with the  provisions  of Section  151(g)
       thereof,

               HEREBY CERTIFIES:

               1. On August 18, 1999, the Board of Directors of the  Corporation
       adopted a resolution  designating  221,000  shares of Preferred  Stock as
       Series D Participating Preferred Stock.

               2. No shares of Series D Participating  Preferred Stock have been
       issued.

               3.  Pursuant  to  the  authority  conferred  upon  the  Board  of
       Directors by the Certificate of  Incorporation  of the  Corporation,  the
       following resolution was duly adopted by the Board of Directors on August
       18, 1999  creating the series of Preferred  Stock  designated as Series D
       Participating Preferred Stock:

               RESOLVED, that the Board of Directors,  pursuant to the authority
       vested in the Board of Directors of this  Corporation in accordance  with
       the provisions of its Certificate of Incorporation, a series of Preferred
       Stock  of  the  Corporation  be and  hereby  is  created,  and  that  the
       determination  and amount thereof and the voting powers,  preferences and
       relative, participating,  optional and other special rights of the shares
       of such  series,  and the  qualifications,  limitations  or  restrictions
       thereof are as follows:

               "Series D Participating Preferred Stock":

               Paragraph 1.  Designation  and Amount.  The shares of such series
       shall be designated  as "Series D.  Participating  Preferred  Stock" (the
       "Series D  Preferred  Stock") and the number of shares  constituting  the
       Series D Preferred Stock shall be 221,000 and its part value is $0.01 per
       share.  Such number of shares may be increased or decreased by resolution
       of the Board of Directors prior to the issuance of any Series D Preferred
       Stock.

<PAGE>

               Paragraph 2. Dividends and Distributions.

               (A)  Subject  to the  rights of the  holders of any shares of any
       series  of  Preferred  Stock (or any  similar  stock)  ranking  prior and
       superior to the Series D Preferred  Stock with respect to dividends,  the
       holders  of shares of Series D  Preferred  Stock,  in  preference  to the
       holders  of Common  Stock,  no par value  (the  "Common  Stock"),  of the
       Corporation, and of any other junior stock, shall be entitled to receive,
       as and when  declared by the Board of Directors out of the surplus or net
       profits, dividends payable in cash on the same date as dividends upon the
       Corporation's  Series C (each such payment  date  referred to herein as a
       "Dividend  Payment  Date") and in the same manner as  dividends  upon the
       Corporation's  Series C,  commencing on the first  Dividend  Payment Date
       after the first  issuance  of a share or  fraction of a share of Series D
       Preferred  Stock,  in an amount per share  (subject to the  provision for
       adjustment  hereinafter  set forth) equal to 100 times the  aggregate per
       share amount of all cash dividends, and 100 times the aggregate per share
       amount   (payable   in  kind)  of  all   non-cash   dividends   or  other
       distributions, other than a dividend payable in shares of Common Stock or
       a  subdivision  of  the  outstanding  shares  of  the  Common  Stock  (by
       reclassification  or  otherwise),  declared on the Common Stock since the
       immediately preceding Dividend Payment Date or, with respect to the first
       Dividend  Payment Date, since the first issuance of any share or fraction
       of a share of Series D Preferred Stock. If the Corporation  shall fail to
       pay any such  dividends  upon all the  issued  and  outstanding  Series D
       Preferred  Stock,  the  deficiency  in dividends  shall be fully paid but
       without  interest  before any dividends shall be set apart or paid on the
       Common Stock. In the event the  Corporation  shall at any time declare or
       pay any dividend on the Common Stock  payable in shares of Common  Stock,
       or  effect  a  subdivision  or  combination  or   consolidation   of  the
       outstanding shares of Common Stock (by reclassification or otherwise than
       by  payment of a dividend  in shares of Common  Stock)  into a greater or
       lesser  number  of shares  of  Common  Stock,  then in each such case the
       amount  to which  holders  of shares of  Series D  Preferred  Stock  were
       entitled  immediately  prior to such event under the  preceding  sentence
       shall be adjusted by multiplying such amount by a fraction, the numerator
       of which is the number of shares of Common Stock outstanding  immediately
       after such event and the  denominator of which is the number of shares of
       Common Stock that were outstanding immediately prior to such event.

               (B) The  Corporation  shall declare a dividend or distribution on
       the  Series  D  Preferred  Stock as  provided  in  paragraph  (A) of this
       Paragraph 2 immediately  after it declares a dividend or  distribution on
       the  Common  Stock  (other  than a  dividend  payable in shares of Common
       Stock).

               (C)  The  Board  of  Directors  may  fix a  record  date  for the
       determination  of holders of shares of Series D Preferred  Stock entitled
       to receive payment of a dividend or distribution declared thereon,  which
       record  date shall be not less than 10 nor more than 60 days prior to the
       date fixed for the payment thereof.

               Paragraph  3.  Voting  Rights.  The holders of shares of Series D
       Preferred Stock shall have the following voting rights:

               (A)  Subject to the  provision  for  adjustment  hereinafter  set
       forth,  each share of Series D Preferred  Stock shall  entitle the holder
       thereof  to  100  votes  on  all  matters  submitted  to a  vote  of  the
       stockholders of the  Corporation.  In the event the Corporation  shall at
       any time  declare  or pay any  dividend  on the Common  Stock  payable in
       shares of  Common  Stock,  or  effect a  subdivision  or  combination  or
       consolidation   of  the   outstanding   shares   of   Common   Stock  (by
       reclassification  or otherwise than by payment of a dividend in shares of
       Common  Stock) into a greater or lesser number of shares of Common Stock,
       then in each such case the number of votes per share to which  holders of
       shares of Series D Preferred  Stock were  entitled  immediately  prior to
       such an event shall be adjusted by multiplying such number by a fraction,
       the  numerator  of  which  is  the  number  of  shares

<PAGE>

       of  Common  Stock  outstanding  immediately  after  such  event  and  the
       denominator  of which is the  number of shares of Common  Stock that were
       outstanding immediately prior to such event.

               (B) Except as otherwise provided herein, in any other Certificate
       of  Amendment to the  Certificate  of  Incorporation  or  Certificate  of
       Designations  creating a series of Preferred  Stock or any similar stock,
       or by law,  the  holders  of shares of Series D  Preferred  Stock and the
       holders  of  shares of Common  Stock and any other  capital  stock of the
       Corporation having general voting rights shall vote together as one class
       on all matters submitted to a vote of stockholders of the Corporation.

               (C) Except as set forth herein, or as otherwise  provided by law,
       holders of Series D Preferred  Stock shall have no special  voting rights
       and their  consent  shall not be required  (except to the extent they are
       entitled to vote with  holders of Common  Stock as set forth  herein) for
       taking any corporate action.

               Paragraph 4. Certain Restrictions.

               (A)  Whenever   quarterly   dividends   or  other   dividends  or
       distributions  payable on the Series D  Preferred  Stock as  provided  in
       Paragraph 2 are in arrears,  thereafter  and until all accrued and unpaid
       dividends and distributions, whether or not declared, on shares of Series
       D  Preferred  Stock  outstanding  shall  have  been  paid  in  full,  the
       Corporation shall not:

                           (i)  declare  or pay  dividends,  or make  any  other
               distributions,  on any shares of stock ranking  junior (either as
               to dividends or upon  liquidation,  dissolution or winding up) to
               the Series D Preferred Stock;

                           (ii)  declare  or pay  dividends,  or make any  other
               distributions, on any shares of stock ranking on a parity (either
               as to dividends or upon  liquidation,  dissolution or winding up)
               with the Series D Preferred Stock,  except dividends paid ratably
               on the  Series D  Preferred  Stock and all such  parity  stock on
               which  dividends  are payable or in arrears in  proportion to the
               total  amounts to which the  holders of all such  shares are then
               entitled;

                           (iii)  redeem or  purchase or  otherwise  acquire for
               consideration  shares of any stock ranking  junior  (either as to
               dividends or upon liquidation,  dissolution or winding up) to the
               Series D Preferred  Stock,  provided that the  Corporation may at
               any time redeem, purchase or otherwise acquire shares of any such
               junior  stock  in  exchange  for  shares  of  any  stock  of  the
               Corporation  ranking  junior  (either  as to  dividends  or  upon
               dissolution, liquidation or winding up) to the Series D Preferred
               Stock; or

                           (iv)  redeem or  purchase  or  otherwise  acquire for
               consideration  any  shares of Series D  Preferred  Stock,  or any
               shares of stock  ranking on a parity  with the Series D Preferred
               Stock, except in accordance with a purchase offer made in writing
               or by  publication  (as  determined by the Board of Directors) to
               all  holders  of such  shares  upon  such  terms as the  Board of
               Directors,  after consideration of the respective annual dividend
               rates and other relative rights and preferences of the respective
               series and classes,  shall determine in good faith will result in
               fair and  equitable  treatment  among  the  respective  series or
               classes.

               (B) The  Corporation  shall  not  permit  any  subsidiary  of the
       Corporation to purchase or otherwise acquire for consideration any shares
       of stock of the Corporation unless the Corporation could, under paragraph
       (A) of this  Paragraph 4,  purchase or  otherwise  acquire such shares at
       such time and in such manner.

               Paragraph 5. Reacquired  Shares. Any shares of Series D Preferred
       Stock  purchased or otherwise  acquired by the  Corporation in any manner
       whatsoever  shall be retired and canceled

<PAGE>

       promptly after the acquisition  thereof. All such shares shall upon their
       cancellation become authorized but unissued shares of Preferred Stock and
       may be reissued as part of a new series of Preferred Stock subject to the
       conditions  and  restrictions  on  issuance  set  forth  herein,  in  the
       Certificate of Incorporation, or in any other Certificate of Amendment to
       the Certificate of Incorporation or Certificate of Designations  creating
       a series of Preferred Stock or any similar stock or as otherwise required
       by law.

               Paragraph  6.  Liquidation,  Dissolution  or Winding Up. Upon any
       liquidation,   dissolution   or  winding  up  of  the   Corporation,   no
       distribution  shall be made (1) to the holders of shares of stock ranking
       junior  (either  as to  dividends  or upon  liquidation,  dissolution  or
       winding up) to the Series D Preferred  Stock unless,  prior thereto,  the
       holders  of shares of Series D  Preferred  Stock  shall  have  received a
       minimum of $100.00 per share,  plus an amount equal to accrued and unpaid
       dividends and distributions thereon, whether or not declared, to the date
       of such  payment,  provided  that  the  holders  of  shares  of  Series D
       Preferred  Stock  shall be entitled  to receive an  aggregate  amount per
       share,  subject to the provision for  adjustment  hereinafter  set forth,
       equal to 100 times the aggregate  amount to be  distributed  per share to
       holders  of shares of Common  Stock,  or (2) to the  holders of shares of
       stock  ranking on a parity  (either as to dividends or upon  liquidation,
       dissolution  or winding  up) with the Series D  Preferred  Stock,  except
       distributions  made ratably on the Series D Preferred  Stock and all such
       parity stock in  proportion  to the total amounts to which the holders of
       all such  shares  are  entitled  upon such  liquidation,  dissolution  or
       winding up. In the event the Corporation shall at any time declare or pay
       any dividend on the Common Stock  payable in shares of Common  Stock,  or
       effect a subdivision or combination or  consolidation  of the outstanding
       shares of Common Stock (by  reclassification or otherwise than by payment
       of a dividend in shares of Common  Stock) into a greater or lesser number
       of shares of Common Stock, then in each such case the aggregate amount to
       which  holders  of shares  of  Series D  Preferred  Stock  were  entitled
       immediately  prior to such event  under the  proviso in clause (1) of the
       preceding  sentence  shall be  adjusted by  multiplying  such amount by a
       fraction  the  numerator of which is the number of shares of Common Stock
       outstanding  immediately after such event and the denominator of which is
       the number of shares of Common  Stock that were  outstanding  immediately
       prior to such event.

               Paragraph 7. Consolidation,  Merger, etc. In case the Corporation
       shall  enter  into  any  consolidation,   merger,  combination  or  other
       transaction  in which the  shares of Common  Stock are  exchanged  for or
       changed into other stock or securities,  cash and/or any other  property,
       then in any such case each share of Series D Preferred Stock shall at the
       same time be  similarly  exchanged  or changed  into an amount per share,
       subject to the provision for adjustment  hereinafter set forth,  equal to
       100 times the  aggregate  amount of stock,  securities,  cash  and/or any
       other property  (payable in kind),  as the case may be, into which or for
       which each share of Common  Stock is changed or  exchanged.  In the event
       the  Corporation  shall at any time  declare or pay any  dividend  on the
       Common Stock payable in shares of Common  Stock,  or effect a subdivision
       or combination or consolidation of the outstanding shares of Common Stock
       (by reclassification or otherwise than by payment of a dividend in shares
       of  Common  Stock  into a greater  or  lesser  number of shares of Common
       Stock),  then in each such  case the  amount  set forth in the  preceding
       sentence  with  respect to the  exchange  or change of shares of Series D
       Preferred  Stock  shall be  adjusted  by  multiplying  such  amount  by a
       fraction,  the numerator of which is the number of shares of Common Stock
       outstanding  immediately after such event and the denominator of which is
       the number of shares of Common  Stock that were  outstanding  immediately
       prior to such event.

               Paragraph 8.  Redemption.  The shares of Series D Preferred Stock
       may be redeemed at the option of the Corporation in whole or in part upon
       any  Dividend   Payment  Date  and  in  the  manner   prescribed  in  the
       Corporation's Certificate of Incorporation,  upon at least 30 days notice
       to the holder of record thereof at a redemption  price per share equal to
       100  times  the fair  market  value  of one  common  share on such  date,
       together with all accrued dividends on the Series D Preferred Stock.

<PAGE>

               Paragraph 9. Rank.  The Series D Preferred  Stock shall rank, (i)
       with  respect to the  payment of  dividends  in parity  with the Series C
       Preferred  Stock and (ii) with  respect  to the  distribution  of assets,
       junior to all other series of the Corporation's preferred shares.

               Paragraph 10. Amendment.  The Certificate of Incorporation  shall
       not be amended in any manner which would  materially  alter or change the
       powers,  preferences or special rights of the Series D Preferred Stock so
       as to affect  them  adversely  without,  in addition to any other vote of
       stockholders  required by law, the affirmative  vote of the holders of at
       least a majority of the outstanding  shares of Series D Preferred  Stock,
       voting together as a single class.

               Paragraph 11. Fractional Shares. The Series D Preferred Stock may
       be issued in  fractions  of a share  which shall  entitle the holder,  in
       proportion to such holder's fractional shares, to exercise voting rights,
       receive  dividends,  participate in distributions and to have the benefit
       of all other rights of holders of the Series D Preferred Stock."

<PAGE>

               IN WITNESS  WHEREOF,  California  Water Service  Group,  Inc. has
       caused this  certificate  to be duly executed this 14th day of September,
       1999.

                                     CALIFORNIA WATER SERVICE GROUP, INC.

                                     By:  /s/Peter C. Nelson
                                          Peter C. Nelson
                                          President and Chief Executive Officer

       Attest:

       /s/Paul Ekstrom
       Paul Ekstrom
       Secretary

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