GARNET RESOURCES CORP /DE/, 10-K405, 1996-03-19

GARNET RESOURCES CORP /DE/
10-K405, 1996-03-19
CRUDE PETROLEUM & NATURAL GAS

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<PAGE> 1
FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1995

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ______________

Commission file number 0-16621

GARNET RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 74-2421851
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

333 CLAY STREET, SUITE 4500, HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (713) 759-1692

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, par value $.01 per share
(Title of class)

Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of voting stock held by non-affiliates of
the Registrant on March 1, 1996 was approximately $16,300,000. On such date,
the last sale price of Registrant's Common Stock was $1.44 per share.

As of March 1, 1996 11,492,162 shares of Registrant's Common Stock,
par value $.01 per share, were outstanding.

Documents Incorporated by Reference:

Definitive Proxy Statement for the Annual Meeting of Shareholders to
be held May 22, 1996. Certain information therein is incorporated into Part
III hereof.
<PAGE> 2
TABLE OF CONTENTS TO FORM 10-K

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General Development of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Financial Information about Industry Segments . . . . . . . . . . . . . . . . . . . . . . 4
Narrative Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Information about Foreign and Domestic Operations and Export Sales . . . . . . 6
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Papua New Guinea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Other Foreign Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Supplementary Information in Respect of Oil and Gas Properties . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 12

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . 13
Market Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . 14
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . 17

PART III

Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . 18
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . 18
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . 19

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . 20

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>

<PAGE> 3
PART I

ITEM 1. BUSINESS.

(A) GENERAL DEVELOPMENT OF BUSINESS.

Garnet Resources Corporation, a Delaware corporation
("Garnet"), is engaged primarily in the exploration, development and production
of potentially significant oil and gas properties located outside the United
States. As used herein, the "Company" shall mean Garnet and its subsidiaries.
Since inception, exploration activities have been conducted in the Republic of
Colombia ("Colombia"), the Independent State of Papua New Guinea ("Papua New
Guinea"), the Republic of Turkey ("Turkey"), the Islamic Republic of Pakistan,
the Kingdom of Spain ("Spain"), the Republic of France ("France") and the
Dominion of Canada ("Canada"). The Company also owned a small number of
working interests in producing oil and gas properties in the United States,
which were sold during 1992.

During 1995 the Company conducted exploration activities on
its properties in Colombia, Papua New Guinea and Turkey, and continued
development and production activities in Colombia. It also continued efforts
to identify a partner to participate in drilling an exploratory well in France
and to acquire oil and gas leases in Canada. During the year the Company began
to focus its efforts increasingly on exploration and production opportunities in
Colombia, and initiated reviews of its exploration and exploitation techniques
and procedures in Colombia. It also implemented a cost reduction program
designed to eliminate more than $1.5 million annually in U.S. and Colombian
general and administrative expenses and production costs.

The Company's activities in Colombia are conducted through
Argosy Energy International, a Utah limited partnership ("Argosy") in which
Garnet is a limited partner and in which a wholly owned subsidiary of Garnet is
the general partner. Argosy has interests in four contracts with Empresa
Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"),
involving exploration, development and production activities in the Putumayo
Basin of southwestern Colombia. Argosy participates in these contracts through
a 55% interest in a joint venture with Neo Energy, Inc., a subsidiary of Aviva
Petroleum Inc. ("Neo"). The four contracts with Ecopetrol include (i) a risk
sharing contract signed in 1987 (the "Santana Contract") currently covering
approximately 86,000 acres (the "Santana Block"), (ii) an association contract
signed in 1992 (the "Fragua Contract") covering approximately 32,000 acres
contiguous to the northern boundary of the Santana Block (the "Fragua Block"),
(iii) an association contract signed in 1995 (the "Yuruyaco Contract") covering
approximately 39,000 acres contiguous to the eastern boundaries of the Santana
Block and the Fragua Block (the "Yuruyaco Block"), and (iv) Association
Agreements signed in 1972, as amended (the "Aporte Putumayo Contracts"),
covering approximately 77,000 acres 20 miles south of the Santana Block (the
"Aporte Putumayo Block"). The Aporte Putumayo Contracts will expire in 2003,
but Argosy and Neo notified Ecopetrol in 1994 that they intend to abandon the
remaining wells and relinquish the Aporte Putumayo Block because declining
production rates have made continued operation economically unattractive. The
abandonment of the wells and associated facilities is scheduled for 1996.

The Santana Block and the Fragua Block have been the focus of
the Company's exploration and development activities in recent years. The
Company has discovered four oil fields on the Santana Block, which produced a
total of approximately 5,600,000 barrels of oil during the

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<PAGE> 4

period from commencement of production in April 1992 through December 1995.
The Company's share of this production was approximately 1,200,000 barrels.
During 1995 one gross (.4 net) dry exploratory well, one gross (.3 net)
productive development well and one gross (.3 net) dry development well were
drilled on the Santana Block. The Company also completed a 3-D seismic
survey over its Toroyaco and Linda fields in 1995, and integrated the survey
results with a reservoir modeling project to confirm the location of additional
development wells to be drilled in the two fields. To increase production from
existing wells, the Company performed fracture stimulation procedures on a
total of seven wells in the four fields in late 1995 and early 1996. See
"Properties - Colombia."

In March 1995 the Company increased its ownership in Argosy by
exchanging 366,625 shares of Garnet's common stock with a value of $3.00 per
share and cash totalling $142,703 for the partnership interests held by
certain of Argosy's limited partners.

In Papua New Guinea, Garnet PNG Corporation ("Garnet PNG"), a
wholly owned subsidiary of Garnet, owns (i) a 7.73% interest (the "PPL-174
Interest") in Petroleum Prospecting License No. 174 ("PPL-174"), a license to
explore for oil and gas on approximately 126,000 acres (the "PPL-174 Area"),
and (ii) a 6% interest (the "PPL-181 Interest") in Petroleum Prospecting
License No. 181 ("PPL-181"), a license to explore for oil and gas on
approximately 952,000 acres (the "PPL-181 Area"). Until September 1995, Garnet
PNG also held a 40% interest (the "PPL-77 Interest") in Petroleum Prospecting
License No. 77 ("PPL-77"), which included most of the area now covered by
PPL-181 and was surrendered in connection with the issuance of PPL-181. An
exploratory well on the PPL-174 Area was commenced in January 1996 and was
plugged and abandoned as a dry hole in March 1996. For more information
regarding PPL-174 and PPL-181, see "Properties - Papua New Guinea".

Garnet was incorporated in the state of Delaware in June 1986.
Garnet's principal executive office is located at 333 Clay Street, Suite 4500,
Houston, Texas 77002 and its telephone number is (713) 759-1692.

(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

The Company operates in one industry segment.

General. The Company is currently engaged in the exploration
of oil and gas properties located in Colombia and Papua New Guinea, and is
engaged in the production and development of oil from its properties in
Colombia. The Company may continue to apply for and to acquire additional oil
and gas exploration permits if suitable prospects are available on advantageous
terms. The Company may also acquire interests in corporations or other
entities which either hold or intend to acquire interests in oil and gas
properties.

Risks Associated with the Company's Business. The Company has
expended significant amounts of capital on the acquisition, exploration and
development of its properties and plans to expend additional capital on such
activities. Even if the results of such activities are favorable, as in
Colombia where the Company has made four oil discoveries, subsequent drilling
at significant costs must be conducted on certain of the properties to
determine whether further commercial development of the properties is feasible.
To finance its planned exploration and

4
<PAGE> 5

development activities, the Company intends to utilize its existing working
capital, cash flow from production in Colombia (see "Properties - Colombia"),
and cash proceeds expected to be received from sales of assets held for
disposition, although there can be no assurance that any of such assets can be
sold on terms acceptable to Garnet. The Company may also consider entering
into additional arrangements whereby certain costs of exploration will be paid
by others to earn an interest in the properties. There can be no assurance
that the additional financing which may be necessary to fund the Company's
operations and obligations will be available on economically acceptable terms.
For additional information on the Company's cash requirements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

In addition, the Company's ability to continue its exploration
and development programs may be dependent upon the ability of its joint venture
partners to finance their portion of such costs and expenses. There can be no
assurance that the Company's partners will contribute, or be in a position to
contribute, their costs and expenses of the joint venture programs. If the
Company's partners do not finance their obligations to the joint ventures, the
Company may be required to accept an assignment of the partners' interests
therein and assume their financing obligations. If sufficient funds cannot be
raised to meet the Company's obligations in connection with its properties, the
interests in the affected properties might be sold or forfeited. In addition,
if sufficient funds are raised, there can be no assurance that the Company will
be able to discover, develop and produce sufficient reserves in Colombia, Papua
New Guinea or elsewhere to recover the costs and expenses incurred in
connection with the acquisition, exploration and development thereof and
achieve profitability.

The Company has invested and may continue to invest primarily
in properties located outside the United States, in certain countries which may
be considered politically and economically unstable. Accordingly, the Company
is subject to risks inherent in the ownership and development of foreign
properties including, without limitation, cancellation or renegotiation of
contracts, royalty and tax increases, retroactive tax claims, expropriation,
adverse changes in currency values, foreign exchange controls, import and
export regulations, environmental controls, and other laws, regulations or
international developments which may adversely affect the Company's properties.
In addition, there are usually significant logistical problems, costs and risks
in conducting oil and gas activities in remote, rugged and primitive regions
such as Papua New Guinea, or in Colombia where Argosy's operations are exposed
to potentially detrimental activities by the leftist guerrillas that have
operated there for many years. Argosy's assets have been damaged in the past
as a result of guerrilla activities, although the losses have been
substantially recovered through insurance. There can be no assurance that
Argosy's operations in Colombia will not be the target of similar attacks in
the future, or that Argosy will be able to continue to insure its assets
against similar losses.

The Company is subject to all the risks normally incident to
drilling for and producing oil and gas, including blowouts, cratering and
fires, any of which could result in damage to or loss of life or property. In
accordance with industry practice, the Company is not fully insured against
these risks, nor are all such risks insurable.

Competition. The oil and gas business is extremely
competitive in all of its phases and particularly in exploration for and
development of new sources of crude oil and natural gas. The Company must
compete with other companies that are larger and financially stronger in
acquiring properties suitable for exploration, in contracting for drilling
equipment, and in securing trained personnel. The Company is not a significant
participant in the oil and gas industry.

5
<PAGE> 6

Markets. There is substantial uncertainty as to the prices
which the Company may receive for production from its existing oil reserves or
from oil and gas reserves, if any, which the Company may discover. The
availability of a ready market and the prices received for oil and gas produced
depend upon numerous factors beyond the control of the Company including, but
not limited to, adequate transportation facilities (such as pipelines), the
marketing of competitive fuels, fluctuating market demand, governmental
regulation and world political and economic developments. World oil and gas
markets are highly volatile and shortage or surplus conditions substantially
affect prices. As a result, there have been dramatic swings in both oil and
gas prices in recent years. The sale of oil from the Santana Block in Colombia
is governed by contracts with Ecopetrol. There is no market for natural gas
from the Putumayo Region of Colombia. See "Properties - Colombia." It is
possible that, under market conditions prevailing in the future, the production
and sale of oil, if any, from the Company's properties in Papua New Guinea may
not be commercially feasible and the production of gas therefrom is not
expected to be commercially feasible.

Regulation. The Company's foreign operations are subject to
regulations imposed by the local regulatory authorities including, without
limitation, currency regulation, import and export regulation, taxation and
environmental controls. The regulations also generally specify, among other
things, the extent to which acreage may be acquired or relinquished, permits
necessary for drilling of wells, spacing of wells, measures required for
preventing waste of oil and gas resources and, in some cases, rates of
production and sales prices to be charged to purchasers.

Specifically, Colombian operations are governed by a number of
ministries and agencies including Ecopetrol, the Ministry of Mines and Energy,
and the Ministry of the Environment. In 1993 Instituto de Recursos Naturales y
Ambiente ("Inderena"), a federal environmental agency in Colombia, began
reviewing the environmental standards and permitting processes for the oil
industry, in general, and in 1994 the Ministry of the Environment was
organized. Accordingly, it is possible that the review of current
environmental laws, regulations and the administration and enforcement thereof,
or the passage of new environmental laws or regulations in Colombia, could
result in substantial costs and liabilities in the future or in delays in
obtaining the necessary permits to conduct the Company's operations in such
country.

The Company's operations in Papua New Guinea are currently
governed by the Department of Mining and Petroleum, which has jurisdiction over
all petroleum exploration in that country. In the event the Company develops
and operates a petroleum business in Papua New Guinea, the Company will be
subject to regulation by the Investment Promotion Authority, which regulates
almost all business operations with significant foreign equity or with foreign
management control.

Employees. The Company's operations are managed from its
Houston, Texas office, which consists of a staff of five employees, using
professional consulting services as needed.

(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES.

Financial information about foreign and domestic operations
may be found in Note 9 of the Notes to Consolidated Financial Statements
contained in Item 8 of Part II.

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<PAGE> 7

ITEM 2. PROPERTIES.

COLOMBIA.

Through its interests in Argosy, the Company presently has a
54.5% indirect interest in the Santana Contract, a 53.5% indirect interest in
the Fragua Contract, and a 55% indirect interest in the Yuruyaco Contract.
Argosy has 110 employees in Colombia and serves as the operator of the Santana
Block, the Fragua Block and the Yuruyaco Block under operating agreements with
Ecopetrol and with Neo.

The Colombian properties are located in the Putumayo Region of
southern Colombia which is bounded by the Andes mountains on the west and
northwest and the Upper Amazon Platform on the east and which lies within the
northern portion of a larger regional basin extending nearly 800 miles
southward through Ecuador into eastern Peru and western Brazil.

Argosy's responsibilities as operator of the joint venture
with Neo are governed by the terms of operating agreements by and between
Argosy and Neo, which provide for the establishment of operating committees
which consist of two representatives from each of Argosy and Neo. Argosy has
exclusive charge of carrying out the program of operations within the budgets
approved by the operating committees and may demand payment in advance from
each party of its respective share of estimated monthly expenditures.

The Santana Contract, the Fragua Contract and the Yuruyaco
Contract have a term of 28 years, including an exploration period of 10 years,
with partial relinquishments of acreage required at the end of years six and
eight. At the end of the 10th year, which will occur in July 1997 for the
Santana Contract, the oldest of the three contracts, all acreage must be
relinquished except acreage contained within productive fields plus a
three-mile reserve zone around each such field. Under the terms of the
contracts, Ecopetrol will receive a royalty equal to 20% of production on
behalf of the Colombian Government and, in the event a discovery is deemed
commercially feasible, Ecopetrol will acquire a 50% interest in the remaining
production from the field, bear 50% of the development costs, and reimburse the
joint venture, from Ecopetrol's share of future production from each well, for
50% of the joint venture's costs of certain exploration activities. When
accumulated oil production from the Santana Contract exceeds seven million
barrels, Ecopetrol will continue to bear 50% of development costs, but its
interest in production revenues and operating costs will increase to 65%. If a
commercial field on the Fragua Block produces in excess of 60 million barrels,
Ecopetrol's interest in production and costs increases in 5% increments from
50% to 70% as accumulated production from the field increases in 30 million
barrel increments from 60 million barrels to 150 million barrels. If a
commercial field on the Yuruyaco Block produces in excess of 60 million
barrels, Ecopetrol's interest in production and costs ranges from 50% to 75%,
based on annual measurements of profitability as defined in the Yuruyaco
Contract. The joint venture paid all costs of the exploration program for the
Santana Block during the first two years of the contract and thereafter the
joint venture and Ecopetrol have been obligated to pay 70% and 30%,
respectively, of such exploration costs. The joint venture bears all costs and
risks of exploration activities on the Fragua Block and the Yuruyaco Block,
subject to Ecopetrol's right to acquire a 50% interest in commercial
discoveries. If a discovery is made and is not deemed by Ecopetrol to be
commercially feasible, the joint venture may continue to develop the field at
its own expense and will recover 200% of the costs thereof, at which time
Ecopetrol will acquire a 50% interest therein at no cost to Ecopetrol or
further reimbursement by Ecopetrol to Argosy or Neo.

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<PAGE> 8

The Company's resulting net participation in revenues and
costs for the Santana Contract, the Fragua Contract and the Yuruyaco Contract
is as follows:

<TABLE>
<CAPTION>
PRODUCTION OPERATING EXPLORATION DEVELOPMENT
REVENUES COSTS COSTS COSTS
---------- --------- ----------- ------------
<S> <C> <C> <C> <C>

Santana Contract::
Before seven million barrels
of accumulated production 21.8% 27.2% 38.1% 27.2%
After seven million barrels
of accumulated production 15.3% 19.1% 38.1% 27.2%

Fragua Contract:
Before 60 million barrels
of accumulated production 21.8% 27.3% 54.6% 27.3%
After 150 million barrels
of accumulated production 13.1% 16.4% 54.6% 27.3%

Yuruyaco Contract:
Before 60 million barrels
of accumulated production 22.0% 27.5% 55.0% 27.5%
After 60 million barrels of
accumulated production at
maximum profitability 11.0% 13.8% 55.0% 27.5%
</TABLE>

The joint venture has completed its seismic acquisition and
drilling obligations for the first eight years of the Santana Contract,
resulting in the discovery of four oil fields, all of which have been declared
commercial by Ecopetrol. The joint venture has the right to continue the
exploration program through 1997 with an obligation to conduct exploration
programs to be approved by Ecopetrol in 1996 and 1997. The joint venture has
also completed its seismic obligations for the first two years of the Fragua
Contract, but no wells have yet been drilled on the Fragua Block.

Oil production from the Santana Block moves through the
25-mile Uchupayaco-Santana pipeline built and completed by the joint venture in
1994 to Ecopetrol's Trans-Andean pipeline, where it then is transported an
additional 230 miles to the Pacific coast export terminal at Tumaco. Under the
terms of a contract with Ecopetrol, all oil produced from the Santana Block is
sold to Ecopetrol. If Ecopetrol exports the oil, the price paid is the export
price received by Ecopetrol, adjusted for quality differences, less a handling
and commercialization fee of $.465 per barrel. If Ecopetrol does not export
the oil, the price paid is based on quoted prices for Colombia's Cano Limon
crude oil, adjusted for quality differences, plus or minus a sales value
differential to be determined by independent analysis, less Ecopetrol's cost to
transport the crude to Cartagena and a handling and commercialization fee of
$.365 per barrel. The average sales price per barrel of oil produced from the
Santana Block during 1995 was $16.59. The contract also requires Argosy to pay
a tariff to transport its oil through the Trans-Andean pipeline, the amount of
which is presently $1.16 per barrel. Under the terms of its contract with
Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in Colombian
pesos which may only be utilized in Colombia.

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<PAGE> 9

as the pledge of Garnet's direct and indirect interests in Argosy. The maximum
term of the loans is not to exceed seven years, and the principal amortization
schedule is based on projected cash flows from wells on the Santana Block. The
loans bear interest at the lender's eurodollar deposit rate plus .25% per annum
for periods of two, three or six months as selected by Argosy. In addition
Argosy paid the lender a commitment fee of .25% per annum on the undisbursed
and uncancelled amount of the guaranty, and also paid the lender a facility fee
of $46,000. In consideration for OPIC's guaranty, Argosy agreed to pay OPIC
certain fees, including a facility fee of $92,000, a guaranty fee of 2.4% per
annum on the outstanding balance of the loans guaranteed, a commitment fee of
.67% per annum on the undisbursed and uncancelled amount of the guaranty, and a
cancellation fee equal to .67% of the amount cancelled.

Argosy's net income, as defined under Colombian law, from
Colombian sources is subject to Colombian taxation at a rate of 35%, although a
"presumptive" minimum income tax based on net assets may apply under certain
circumstances. Unless Argosy transfers such net income to its assigned capital
account, an additional remittance tax will accrue at the rate of 12% in 1996,
10% in 1997 and 7% after 1997. Payment of the additional remittance tax, if
any, may be deferred under certain circumstances if Argosy has reinvested such
income in Colombia. For oil fields discovered before 1995, the Colombian
Government also imposes a production tax equal to 7% of the crude oil price
through 1997 if the field began producing before 1995, or through 2000 if the
field began producing after 1994.

PAPUA NEW GUINEA.

The PPL-174 Area and the PPL-181 Area are located in the
Western, Gulf and Southern Highland Provinces of Papua New Guinea. The
northern section of the PPL-181 Area is in a mountainous tropical rain forest
while the southern section of PPL-181 and all of PPL-174 are predominantly
lowlands jungle and coastal swamps. In 1986 oil was discovered approximately
10 miles from the northern border of PPL-181 in an adjoining license area.

Exploration activities on PPL-77 since 1986 identified a large
potential oil prospect (the "Kamusi Prospect") on PPL-77 and two adjoining
licenses. The Company entered into an agreement in 1994 with several other
companies to fund the costs of a well on the Kamusi Prospect. In January 1995
the Government of Papua New Guinea issued PPL-174 to Garnet PNG and its joint
venture partners. PPL-174 covers the Kamusi Prospect and includes a portion of
the acreage formerly within the boundaries of PPL-77 and adjoining areas.
Garnet PNG will contribute approximately $238,000 to the costs of the well,
which was commenced in January 1996 and was plugged and abandoned as a dry hole
in March 1996. The Company charged to expense in 1995 approximately $675,000
of previously capitalized acquisition and exploration costs pertaining to Papua
New Guinea.

In April 1995 the Company entered into an agreement with
Occidental International Exploration and Production Company ("Occidental")
covering PPL-77. Under the agreement an application for a new license was
submitted to the Papua New Guinea Government. PPL-181 was issued in September
1995 and is owned by Occidental (88%), Garnet PNG (6%) and Niugini Energy Pty.
Limited (6%). Occidental agreed to drill and complete at its cost a test well
on the PPL-181 Area within the first two years.

Under the provisions of PPL-174 and PPL-181, the terms of any
oil and gas development are set forth in a Petroleum Agreement with the
Government of Papua New Guinea.

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<PAGE> 10

The Petroleum Agreement provides that the operator must carry out an appraisal
program after a discovery to determine whether the discovery is of commercial
interest. If the appraisal is not carried out or the discovery is not of
commercial interest, the license may be forfeited. If the discovery is of
commercial interest, the operator must apply for a Petroleum Development
License and must procure liability insurance to cover environmental damage or
loss to third parties. The Petroleum Agreement also provides that the
Government retains a royalty on production equal to 1.25% of the wellhead value
of the petroleum and, at its election, may acquire up to a 22.5% interest in
the petroleum development after recoupment by the operator of the project costs
attributable thereto out of production. In addition, income from petroleum
operations is subject to a Petroleum Income Tax at the rate of 50% of net
income, which is defined as gross revenue less royalties, allowances for
depreciation, interest deductions, operating costs and previous tax losses
carried forward. An Additional Profits Tax of 50% of cash flow (after
deducting ordinary income tax payments) is also payable when the accumulated
value of net cash flows becomes positive. For annual periods in which net cash
flows are negative, the cumulative amount is carried forward and increased at
an annual accumulation rate of 27%. The Additional Profits Tax is calculated
separately for each Petroleum Development License. In calculating the
applicable tax, interest expenses paid by Garnet PNG prior to the issuance of a
Petroleum Development License and, thereafter, to the extent that Garnet PNG's
debt to equity ratio exceeds two-to-one, are not deductible.

OTHER FOREIGN AREAS.

A wholly owned subsidiary of Garnet has held exploration
licenses in two areas of Turkey since 1989. Two exploratory wells were drilled
on licenses in the two areas, both of which were plugged and abandoned as dry
holes in February 1995. The Company has surrendered the licenses in
southwestern Turkey and plans no further activity. The licenses in
southeastern Turkey, in which the Company has a 50% interest, have been
extended until August 1996. Although future activity will depend on
re-interpretation of seismic data and well results, the Company presently plans
no additional exploration on these licenses.

Garnet was awarded permits for oil and gas exploration in
France in 1991 and 1992, and conducted geological studies and a seismic program
over portions of the permits. Although an attractive drillable prospect was
identified, the Company was unable to locate a partner to participate in
drilling a test well and in 1995 elected not to extend the permits.

Beginning in 1990, a wholly owned subsidiary of Garnet has
leased approximately 18,000 acres in the Province of British Columbia in
Canada. Because of the inability to lease the additional acreage necessary to
justify exploration activities, the Company plans to terminate all of the
leases.

The Company charged to expense approximately $2,815,000 in
1994 and $873,000 in 1995 of previously capitalized acquisition and
exploration costs pertaining to these and other countries.

SUPPLEMENTARY INFORMATION IN RESPECT OF OIL AND GAS PROPERTIES.

Reserves Reported to Other Agencies. No estimates of the
Company's total proved net oil and gas reserves have been filed with or
included in reports to any federal authority or agency other than the
Securities and Exchange Commission and OPIC.

10
<PAGE> 11

Productive Wells and Acreage. As of December 31, 1995, the
Company owned 10 gross (2.2 net) productive oil wells and 3,212 gross (1,077
net) developed acres in Colombia.

Undeveloped Acreage. The following table sets forth estimates
of the undeveloped acreage for which oil and gas leases or concessions were
held by the Company as of December 31, 1995:

<TABLE>
<CAPTION>
GROSS ACRES NET ACRES
----------- ---------
<S> <C> <C>
Canada 18,321 18,321
Colombia 231,108 125,823
France 107,208 107,208
Papua New Guinea 1,078,000 66,860
Turkey 243,648 121,824
--------- -------

Total 1,678,285 440,036
========= =======
</TABLE>

Drilling Activity. The following table sets forth the number of
wells drilled by the Company during the three years ended December 31, 1995.

<TABLE>
<CAPTION>
EXPLORATORY DEVELOPMENT
--------------------------- -------------------------
PRODUCTIVE DRY PRODUCTIVE DRY
------------ ----------- ----------- -----------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1995:
Colombia - - 1 .4 1 .3 1 .3
Turkey - - 1 .3 - - - -
--- --- --- ---- --- ---- --- ----
- - 2 .7 1 .3 1 .3
=== === === ==== === ==== === ====
Year ended
December 31, 1994:
Colombia - - 1 .4 1 .3 - -
=== === === ==== === ==== === ====

Year ended
December 31, 1993:
Colombia - - 2 .7 2 .6 - -
=== === === ==== === ==== === ====
</TABLE>

Present Activities. As of December 31, 1995, no wells were
in progress.

Additional Information. Reference is made to the Supplemental
Oil and Gas Information included in the consolidated financial statements
contained in Item 8 of Part II for additional information regarding the
Company's oil and gas producing activities prepared in accordance with the
requirements of Statement of Financial Accounting Standards No. 69 "Disclosures
About Oil and Gas Producing Activities."

11
<PAGE> 12

ITEM 3. LEGAL PROCEEDINGS.

There are no material legal proceedings to which the Company
is a party or to which any of its property is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

12
<PAGE> 13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(A) MARKET INFORMATION.

Shares of Garnet's Common Stock are traded on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol "GARN". The
range of reported high and low sales prices for shares of Garnet's Common Stock
as supplied by Nasdaq was as follows:

<TABLE>
<CAPTION>
CALENDAR PERIOD HIGH LOW
--------------- ---- ---

1995
<S> <C> <C>
Fourth Quarter $ 2-3/8 $ 1
Third Quarter 2-3/8 1-5/8
Second Quarter 3-1/8 2-3/4
First Quarter 3-1/2 2-1/8

1994

Fourth Quarter 4 3
Third Quarter 4-1/2 3-1/4
Second Quarter 4-1/2 3-3/8
First Quarter 5 4
</TABLE>

(B) HOLDERS.

As of March 1, 1996, shares of Garnet's Common Stock were held
of record by approximately 1,700 persons, including several holders who are
nominees for an undetermined number of beneficial owners.

Garnet has neither declared nor paid any cash dividends on its
Common Stock. Under the terms of an agreement with the holders of its 9 1/2%
convertible subordinated debentures (the "Debentures"), Garnet has agreed that
it will not pay dividends or make distributions to the holders of its Common
Stock while the Debentures are outstanding. Any future determination as to
declaration and payment of dividends, if permitted, will be made at the
discretion of the Board of Directors. The ability to pay dividends may be
further restricted by the agreements and regulations described below.

The terms of the guaranty agreement between Argosy and OPIC
restrict Argosy's ability to make distributions to its partners prior to the
repayment of the guaranteed loans. Also, under the terms of its contracts with
Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in Colombian
pesos which may only be utilized in Colombia. To date, Argosy has experienced
no

13
<PAGE> 14

difficulty in repatriating the remaining 75% of such payments which are payable
in United States dollars.

Upon presentation of a tax clearance certificate evidencing
Garnet PNG's compliance with the relevant provisions of Papua New Guinea's
income tax laws, profits, dividends and certain other payments, if any, up to an
amount of 500,000 kina (approximately $US375,000) per year may be fully remitted
out of Papua New Guinea. Amounts in excess of 500,000 kina may also be
remitted, subject to clearance from the Bank of Papua New Guinea.

ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial data should be read in
conjunction with the consolidated financial statements and notes thereto
included in Item 8 of Part II.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
INCOME STATEMENT DATA: 1995 1994 1993 1992 1991
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 8,881,133 $ 4,355,365 $ 4,596,766 $ 3,383,477 $1,204,134
Net loss (4,623,322) (7,425,527) (3,447,093) (11,078,080) (1,713,574)
Net loss per share (.40) (.67) (.31) (1.01) (.20)
Weighted average
shares outstanding 11,416,828 11,125,537 11,124,929 11,004,786 8,665,984
Cash dividends
per share - - - - -

<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
BALANCE SHEET DATA: 1995 1994 1993 1992 1991
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 49,959,028 $ 49,300,037 $ 52,151,499 $ 38,345,246 $ 49,086,780
Long-term debt 20,151,120 17,506,105 15,227,999 - 99,090
Stockholders' equity 22,266,805 25,790,252 33,215,779 36,655,372 46,843,549
</TABLE>

Effective January 1, 1993, the Company changed its accounting
for income taxes. See Note 6 of the Notes to Consolidated Financial Statements
contained in Item 8 of Part II.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

(A) LIQUIDITY AND CAPITAL RESOURCES.

For the three years ended December 31, 1995, the Company
expended approximately $23,250,000 for the acquisition, exploration and
development of its oil and gas properties. Such expenditures include
approximately $20,350,000 for exploration and development activities in
Colombia, approximately $450,000 for exploration and related costs in Papua New
Guinea, and approximately $2,450,000 for acquisition and exploration activities
in Turkey, France, Canada and other countries.

These activities have been financed primarily by proceeds from
(i) the issuance of the Debentures in 1993, the net proceeds of which totalled
$14,231,000, and (ii) loans guaranteed by OPIC, the net proceeds of which
amounted to approximately $8,425,000. Other than the OPIC guaranty the Company
has no significant lines of credit. The working capital of the Company was
approximately $2,790,000 as of December 31, 1995, which the Company expects to
utilize

14
<PAGE> 15

principally in its foreign exploration and development activities. The
Company's working capital has been reduced to reflect approximately $3,962,000
in principal payments presently due on the OPIC-guaranteed debt in 1996.
Because the principal amortization schedule is based on projected cash flows
from developed oil reserves, the Company anticipates that such payments will be
rescheduled to later years as development activities are conducted on the
Santana Block, and that its working capital will therefore be increased by such
amounts.

Argosy and its joint venture partner have completed the
seismic acquisition and drilling obligations for the first eight years of the
Santana Contract, resulting in the discovery of four oil fields. The joint
venture has the right to continue the exploration program through 1997 with an
obligation to conduct exploration programs to be approved by Ecopetrol in 1996
and 1997. The Company plans to perform additional seismic work and to drill an
additional exploratory well in 1996 on the Santana Block, with estimated total
costs to the Company of approximately $2,200,000. The seismic programs
required during the first two years of the Fragua Contract have also been
completed. An additional seismic survey is planned for 1996, for which the
Company's share of the costs is estimated to be approximately $250,000. The
Company also plans to conduct a seismic program on the Yuruyaco Block in 1996,
for which its share of the costs is estimated to be $400,000.

The Toroyaco and Linda fields, the first two fields discovered
on the Santana Block, began producing in 1992. The Mary and Miraflor fields,
the last two fields discovered, were declared commercial by Ecopetrol in 1993.
Production from the four fields is presently averaging approximately 9,000
barrels of oil per day. The Company's share of such production is 21.8%; it
also receives an additional 21.8% of the production from certain wells until it
recovers the drilling and completion costs for those wells allocable to
Ecopetrol but paid by the Company.

As of December 31, 1995, the Company was completing the
construction of production facilities for the Mary and Miraflor fields, for
which the Company's share of the remaining costs is expected to be
approximately $700,000. The Company also plans to drill at least four
additional development wells in the Toroyaco and Linda fields in 1996 and 1997.
The Company's share of the costs of drilling and completing each of the wells
in these fields is expected to range from $850,000 to $1,050,000.

Garnet PNG will contribute approximately $238,000 in 1996 to
the costs of the exploratory well on the Kamusi Prospect in Papua New Guinea.

As described herein, the Company's operations are primarily
located outside the United States. Although certain of such operations are
conducted in foreign currencies, the Company considers the U.S. dollar to be
the functional currency in most of the countries in which it operates. In
addition, the Company has no significant operations in countries with highly
inflationary economies. As a result, the Company's foreign currency
transaction gains and losses have not been significant. Exchange controls
exist for the repatriation of funds from Colombia and Papua New Guinea. See
"Market for Registrant's Common Equity and Related Stockholder Matters -
Dividends." The Company believes that the continuing viability of its
operations in these countries will not be affected by such restrictions.

It is anticipated that the Company's foreign exploration and
development activities will require substantial amounts of capital. To finance
its planned exploration and development activities, the Company intends to
utilize its existing working capital, cash flow from production in Colombia,
and cash proceeds expected to be received from the sale of assets held for
disposition,

15
<PAGE> 16

although there can be no assurance that any of such assets can be sold on terms
acceptable to the Company. In 1995 the Company also identified and implemented
more than $1.5 million in annual reductions of U.S. and Colombian general and
administrative expenses and production costs. The Company may also consider
entering into additional arrangements whereby certain costs of exploration will
be paid by others to earn an interest in the properties. As of December 31,
1995, Garnet was not in compliance with the minimum net worth covenant required
by the Debentures. The holders of the Debentures have waived compliance with
this requirement through 1996. If Garnet is unable to increase its net worth
to the minimum required, it will be necessary to extend the waiver or
renegotiate the terms of the debt.

The present environment for financing the acquisition of oil
and gas properties or the ongoing obligations of an oil and gas business is
uncertain due, in part, to the substantal instability in oil and gas prices in
recent years and to the volatility of financial markets. There can be no
assurance that the additional financing which may be necessary to fund the
Company's operations and obligations will be available on economically
acceptable terms. In addition, the Company's ability to continue its
exploration and development programs may be dependent upon its joint venture
partners' financing their portion of such costs and expenses. There can be no
assurance that the Company's partners will contribute, or be in a position to
contribute, their costs and expenses of the joint venture programs. If the
Company's partners cannot finance their obligations to the joint ventures, the
Company may be required to accept an assignment of the partners' interests
therein and assume their financing obligations. If sufficient funds cannot be
raised to meet the Company's obligations in connection with its properties, the
interests in such properties might be sold or forfeited.

(B) RESULTS OF OPERATIONS.

The Company incurred net losses of $4,623,322 ($.40 per
share), $7,425,527 ($.67 per share) and $3,447,093 ($.31 per share ) for the
years ended December 31, 1995, 1994 and 1993, respectively. The net loss for
1993 was increased by approximately $172,000 ($.02 per share) for the
cumulative effect to December 31, 1992 of a change in accounting principle
resulting from the adoption, effective January 1, 1993, of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes."

Increases in 1995 in oil and gas revenues, production costs
and depreciation, depletion and amortization reflect higher oil prices and
production from new wells in Colombia. Production costs per barrel decreased
in 1994 and 1995 because of a lower tariff on the Trans-Andean pipeline which
became effective in February 1994, reduced trucking charges resulting from the
completion of the Uchupayaco-Santana pipeline in June 1994, and the Company's
cost reduction program implemented in the third quarter of 1995. The Company's
comparative average daily sales volumes, average sales prices and costs per
barrel in Colombia for such periods were as follows, expressed in barrels of
oil per day ("BOPD"):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Average oil sales (BOPD) 1,443 806 891
Average oil price per barrel $16.39 $13.44 $13.97
Production costs per barrel $ 6.71 $ 8.52 $ 9.96
Depreciation, depletion and
amortization per barrel $ 9.37 $ 6.67 $ 7.61
</TABLE>

16
<PAGE> 17

During 1993 the Company charged to expense additional costs
pertaining to oil and gas exploration activities in Spain ($36,110) and Papua
New Guinea ($11,316), and also recorded a loss of $228,669 on the sale of a
drilling rig used in its exploration and development activities in Colombia.
During 1994 the Company recorded as expense the costs of a dry hole drilled in
Turkey ($576,250), investments in leases, license blocks or permit applications
in Canada ($583,500), Turkey ($1,174,080) and France ($186,000), costs
pertaining to oil and gas exploration activities in other countries ($74,532),
and interest previously capitalized in connection with these activities
($220,448). Based on declining market conditions for sales of oil and gas
properties and management's expectations of the amounts to be realized from
disposition of the remaining royalty and mineral interests acquired in mergers
in 1991, the Company further reduced the carrying value of such assets by
$1,900,000 in 1994. During 1995 the Company charged to expense its remaining
investments in Papua New Guinea ($609,700) and France ($672,592), costs
pertaining to oil and gas exploration in other countries ($74,461), and
interest previously capitalized in connection with these activities ($190,525).

Interest income increased in 1994 due to higher cash balances
attributable to the placement of the Debentures in 1993, and declined in 1995
as a consequence of the expenditure of such cash balances. General and
administrative expenses increased in 1995 as a result of nonrecurring severance
costs incurred in connection with management changes, and legal and
professional fees relating to the consideration of a business combination, the
effects of which were substantially offset by a cost reduction program
implemented in the third quarter of 1995. The increases in interest expense in
1994 and 1995, net of amounts capitalized, resulted from the issuance of the
Debentures and the receipt of the OPIC-guaranteed loans in 1994 and 1995. The
provision for current income taxes, all of which relates to Colombian
operations, was higher each year because of increases in the Colombian
presumptive income tax attributable to ongoing capital expenditures related to
productive assets. These increases were partially offset by the effects of
deferred tax benefits recorded in 1993 and 1994. The foreign currency
translation gain recorded in 1995 resulted from an approximate 19% devaluation
in the Colombian peso during 1995 and the settlement of a liability.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Financial Statements and Financial Statement Schedules
included separately herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

17
<PAGE> 18

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required with respect to directors is set
forth under the caption "Election of Directors" in Garnet's definitive Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.

The following table lists the names, ages, and principal
occupations of each of the executive officers of Garnet. Each executive
officer serves at the discretion of the Board of Directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Montague H. Hackett, Jr....... 63 Chairman of the Board and Director
Douglas W. Fry................ 53 President, Chief Executive Officer and Director
W. Kirk Bosche'............... 45 Vice President, Treasurer and Secretary
</TABLE>

Montague H. Hackett, Jr. Mr. Hackett has been employed as
Chairman of the Board of Garnet since January 1995 and has served as a director
of Garnet since April 1987. Since January 1996, Mr. Hackett has been employed
by Victory Capital LLC, a privately held limited liability company ("Victory")
that conducts its operations through small and medium-sized companies in which
Victory holds controlling or other significant equity interests. From October
1989 through June 1994, Mr. Hackett served as President and as a director of
Wood River Capital Corporation, a Small Business Investment Company. From
October 1991 through December 1995, Mr. Hackett was also employed by Noel
Group, Inc., a publicly traded company which also conducts its operations
through small and medium-sized companies. Mr. Hackett is a director and
Deputy Chairman of International Gold Resources Corporation.

Douglas W. Fry. Mr. Fry has been employed as President of
Garnet and has served as a director of Garnet since September 1995, and has
been Chief Executive Officer of Garnet since February 1996. Since 1980 he has
also been President of Argosy Energy Incorporated, a wholly owned subsidiary of
Garnet, or of the subsidiary's predecessor.

W. Kirk Bosche'. Mr. Bosche' has served as Vice President and
Treasurer of Garnet since its inception, and as Secretary of Garnet since
February 1996.

ITEM 11. EXECUTIVE COMPENSATION.

The information required is set forth under the captions
"Executive Compensation" and "Certain Relationships and Related Transactions"
in Garnet's definitive Proxy Statement to be filed pursuant to Regulation 14A
and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required is set forth under the caption
"Security Ownership of Certain Beneficial Owners" in Garnet's definitive Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.

18
<PAGE> 19

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required is set forth under the caption
"Certain Relationships and Related Transactions" in Garnet's definitive Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.

19
<PAGE> 20
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

a. The following documents are filed as part of this report:

(1)-(2) Financial statements and financial statement
schedules - see the accompanying Index to Financial
Statements and Financial Statement chedules.

(3) Exhibits - see the accompanying Index of Exhibits.

b. No Reports on Form 8-K were filed by Registrant during the
three months ended December 31, 1995.

20
<PAGE> 21

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

GARNET RESOURCES CORPORATION
(Registrant)

By: /s/Douglas W. Fry
---------------------
Douglas W. Fry
President, Chief Executive
Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/Douglas W. Fry President, Chief Executive March 13, 1996
- ------------------------------------- Officer and Director
Douglas W. Fry (principal executive officer)

/s/Montague H. Hackett, Jr. Chairman of the Board March 13, 1996
- ------------------------------------- and Director
Montague H. Hackett, Jr.

/s/WENDELL W. ROBINSON Chairman of the March 13, 1996
- ------------------------------------- Executive Committee
Wendell W. Robinson and Director

/s/Robert J. Cresci Director March 13, 1996
- -------------------------------------
Robert J. Cresci

/s/Alastair Manson Director March 13, 1996
- -------------------------------------
Alastair Manson

/s/Arthur L. Swanson Director March 13, 1996
- -------------------------------------
Arthur L. Swanson
</TABLE>

21
<PAGE> 22

<TABLE>
<S> <C> <C>
/s/JOHN V. TUNNEY Director March 13, 1996
- -------------------------------------
John V. Tunney

/s/W. Kirk Bosche' Vice President, March 13, 1996
- ------------------------------------- Treasurer and Secretary
W. Kirk Bosche' (principal financial officer
and principal accounting
officer)
</TABLE>

22
<PAGE> 23
INDEX OF EXHIBITS

<TABLE>
<CAPTION>
ITEM NO. ITEM TITLE EXHIBIT NO.
----------- ------------------------------------------------------ ----------------
<S> <C> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession: Not applicable.

(3) Articles of Incorporation and By-Laws:
(A) Restated Certificate of Incorporation filed on
April 3, 1987, incorporated by reference to
Exhibit 3(A) to Form S-1 Registration
Statement No. 33-16426. *
(B) By-Laws, as amended, incorporated by
reference to Exhibit 3(B) to Registrant's
Form 10-K for the fiscal year ended
December 31, 1994. *

(4) Instruments defining the rights of security holders,
including indentures:
(A) Excerpts from Restated Certificate of Incorpo-
ration, incorporated by reference to Exhibit
4(A) to Form S-1 Registration Statement
No. 33 -16426. *
(B) Excerpts from By-Laws, as amended, incor-
porated by reference to Exhibit 4(B) to
Form S-1 Registration Statement No. 33-16426. *
(C) Specimen Certificate for Common Stock of
Garnet Resources Corporation, par value $.01
per share, incorporated by reference to Exhibit
4(C) to Amendment No. 1 to Form S-1
Registration Statement No. 33-16426. *
(D) Form of 9 1/2% convertible subordinated
debenture, incorporated by reference to Exhibit 4
to Registrant's Form 10-K for the fiscal year
ended December 31, 1993. *

(9) Voting trust agreement: Not applicable.

(10) Material contracts:
(A) Risk Sharing Contract by and between
Empresa Colombiana de Petroleos, on
the one part, and Argosy Energy
International and Neo Energy, Inc., on the
other part, incorporated by reference to
Exhibit 10(I) to Form S-1 Registration
Statement No. 33-16426. *
(B) Amendment dated March 6, 1990 to the Risk
Sharing Contract by and between Empresa
Colombiana de Petroleos, on the one part,
and Argosy Energy International and Neo
Energy, Inc. on the other part, incorporated
by reference to Exhibit 10(EE) to Registrant's
Form 10-K for the fiscal year ended
December 31, 1989. *
</TABLE>

23
<PAGE> 24

<TABLE>
<CAPTION>
ITEM NO. ITEM TITLE EXHIBIT NO.
----------- ------------------------------------------------------ ----------------
<S> <C> <C>
(C) Operating Agreement for the Santana Area
dated as of September 16, 1987 by and
between Argosy Energy International and
Neo Energy, Inc., incorporated by reference to
Exhibit 10(W) to Amendment No. 1 to Form S-1
Registration Statement No. 33-16426. *
(D) Contract for Sale of Santana Crude dated
March 6, 1995 by and among Empresa
Colombiana de Petroleos, Argosy Energy
International and Neo Energy, Inc., incorporated
by reference to Exhibit 10(E) to Registrant's
Form 10-K for the fiscal year ended
December 31, 1994. *
(E) Association Contract for the Fragua Area
effective June 1, 1992 by and between
Empresa Colombiana de Petroleos, on the
one part, and Argosy Energy International
and Neo Energy, Inc., on the other part,
incorporated by reference to Exhibit 10(JJ) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1992. *
(F) Operating Agreement for the Fragua Area dated
as of April 15, 1992 by and between Argosy
Energy International and Neo Energy, Inc.,
incorporated by reference to Exhibit 10(KK) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1992. *
(G) Association Contract for the Yuruyaco Area
effective November 19, 1995 by and between
Empresa Colombiana de Petroleos, on the
one part, and Argosy Energy International and
Neo Energy, Inc., on the other part. 10(G)
(H) Second Amended and Restated Limited
Partnership Agreement of Argosy Energy
International dated as of January 11, 1991,
incorporated by reference to Exhibit 10(GG)
to Form S-4 Registration Statement No. 33-43533. *
(I) Amendment to Second Amended and Restated
Limited Partnership Agreement of Argosy Energy
International dated as of January 13, 1994,
incorporated by reference to Exhibit 10(BB)
to Registrant's Form 10-K for the fiscal year ended
December 31, 1993. *
(J) Second Amendment to Second Amended and
Restated Limited Partnership Agreement of
Argosy Energy International dated as of
July 1, 1994 incorporated by reference to
Exhibit 10(J) to Registrant's Form 10-K for the
fiscal year ended December 31, 1994. *
</TABLE>

24
<PAGE> 25

<TABLE>
<CAPTION>
ITEM NO. ITEM TITLE EXHIBIT NO.
----------- ------------------------------------------------------ ----------------
<S> <C> <C>
(K) Petroleum Prospecting License No. 174, incorporated
by reference to Exhibit 10(O) to Registrant's Form 10-K
for the fiscal year ended December 31, 1994. *
(L) Operating Agreement for the Papua New Guinea
PPL-174 Joint Venture among Arakis Energy
Corporation, Bossrich Investment Limited, China
National Oil and Gas Exploration and Development
Corporation, China National United Oil
Corporation, Garnet Resources Corporation,
Gedd PNG Limited, Marubeni Corporation, and
Niguini Energy Pty. Limited dated as of
December 5, 1994, incorporated by reference to
Exhibit 10(P) to Registrant's Form 10-K for the
fiscal year ended December 31, 1994. *
(M) Petroleum Prospecting License No. 181,
incorporated by reference to Exhibit 10(A) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1995. *
(N) Papua New Guinea PPL-77 Agreement dated
April 27, 1995 among Garnet PNG Corporation,
Niugini Energy Pty. Limited and Occidental
International Exploration and Production
Company, incorporated by reference to Exhibit 10(B)
to Registrant's Form 10-Q for the quarterly period
ended September 30, 1995. *
(O) Purchase Agreement dated as of
December 21, 1993 among Garnet Resources
Corporation and the Investors purchasing
Registrant's 9 1/2% Convertible Subordinated
Debentures, incorporated by reference
to Exhibit 10(Y) to Registrant's Form 10-K for the
fiscal year ended December 31, 1993. *
(P) Pledge Agreement dated as of December 21, 1993
made by Garnet Resources Corporation in favor of
Pecks Management Partners Ltd., incorporated by
reference to Exhibit 10(Z) to Registrant's Form
10-K for the fiscal year ended December 31, 1993. *
(Q) Noteholders' and Stockholders' Agreement dated as
of December 21, 1993 among Garnet Resources
Corporation, the Investors purchasing Registrant's
9 1/2% Convertible Subordinated Debentures, and
certain existing stockholders of Registrant,
incorporated by reference to Exhibit 10(AA) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1993. *
(R) Finance Agreement dated May 2, 1994
between Argosy Energy International and
Overseas Private Investment Corporation,
incorporated by reference to Exhibit 10(A)
to Registrant's Form 10-Q for the quarterly
period ended September 30, 1994. *
</TABLE>

25
<PAGE> 26

<TABLE>
<CAPTION>
ITEM NO. ITEM TITLE EXHIBIT NO.
----------- ------------------------------------------------------ ----------------
<S> <C> <C>
(S) Amendment No. 1 dated July 28, 1994 to
Finance Agreement between Argosy Energy
International and Overseas Private Investment
Corporation, incorporated by reference to
Exhibit 10(B) to Registrant's Form 10-Q for
the quarterly period ended September 30, 1994. *
(T) Amendment No. 2 dated March 24, 1995 to
Finance Agreement between Argosy Energy
International and Overseas Private Investment
Corporation, incorporated by reference to
Exhibit 10(C) to Registrant's Form 10-Q for the
quarterly period ended September 30, 1995. *
(U) Amendment No. 3 dated September 26, 1995 to
Finance Agreement between Argosy Energy
International and Overseas Private Investment
Corporation, incorporated by reference to
Exhibit 10(D) to Registrant's Form 10-Q for the
quarterly period ended September 30, 1995. *
(V) Loan Agreement dated August 3, 1994 by and
between Texas Commerce Bank National
Association and Argosy Energy International,
incorporated by reference to Exhibit 10(C) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1994. *
(W) Stage I Promissory Note dated August 3, 1994
from Argosy Energy International to Texas
Commerce Bank National Association in the
principal amount of $4,400,000, incorporated by
reference to Exhibit 10(D) to Registrant's Form
10-Q for the quarterly period ended
September 30, 1994. *
(X) Stage II Promissory Note dated October 25, 1995
from Argosy Energy International to Texas
Commerce Bank National Association in the
principal amount of $4,800,000, incorporated by
reference to Exhibit 10(E) to Registrant's Form 10-Q
for the quarterly period ended September 30, 1995. *
(Y) Guaranty dated July 26, 1994 from Overseas
Private Investment Corporation to Texas
Commerce Bank National Association, incorporated
by reference to Exhibit 10(E) to Registrant's Form
10-Q for the quarterly period ended
September 30, 1994. *
(Z) Project Support Agreement dated August 3, 1994
among Garnet Resources Corporation, Argosy
Energy International and Overseas Private
Investment Corporation, incorporated by reference
to Exhibit 10(F) to Registrant's Form 10-Q for the
quarterly period ended September 30, 1994. *
</TABLE>

26
<PAGE> 27

<TABLE>
<CAPTION>
ITEM NO. ITEM TITLE EXHIBIT NO.
----------- ------------------------------------------------------ ----------------
<S> <C> <C>
(AA) Security Agreement dated August 3, 1994 made
by Argosy Energy International to Overseas Private
Investment Corporation, incorporated by reference
to Exhibit 10(G) to Registrant's Form 10-Q for
the quarterly period ended September 30, 1994. *
(BB) Escrow Agreement dated August 3, 1994 among
Argosy Energy International, Overseas Private
Investment Corporation, Texas Commerce Bank
National Association, as Lender, and Texas
Commerce Bank National Association, as Escrow
Agent, incorporated by reference to Exhibit 10(H)
to Registrant's Form 10-Q for the quarterly period
ended September 30, 1994. *
(CC) Conditional Assignment Agreement dated
August 3, 1994 made by Argosy Energy
International in favor of Overseas Private
Investment Corporation, incorporated by
reference to Exhibit 10(J) to Registrant's
Form 10-Q for the quarterly period ended
September 30, 1994. *
(DD) Subordination Agreement dated August 3, 1994
made by Garnet Resources Corporation in favor
of Overseas Private Investment Corporation,
incorporated by reference to Exhibit 10(K) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1994. *
(EE) Subordination Agreement dated August 3, 1994
made by Argosy Energy Incorporated in favor of
Overseas Private Investment Corporation,
incorporated by reference to Exhibit 10(L) to
Registrant's Form 10-Q for the quarterly period
ended September 30, 1994. *
(FF) Pledge Agreement dated August 3, 1994 made
by Garnet Resources Corporation and Argosy
Energy Incorporated to Overseas Private
Investment Corporation, incorporated by reference
to Exhibit 10(M) to Registrant's Form 10-Q for the
quarterly period ended September 30, 1994. *
(GG) 1987 Stock Option Plan of Garnet Resources
Corporation, incorporated by reference to
Exhibit 10(F) to Form S-1 Registration
Statement No. 33-16426. *
(HH) 1990 Stock Option Plan of Garnet Resources
Corporation, as amended, incorporated by
reference to Appendix A to Garnet Resources
Corporation's Notice of Annual Meeting and Proxy
Statement for its Annual Meeting of Shareholders
held on June 21, 1995. *
(II) Form of Garnet Resources Corporation Non-
Incentive Stock Option Agreement for
employees, incorporated by reference to Exhibit
10(G) to Form S-1 Registration Statement No.
33-16426. *
</TABLE>

27
<PAGE> 28

<TABLE>
<CAPTION>
ITEM NO. ITEM TITLE EXHIBIT NO.
----------- ------------------------------------------------------ ----------------
<S> <C> <C>
(JJ) Incentive Stock Option Agreement for non-
employees, incorporated by reference to Exhibit
10(H) to Form S-1 Registration Statement
No. 33-16426. *
(KK) 1987 Stock Option Plan of Argosy Energy
Incorporated, incorporated by reference to
Exhibit 10(BB) to Registrant's Form 10-K
for the fiscal year ended December 31, 1988. *
(LL) Form of Argosy Energy Incorporated Non-
Incentive Stock Option Agreement for employees,
incorporated by reference to Exhibit 10(CC) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1988. *
(MM) Form of Argosy Energy Incorporated Non-
Incentive Stock Option Agreement for non-
employees, incorporated by reference to Exhibit
10(DD) to Registrant's Form 10-K for the fiscal
year ended December 31, 1988. *
(NN) 1990 Directors' Stock Option Plan of Garnet
Resources Corporation, as amended,
incorporated by reference to Exhibit 10(Z) to
Registrant's Form 10-K for the fiscal year ended
December 31, 1992. *
(OO) Letter Agreement dated June 28, 1995 between
George M. Nevers and Garnet Resources
Corporation, incorporated by reference to
Exhibit 10(F) to Registrant's Form 10-Q for the
quarterly period ended September 30, 1995. *
(11) Statement re computation of per share earnings is not
required because the relevant computations can be
clearly determined from the material contained in the
financial statements included herein.

(12) Statements re computation of ratios: Not applicable.

(13) Annual report to security holders, Form 10-Q or
quarterly report to security holders: Not applicable.

(16) Letter re change in certifying accountant:
Not applicable.

(18) Letter re change in accounting principles:
Not applicable.

(21) Subsidiaries of the registrant. 21

(22) Published report regarding matters submitted to
vote of security holders: Not applicable.

(23) Consents of experts and counsel. 23

(24) Power of attorney: Not applicable.
</TABLE>

28
<PAGE> 29

<TABLE>
<CAPTION>
ITEM NO. ITEM TITLE EXHIBIT NO.
----------- ------------------------------------------------------ ----------------
<S> <C> <C>
(27) Financial Data Schedule. 27

(28) Information from reports furnished to state
insurance regulatory authorities: Not applicable.

(99) Additional exhibits: Not applicable.
</TABLE>

* Incorporated by reference

29
<PAGE> 30

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants F-2
Consolidated Balance Sheets, December 31,
1995 and 1994 F-3
Consolidated Statements of Operations for
the years ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993 F-7
Notes to Consolidated Financial Statements F-9
Supplemental Oil and Gas Information F-20

GARNET RESOURCES CORPORATION
FINANCIAL STATEMENT SCHEDULE

Schedule I - Condensed Financial Information
of Registrant
Balance Sheets, December 31, 1995 and 1994 F-25
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-27
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-28
</TABLE>

<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Garnet Resources Corporation:

We have audited the accompanying consolidated balance sheets of
Garnet Resources Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the schedule based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Garnet Resources Corporation and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.

As discussed in Note 6 to the consolidated financial statements, as
of January 1, 1993, the Company changed its method of accounting for income
taxes.

Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The financial statement schedule
listed in the index to financial statements and financial statement schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. The financial statement schedule has been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1996

F-2
<PAGE> 32

GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
ASSETS 1995 1994
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,713,191 $ 7,990,605
Accounts receivable 2,302,712 2,276,500
Inventories 986,532 1,257,207
Prepaid expenses 249,454 133,692
----------- -----------

Total current assets 9,251,889 11,658,004
----------- -----------
NET ASSETS HELD FOR DISPOSITION 403,941 514,624
----------- -----------

PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties (full-cost method)-
Proved 46,044,011 35,948,942
Unproved (excluded from amortization) 4,598,001 6,416,808
----------- -----------

50,642,012 42,365,750

Other equipment 137,343 142,993
----------- -----------

50,779,355 42,508,743
Less - Accumulated depreciation,
depletion and amortization (11,384,135) (6,446,953)
----------- -----------

39,395,220 36,061,790
----------- -----------

OTHER ASSETS 907,978 1,065,619
----------- -----------

$49,959,028 $49,300,037
=========== ===========

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-3
<PAGE> 33

GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONTINUED

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,043,758 $ 1,932,156
Accounts payable and accrued liabilities 2,418,270 3,703,494
----------- -----------

Total current liabilities 6,462,028 5,635,650
----------- -----------

LONG-TERM DEBT, net of current portion 20,151,120 17,506,105
----------- -----------

DEFERRED INCOME TAXES 640,919 -
----------- -----------

OTHER LONG-TERM LIABILITIES 438,156 368,030
----------- -----------

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000
shares authorized, 11,492,162 shares issued
and outstanding as of December 31, 1995,
11,125,537 shares issued and outstanding
as of December 31, 1994 114,922 111,255
Capital in excess of par value 52,491,212 51,395,004
Retained earnings (deficit) (30,339,329) (25,716,007)
----------- -----------

Total stockholders' equity 22,266,805 25,790,252
----------- -----------

$49,959,028 $49,300,037
=========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE> 34

GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Oil sales $ 8,635,570 $ 3,952,351 $ 4,539,710
Interest 245,563 403,014 57,056
----------- ----------- -----------

8,881,133 4,355,365 4,596,766
----------- ----------- -----------
4,355,365 4,596,766 3,383,477
----------- ----------- -----------
COSTS AND EXPENSES:
Production 3,533,572 2,506,049 3,236,064
Exploration 1,547,278 2,814,809 59,954
Loss on net assets held for disposition - 1,900,000 -
Loss on sale of drilling rig - - 228,669
General and administrative 1,672,501 1,515,553 1,699,940
Interest 1,491,131 967,473 46,218
Depreciation, depletion and amortization 4,949,682 1,971,328 2,483,051
Foreign currency translation (gain) loss (741,557) 19,698 (61,022)
----------- ----------- -----------

12,452,607 11,694,910 7,692,874
----------- ----------- -----------

INCOME (LOSS) BEFORE INCOME TAXES (3,571,474) (7,339,545) (3,096,108)

PROVISION FOR INCOME TAXES 1,051,848 85,982 178,923
----------- ----------- -----------

INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (4,623,322) (7,425,527) (3,275,031)

CUMULATIVE EFFECT ON PRIOR YEARS
OF CHANGE IN ACCOUNTING
PRINCIPLE FOR INCOME TAX - - (172,062)
----------- ----------- -----------

NET LOSS $(4,623,322) $(7,425,527) $(3,447,093)
=========== =========== ===========

NET LOSS PER SHARE:
Net loss before change
in accounting principle $ (.40) $ (.67) $ (.29)
Cumulative effect of change
in accounting principle - - (.02)
----------- ----------- -----------

NET LOSS PER SHARE $ (.40) $ (.67) $ (.31)
=========== =========== ===========

WEIGHTED AVERAGE SHARES
OUTSTANDING 11,416,828 11,125,537 11,124,929
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE> 35
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
------------------------ CAPITAL IN RETAINED TOTAL
NUMBER EXCESS OF EARNINGS STOCKHOLDERS'
OF SHARES AMOUNT PAR VALUE (DEFICIT) EQUITY
--------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1992 11,122,537 $111,225 $51,387,534 $(14,843,387) $36,655,372

Exercise of stock options 3,000 30 7,470 - 7,500
Net loss - - - (3,447,093) (3,447,093)
---------- -------- ----------- ------------ -----------

BALANCE AT
DECEMBER 31, 1993 11,125,537 111,255 51,395,004 (18,290,480) 33,215,779

Net loss - - - (7,425,527) (7,425,527)
---------- -------- ----------- ------------ -----------

BALANCE AT
DECEMBER 31, 1994 11,125,537 111,255 51,395,004 (25,716,007) 25,790,252

Acquisition of partnership
interests in Argosy
Energy International 366,625 3,667 1,096,208 - 1,099,875
Net loss - - - (4,623,322) (4,623,322)
---------- -------- ----------- ------------ -----------

BALANCE AT
DECEMBER 31, 1995 11,492,162 $114,922 $52,491,212 $(30,339,329) $22,266,805
========== ======== =========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE> 36

GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,623,322) $(7,425,527) $(3,447,093)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities -
Exploration costs 1,547,278 2,814,809 59,954
Loss on net assets held for disposition - 1,900,000 -
(Gain) loss on sale of drilling rig
and other equipment (4,970) 11,683 228,669
Depreciation, depletion and amortization 4,949,682 1,971,328 2,483,051
Amortization of other assets 224,276 193,065 61,402
Deferred income taxes 640,919 (226,639) 81,891
Change in assets and liabilities -
Increase in accounts receivable (673,808) (222,291) (26,699)
(Increase) decrease in inventories 24,525 209,610 (115,359)
(Increase) decrease in prepaid expenses 36,162 38,678 (72,847)
Increase (decrease) in accounts payable
and accrued liabilities (586,645) 330,705 1,045,798
Increase in other long-term liabilities 134,013 - -
----------- ----------- -----------

Net cash provided by (used for)
operating activities 1,668,110 (404,579) 298,767
----------- ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short-term investments - - 49,093
Additions to oil and gas properties (9,331,942) (7,825,163) (6,098,935)
Additions to other equipment (6,880) (7,977) (5,166)
Proceeds from asset dispositions 5,000 88,131 1,345,493
(Increase) decrease in joint venture
and contractor advances 621,225 1,550,501 (2,164,381)
(Increase) decrease in inventories 300,256 23,199 (287,199)
(Increase) decrease in net assets
held for disposition 110,683 31,686 (11,852)
(Increase) decrease in other assets 24,170 10,025 (16,049)
Acquisition of partnership interests in
Argosy Energy International, net
of cash acquired (92,621) - -
----------- ----------- -----------

Net cash used for investing activities (8,370,109) (6,129,598) (7,188,996)
----------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-7
<PAGE> 37

GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of debt $ 4,754,880 $ 4,161,080 $15,990,337
Repayments of debt (208,983) (629,176) (183,070)
Proceeds from issuances of common stock - - 7,500
Costs of debt issuances (121,312) (339,266) (801,225)
----------- ----------- -----------

Net cash provided by financing activities 4,424,585 3,192,638 15,013,542
----------- ----------- -----------

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,277,414) (3,341,539) 8,123,313

CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 7,990,605 11,332,144 3,208,831
----------- ----------- -----------

CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 5,713,191 $ 7,990,605 $11,332,144
=========== =========== ===========

Supplemental disclosures of cash
flow information:

Cash paid for -
Interest, net of amounts capitalized $ 1,334,676 $ 906,344 $ -
Income taxes 490,624 357,515 519,433
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-8
<PAGE> 38

GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES-

Nature of operations-

Garnet Resources Corporation, a Delaware corporation ("Garnet"), and
its subsidiaries (collectively referred to as the "Company") are engaged in the
exploration, development and production of oil and gas properties located
outside the United States. The Company operates primarily in Colombia and Papua
New Guinea.

Principles of consolidation-

The consolidated financial statements include the accounts of Garnet
and its majority-owned subsidiaries. Intercompany accounts and transactions
have been eliminated. The Company accounts for its investment in Argosy Energy
International, a limited partnership ("Argosy") in which Garnet is a limited
partner and a wholly owned subsidiary of Garnet is the general partner (see
Note 2), using the proportionate consolidation method.

Cash equivalents-

Cash equivalents include highly liquid debt instruments with an
initial maturity of three months or less at the date of purchase. Cash
equivalents at December 31, 1994 were $722,338, and consisted of U.S. Treasury
Bills carried at cost, which approximates market value. The Company had no cash
equivalents at December 31, 1995.

Inventories-

Inventories consist of oilfield equipment, materials and supplies,
and crude oil. For presentation in the accompanying consolidated statements of
cash flows, changes in oilfield equipment inventory are included as investing
activities because they relate to the Company's exploration and development
activities, while changes in other types of inventories are included as
operating activities.

Oil and gas properties-

The Company follows the full-cost method of accounting for oil and
gas properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration and development of oil and gas
reserves are capitalized in separate cost centers for each country. Such
capitalized costs include contract and concession acquisition, geological,
geophysical and other exploration work, drilling, completing and equipping oil
and gas wells, constructing production facilities and pipelines, and other
related costs. The Company also capitalizes interest costs related to
unevaluated oil and gas properties. The Company incurred total interest costs
of $2,252,483, $1,831,803 and $202,448 in 1995, 1994 and 1993, respectively, of
which $761,352, $831,677 and $156,230 were capitalized as additional costs of
oil and gas properties.

F-9
<PAGE> 39

The capitalized costs of oil and gas properties in each cost center
are amortized on a composite unit-of- production method based on future gross
revenues from proved reserves. Sales or other dispositions of oil and gas
properties are normally accounted for as adjustments of capitalized costs. Gain
or loss is not recognized in income unless a significant portion of a cost
center's reserves is involved. Capitalized costs associated with the
acquisition and evaluation of unproved properties are excluded from
amortization until it is determined whether proved reserves can be assigned to
such properties or until the value of the properties is impaired. Unproved
properties are assessed at least annually to determine whether any impairment
has occurred. If the net capitalized costs of oil and gas properties in a cost
center exceed an amount equal to the sum of the present value of estimated
future net revenues from proved oil and gas reserves in the cost center and the
costs of properties not being amortized, both adjusted for income tax effects,
such excess is charged to expense.

Revenue recognition-

Oil and gas revenues from producing wells are recognized when the
oil or gas is sold.

Net loss per share-

Net loss per share is computed using the weighted average number of
shares of common stock outstanding. No effect was given to common stock
equivalents as the effect would be antidilutive.

Use of estimates-

The preparation of these financial statements requires the use of
certain estimates by management in determining the Company's assets,
liabilities, revenues and expenses. Depreciation, depletion and amortization of
oil and gas properties and the impairment of oil and gas properties are
determined using estimates of oil and gas reserves. There are numerous
uncertainties in estimating the quantity of proved reserves and in projecting
the future rates of production and timing of development expenditures.
Reference is made to the Supplemental Oil and Gas Information for additional
information regarding the process of estimating proved reserve quantities and
related cash flows.

(2) COLOMBIAN OPERATIONS-

Through its ownership of interests in Argosy, the Company has an
indirect interest in a risk sharing contract in Colombia (the "Santana
Contract") with Empresa Colombiana de Petroleos, the Colombian national oil
company ("Ecopetrol"). The Santana Contract currently entitles Argosy and its
joint venture partner to explore for oil and gas on approximately 86,000 acres
located in the Putumayo Region of Colombia (the "Santana Block") and provides
for a ten- year exploration period expiring in 1997, subject to a requirement
for additional partial relinquishments in 1997, and for a production period
expiring in 2015. Argosy and its joint venture partner also have two
association contracts (the "Fragua Contract" and the "Yuruyaco Contract") with
Ecopetrol. The Fragua Contract covers an area of approximately 32,000 acres
contiguous to the northern boundary of the Santana Block (the "Fragua Block"),
while the Yuruyaco Contract covers an area of approximately 39,000 acres
contiguous to the eastern boundaries of the Santana Block and the Fragua Block
(the "Yuruyaco Block"). The 10-year exploration periods provided by the Fragua
Contract and the Yuruyaco Contract will expire in 2002 and 2005, respectively,
and the 28-year contract terms will expire in 2020 and 2023, respectively.
Argosy and its joint venture partner also have the right until 2003 to explore
for and produce oil and gas from approximately 77,000 acres located in the
Putumayo Region (the "Aporte Putumayo Block") pursuant to other agreements with
Ecopetrol.

F-10
<PAGE> 40

Argosy and its joint venture partner notified Ecopetrol in 1994 that they
intend to abandon the remaining wells and relinquish the Aporte Putumayo Block
because declining production rates have made continued operation economically
unattractive.

Argosy serves as the operator of the Colombian properties under
joint venture agreements. The Santana Contract, the Fragua Contract and the
Yuruyaco Contract provide that Ecopetrol will receive a royalty equal to 20% of
production on behalf of the Colombian government and, in the event a discovery
is deemed commercially feasible, Ecopetrol will acquire a 50% interest in the
remaining production from the field, bear 50% of the development costs, and
reimburse the joint venture, from Ecopetrol's share of future production from
each well, for 50% of the joint venture's costs of successful exploratory wells
in the field. When accumulated oil production from the Santana Contract exceeds
seven million barrels, Ecopetrol will continue to bear 50% of development
costs, but its interest in production revenues and operating costs will
increase to 65%. If a commercial field on the Fragua Block produces in excess
of 60 million barrels, Ecopetrol's interest in production and costs will
increase in 5% increments from 50% to 70% as accumulated production from the
field increases in 30 million barrel increments from 60 million barrels to 150
million barrels. If a commercial field on the Yuruyaco Block produces in excess
of 60 million barrels, Ecopetrol's interest in production and costs ranges from
50% to 75%, based on annual measurements of profitability as defined in the
Yuruyaco Contract. The joint venture paid all costs of the exploration program
for the Santana Block during the first two years of the contract and thereafter
the joint venture and Ecopetrol have been obligated to pay 70% and 30%,
respectively, of such exploration costs. The joint venture bears all costs and
risks of exploration activities on the Fragua Block and the Yuruyaco Block,
subject to Ecopetrol's right to acquire a 50% interest in commercial
discoveries. If a discovery is made and is not deemed by Ecopetrol to be
commercially feasible, the joint venture may continue to develop the field at
its own expense and will recover 200% of the costs thereof, at which time
Ecopetrol will acquire a 50% interest therein at no cost to Ecopetrol or
further reimbursement by Ecopetrol to Argosy.

The Company's resulting net participation in revenues and costs for
the Santana Contract, the Fragua Contract and the Yuruyaco Contract are as
follows:

<TABLE>
<CAPTION>
PRODUCTION OPERATING EXPLORATION DEVELOPMENT
REVENUES COSTS COSTS COSTS
-------- ----- ----- -----
<S> <C> <C> <C> <C>
Santana Contract:
Before seven million barrels
of accumulated production 21.8% 27.2% 38.1% 27.2%
After seven million barrels
of accumulated production 15.3% 19.1% 38.1% 27.2%

Fragua Contract:
Before 60 million barrels
of accumulated production 21.8% 27.3% 54.6% 27.3%
After 150 million barrels
of accumulated production 13.1% 16.4% 54.6% 27.3%

F-11
<PAGE> 41

The joint venture has completed its seismic acquisition and drilling
obligations for the first eight years of the Santana Contract, resulting in the
discovery of four oil fields, all of which have been declared commercial by
Ecopetrol. The joint venture has the right to continue the exploration program
through 1997 with an obligation to conduct exploration programs to be approved
by Ecopetrol in 1996 and 1997. The joint venture has also completed its seismic
obligations for the first two years of the Fragua Contract, but no wells have
yet been drilled on the Fragua Block.

Under the terms of a contract with Ecopetrol, all oil produced from
the Santana Block is sold to Ecopetrol. If Ecopetrol exports the oil, the
price paid is the export price received by Ecopetrol, adjusted for quality
differences, less a handling and commercialization fee of $.465 per barrel. If
Ecopetrol does not export the oil, the price paid is based on quoted prices for
Colombia's Cano Limon crude oil, adjusted for quality differences, plus or
minus a sales value differential to be determined by independent analysis, less
Ecopetrol's cost to transport the crude to Cartagena and a handling and
commercialization fee of $.365 per barrel. Under the terms of its contract with
Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in Colombian
pesos which may only be utilized in Colombia. To date, Argosy has experienced
no difficulty in repatriating the remaining 75% of such payments which are
payable in United States dollars.

As general partner, the Company's subsidiary is contingently liable
for any obligations of Argosy and may be contingently liable for claims
generally related to the conduct of Argosy's business.

(3) EXPLORATION LICENSES IN PAPUA NEW GUINEA-

Garnet PNG Corporation, a wholly owned subsidiary of Garnet ("Garnet
PNG"), owns interests in two petroleum prospecting licenses in Papua New Guinea
which entitle it and its joint venture partners to explore for oil and gas.
Garnet PNG owns a 7.73% interest (the "PPL-174 Interest") in Petroleum
Prospecting License No. 174 ("PPL-174) which covers 126,000 acres (the "PPL-174
Area"), and a 6% interest (the "PPL-181 Interest") in Petroleum Prospecting
License No. 181 ("PPL-181") which covers 952,000 acres (the "PPL-181 Area").
Until September 1995, Garnet PNG also held a 40% interest (the "PPL-77
Interest") in Petroleum Prospecting License No. 77 ("PPL-77"), which included
most of the area now covered by PPL-181 and was surrendered in connection with
the issuance of PPL-181, as further described below. In 1986, oil was
discovered approximately 10 miles from the northern border of the PPL-181 Area
in an adjoining license area.

In April 1995 the Company entered into an agreement with Occidental
International Exploration and Production Company ("Occidental") covering
PPL-77. Under the agreement an application for a new license was submitted to
the Papua New Guinea Government. PPL-181 was issued in September 1995 and is
owned by Occidental (88%), Garnet PNG (6%) and Niugini (6%). Occidental agreed
to drill and complete at its cost a test well on the PPL-181 Area within the
first two years.

Upon presentation of a tax clearance certificate evidencing Garnet
PNG's compliance with the relevant provisions of Papua New Guinea's income tax
laws, profits, dividends and certain

F-12
<PAGE> 42

other payments, if any, up to an amount of 500,000 kina (approximately
$US375,000) per year may be fully remitted out of Papua New Guinea. Amounts in
excess of 500,000 kina may also be remitted, subject to clearance from the Bank
of Papua New Guinea.

(4) LONG-TERM DEBT-

Long-term debt at December 31, 1995 and 1994 consisted of the
following:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
9 1/2% convertible subordinated debentures $15,000,000 $15,000,000

Notes payable by Argosy to a U.S. bank 9,113,520 4,161,080

Note payable by Argosy to a Colombian bank 81,359 277,181
----------- -----------
24,194,879 19,438,261
Less - Current portion (4,043,758) (1,932,156)
----------- -----------

$20,151,120 $17,506,105
=========== ===========
</TABLE>

In December 1993 Garnet issued $15,000,000 of convertible
subordinated debentures (the "Debentures") due December 1998. The Debentures
bear interest at 9 1/2% per annum payable quarterly and are convertible at the
option of the holders into Garnet common stock at $5.50 per share. If the
Company elects to prepay the Debentures under certain circumstances, it will
issue warrants under the same economic terms as the Debentures. At the option
of a holder, in the event of a change of control of the Company, the Company
will be required to prepay such holder's Debenture at a 30% premium. The
Debentures are secured by a pledge of all of the common stock of Garnet's
wholly owned subsidiary which serves as the general partner of Argosy (see Note
2). Under the terms of an agreement with the holders of its Debentures, Garnet
has agreed that it will not pay dividends or make distributions to the holders
of its common stock. As of December 31, 1995, Garnet was not in compliance
with the minimum net worth required by the Debentures. The holders of the
Debentures have waived compliance with this requirement through 1996.

In 1994 Argosy entered into a finance agreement with Overseas
Private Investment Corporation, an agency of the United States government
("OPIC"), pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank
loans to Argosy. The loans were funded in two stages of $4,400,000 in August
1994 and $4,800,000 in October 1995. The Company plans to use these funds to
drill development wells and construct pipelines and production facilities in
Colombia. OPIC's guaranty is secured by Argosy's interest in the Santana
Contract and related assets, as well as the pledge of Garnet's direct and
indirect interests in Argosy. The terms of the guaranty agreement also restrict
Argosy's ability to make distributions to its partners prior to the repayment
of the guaranteed loans. The maximum term of the loans is not to exceed seven
years, and the principal amortization schedule is based on projected cash flows
from wells on the Santana Block. The loans bear interest at the lender's
eurodollar deposit rate plus .25% per annum for periods of two, three or six
months as selected by Argosy. The interest rate at December 31, 1995 was 5-
15/16%. In addition Argosy paid the lender a commitment fee of .25% per annum
on the undisbursed and uncancelled amount of the guaranty, and also paid the
lender a facility fee of $46,000. In consideration for OPIC's guaranty, Argosy
agreed to pay OPIC certain fees, including a facility fee of $92,000, a
guaranty fee of 2.4% per annum on the outstanding balance of the loans

F-13
<PAGE> 43

guaranteed, a commitment fee of .67% per annum on the undisbursed and
uncancelled amount of the guaranty, and a cancellation fee equal to .67% of the
amount cancelled. As of December 31, 1995, Argosy was not in compliance with
the present value and debt service coverage ratios required under the finance
agreement. Subsequent to that date, OPIC waived compliance with the present
value ratio and revised the principal amortization schedule to reflect current
estimates of cash flows from wells on the Santana Block, the effect of which
enabled Argosy to comply with the debt service coverage ratio.

In 1993 Argosy received a loan from a Colombian bank, of which the
Company's share amounted to $520,135. The loan is secured by receivables from
Ecopetrol for well costs allocable to Ecopetrol but paid by Argosy, bears
interest at U.S. prime plus 2%, and is repaid in varying amounts from
Ecopetrol's share of production from the wells. The interest rate at December
31, 1995 was 10-1/2%.

(5) STOCK OPTION PLANS-

Garnet and a predecessor entity have adopted stock option plans (the
"Employee Plans") pursuant to which an aggregate of 1,483,000 shares of
Garnet's common stock is authorized to be issued upon exercise of options
granted to officers, employees and certain other persons or entities performing
substantial services for or on behalf of Garnet or its subsidiaries.

The Stock Option and Compensation Committee of Garnet's Board of
Directors (the "Committee") is vested with sole and exclusive authority to
administer and interpret the Employee Plans, to determine the terms upon which
options may be granted, to prescribe, amend and rescind such interpretations
and determinations and to grant options to directors. Current Committee members
are not eligible to receive options under the Employee Plans.

In addition, Garnet has adopted the 1990 Directors' Stock Option Plan
(the "Directors' Plan") pursuant to which an aggregate of 470,000 shares of
Garnet's common stock is authorized to be issued to directors who are not
employees of the Company. Under the terms of the Directors' Plan, as amended,
options may be granted at the discretion of the Board of Directors, provided,
however, that the timing of the option grants is restricted to the second
quarter of Garnet's fiscal year.

Each option is exercisable for a period of 10 years and 30 days from
the date of grant. The purchase price of shares issuable upon exercise of an
option may be paid in cash or by delivery of shares with a value equal to the
exercise price of the option. The Committee has determined that the right to
exercise non-incentive options issued to employees vests over a period of four
years, so that 20% of the option is exercisable on the date of grant and 20%
becomes exercisable on each anniversary of the date of grant. Non-incentive
options issued to directors and other eligible participants generally are fully
exercisable on and after the date of grant.

The following is a summary of stock option activity in connection
with the Employee Plans and the Directors' Plan:

F-14
<PAGE> 44

<TABLE>
<CAPTION>
SHARES PRICE RANGE
--------- --------------
<S> <C> <C>
Options outstanding at
December 31, 1992 952,500 $2.50 - $13.83

Options granted 310,000 4.78 - 5.75
Options exercised (3,000) 2.50
Options expired (30,000) 4.78 - 13.83
--------- --------------

Options outstanding at
December 31, 1993 1,229,500 2.50 - 13.83

Options granted 140,000 4.05
--------- --------------

Options outstanding at
December 31, 1994 1,369,500 $2.50 - $13.83

Options granted 618,000 2.69 - 2.87
Options expired (658,398) 2.50 - 13.83
--------- --------------

Options outstanding at
December 31, 1995 1,329,102 $2.50 - $13.83
========= ==============
</TABLE>

As of December 31, 1995, options for 1,076,289 shares were exercisable.

In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, a new standard
for accounting for stock-based compensation. This standard established a
fair-value based method of accounting for stock options awarded after December
31, 1995 and encourages companies to adopt SFAS No. 123 in place of the
existing accounting method, which requires expense recognition only in
situations where stock compensation plans award intrinsic value to recipients
at the date of grant. Companies that do not follow SFAS No. 123 for accounting
purposes must make annual pro forma disclosures of its effects. Adoption of the
standard is required in 1996, although earlier implementation is permitted. The
Company does not intend to adopt SFAS No. 123 for accounting purposes; however
it will make annual pro forma disclosures of its effects commencing in 1996.

(6) INCOME TAXES-

Income (loss) before income taxes and the provision for income taxes consisted
of the following:

F-15
<PAGE> 45

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before income
taxes -
Domestic $(2,340,158) $(3,974,184) $(1,687,841)
Foreign (1,231,316) (3,365,361) (1,408,267)
----------- ----------- -----------

$(3,571,474) $(7,339,545) $(3,096,108)
=========== =========== ===========

Provision for income taxes -
Foreign -
Current $ 410,929 $ 312,621 $ 270,656
Deferred 640,919 (226,639) (91,733)
----------- ----------- -----------
$ 1,051,848 $ 85,982 $ 178,923
=========== =========== ===========
</TABLE>

Effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting
for Income Taxes," which requires deferred income taxes to be provided for the
expected tax effects of differences between the financial statement and tax
bases of assets and liabilities. The cumulative effect of the change in
accounting principle through December 31, 1992 was to increase the net loss for
the year ended December 31, 1993 by $172,062 ($.02 per share). The provisions
for income taxes and deferred income taxes payable relate to the Colombian
activities of Argosy. No United States deferred taxes were provided because the
tax bases of the Company's assets exceed the financial statement bases,
resulting in a deferred tax asset which the Company has determined is not
presently realizable.

The Company's net deferred income tax liabilities as of December 31,
1995 and 1994 were as follows:

<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Deferred tax liability $ 1,271,884 $1,043,984
Deferred tax asset (10,024,880) (9,199,165)
Valuation allowance 9,393,915 8,155,181
----------- ----------
Net deferred tax liability $ 640,919 $ -
=========== ==========
</TABLE>

Temporary differences included in the deferred tax liabilities related
primarily to property and equipment. Deferred tax assets principally consisted
of net operating loss carryforwards.

As of December 31, 1995, the Company had a regular tax net operating loss
carryforward and an alternative minimum tax loss carryforward of approximately
$26,400,000 and $26,000,000, respectively. These loss carryforwards will expire
beginning in 2001 if not utilized to reduce U.S. income taxes otherwise payable
in future years, and are limited as to utilization because of the occurrences
of "ownership changes" (as defined in Section 382 of the Internal Revenue Code
of 1986, as amended) in 1991 and earlier years. Such loss carryforwards also
exclude regular tax net operating loss carryforwards aggregating approximately
$4,500,000 attributable to certain of

F-16
<PAGE> 46

Garnet's subsidiaries, which can be used in certain circumstances to offset
taxable income generated by such subsidiaries.

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS-

The carrying amounts of cash and cash equivalents, accounts
receivable, and accounts payable and accrued liabilities approximate fair value
because of the short maturity of these items. The carrying amounts of notes
payable by Argosy to U.S. and Colombian banks approximate fair value because
the interest rates on these instruments change with market interest rates.
There are no quoted market prices for the Debentures. Because the Debentures
are convertible into shares of Garnet's common stock, the fair value of the
Debentures is contingent on market prices for the common stock, the value of
the Company's assets, and the results of its operation. In addition the
Debentures contain unique terms, conditions, covenants and restrictions.
Consequently the Company is unable to estimate the fair value of the
Debentures.

(8) CONCENTRATION OF CREDIT RISK-

During the years ended December 31, 1995, 1994 and 1993, all of the
Company's oil production was purchased by Ecopetrol. As of December 31, 1995
and 1994, accounts receivable included approximately $1,513,000 and $1,492,000,
respectively, from Ecopetrol. The Company believes that its oil production
could be sold to other purchasers at similar prices in lieu of sales to
Ecopetrol.

(9) OPERATIONS BY GEOGRAPHIC AREA-

The Company operates in one industry segment. Information about the
Company's operations for the years ended December 31, 1995, 1994 and 1993 by
different geographic areas is shown below.

<TABLE>
<CAPTION>
OTHER
UNITED FOREIGN
1995 STATES COLOMBIA AREAS TOTAL
- ---- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C>

Oil and gas sales $ - $ 8,635,570 $ - $ 8,635,570
========= =========== ============ ============

Operating profit (loss) $ (6,476) $ 158,792 $ (1,547,278) $ (1,394,962)
========= =========== ============

General corporate income and expenses, net (2,176,512)
------------

Income (loss) before income taxes $ (3,571,474)
============

Identifiable assets $ 937,359 $43,303,637 $ 4,841 $ 44,245,837
========= =========== ============

Corporate assets:
Cash and cash equivalents 5,713,191
------------

Total assets $ 49,959,028
============

</TABLE>

F-17
<PAGE> 47

The operating loss in other foreign areas represents oil and gas
acquisition and exploration costs charged to expense, of which $674,554 was in
Papua New Guinea, $798,263 was in France and $74,461 was in other countries.

<TABLE>
<CAPTION>
OTHER
UNITED FOREIGN
1994 STATES COLOMBIA AREAS TOTAL
- ---- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Oil and gas sales $ - $ 3,952,351 $ - $ 3,952,351
=========== =========== =========== ============

Operating profit (loss) $(1,905,734) $ (519,292) $(2,814,809) $ (5,239,835)
=========== =========== ===========

General corporate income and expenses, net (2,099,710)
------------

Income (loss) before income taxes $ (7,339,545)
============

Identifiable assets $ 1,411,740 $38,851,245 $ 1,046,447 $ 41,309,432
=========== =========== ===========

Corporate assets:
Cash and cash equivalents 7,990,605
------------

Total assets $ 49,300,037
============
</TABLE>

The operating loss in the United States reflects a provision for
loss on net assets held for disposition of $1,900,000. The operating loss in
other foreign areas represents oil and gas acquisition, exploration and
capitalized interest costs charged to expense, of which $1,878,094 was in
Turkey, $651,913 was in Canada, $206,625 was in France, and $78,177 was in
other countries.

Oil and gas sales $ - $ 4,539,710 $ - $ 4,539,710
=========== =========== =========== ============

Operating profit (loss) $ (22,309) $(1,401,750) $ (43,674) $ (1,467,733)
=========== =========== ===========

General corporate income and expenses, net (1,628,375)
----------

Income (loss) before income taxes $ (3,096,108)
============

Identifiable assets $ 3,451,994 $35,106,828 $ 2,241,485 $ 40,800,307
=========== =========== ===========

Corporate assets:
Cash and cash equivalents 11,332,144
Note receivable 19,048
------------

Total assets $ 52,151,499
============
</TABLE>

F-18
<PAGE> 48

(10) ACQUISITION OF RGO ENERGY INC. AND RGO PARTNERS, LTD. -

In 1991, in transactions accounted for as purchases, Garnet acquired
RGO Energy Inc. and RGO Partners, Ltd., two privately-owned entities (referred
to collectively herein as "the RGO Entities"). At the date of acquisition,
approximately 60% of the assets of the RGO Entities was comprised of cash, with
the balance being primarily working, royalty and mineral interests in producing
and undeveloped oil and gas properties in the United States. All of the working
interests acquired in the mergers were sold in 1993. Because management intends
to sell the remaining royalty and mineral interests when the market conditions
are suitable, these assets are reflected as "Net assets held for disposition"
in the accompanying consolidated balance sheets. Based on declining market
conditions for sales of oil and gas properties and management's expectations of
the amounts to be realized from dispositions of the working, royalty and
mineral interests, the Company recorded a provision for loss on disposition of
the assets of $1,900,000 during 1994.

F-19
<PAGE> 49

GARNET RESOURCES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS INFORMATION

The following tables set forth information about the Company's oil
and gas producing activities pursuant to the requirements of SFAS No. 69
"Disclosures About Oil and Gas Producing Activities."

<TABLE>
<CAPTION>
CAPITALIZED COSTS
- ----------------- OTHER
FOREIGN
DECEMBER 31, 1995 COLOMBIA AREAS TOTAL
- ----------------- ----------- -------- -----------
<S> <C> <C> <C>
Proved properties $46,044,011 $ - $46,044,011
Unproved properties 4,598,001 - 4,598,001
----------- -------- -----------

50,642,012 - 50,642,012
Accumulated depreciation,
depletion and amortization (11,286,629) - (11,286,629)
----------- -------- -----------

Net capitalized costs $39,355,383 $ - $39,355,383
=========== ======== ===========

DECEMBER 31, 1994
- -----------------

Proved properties $35,948,942 $ - $35,948,942
Unproved properties 5,433,435 983,373 6,416,808
----------- -------- -----------

41,382,377 983,373 42,365,750
Accumulated depreciation,
depletion and amortization (6,349,674) - (6,349,674)
----------- -------- -----------

Net capitalized costs $35,032,703 $983,373 $36,016,076
=========== ======== ===========
</TABLE>

The Company's investment in oil and gas properties as of December
31, 1995 includes $4,598,001 in unevaluated properties which have been excluded
from amortization. Such costs will be evaluated in future periods based on
management's assessment of exploration activities, expiration dates of
licenses, permits and concessions, changes in economic conditions and other
factors. Such costs were incurred as follows:

<TABLE>
<CAPTION>
PROPERTY CAPITALIZED
ACQUISITION EXPLORATION INTEREST TOTAL
----------- ----------- -------- -----
<S> <C> <C> <C> <C>
Year Ended December 31,
1995 $ - $ 799,426 $260,730 $1,060,156
1994 - 679,466 66,224 745,690
1993 - 1,197,381 37,183 1,234,564
1992 and earlier 455,601 982,391 119,599 1,557,591
-------- ---------- ------- ----------

$455,601 $3,658,664 $483,736 $4,598,001
======== ========== ======== ==========

</TABLE>

F-20
<PAGE> 50

<TABLE>
<CAPTION>
COSTS INCURRED
- --------------
OTHER
YEAR ENDED FOREIGN
DECEMBER 31, 1995 COLOMBIA AREAS TOTAL
- ----------------- --------- --------- ----------
<S> <C> <C> <C>

Property acquisition-
Proved properties $1,590,943 $ - $1,590,943
Unproved properties - 61,361 61,361
Exploration 1,439,406 502,544 1,941,950
Development 6,229,286 - 6,229,286
---------- --------- ----------

Total costs incurred $9,259,635 $ 563,905 $9,823,540
========== ========= ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
- -----------------
<S> <C> <C> <C>
Property acquisition-
Proved properties $ - $ - $ -
Unproved properties - 149,971 149,971
Exploration 1,982,601 1,469,399 3,452,000
Development 5,149,002 - 5,149,002
---------- ---------- ----------

Total costs incurred $7,131,603 $1,619,370 $8,750,973
========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
- -----------------
<S> <C> <C> <C>
Property acquisition-
Proved properties $ - $ - $ -
Unproved properties - 29,824 29,824
Exploration 3,599,963 340,513 3,940,476
Development 2,560,701 - 2,560,701
---------- ---------- ----------

Total costs incurred $6,160,664 $ 370,337 $6,531,001
========== ========== ==========

</TABLE>

F-21
<PAGE> 51

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>

Revenues $8,635,570 $3,952,351 $ 4,539,710
---------- ---------- -----------

Expenses-
Production costs 3,533,572 2,506,049 3,236,064
Depreciation, depletion and amortization 4,936,955 1,949,364 2,473,688
---------- ---------- -----------

8,470,527 4,455,413 5,709,752
---------- ---------- -----------

Results of operations before income taxes 165,043 (503,062) (1,170,042)

Provision for income taxes 70,638 - -
---------- ---------- -----------

Results of operations from oil and gas
producing activities $ 94,405 $ (503,062) $(1,170,042)
========== ========== ===========

Sales price per barrel $16.39 $13.44 $13.97

Production costs per barrel 6.71 8.52 9.96

Depreciation, depletion and amortization per
dollar of oil and gas revenues .57 .49 .54
</TABLE>

During the years ended December 31, 1995, 1994 and 1993, all of the
Company's oil and gas producing operations were located in Colombia.

During 1995, 1994 and 1993 the Company also charged to expense a
total of $1,547,278, $2,814,809 and $43,674, respectively, of acquisition and
exploration costs pertaining to its activities in other foreign areas.

OIL AND GAS RESERVE QUANTITIES (UNAUDITED)

Proved reserves represent estimated quantities of crude oil and
natural gas which geological and engineering data demonstrate to be reasonably
recoverable in the future from known reservoirs under existing economic and
operating conditions. Proved developed reserves can be expected to be recovered
through existing wells with existing equipment and operating methods.

Estimates of proved and proved developed oil and gas reserves are
subject to numerous uncertainties inherent in the process of developing the
estimates including the estimation of the reserve quantities and estimated
future rates of production and timing of development expenditures. The accuracy
of any reserve estimate is a function of the quantity and quality of available
data and of engineering and geological interpretation and judgment. Results of
drilling, testing and production subsequent to the date of the estimate may
justify revision of such estimate. Additionally, the estimated volumes to be
commercially recoverable may fluctuate with changes in prices of oil and
natural gas.

F-22
<PAGE> 52

Estimates of the Company's proved reserves and related valuations,
as shown in the following tables, were developed pursuant to SFAS No. 69.
Estimates of future recoverable oil reserves and projected future net revenues
were provided by Huddleston & Co., Inc. The Company's proved reserves were
comprised entirely of crude oil in Colombia, and are stated in barrels.

<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year 4,626,883 5,330,622 5,507,199
Revisions of previous estimates (377,493) (409,677) 148,462
Production (526,834) (294,062) (325,039)
Purchases of reserves in place 219,675 - -
--------- --------- ---------

End of year 3,942,231 4,626,883 5,330,622
========= ========= =========

Proved developed reserves at end of year 1,939,420 2,076,892 1,995,786
</TABLE>

The following tables present the standardized measure of discounted
future net cash flows relating to proved oil and gas reserves and the changes
in the standardized measure of discounted future net cash flows. Future cash
inflows and costs were computed using prices and costs in effect at the end of
the applicable year without escalation. Future income taxes were computed by
applying the appropriate statutory income tax rate to the pretax future net
cash flows reduced by future tax deductions and net operating loss
carryforwards.

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Future cash inflows $69,343,840 $71,887,880 $63,007,940
Future costs-
Production 18,021,679 15,541,058 17,648,412
Development 5,264,508 7,944,542 11,125,950
----------- ----------- -----------

Future net cash flows
before income taxes 46,057,653 48,402,280 34,233,578
Future income taxes 4,232,095 5,980,232 3,294,156
----------- ----------- -----------

Future net cash flows 41,825,558 42,422,048 30,939,422
10% discount factor 11,151,677 9,987,325 9,062,891
----------- ----------- -----------

Standardized measure of
discounted future net
cash flows $30,673,881 $32,434,723 $21,876,531
=========== =========== ===========

</TABLE>

F-23
<PAGE> 53

CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>

Standardized measure,
beginning of year $32,434,723 $21,876,531 $27,640,290
Increases (decreases) -
Sales, net of production costs (5,101,998) (1,446,302) (1,303,646)
Net change in sales prices,
net of production costs 1,578,689 13,222,039 (16,792,892)
Changes in estimated future
development costs (1,749,979) (167,944) (1,518,833)
Development costs incurred during
the year that reduced future
development costs 4,994,019 4,079,420 1,825,609
Revisions of quantity estimates (9,003,192) (5,808,213) 789,398
Accretion of discount 3,702,993 2,422,386 3,893,688
Net change in income taxes 1,676,288 (2,247,878) 8,949,260
Purchases of reserves in place 1,758,109 - -
Changes in production rates
(timing) and other 384,229 504,684 (1,606,343)
----------- ----------- -----------

Standardized measure,
end of year $30,673,881 $32,434,723 $21,876,531
=========== =========== ===========

</TABLE>

The standardized measure of discounted future net cash flows does
not purport to present the fair market value of the Company's proved reserves.
An estimate of fair value would also take into account, among other things, the
recovery of reserves in excess of proved reserves, anticipated future changes
in prices and costs and a discount factor more representative of the time value
of money and the risks inherent in reserve estimates.

F-24
<PAGE> 54

SCHEDULE I

GARNET RESOURCES CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
ASSETS 1995 1994
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,088,683 $ 6,879,320
Accounts receivable 1,986,660 4,427,287
Prepaid expenses 26,100 16,369
----------- -----------

Total current assets 3,101,443 11,322,976
----------- -----------

INVESTMENTS IN AND ADVANCES
TO SUBSIDIARIES 34,079,600 28,414,582
----------- -----------

PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties (full-cost method)-
Unproved (excluded from amortization) - 671,764
Other 63,918 69,568
----------- -----------

63,918 741,332
Less - Accumulated depreciation (47,064) (53,690)
----------- -----------

16,854 687,642
----------- -----------

OTHER ASSETS 459,062 614,063
----------- -----------

$37,656,959 $41,039,263
=========== ===========
</TABLE>

These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.

F-25
<PAGE> 55

SCHEDULE I

GARNET RESOURCES CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

(CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 325,978 $ 249,011
----------- -----------

LONG-TERM DEBT 15,000,000 15,000,000
----------- -----------

OTHER LONG-TERM LIABILITIES 64,176 -
----------- -----------

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
20,000,000 shares authorized, 11,492,162
shares issued and outstanding as of
December 31, 1995, 11,125,537 shares issued
and outstanding as of December 31, 1994 114,922 111,255
Capital in excess of par value 52,491,212 51,395,004
Retained earnings (deficit) (30,339,329) (25,716,007)
----------- -----------

Total stockholders' equity 22,266,805 25,790,252
----------- -----------

$37,656,959 $41,039,263
=========== ===========
</TABLE>

These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.

F-26
<PAGE> 56

SCHEDULE I

GARNET RESOURCES CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
INTEREST INCOME $ 519,630 $ 651,133 $ 35,358
----------- ----------- -----------

COSTS AND EXPENSES:
Exploration 798,263 281,588 -
General and administrative 1,953,436 1,817,112 1,930,439
Interest 819,134 951,138 46,218
Depreciation 5,874 4,771 6,029
----------- ----------- -----------

3,576,707 3,054,609 1,982,686
----------- ----------- -----------

INCOME (LOSS) BEFORE EQUITY IN
EARNINGS (LOSSES) OF SUBSIDIARIES (3,057,077) (2,403,476) (1,947,328)

EQUITY IN EARNINGS (LOSSES) OF
SUBSIDIARIES (1,566,245) (5,022,051) (1,499,765)
----------- ----------- -----------

NET LOSS $(4,623,322) $(7,425,527) $(3,447,093)
=========== =========== ===========
</TABLE>

These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.

F-27
<PAGE> 57

SCHEDULE I

GARNET RESOURCES CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,623,322) $(7,425,527) $(3,447,093)
Equity in (earnings) losses of subsidiaries 1,566,245 5,022,051 1,499,765
Exploration costs 798,263 281,588 -
Depreciation 5,874 4,771 6,029
Changes in components of working capital 159,500 (110,478) 158,436
Other 213,309 173,173 61,402
----------- ----------- -----------

Net cash used for operating activities (1,880,131) (2,054,422) (1,721,461)
----------- ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and advances from
(to) subsidiaries (6,131,388) (720,751) 1,181,923
Capital expenditures (132,902) (528,781) (11,442)
Loans to Argosy Energy International - (4,390,000) (3,750,000)
Loans repaid by Argosy Energy International 2,353,784 3,853,512 -
----------- ----------- -----------

Net cash used for investing activities (3,910,506) (1,786,020) (2,579,519)
----------- ----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt - - 15,000,000
Proceeds from issuances of common stock - - 7,500
Costs of debt issuance - (38,799) (731,716)
----------- ----------- -----------

Net cash provided by (used for)
financing activities - (38,799) 14,275,784
----------- ----------- -----------

NET INCREASE (DECREASE) IN CASH (5,790,637) (3,879,241) 9,974,804

CASH AT BEGINNING OF PERIOD 6,879,320 10,758,561 783,757
----------- ----------- -----------

CASH AT END OF PERIOD $ 1,088,683 $ 6,879,320 $10,758,561
=========== =========== ===========
</TABLE>

These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.

F-28

<PAGE> 1
EXHIBIT 10(G)

Official Translation No. 79/95 of a document in Spanish.

REPUBLIC OF COLOMBIA
NOTARIAL CIRCUIT OF BOGOTA
16TH NOTARIAL OFFICE

Fourth Copy

DEED No. 2782 of SEPTEMBER 29, 1995

REGISTRY

BY: DARIO CARDENAS NAVAS

OTTO BARRIOS GALVIS
NOTARY

<PAGE> 2

Seal on Side: OTTO BARROS GALVIS Sixteenth Notary of Santafe de
Bogota D.C.

Seal: REPUBLUC OF COLOMBIA Notarial Paper ASSOCIATI0N OF
NOTARIES OF COLOMBIA

NUMBER ----- 2782 -------------------------------- TWO THOUSAND SEVEN
HUNDRED EIGHTY-TWO. --------------------------------------------------------
In the city of Santa Fe de Bogota, Capital District, Department of
Cundinamarca, Republic of Colombia, on the twenty-ninth (29th) day
of the month of September of nineteen hundred ninety-five (1995),
there appeared before me OTTO BARRIOS GALVIS, Sixteenth (16th)
Notary of Santa Fe de Bogota, Doctor DARIO CARDENAS NAVAS, of legal
age, resident of this city of Santa Fe de Bogota, D.C., of
Colombian nationality, identified with Citizen's ID Card No.
17.066.629 of Bogota, over fifty (50) years of age, who acts in his
own behalf and stated: That he presents for registry and
preservation in this Notarial Office, the Association Contract for
the sector called YURUYACO, signed between Argosy Energy
International, Neo Energy Inc. and the EMPRESA COLOMBIANA DE
PETROLEOS ECOPETROL, on the twentieth (20th) of September nineteen
hundred ninety-five (1995) along with a) the calculation,
directions and distances starting from the GAUSS coordinates, b)
Appendix "B" Operating Contract and c) map of the area contracted
which constitutes Appendix "A". The undersigned Notary declares
duly registered in this Notarial Office and under the number of
this instrument, the stated document so that it serve for the
intended legal purposes and based on this act copies or
certifications can be issued to the interested parties. ------------
HAVING BEEN READ by the appearing party this public instrument, he
approved it and signed it as a sign of his acceptance, along with
the undersigned Notary who, in this way, authorizes it. This
instrument was prepared on the folio No. AA 1778876. ---------------
Supplied gratis by the notary and incurs notarial duties in the
amount of $4,500 in conformity with that authorized in Decree 1572
of July 22, 1994. --------------------------------------------------

<PAGE> 3

AMENDED "SEVEN HUNDRED, EIGHTY, the, decree" APPROVED.

Signed (illegible)

DARIO CARDENAS NAVAS

C.C. No. 17.066.629 of Bogota

Over 50 years old

Signed (illegible)

OTTO BARRIOS GALVIS

Notary Sixteen (16) of Santa Fe de Bogota

Seal: REPUBLIC OF COLOMBIA SANTAFE DE BOGOTA OTTO BARRIOS GALVIS

Sixteenth Notary
<PAGE> 4

EMPRESA COLOMBIANA DE PETROLEOS

ECOPETROL

ASSOCIATION CONTRACT

ASSOCIATE: ARGOSY ENERGY INTERNATIONAL ----------------------

NEO ENERGY INTERNATIONAL -------------------------

SECTOR: YURUYACO -----------------------------------------

EFFECTIVE DATE: November 19, 1995

The contracting parties, that is: for the first part, the Empresa Colombiana de
Petroleos, who hereinafter shall be called ECOPETROL, an industrial and
commercial enterprise of the State authorized by Law 165 of 1948, presently
governed by the statutes, approved by Decree 1209 of June 15, 1994, with
principal domicile in Santa Fe de Bogota, represented by LUIS BERNARDO FLOREZ
ENCISO, of legal age, identified with Citizen's ID Card No. 19.092.255 issued
in Santa Fe de Bogota, domiciled in Santa Fe de Bogota who states: 1. That in
his position as President of ECOPETROL he acts in representation of this
company, and 2. That for entering into this contract he has been authorized by
the Board of Directors of ECOPETROL, as certified in Act No. 2100 of May 16,
1995 and, for the second part, Argosy Energy International, a corporation
organized in accordance with the laws of the United States of North America,
with principal domicile in Salt Lake City, Utah, with a branch established in
Colombia and principal domicile in Santa Fe de Bogota, pursuant to public deed
no. 5324 of October 25, 1983, granted in the Seventh (7th) Notarial Office of
the Santa Fe de Bogota Circuit, represented by DOUGLAS W. FRY, of legal age,
identified with passport number 051644793, who states: 1. That in his position
as legal representative he acts in representation of the company Argosy Energy
International and 2. That in order to enter into this contract he is fully
authorized as certified in the

<PAGE> 5
2

certificate of existence and legal representation issued by the Chamber of
Commerce of Santa Fe de Bogota and Neo Energy Inc., Colombian branch of Neo
Energy Inc. of Dallas, Texas, United States of America, constituted by means of
public deed number 6.179 of October 23, 1986, granted in the Fourth (4th)
Notarial Office of the Santa Fe de Bogota Circuit, represented by ROLAND
SUTTILL, of legal age, identified with passport E-1106181, which states: 1.
That in his Position as Manager he acts in representation of the company Neo
Energy Inc. and 2. That in order to enter into this contract he is fully
authorized as certified in the certificate of existence and legal
representation issued by the Chamber of Commerce of Santa Fe de Bogota. The two
companies described shall be called, for all effects, THE ASSOCIATE. Under the
conditions noted, ECOPETROL and THE ASSOCIATE certify that they have entered
into the contract contained in the following clauses: -------------------------
CHAPTER I - GENERAL PROVISIONS ------------------------------------------------
CLAUSE 1 - OBJECT OF THE CONTRACT ---------------------------------------------

1.1 The object of this contract is the exploration of the Contracted Area and
the exploitation of the Oil owned by the Nation that may be found in said area,
described in Clause 3. --------------------------------------------------------

1.2 In conformity with Article I of Decree No. 2310 of 1974, the exploration
and exploitation of hydrocarbons owned by the Nation is charged to ECOPETROL, a
company that may carry out said activities directly or by means of contracts
with private parties. Based on the stated provision, ECOPETROL has agreed with
THE ASSOCIATE to explore the Contracted Area and exploit the Oil that may be
found in it, under the terms and conditions set forth in this document,
Appendix "A" and Appendix "B" (Operating Agreement) that form an integral part
of this contract. -------------------------------------------------------------
1.3 Without prejudice to that which is stipulated in this contract, it is
understood that THE ASSOCIATE will have in the Oil that is produced in the
Contracted Area and in that corresponds to him, the same rights and obligations
that they have

<PAGE> 6
3

in Colombian law, those who exploit Oil owned by the Nation within the
country. ---------------------------------------------------------------------
1.4 ECOPETROL and THE ASSOCIATE agree that exploration and exploitation work
will be carried out in the terrain of the Contracted Area, that they will
divide the costs and risks of the same between themselves in the proportions
and under the terms set forth in this contract and that the properties that
they acquire and the Oil produce and stored will belong to each Party in the
stipulated proportions. ------------------------------------------------------
CLAUSE 2 - APPLICATION OF THE CONTRACT ---------------------------------------
This contract is applicable to the Contracted Area, marked in Clause 3, or the
part of the latter, subject to the terms of the same when Clause 8 has been
applied. ---------------------------------------------------------------------
CLAUSE 3 - CONTRACTED AREA ---------------------------------------------------
The Contracted Area is called "YURUYACO", it consists of an area of fifteen
thousand six hundred fifty-three (15,653) hectares with two thousand six
hundred eighty (2,680) square meters and is located within the municipal
jurisdictions of Santa Rosa in the Department of Cauca and Albania and
Valparaiso in the Department of Caqueta.- This area is described below and, as
appears in the map that is attached as Appendix "A", which forms an integral
part of this contract, as well as the corresponding calculation tables: The
reference point has been taken as the Geodesic Vertex "YAPURAMIA- 1323" of the
Agustin Codazzi Geographical Institute whose GAUSS plane coordinates with
origin 3 degrees WEST of Santa Fe de Bogota are: N-619,502.81 meters,
E-1,092,804.61 meters which correspond to the geographical coordinates,
Latitude 01 degree 09' 28''.651 to the north of the Equator, Longitude 76
degrees 14' 49''.675 to the West of Greenwich. From this Vertex, one follows a
direction of S 79 degrees 04' 30''.597 E for a distance of 5,291.29 meters
until arriving at Point "A", starting point, whose coordinates are:
N-678,500.00 meters, E- 1,098,000.00 meters. From this Point "A" one follows
in a NORTHERN direction for a distance of 6,000.00 meters until arriving at
Point

<PAGE> 7
4

"B" whose coordinates are: N-624,500.00 meters, E-1,098,000.00 meters. The
straight line "A-B" borders on part of Line "C-B" of the "FRAGUA" Association
Contract signed with Argosy Energy International. From this Point "B" one
continues with a direction of N 47 degrees 29' 22''.391 E for a distance of
8,139.41 meters until arriving at Point "C" whose coordinates are: N-630,000.00
meters, E-1,104,000.00 meters. From Point "C" one continues in an EASTERN
direction for a distance of 4,000.00 meters until arriving at Point "D" whose
coordinates are: N-630,000.00 meters, E-1,108,000.00 meters. From this Point
"D" one continues in a SOUTHERN direction for a distance of 6,000.00 meters
until arriving at Point "E" whose coordinates are: N-624,000.00 meters, E-
1,108,000.00 meters. From this Point "E" one continues in an EASTERN direction
for a distance of 4,000.00 meters until arriving at Point "F" whose coordinates
are: N-624,000.00 meters, E-1,112,000.00 meters. From this Point "F" one
continues in a SOUTHERN direction for a distance of 6,000.00 meters until
arriving at Point "G" whose coordinates are: N-0618,000.00 meters,
E-1,112,000.00 meters. From this Point "G" one continues in a WESTERN
direction for a distance of 6,000.00 meters until arriving at Point "H" whose
coordinates are: N- 618,000.00 meters, E-1,106,000.00 meters. From this Point
"H" one continues in a direction of S 47 degrees 47' 00''.404 W for a distance
of 10,801.90 meters until arriving at Point "I" whose coordinates are:
N-610,741.83 meters, E-1,098,000.00 meters. From this Point "I" one continues
in a NORTHERN direction for a distance of 7,758.17 meters until arriving at
Point "A", starting point and closing the boundaries. The "I-A" line borders
for its entire length on the "D-C" line of the "SANTANA-B" Association Contract
signed with Argosy Energy International.---------------------------------------
Paragraph 1.- Any time that any individual presents a claim as titleholder of
the ownership of the subsoil within the Contracted Area, ECOPETROL will assume
the attention of the case and the obligations that may arise.------------------

<PAGE> 8
5

Paragraph 2.- In the event that part of the Contracted Area extends over areas
that are or have been reserved and declared within the National Park System,
in accordance with that agreed in Clause 30 (Paragraph 30.4) of this Contract,
THE ASSOCIATE is obligated to observe the conditions that the competent
authorities impose, without this contract being deemed modified and without
there being any claim against ECOPETROL. --------------------------------------
CLAUSE 4 - DEFINITIONS --------------------------------------------------------
For effects of this contract, the expressions that are mentioned below, will
have the following meaning: ---------------------------------------------------
4.1 Contracted Area: This is the terrain defined in Clause 3, preceding,
subject to Clause 8. ----------------------------------------------------------
4.2 Commercial Field: This is that portion of the Contracted Area that is
capable of producing Oil in economically exploitable quantity and
quality.-----------------------------------------------------------------------
4.3 Executive Committee: This is the organ that is formed within thirty (30)
days following the acceptance of a Commercial Field to supervise, control and
approve all the operations and action that are carried out during the term of
this contract. ----------------------------------------------------------------
4.4 Direct Exploration Costs: These are those monetary payments that THE
ASSOCIATE incurs for the acquisition of seismic, the drilling of Stratigraphic
Wells, and the drilling of Exploratory Wells, as well as for locating,
finishing, equipping and testing of said wells, flow lines and separators. The
Direct Exploration Costs do not include administrative or technical support
from the head office or central offices of the Company. -----------------------
4.5 Joint Account: The records that will be kept by means of accounting
ledgers, in accordance with Colombian laws, to credit or charge the Parties,
the share that corresponds to them in the Joint Operation.---------------------
4.6 Budgetary Execution: These are the resources in effect spent and/or
committed in each of the programs and projects approved for a determined
calendar year. ----------------------------------------------------------------

<PAGE> 9
6

4. 7 Effective Date: This will be the calendar day on which the term of
sixty (60) calendar days counted starting from the date on which contract is
signed elapses, starting from which all terms agreed to in it, subject to the
validity of this same contract, are counted.----------------------------------
4.8 Flow of Funds: This is constituted by the physical movement of money
(income and disbursements) that the Joint Account must make in order to meet
the different obligations that the Association has contracted in carrying out
normal operations. -----------------------------------------------------------
4.9 Natural Gas: Mixture of hydrocarbons in a gaseous state, composed of
the most volatile members of the paraffin series of hydrocarbons.-------------
4.10 Direct Expenses: These are all those payments charged to the Joint
Account for personnel expenses directly linked to the Association, purchase of
materials and supplies, contracting of services with third parties and other
general expenses that the Joint Operation requires in the normal course of its
activities.-------------------------------------------------------------------
4.11 Indirect Expenses: These are those payments charged to the Joint
Account for technical and/or administrative support that the Operator of the
Joint Operation eventually provides from his own organization.----------------
4.12 Commercial Interest: When dealing in pesos, this will the current
interest rate that the Banking Superintendency certifies for the corresponding
period; when dealing in United States dollars, it will be the prime rate set
by CITIBANK of New York.------------------------------------------------------
4.13 Interest in the Operation: This is the share in the obligations and
rights that each one of the Parties acquires in the exploration and
exploitation of the Contracted Area. -----------------------------------------
4.14 Investments in Development: These refer to the sum of money invested
in goods and equipment that are capitalized as assets for the Joint Operation
in a Commercial Field once the existence of the latter is accepted by the
Parties.----------------------------------------------------------------------
4.15 Production Objectives: These are the formations, layers or

<PAGE> 10
7

sands with possible accumulation of hydrocarbons. -----------------------------
4.16 Joint Operation: The activities and works executed or in the process of
execution in behalf of the Parties and to their account.-----------------------
4.17 Operator: The person designated by the Parties so that, to their
account, he carries out directly the operations needed to explore and exploit
the Oil that is found in the Contracted Area.----------------------------------
4.18 Parties: On the Effective Date, ECOPETROL and THE ASSOCIATE. Later, and
at any time, ECOPETROL, for the first part and THE ASSOCIATE, and/or its
assignees, for the other part. ------------------------------------------------
4.19 Exploration Period: This is the lapse which THE ASSOCIATE has for
complying with the obligations stipulated in Clause 5 of this contract and that
will not be greater than six (6) years counted starting from the Effective
Date, with the exception of the cases contemplated in Clauses 9 (Paragraphs 9.3
and 9.8) and 34.---------------------------------------------------------------
4.20 Exploitation Period: The time that transpires from when the Exploration
Period ends until the end of this contract. -----------------------------------
4.21 Oil: The natural mixture of hydrocarbons in a liquid or gaseous state
under normal conditions, as well as those substances that accompany them or
are derived from them with the exception of helium and rare gases.-------------
4.22 Exploratory Well: This is any well designated as such by THE ASSOCIATE
to be drilled or deepened by him in the Contract Area in the search for Oil.
For the performance of the obligations agreed to in Clause 5 of this contract,
the respective Exploratory Well will be qualified as such beforehand between
ECOPETROL and THE ASSOCIATE.---------------------------------------------------
4.23 Exploitation (or Development) Well: This is any well scheduled
beforehand by the Executive Committee for the production of petroleum within
the Commercial Area. ----------------------------------------------------------
4.24 Budget: This is the basic planning tool by which resources are assigned
to specific projects to be applied within one calendar year or part of the year
in order to achieve the goals and objectives proposed by THE ASSOCIATE or the
Operator. ---------------------------------------------------------------------

<PAGE> 11
8

4.25 Extensive Production Tests: These are the operations that are executed
in one or several producing Exploratory Wells, in order to evaluate the
production conditions and behavior of the deposit.-----------------------------
4.26 Reimbursement: This is the payment of fifty percent (50%) of the Direct
Exploration Costs which THE ASSOCIATE has incurred. ---------------------------
4.27 Exploratory Work: These are those operations that THE ASSOCIATE
executes with regards to the search and discovery of oil inside the Contract
Area. -------------------------------------------------------------------------
CHAPTER II - EXPLORATION ------------------------------------------------------
CLAUSE 5 - TERMS AND CONDITIONS -----------------------------------------------
5.1.1 During the first year counted starting from the Effective Date of this
contract, THE ASSOCIATE is obligated to acquire a program of minimum thirty
(30) kilometers of new seismic. During the second year THE ASSOCIATE will
carry out the acquisition of a program of minimum twenty (20) kilometers of
seismic. At the end of the second year THE ASSOCIATE will have the option of
waiving the contract, provided that he has complied with the above stated
obligations. -----------------------------------------------------------------
5.1.2 During the third year THE ASSOCIATE will drill one (1) Exploratory Well
until the formations that may product Oil in the area are penetrated. Upon
expiration of this year, the contract will end, if its extension has not been
requested and authorized in conformity with Paragraph 5.2 of this Clause and a
Commercial Field has not been discovered.-------------------------------------
5.2 If THE ASSOCIATE has satisfactorily performed the obligations stipulated
in Clause 5, ECOPETROL, upon request by THE ASSOCIATE, will extend annually for
up to three (3) additional years, the Exploration Period and during each year
of extension THE ASSOCIATE will be obligated to do Exploratory Work in the
Contraced Area, consisting of the drilling of one (1) Exploratory well until
the formations that may produce oil in the area are penetrated.---------------
5.3 If during any year of the Exploration Period THE ASSOCIATE

<PAGE> 12
9

resolves to proceed with work corresponding to the following year, it may
request ECOPETROL to approve the carrying out of said work. If the request is
accepted by ECOPETROL, the latter will determine in what way and in what
amount the transfer of the stated obligations will be done.------------------
5.4 During the term of this contract, THE ASSOCIATE may do Exploration Work
in the areas that it keeps in conformity with Clause 8 and THE ASSOCIATE will
be solely responsible for the risks and costs of these activities and,
therefore, will have complete and exclusive control of the same without the
maximum duration of the contract being modified for this reason.-------------
CLAUSE 6 - SUPPLY OF INFORMATION DURING EXPLORATION -------------------------
6.1 ECOPETROL will supply THE ASSOCIATE, when the latter so requests, all
the information that it has in its power on the Contracted Area. The costs
caused by the reproduction and delivery of said information will be charged
to THE ASSOCIATE.------------------------------------------------------------
6.2 During the Exploration Period THE ASSOCIATE will deliver to ECOPETROL, as
it is obtained, all the geological and geophysical information, edited magnetic
tapes, processed seismic sections and all field data that serves as support,
magnetic and gravimetric profiles, all in reproducible originals, copies of the
geophysical reports, reproducible originals of the all the records for wells
that THE ASSOCIATE drills, including the final composite graph of each well and
copies of the final drilling report that includes analysis of core samples, the
results of production tests and any other information related to the drilling,
study or interpretation of any kind that THE ASSOCIATE does for the Contracted
Area with no limitations whatsoever. ECOPETROL has the right, at any time and
through the appropriate procedures, to be present at all operations and verify
the information listed above. -----------------------------------------------
6.3 The Parties agree that during the term of this contract, all information
that is obtained in the performance of the same is of a confidential nature.
Likewise, Parties agree that in each

<PAGE> 13
10

case they may exchange information with companies associated or not associated
with ECOPETROL. It is understood that that which is agreed to herein will be
without prejudice to the obligation to supply the Ministry of Mines and Energy
all the information that it requests in conformity with current legal and
regulatory dispositions. Nevertheless, it is understood and thus agreed that
the Parties may provide, at their sole discretion, the information that their
affiliates, consultants, contractors, financial entities require and that is
required by competent authorities with jurisdiction over the Parties or their
affiliates, or by the norms of any stock exchange on which the shares of the
Parties or related corporations are registered.--------------------------------
CLAUSE 7 - EXPLORATION BUDGET AND PROGRAMS ------------------------------------
THE ASSOCIATE will have the obligation to prepare, observing that which is
established in this contract, the programs and budgets necessary for the
exploration of the Contracted Area. Said budgets and programs will be
presented in a timely manner to ECOPETROL. ------------------------------------
CLAUSE 8 - RETURN OF AREAS ----------------------------------------------------
8.1 At the end of the initial exploration period or extensions that THE
ASSOCIATE has obtained, or no later than the expiration of the sixth (6th)
year, if a Commercial Field has been discovered in the Contracted Area, said
area will be reduced to fifty percent (50%); two (2) years later, the area will
be reduced to an area equal to fifty percent (50%) of the Contracted Area and
two (2) years later said area will be reduced to the area of the Commercial
Field or Commercial Fields that are in production or development plus a reserve
area of five (5) kilometers wide around each field. the Commercial Fields plus
the zone that surrounds the each field will be called the exploitation area and
this will be the only part of the Contracted Area that will remain subject to
the terms of this contract. ---------------------------------------------------
8.2 THE ASSOCIATE will determine the areas that it will return to ECOPETROL in
lots with a minimum area of five thousand (5,000)

<PAGE> 14
11

hectares each, unless THE ASSOCIATE shows that this is not possible.
Notwithstanding the obligation to return the areas dealt with in Clause 8
(Paragraph 8.1), THE ASSOCIATE is not obligated to return areas that are under
development or in production, including the reserve zones of five (5)
kilometers wide that surround said areas, except in the event that due to
reasons imputable to THE ASSOCIATE the development or production operations are
suspended for more than one year without just cause, in which case it will
return said areas to ECOPETROL, ending the contract for said areas or part of
the area. That which is set forth herein is likewise applicable to the
exploitation under the sole risk mode. ----------------------------------------
CHAPTER III - EXPLOITATION ----------------------------------------------------
CLAUSE 9 - TERMS AND CONDITIONS -----------------------------------------------
9.1 In order to start the Joint Operation under the terms of this contract,
it is deemed that the exploitation works will begin on the date on which the
Parties recognize the existence of a Commercial Field or when that which is set
forth in Clause 9 (Paragraph 9.5) is fulfilled. The existence of a Commercial
Field will be determined by means of the drilling, by THE ASSOCIATE, of a
sufficient number of wells which allows the area and the commercialness of the
field to be reasonably defined. In this case, THE ASSOCIATE will inform
ECOPETROL in writing of the finding of a Commercial Field, providing the
studies on which it has based this conclusion. ECOPETROL, within a period of
ninety (90) calendar days starting from the date on which THE ASSOCIATE
delivers all the support documentation, must accept or oppose the existence of
the Commercial Field. ECOPETROL may request the additional information that it
deems necessary within thirty (30) days following the date of presentation of
the first support documentation.-----------------------------------------------
9.2.1 If ECOPETROL accepts the existence of the Commercial Field, it will
notify this to THE ASSOCIATE within the period of ninety (90) calendar days
dealt with in Clause 9 (Paragraph 9.1) and will

<PAGE> 15
12

begin to share, under the terms of this contract, in the development of the
Commercial field, discovered by THE ASSOCIATE.---------------------------------
9.2.2 ECOPETROL will reimburse THE ASSOCIATE fifty percent (50%) of the
Direct Exploration Costs of: --------------------------------------------------
9.2.2.1 The drilling of Exploratory Wells drilled by THE ASSOCIATE that are
commercially productive. ------------------------------------------------------
9.2.2.2 The seismic acquistion and drilling of Stratigraphic Wells done prior
to the date on which ECOPETROL makes a pronouncement with respect to the
existence of each Commercial Field.--------------------------------------------
9.2.2.3 The drilling of A-1 Exploratory Wells, according to the Lahee
classification, that are dry, drilled by THE ASSOCIATE prior to the date on
which ECOPETROL makes a pronouncement with respect to the existence of each
Commercial Field. -------------------------------------------------------------
9.2.2.4 The drilling of Exploratory Wells that are dry, drilled by THE
ASSOCIATE prior to the discovery well of the Commercial Field.-----------------
9.2.3 The amount of these costs will be determined in United States dollars,
taking as reference date that on which THE ASSOCIATE has made said
disbursements; therefore, the costs incurred in Colombian pesos will be
liquidated at the representative market exchange rate certified by the Bank of
the Republic that is in effect on the date indicated herein. ------------------
9.2.4 The reimbursement of the Direct Exploration Costs, pursuant to that
stated in Clause 9 (Paragraph 9.2.2) will be made by ECOPETROL to THE ASSOCIATE
starting from the time when the field is put into production by the Operator,
with the amount in dollars equivalent to fifty percent (50%) of its direct
share in the total production of the respective field, after deducting the
percentage corresponding to royalties. ----------------------------------------
9.3 If ECOPETROL does not accept the existence of the Commercial Field dealt
with in Clause 9 (Paragraph 9.1), it may indicate to THE ASSOCIATE the
additional work that it feels necessary to demonstrate the existence of a
Commercial Field, work whose cost

<PAGE> 16
13

may be greater than TWO MILLION DOLLARS (US$ 2,000,000, nor may they require
for their execution a period greater than one (1) year, in which case, the
Exploration Period for the Contracted Area will be automatically extended for a
period equal to that which has been agreed to between the Parties as necessary
for executing the additional work requested by ECOPETROL in this clause, but
without prejudice to that which is stipulated for the reduction of areas in
Clause 8 (Paragraph 8.1). -----------------------------------------------------
9.4 If ECOPETROL, after the additional work that has been requested in
accordance with Clause 9 (Paragraph 9.3) has been executed, accepts the
existence of the Commercial Field dealt with in Clause 9 (Paragraph 9.1), it
begins to share in the development operations of the above mentioned field
under the terms established in this contract and will reimburse THE ASSOCIATE
in the manner stipulated in Clause 9 (Paragraphs 9.2.3 and 9.2.4), for fifty
percent (50%) of the cost of the additional work requested, dealt with in
Clause 9 (Paragraph 9.3) and the works executed will become the property of the
Joint Account. ----------------------------------------------------------------
9.5 If ECOPETROL does not accept the existence of a Commercial field, after
the additional work dealt with in Clause 9 (Paragraph 9.3) has been done, THE
ASSOCIATE has the right to execute the work that it deems necessary for the
exploitation of said field and to reimburse itself for two hundred percent
(200%) of the total cost of the works executed at its risk in the respective
field and up to fifty percent (50%) of the Direct Exploration Costs that THE
ASSOCIATE has carried out before the discovery, in conformity with that set
forth in Clause 9 (Paragraph 9.2.2). For effects of this clause, the
reimbursement will be made with the value of the oil produced, less the
roylaties dealt with in Clause 13, deducting the costs of production,
collection, transport and sale. If THE ASSOCIATE accepts the sole risk mode,
it is understood that the exploitation period begins starting from the date on
which ECOPETROL communicates to THE ASSOCIATE that it does not accept the
<PAGE> 17

commercialness. For effects of the liquidation of the value in dollars of the
disbursements made in pesos, it will be liquidated at the exchange rate on the
date on which THE ASSOCIATE has made said disbursements. For purposes of this
clause, the value of each barrel of oil produced in said field during one
calendar month will be the average price per barrel that THE ASSOCIATE receives
from the sale of its share in the Oil produced in the Contracted Area during
the same month. When THE ASSOCIATE has been reimbursed for the percentage
established in this clause, all the wells drilled, facilities and all types of
assets acquired by THE ASSOCIATE for the exploitation of the field and paid as
indicated in this clause, will become the property of the Joint Account at no
cost whatsoever, after the acceptance of ECOPETROL of sharing in the
development of said field. ---------------------------------------------------
9.6 ECOPETROL may at any time begin to share in the operation of the field
discovered and developed by THE ASSOCIATE without prejudice to the right of THE
ASSOCIATE to reimbursement of the investments that it has made from its
account, in the manner and percentage stipulated in Clause 9 (Paragraph 9.5).
Once THE ASSOCIATE has recovered this, ECOPETROL will begin to share in the
economic results of the wells developed exclusively by THE ASSOCIATE. --------
9.7 In order to mark a Commercial Field, all the geological and geophysical
information and that of the wells drilled in said field or that are related to
it will be considered. -------------------------------------------------------
9.8 If at the end of the Exploration Period of six (6) years dealt with in
Clause 5 (Paragraph 5.2), THE ASSOCIATE has drilled one or several Exploratory
Wells that indicate the possible existence of a Commercial Field, ECOPETROL,
upon request from THE ASSOCIATE, will extend the Exploration Period for the
time needed, which does not exceed one year, so that THE ASSOCIATE has the
opportunity to demonstrate the existence of said Commercial Field, without
prejudice to that which is established in Clause 8. --------------------------
<PAGE> 18

CLAUSE 10 - TECHNICAL CONTROL OF THE OPERATIONS ------------------------------
10.1 The parties agree that THE ASSOCIATE is the Operator and, as such, with
the limitations set forth in this contract, will have control of all the
operations and activities that it deems necessary for a technical, efficient
and economic exploitation of the Oil that is found within the area of the
Commercial Field. ------------------------------------------------------------
10.2 The Operator has the obligation to realize all the development and
production operations in accordance with known industrial standards and
practices, using for this the best technical methods and systems that the
economic and efficient exploitation of Oil require and applying the legal and
regulatory dispositions on the matter. ---------------------------------------
10.3 For all purposes of this contract, the Operator will be considered as an
entity distinct from the Parties as well as for the application of civil, labor
and administrative legislation and for its relationships with the personnel in
its service, in accordance with Clause 32. -----------------------------------
10.4 The Operator will have the right to resign as such, through written
notification to the Parties six (6) months prior to the date on which it
desires to make its resignation effective. The Executive Committee will
designate the new Operator in accordance with Clause 19 (Paragraph 19.3.2). --
CLAUSE 11 - EXPLOITATION PROGRAMS AND BUDGETS---------------------------------
11.1 Within the three (3) months following the acceptance of a Commercial
Field in the Contracted Area, the Operator will present to the Parties a
schedule of activities and a bidget for the rest of the corresponding calendar
year. In the event that less than six and a half (6-1/2) months remain
until the end of said year, the Operator will prepare and present a budget
and program for the following calendar year, within a period of three
(3) months. ------------------------------------------------------------------
Future budgets and programs will be presented to the Parties in an ordinary
meeting of the Executive Committee set for the month of July of the immediately
previous year. Within twenty (20) days
<PAGE> 19

following the receipt of the budgets and programs, the Parties will inform the
Operator in writing of the changes that they wish to propose. When this
occurs, the Operator will take into account the observations and reforms
proposed by the Parties in the preparing of the budget and programs that will
be submitted for final approval by the Executive Committee in the ordinary
meeting in the month of November of each year, except in the event that less
than six and a half (6-1/2) months remain until the end of the year in which
the existence of the Commercial Field is recognized. In the event that the
total budget has not been approved before the month of November, those aspects
of the budget on which an agreement has been reached, will be approved by the
Executive Committee, and those aspects not approved will be submitted
immediately to the Parties for later study and final decision in the manner set
forth in Clause 20. -----------------------------------------------------------
11.2 The Parties may propose additions to or revisions of the approved budget
or programs, but, except in emergencies, they must not be formulated with a
frequency of less than three (3) months. The Executive Committee will decide on
the proposed additions or revisions in a meeting which will be called within
thirty (30) days following the presentation of the same. ----------------------
11.3 The programs and budgets have as their principal objective:
11.3.1 To determine the operations to be carried out during the following
calendar year; and ------------------------------------------------------------
11.3.2 To determine the expenses and investments that the Operator is
empowered to make. ------------------------------------------------------------
11.4 The terms programs and budget mean the work plan and the estimated
expenses and investments that the Operator will make in the different aspects
of the operation, such as: ---------------------------------------------------
11.4.1 Capital investments in production: drilling for developing deposits,
reconditioning or rehabilitation of wells and specific constructions for
production. -------------------------------------------------------------------
11.4.2 General construction and equipment: industrial and camp
<PAGE> 20

facilities, transport and construction equipment, drilling and production
equipment. Other constructions and equipment. -------------------------------
11.4.3 Maintenance and operating expenses: production expenses, geological
expenses and administrative expenses for the operation. ----------------------
11.4.4 Working capital requirements. ---------------------------------------
11.4.5 Fund for unforeseen requirements. -----------------------------------
11.5 The Operator will pay all the expenses and investments and will carry
out the development and production operations in accordance with the programs
and budgets that are referred to in Clause 11 (Paragraph 11.1), without
exceeding by ten percent (10%) the total budget for each year, except with
authorization from the Parties in special cases. ----------------------------
11.6 The Operator will not, at his sole discretion, begin any project, nor
will charge the Joint Account for expenses not approved in the budget, which
exceed the sum of forty thousand United States dollars (US$40,000) or its
equivalent in Colombian currency, per project or per quarter. ---------------
11.7 The Operator is authorized to pay expenses inputable to the Joint
Account without prior authorization from the Executive Committee, when taken
emergency measures that tend to safeguard personnel or property of the Parties,
emergency expenses arising from fire, floods, storms or other disasters;
indispensable emergency expenses for the operation and maintenance of
production facilities, including the maintenance of wells in production
conditions with maximum efficiency; indispensable emergency expenses for the
protection and preservation of materials and equipment needed in the
operations. In these cases, the Operator must call a special meeting of the
Executive Committee as soon as possible to obtain its approval in order to
continue with the emergency measures. ----------------------------------------
CLAUSE 12 - PRODUCTION -------------------------------------------------------
12.1 With the frequency that is needed, the Operator will determine, with the
approval of the Executive Committee, the
<PAGE> 21
18

Maximum Productive Efficiency Rate (MER) for each Commercial Field. This
Maximum Productive Efficiency Rate (MER) will be the maximum production rate of
oil that can be extracted from a deposit with the objective of obtaining the
maximum final recovery of the reserves. The estimated production must be
decreased in whatever way necessary to compensate for the real or anticipated
conditions of the operation, such as wells in repair that are not producing,
limitations of capacities of the collection lines, pumps, separators, tanks,
pipelines and other facilities. ----------------------------------------------
12.2 Periodically, at least once a year, the Operator will determine,
with the approval of the Executive Committee, the area deemed capable of
producing Oil in commercial amounts in each field and will propose the
spacing and schedule for drilling Exploitation Wells on an economic and
efficient basis. -------------------------------------------------------------
12.3 The Operator will prepare and deliver to each of the Parties, at regular
intervals of three (3) months, a program that indicates the share in production
and another that shows the distribution of production of each Party for the
following six (6) months. The production forecast will be made based on the
Maximum Productive Efficiency Rate (MER) as has been stipulated in Clause 12
(Paragraph 12.1) and adjusted to the rights of each Party, in accordance with
this contract. The distribution program for production will be determined
based on the periodic petitions of each Party, and in conformity with Clause 14
(Paragraph 14.2) with the corrections that are needed to insure that neither of
the Parties, being able to remove, will receive less than the amount to which
he has a right according to that which is set forth in Clause 14 and without
prejudice to that which is stipulated in Clauses 21 (Paragraph 21.2) and 22
(Paragraph 22.5). ------------------------------------------------------------
12.4 If either of the Parties foresees a reduction of his capacity to receive
Oil with regards to the forecast supplied to the Operator, he must report this
to the latter as soon as possible, and if said reduction is due to an emergency
situation, he will
<PAGE> 22
19

notify the Operator within twelve (12) hours following the occurence of the
event that caused the reduction. Consequently, said Party will provide the
Operator with a new receiving program taking into account the corresponding
reduction. -------------------------------------------------------------------
12.5 The Operator may use the crude oil and gas that is consumed in
performing the production operations in the Contracted Area and these
consumptions will be exempt from the royalties dealt with in Clause 13
(Paragraphs 13.1 and 13.2). --------------------------------------------------
CLAUSE 13 - ROYALTIES --------------------------------------------------------
13.1 During the exploitation of the Contracted Area, prior to the
distribution of the production that corresponds to the Parties, the Operator
will deliver to ECOPETROL as royalty a percentage of twenty percent (20%) of
the measured production of liquid hydrocarbons in said area. ECOPETROL, at its
own cost and risk, will take in kind from the tanks owned by the Joint Account,
the percentage of production corresponding to royalties. ---------------------
13.2 As royalty, the Operator will deliver to ECOPETROL twenty percent (20%)
of the gas production. -------------------------------------------------------
13.3 Of the percentage of production corresponding to royalties, ECOPETROL
will, in the manner and terms established by law, pay the nation, Departments
and Municipalities the royalties corresponding to the total production of the
Commercial Field and, in no case, will THE ASSOCIATE be responsible for any
payment to these entities and persons for said concept. ----------------------
CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF THE OIL -------------------------
14.1 The Oil produced, excepting that which has been used in benefit to the
operations of this contract and that which is inevitably wasted in these
functions, will be transported to common tanks of the Parties or other
measuring facilities that the Parties agree on. The Oil will be measured in
conformity with the standards and methods accepted by the oil industry and,
based on this measurement, the percentages referred to in Clause 13 will be
determined. From this time on, the remaining Oil becomes the
<PAGE> 23
20

property of each Party in the proportions specified in this contract. ---------
14.2 Distributions of Production --------------------------------------------
14.2.1 After deducting the percentage corresponding to royalties, the rest of
the Oil and gas produced from the Contracted Area is owned by the Parties in
the proportion of fifty percent (50%) for ECOPETROL and fifty percent (50%) for
THE ASSOCIATE until the accumulated production of the Contracted Area reaches
the amount of 60 million barrels of Oil. --------------------------------------
14.2.2 When the accumulated production is greater than 60 million barrels of
Oil, the rest of the Oil and gas produced from the Contracted Area (after
deducting the percentage corresponding to royalties) is owned by the Parties in
the proportion that results from applying the R factor as stated in the
following table: --------------------------------------------------------------

R FACTOR Distribution of Production after Royalties (%)

ASSOCIATE ECOPETROL
0.0 to 1.0 50 50
1.0 to 2.0 50/R 100 - 50/R
2.0 or more 25 75

14.2.3 For effects of the preceding table, the R factor is defined in the
following terms: --------------------------------------------------------------

IA
R = ---------------
ID + A - B + GO

IA (Accumulated Income of THE ASSOCIATE): This is the valuation of the
accumulated income corresponding to the volume of hydrocarbons produced of THE
ASSOCIATE at the reference price agreed on by the Parties, excluding the
hydrocarbons re-injected in the Fields of the Contracted Area, those consumed
in the operation and the gas burned. ------------------------------------------
The average reference price of the hydrocarbons will be determined by mutual
agreement between the Parties. ------------------------------------------------
In order to detrmine the Accumulated Income, the Monthly Income
<PAGE> 24

will be taken as the base, which in turn will be determined as the result of
multiplying the average monthly reference price by the month's production in
accordance with Form 9 of the MME. --------------------------------------------
ID (Accumulated Development Investments): Are fifty percent (50%) of the
accumulated development investments approved by the Executive Committee of the
Association. ------------------------------------------------------------------
A: Are the Direct Exploration costs that THE ASSOCIATE has incurred in
accordance with Clause 9 (Paragraphs 9.2.2, 9.2.3 and 9.2.4) of this
Contract. ---------------------------------------------------------------------
B: This is the accumulated reimbursement of the Direct Exploration Costs,
mentioned above, in accordance with Clause 9 (Paragraphs 9.2.2, 9.2.3 and
9.2.4) of this Contract. ------------------------------------------------------
GO (Accumulated Operationg Expenses): Are the accumulated operating expenses,
approved by the Executive Committee of the Association, in the proportion that
corresponds to THE ASSOCIATE plus the accumulated transport costs of THE
ASSOCIATE. Transport costs are understood to be the investment and operating
expenses for the transport of hydrocarbons prodcued in the commercial fields
located in the Contracted Area, from the latter to the export port or site
where it is agreed to take the price to be used in the calculation of income,
IA. Said transport costs will be determined by the parties by mutual
agreement once the exploitation stage of the fields whose commercialness has
been accepted by ECOPETROL begins. Within the Operating Expenses are included
the Special Contributions or similar items that are applied directly to the
exploitation of hydrocarbons in the Contracted Area. --------------------------
All the values included in the determining of the R factor will be taken in
current dollars. --------------------------------------------------------------
To said effect, the expenses in pesos must be converted to dollars at the
Representative Market Exchange Rate certified by the Bank of the Republic that
governs on the date on which the corresponding disbursements have been made. --
14.2.4. Calculation of the R Factor: The distribution of----------------------
<PAGE> 25
22

production based on the R factor will begin to be applied at the first day of
the third calender month after that on which the accumulated production in the
Contracted Area reaches the amount at 60 million barrels of oil. The
calculation of the R factor will be done based on the closing corresponding to
the calender month in which the accumulated production of 60 million barrels of
Oil was reached. The resulting production distribution will be applied until
June 30 of the following year. Starting at that time, the distribution of
production with application of the R factor will be made for periods of one
year (July 1 to June 30), on the liquidatiion of the same based on the
accumulated amounts as of December 31 of the immediatly previous year in
conformity with the corresponding accounting closing.--------------------------
14.2.5. In the event that a field produces crude oil and gas jointly, to apply
the above table of distribution, the total accumlated production that will be
taken into account will be that of the main hydrocarbon in accordance with the
authorization that the Ministry of Mines and Energy grants for the
exploitation of said field. In order to determine the total accumulated
production, the measure for the equivalent gas is the amount of 7,000 standard
cubic feet of gas per barrel of Oil. ------------------------------------------
14.3 In addition to the tanks and other jointly owned facilities, each Party
will have the right to build his own production facilities in the Contracted
Area for his own and exclusive use, complying with the legal regulations. The
transport and delivery of Oil of each Party to the pipeline and other deposits
that are not those jointly owned will be done at the exclusive cost and risk of
the Party that receives the Oil. ----------------------------------------------
14.4 In the event that production is obtained from places not connected by
pipelines, the installation of pipelines to the point where the Oil can be sold
or to a place that connects to the pipeline may be agreed on by the Parties and
charged to the Joint Account. If the Parties agree to the construction of said
pipelines, they will enter into the contracts that they deem convenient to this
effect and will designate the Operator in accordance with current legal
dispositions. -----------------------------------------------------------------

<PAGE> 26
23

14.5 Each Party will be the owner of the Oil that is produced and stored as
a result of the Operation that is placed at his disposal, as stipulated in this
contract, and at his cost he must receive it in kind or sell it or dispose of
it separately, pursuant to that set forth in Clause 14 (Paragraph 14.3). ------
14.6 If any of the Parties, for any reason, cannot dispose separately or
remove from the tanks of the Joint Account, all or part of the Oil that
corresponds to him in accordance with this contract, the following procedure
will be applied: --------------------------------------------------------------
14.6.1 If ECOPETROL is the Party that cannot remove, in whole or in part, its
quota of Oil (share plus royalties), in conformity with Clause 12 (Paragraph
12.3), the Operator may continue to produce the field and deliver to THE
ASSOCIATE, in addition to the portion that represents the quota for the THE
ASSOCIATE in the operation based on one hundred percent (100%) of MER, all that
Oil which THE ASSOCIATE chooses and is in capacity to remove up to a limit of
one hundred percent (100%) of the MER, crediting ECOPETROL, for later
delivery, for the volume of Oil that ECOPETROL had the right to remove but did
not remove. But for the volume of Oil not removed that corresponds, in that
month, to royalties to ECOPETROL, THE ASSOCIATE, upon request by ECOPETROL,
will pay the latter in United States dollars, the difference that exists
between the amount of Oil that it removed and the amount of Oil that
corresponds to it as royalties as dealt with in Clause 13 (Paragraphs 13.1 and
13.2), being understood that any removal of Oil that ECOPETROL does will be
applied, in first place, to the payment in kind of royalties, and that this
being covered, the additional removals of Oil that are done will be appled to
the share that corresponds to it according to Clause 14 (Paragraph 14.2)-----
14.6.2 In the event that THE ASSOCIATE is the Party that cannot remove, in
whole or in part, its portion assigned under Clause 12 (Paragraphs 12.3), the
Operator will deliver to ECOPETROL, based on
<PAGE> 27
24

one hundred percent (100%) of the MER, not only the share and quota that
corresponds to it, but also the Oil that ECOPETROL is in capacity to remove up
to a limit of one hundred percent (100%) of the MER, crediting THE ASSOCIATE
for later delivery, the part that corresponds to it of its quota and that is
has not been able to remove. --------------------------------------------------
14.7 When both Parties are in capacity to receive the Oil assigned according
to Clause 12 (Paragraph 12.3), the Operator will deliver to the Party that had
been unable to receive its quota of production before, a minimum of ten percent
(10%) per month of the production that corresponds to the other Party monthly
and, by mutual agreement, up to one hundred percent (100%) of the quota not
received, until the time when the total quantities that have been credited to
the Party who was unable to receive his Oil are canceled. ---------------------
14.8 With prejudice to the legal dispositions that regulate the matter, each
Party will be free, at any time, to sell or export its share of Oil obtained,
accordance with this contract, or dispose of the same in any way whatsoever. --
CLAUSE 15 - USE OF GAS --------------------------------------------------------
In the event that one or several fields of Oil are discovered in a liquid state
with associated gas, the Operator, within two (2) years following the
commencement of commercial production of the field, will present a plan for use
of the Natural Gas to the benefit of the Joint Account. The Executive Committee
will approve the plan and will determine the execution schedule for the same.
If the Operator does not present any plan within two (2) years or does not
execute the plan that has been approved within the terms set out by the
Executive Committee, ECOPETROL may take, free of charge, for itself all the
available gas in the deposits being exploited, as far as it is not required for
the efficient exploitation of the field. --------------------------------------
CLAUSE 16 - UNIFICATION -------------------------------------------------------

<PAGE> 28

When an economically exploitable deposit extends in a continuous manner to a
structure located in the Contracted Area and other or other areas, the
Operator, in agreement with ECOPETROL and other interested parties, must put
into practice, after approval by the Ministry of Mines and Energy, a unified
exploitation plan which must meet engineering techniques for the exploitation
of Oil. --------------------------------------------------------------------
CLAUSE 17 -- SUPPLYING OF INFORMATION AND INSPECTION DURING EXPLOITATION ------
17.1 The Operator will deliver to the Parties, as they are obtained,
reproducible originals (sepias) and copies of the electrical, radioactive and
sonic records of the drilled wells, histories, core analyses, production tests
and all routine reports made or received in relation to the operations and
activities carried out in the Contracts Area.-------------------------------
17.2 Each one of the parties, at its cost and risk, will have the right, by
means of authorized representatives, to inspect the wells and facilities of the
Contracted Area and the activities related to it. Said representatives will
have the rights to examine cores, samples, maps, records of drilled wells,
surveys, ledgers and any other source of information related to the performance
of this contract. ------------------------------------------------------------
17.3 In order that ECOPETROL complies with that agreed to in Clause 29, the
Operator will prepare and deliver to ECOPETROL and the reports that the
National Government requires. ------------------------------------------------
17.4 The information and data related to exploitation work must be kept
confidential under the same terms of Clause 6 (Paragraph 6.3) of this
contract. -------------------------------------------------------------------
CHAPTER IV - EXECUTIVE COMMITTEE ---------------------------------------------
CLAUSE 18 - CONSTITUTION -----------------------------------------------------
18.1 Within thirty (30) calendar days following the acceptance of a Commercial
Field, each Party must name a representative and his corresponding first and
second alternates, to form part of the Executive Committee and inform the other
party in writing of the
<PAGE> 29
26

names and addresses of its representative and alternates. The Parties may
change representative or alternatives at any time, but they must communicate
thisin writing to the other Party. The vote or decision of the representative
of each one of the Parties will bind said Party. If the principal
representative of one of the Parties cannot attend a meeting of the Committee,
he will designate in writing which alternate must attend, who will have the same
authority as the principal. ---------------------------------------------------
18.2 The Executive Committee will hold ordinary meetings during the months of
March, July and November, in which it will review the exploitation program
carried out by the Operator and the immediate plans. Annually, in the ordinary
meeting in the month of July, the Operator will present to the Executive
Committee the annual operating program and expense and investment budget for
the next calendar year which will be examined and approved in the ordinary
meeting in the month of November. ---------------------------------------------
18.3 The Parties and the Operator may request that special meetings of the
Executive Committee be called to analyze specific conditions of the operation.
The president of the Committee will notify the date of the meeting and topics
to be discussed ten (10) calendar days beforehand. Any matter that has not
been included on the agenda for the meeting may be dealt with during the same,
after acceptance by the representatives of the Parties on the Committee.
18.4 The representative of each one of the Parties will have, in all matters
discussed in the Executive Committee, one vote equivalent to the percentage of
its total interests in the Joint Operation. For its validity, every resolution
or decision made by the Executive Committee must have the affirmative vote of
more than fifty percent (50%) of the total interest. In accordance with this
procedure, the decisions adopted by the Executive Committee will be binding and
final on the Parties and the Operator. ----------------------------------------
CLAUSE 19 - FUNCTIONS ---------------------------------------------------------
19.1 The representatives of the Parties will constitute the

<PAGE> 30
27

Executive Committee vested with full authority and responsibility for setting
and adopting exploitation, development, operating programs and budgets relative
to this contract. A representative of the Operator will attend the meetings of
the Executive Committee. ------------------------------------------------------
19.2 The Executive Committee will name its Secretary. The Secretary will
keep complete and detailed acts and minutes of all the meetings, as well as
notes of all the discussions and decisions made by the Committee. The copies of
these acts, for their validity, must be approved and signed by the
representatives of the Parties within five (5) business days following the
closing of the meeting and be delivered to them as soon as possible. ----------
19.3 The functions of the Executive Committee are, among others, the
following: --------------------------------------------------------------------
19.3.1 Adopt its own regulations. -------------------------------------------
19.3.2 Designate the Operator in the event of resignation or removal. -------
19.3.3 Designate the Outside Auditor of the Joint Account. ------------------
19.3.4 Approve or disapprove the annual operations program and expense and
budget and any modification or revision and authorize extra expenses.----------
19.3.5 Determine expense norms and policies.----------------------------------
19.3.6 Approve or reject any recommendation of expenses that the Operator
makes (which have not been included in the approved budget) when said expenses
exceed the sum of forty thousand United States dollars (US$40,000) or its
equivalent in Colombian currency. ---------------------------------------------
19.3.8 Create the sub-committees that it deems necessary and set the functions
that these must carry out, under its direction and charged to the Joint
Account. ----------------------------------------------------------------------
19.3.9 Define the type and periodicity of the drilling, operating and
production reports and any other information that the Operator

<PAGE> 31
28

must supply to the Parties charged to the Joint Account. ----------------------
19.3.10 Supervise the functioning of the Joint Account. ---------------------
19.3.11 Authorize the Operator to enter into contracts in behalf of the Joint
Operation and whose value exceeds forty thousand United States dollars
(US$40,000) or its equivalent in Columbian legal tender, and ------------------
19.3.12 In general, execute all the functions authorized in this contract and
that do not correspond to another entity or person by express clause or legal
or regulatory disposition. ----------------------------------------------------
CLAUSE 20 - DECISION IN THE EVENT OF DISAGREEMENT IN THE OPERATION
20.1 Any project related to the Joint Operation which for its execution
requires the approval of the Executive Committee, as established in this
contract, and about which the representatives of the Parties on said Committee
are not in agreement, will be submitted directly to the higherst executive of
each of the Parties resident in Colombia in order to make a joint decision. If
within sixty (60) calendar days following the presentation of the consultation
the Parties arrive at an agreement or decision on the matter in question, this
will be communicated to the Secretary of the Executive Committee who must call
a meeting of this organism within fifteen (15) calendar days following the
receipt of the communication and the members of said Committee are obligated to
ratify this agreement or decision in said meeting. ----------------------------
10.2 If within sixty (60) calendar days following the date of presentation of
the consulation the Parties do not arrive at an agreement on the difference,
the operations may be executed in accordance with Clause 21. ------------------
CLAUSE 21 - OPERATIONS UNDER THE RISK OF ONE OF THE PARTIES -------------------
21.2 If at any time one of the Parties wishes to drill an Exploitation Well
not approved in the operating program, it will notify the other Party in
writing no less than thirty (30) calendar days prior to the next meeting of the
Executive Committee of his desire to drill said well including information such
as location,

<PAGE> 32
29

recommendation for drilling, depth and estimated costs. The Operator will
include said proposal among the points to be dealt with in the next meeting of
the Executive Committee. If this proposal is approved by the Executive
Committee, said well will be drilled charged to the Joint Account. If said
proposal is not accepted by the Executive Committee, the Party that wishes to
drill the stated well, who hereinafter will be called the participating Party,
will have the right to drill, finish, produce or abandon said well at his
exclusive cost and risk. The Party who does not wish to participated in the
above operation will be called the non-participating Party. The participating
Party must commence the drilling of said well within one hundred eighty (180)
days following the rejection by the Executive Committee. If the drilling does
not commence within this period, it must be submitted for consideration again
by the Executive Committee. Upon request by the participating Party, the
Operator will drill the above stated well to the account and risk of the
participating Party, provided that in the judgement of the Operator this
operation does not interfere with the normal development of the operations of
the field, after advance payment to the Operator, by the participating Party,
of the sums that the Operator deems necessary to carry out the drilling. In
the event that said well cannot be drilled by the Operator without interfering
with normal development of the operations, the participating Party will have
the right to drill said well directly or through a competent service company
and, in the latter case, the participating Party will be responsible for said
operation, without interfering in the development of the normal operations of
the field. --------------------------------------------------------------------
21.2 If the well referred to in Clause 21 (Paragraph 21.1) is completed as a
producer, it will be administered by the Operator and the production of said
well, after deducting the royalties dealt with in Clause 13, will be owned by
the participating Party who will pay all the costs of operating said well until
the net
<PAGE> 33
30

value of production, after deducting production, collection, storage, transport
and other similar costs and sales costs, is equal to two hundred percent (200%)
of the drilling and finishing costs of said well, which starting at that time
and for purposes of this contract will be owned by the Joint Account as if it
had been drilled with the approval of the Executive Committee to the account of
the Parties. For purposes of this clause, the value of each barrel of Oil
produced at said well, during one calendar month, before deducting the above
mentioned costs, will be the average price per barrel that the participating
Party receives from the sales of his share in the Oil produced in the
Contracted Area during the same month. ----------------------------------------
21.3 If at any time one of the Parties wishes to recondition, deepen or plug
a well that is not in commercial production or that is a dry well that has been
drilled by the Joint Account, and if these operations have not been included in
a program approved by the Executive Committee, said Party will give notice to
the other Party of its intention to recondition, deepen or plug the stated
well. If there is no equipment at the site, the procedure stipulated in Clause
21 (Paragraphs 21.1 and 21.2) will be applied. If there is at the site adequate
equipment for carrying out the proposed operations, the Party that receives the
notification of the operations that the other Party wishes to carry out will
have forty-eight (48) hours counted starting from the receipt of the notice, to
approve or disapprove the operation, and if during this term no response
whatsoever is received, it is understood that the operation will be done to the
account and risk of the Joint Account. If the proposed work is done to the
sole account and risk of a participating Party, the well will be administered
subject ot Clause 21 (Paragraph 21.2). ----------------------------------------
21.4 If at any time one of the Parties wishes to build new facilities for
the extraction of liquids from the gas and for transport and exportation of
Oil, which will be called additional
<PAGE> 34
31

facilities, said party will notify the other in writing giving the following
information: ---------------------------------------------------------------
21.4.1 General description, design, specifications and estimated costs of the
additional facilities. ------------------------------------------------------
21.4.2 Projected capacity. -------------------------------------------------
21.4.3 Approximate date of commencement of the construction and duration of
the same. Within ninety (90) days counted starting from the date of
notification, the other Party, by means of written notice, has the right to
decide if it will participate in the projected additional facilities. In the
event that said party opts to not participate in the additional facilities, or
does not reply to the proposal of the participating Party, who hereinafter will
be called building Party, the latter may proceed with the additional facilities
and order the Operator to build, operate and maintain said facilities to the
exclusive cost and risk of the building Party, without prejudice to the normal
development of the Joint Operations. The buliding party may negotiate with the
other Party the use of sale facilities for the Joint Operation. During the
time in which the facilities are operated to the account and risk of the
building party, the Operator will charge the latter for all the operating and
maintneance costs of the additional facilties in accordance with generally
accepted accounting standards. ----------------------------------------------
CHAPTER V - JOINT ACCOUNT-----------------------------------------------------
CLAUSE 22 - MANAGEMENT -------------------------------------------------------
22.1 Without prejudice to that which is stipulated in other clauses in this
contact, the expenses for Exploration Work will be to the account and risk of
THE ASSOCIATE. ---------------------------------------------------------------
22.2 From the time when the existence of a Commercial Field is accepted by the
parties, and subject to the provisions of Clause 5 (Paragraph 5.2) and Clause
13 (Paragraphs 13.1 and 13.2), the ownership of the right or interest in the
Operation of the Contracted Area will be divided as follows: EXOPETROL fifty
percent (50%) and THE ASSOCIATE fifty percent (50%). From this
<PAGE> 35
32

point on all the expenses, payments, investments, costs and obligations that
are made anc contracted for carrying out the operations, in conformity with
this contract, and the investments made by THE ASSOCIATE before and after the
recognition of a Commercial Field, in drilling and finishing of the wells that
have resulted producers in the field, will be charged to the Joint Account.
Except for that set forth in Clauses 14 (Paragraph 14.3) and 21, all the
property acquired or used thereinafter for the fulfillment of the activities of
the operation of the Commercial Field will be paid for and belong to the
Parties, in the same proportion described in this clause. ---------------------
22.3 In the first five (5) days of each month, the Parties will supply to the
Operator, in the bank that the letter designates, the quota that corresponds to
them of the budget, in accordance with the needs and in the currency in which
the expenses must be paid, that is, in Colombian pesos or in United States
dollars, as has been requested by the Operator in conformity with the programs
and budgets approved by the Executive Committee. When THE ASSOCIATE does not
have available the Colombian pesos needed to cover the quota that corresponds
to it in its contribution in that currency, ECOPETROL will have the right to
supply said pesos and to receive the credit for the contributions that it must
make in dollars, liquidated at the representative market exchange rate
certified by the Banking Superintendency for the day on which ECOPETROL must
make the corresponding contribution, when said transaction is permitted by
legal dispositions. -----------------------------------------------------------
22.4 The Operator will present to the Parties on a monthly basis, and within
thirty (30) calendar days following the end of each month, a monthly statement
in which he will show the sums advanced, the expenses paid, the obligations
pending and a report of all the charges and credits made to the Joint Account,
report which will be prepared in accordance with Appendix "B". If the payments
dealt with in Clause 22 (Paragraph 22.3) are not made within the term
<PAGE> 36

provided and the Operator decides to cover them, the late Party will pay
Commercial Interest, in the same currency in which the payment has been
incurred, during the time of delay.---------------------------------------------
22.5 If one of the Parties does not contribute, on a timely basis, to the
Joint Account the sums that correspond to it, starting from that date said
Party will be deemed a late Party and the other Party as the prompt Party. If
the prompt Party has made the contribution corresponding to the late Party, in
addition to its own, said Party will have the right after sixty (60) days of
late payment, to have the Operator deliver to it the entirety of the share of
the late Party, in the Contracted Area (excluding the percentage corresponding
to royalties), up to the amount of production that allows the prompt Party a
net income from sales made equal to the amount not paid by the late Party, plus
annual interest equal to the Commercial Interest starting from sixty (60) days
following the date on which the late payment beings. "Net income" is understood
to be the difference between the sale price of the oil taken by the prompt
Party, less the cost of transporting, storage, loading and other reasonable
expenses paid by the prompt Party in the sale of the products taken. The right
of the prompt Party may be exercised at any time after thirty (30) days from
notification in writing to the late Party of its intention to take part or the
entirety of the production corresponding to the late Party. --------------------
22.6.1 All the Direct Expenses of the Joint Operation will be charged to the
Parties in the same proportion in which production is distributed after
royalties.----------------------------------------------------------------------
22.6.2 Indirect Expenses will charged to the Parties in the same proportion
established for Direct Expenses in Paragraph 22.6.1 of this clause. The amount
of these expenses will be the result of taking the total annual value of the
investments and expense (excluding technical and administrative support) and
applying to it the equation a + m (X-b). In this equation "X" is the total value
<PAGE> 37

of the investments and annual expenses, and "a", "m" and "b" are constants whose
values are set out in the following table with regards to the amount of the
annual investments and expenses:------------------------------------------------

<TABLE>
<CAPTION>
AMOUNT OF INVESTMENTS AND EXPENSES VALUES OF THE CONSTANTS
<S> <C> <C> <C> <C> <C>
"X" (US$) "a"(US)$ m(frac.) "b"(US$)
1. 0 25,000,000 0 0.10 0
2. 25,000,001 50,000,000 2,500,000 0.08 25,000,000
3. 50,000,001 100,000,000 4,500,000 0.07 50,000,000
4. 100,000,001 200,000,000 8,000,000 0.06 100,000,000
5. 200,000,001 300,000,000 14,000,000 0.04 200,000,000
6. 300,000,001 400,000,000 18,000,000 0.02 300,000,000
7. 400,000,001 on up 20,000,000 0.01 400,000,000
</TABLE>

The equation will be applied one time per year in each case with the value of
the constants that correspond to the total value of annual investments and
expenses.-----------------------------------------------------------------------
22.7 The monthly statements of account dealt with in Clause 22 (Paragraph
22.4) may be reviewed or objected to by either of the Parties from the time
when they are received by them and up to two (2) years after the end of the
calendar year to which they correspond, clearly specifying the items corrected
or objected to and the corresponding reasons. Any account that has not been
corrected or objected to within this period will be deemed final and
correct.------------------------------------------------------------------------
22.8 The Operator will keep accounting records, vouchers and reports for the
Joint account in Colombian pesos, in accordance with Colombian laws and every
charge or credit to the Joint Account will be made in accordance with the
accounting procedure established in Appendix "B", which forms part of this
contract. In the event of a discrepancy between said accounting procedure and
that set forth in this contract, the stipulations of the latter will
prevail.------------------------------------------------------------------------
22.9 The Operator may realize the sales of materials or equipment during the
first twenty (20) years of the Exploitation Period to
<PAGE> 38

the benefit of the Joint Account, when the amount of that sold does not exceed
five thousand United States dollars (US$5,000) or its equivalent in Colombian
pesos. This type of operations, per calendar year, may not exceed the sum of
fifty thousand United States dollars (US$50,000) or its equivalent in Colombian
currency. The sales that surpass these amounts or those of real estate must be
approved by the Executive Committee. The sale of said materials or equipment
will be done at a reasonable commercial price in accordance with the use
conditions of the goods.--------------------------------------------------------
22.10 All machinery, equipment or other goods or movable elements acquired by
the Operator for the execution of this contract charged to the Joint Account,
will be owned by the Parties equally. However, in the event that one of the
Parties has decided to terminate its interest in the contract before the first
seventeen (17) years of the Exploitation Period have elapsed, with the exception
of that set forth in Clause 25, said Party is obligated to sell to the other,
part or all of its interest in said elements at a reasonable commercial price or
its book value, whichever is lower. In the event that the other Party does not
wish to buy them within ninety (90) days following the formal offer for sale
that is made, the Party who wishes to retire will have the right to assign the
interest that corresponds to it in said machinery, equipment or elements to a
third party. If THE ASSOCIATE decides to retire after seventeen (17) years of
the Exploitation Period have elapsed, its rights in the Joint Operation will
pass without cost to ECOPETROL, after its acceptance.---------------------------
CHAPTER VI - DURATION OF THE CONTRACT-------------------------------------------
CLAUSE 23 - MAXIMUM DURATION----------------------------------------------------
This contract will have a maximum duration, starting from its Effective Date, of
twenty-eight (28) years, distributed as follows: up to six (6) years as
Exploration Period in conformity with Clause 5, without prejudice to that which
is stipulated in Clause 9 (Paragraphs 9.3 and 9.8) and twenty-two (22) years as
Exploitation
<PAGE> 39

Period counted starting from the ending date of the Exploration Period. It is
understood that in the events contemplated in this contract, in which the
Exploration period is extended, in no case will the total term be extended for
more than twenty-eight (28) years.----------------------------------------------
Paragraph: If after accepting the commercialness of one or more fields, THE
ASSOCIATE continues fulfilling the exploratory obligations agreed to in Clause
5, it may simultaneously proceed with the exploitation of said fields before the
Exploration Period defined in Clause 4, Paragraph 4.19, ends, but only starting
from the date of expiration of the latter will the exploitation Period of 22
years begin to be counted.------------------------------------------------------
CLAUSE 24 - TERMINATION---------------------------------------------------------
This contract will terminate in any of the following cases:---------------------
24.1 Due to elapsation of the Exploration period without THE ASSOCIATE having
discovered a Commercial Field, except for that which is stipulated in Clauses 9
(paragraphs 9.5 and 9.8) and 34.
24.2 When the time of duration of the contract, stipulated in clause 23, has
passed.-------------------------------------------------------------------------
24.3 At any time by will of THE ASSOCIATE, after fulfilling its obligations
dealt with in Clause 5 and others contracted in conformity with this
contract.-----------------------------------------------------------------------
24.4 For the special causes dealt with in Clause 25.--------------------------
CLAUSE 25 - CAUSES FOR UNILATERAL TERMINATION-----------------------------------
25.1 Unilaterally, ECOPETROL may declared this contract terminated, at any
time before the expiration of the period agreed to in Clause 23, in the
following cases:----------------------------------------------------------------
25.1.1 Dissolving of THE ASSOCIATE and its assignees.-------------------------
25.1.2 If THE ASSOCIATE or its assignees transfer this contract, in whole or
in part, without fulfilling that which is set forth in Clause 27.---------------
25.1.3 Due to the financial incapacity of THE ASSOCIATE and its assignees,
which is presumed when there is a judicial declaration
<PAGE> 40

of bankruptcy or a creditor's agreement is ordered judicially. -----------------
25.1.4 Due to the non-performance of the obligations contracted by THE
ASSOCIATE in conformity with this contract. ------------------------------------
At the expiration of each of the periods contemplated for the performance of the
exploratory obligations, THE ASSOCIATE will present a written report which shows
the performance of the obligations of the respective period. In the event that
these have not been performed, the Operator will have a period of sixty (60)
calendar days to complete them diligently according to good oil practices. If
this period is not sufficient, the Parties may, by mutual agreement, establish
an additional period for said performance. If at the end of this time, all the
work agreed to has not yet been done, the Operator will be deemed in breach of
contract and in consequence ECOPETROL may proceed in conformity with that which
is established in Clause 25.3. -------------------------------------------------
25.2 In the event of a unilateral declaration of termination, the rights of
THE ASSOCIATE stated in this contract, as an interested Party as well as
Operator, if at the time of the declaration of the unilateral termination THE
ASSOCIATE acting in both capacities, will cease. -------------------------------
25.3 ECOPETROL may not unilaterally declare this contract terminated, but
rather after sixty (60) calendar days of having notified THE ASSOCIATE or its
assignees in writing, clearly specifying the causes invoked to make said
declaration and only if the other Party has not presented satisfactory
explanations to ECOPETROL or if THE ASSOCIATE has not corrected the failure to
perform the contract, without prejudice to the right of THE ASSOCIATE to the
legal recourse that it deems convenient. ---------------------------------------
CLAUSE 26 - OBLIGATIONS IN THE EVENT OF TERMINATION ----------------------------
26.1 The contract being terminated in accordance with Clause 24, in its
Exploration Period or Exploitation Period, THE ASSOCIATE will leave the wells in
production that on said date are producers and will deliver the buildings,
pipelines, transfer lines and other
<PAGE> 41

real estate of the Joint Account (located in the Contracted Area), all of which
will pass without cost to ECOPETROL with the easements and property acquired in
benefit to the contract, even though the ones or the others are found outside
the Contracted Area. -----------------------------------------------------------
26.2 If this contract terminates for any cause after having passed the first
seventeen (17) years of the Exploitation Period, all the interest of THE
ASSOCIATE in the machinery, equipment or other goods or movable elements used or
acquired by THE ASSOCIATE or by the Operator for the execution of this contract
will pass without cost to ECOPETROL. -------------------------------------------
26.3 If this contract terminates before the seventeen (17) years of the
Exploitation Period, that which is stipulated in Clause 22 (Paragraph 22.1) will
be fulfilled. ------------------------------------------------------------------
26.4 In the event that this contract terminates by unilateral declaration,
given at any time, all the movable and immovable property acquired to the
exclusive benefit of the Joint account will pass without cost to ECOPETROL. ----
26.5 This contract having terminated for any cause and at any time, the
Parties have the obligation to satisfactorily fulfill their legal obligations
one to another and to third parties and those contracted in this contract. -----
CHAPTER VII - MISCELLANEOUS PROVISIONS -----------------------------------------
CLAUSE 27 - RIGHTS OF ASSIGNMENT -----------------------------------------------
27.1 THE ASSOCIATE will have the right to assign or transfer, in whole or in
part, its interests, rights and obligations in the association contract to
another person, company or group, with the prior approval of the Ministry of
Mines and Energy and the President of the Empresa Colombiana de Petroleos,
ECOPETROL. ---------------------------------------------------------------------
In consequence, any plan that implies the assignment or transfer, in whole or in
part, of the interests, rights and obligations in the contract, must be make
known to the Ministry of Mines and Energy and the President of the Empresa
Colombiana de Petroleos - ECOPETROL, by written certificate of THE ASSOCIATE,
indicating the
<PAGE> 42

essential elements of the deal, such as the likely assignee, amount, interests,
rights and obligations to be assigned, scope of the operation, etc. Within the
following thirty (30) business days, the Ministry of Mines and Energy and the
President of the Empresa Colombiana de Petroleos, ECOPETROL, will exercise the
discretionary faculty to analyze the qualities of the possible assignees, after
which they will make their decision without being obligated to present reasons.
In any case, the criteria of the Ministry of Mines and Energy will prevail. ----
27.2 If more than thirty (30) business days, counted starting from the date of
receipt of the request by the Ministry of Mines and Energy, without THE
ASSOCIATE having received a response, it is understood for all effects, that the
request has been approved. -----------------------------------------------------
27.3 The assignments that are made during the Exploration Period between
companies legally established in Colombia, will not be subject to the above
process and they will be formalized by means of the written authorization from
the Empresa Colombiana de Petroleos, ECOPETROL, and the signing of the
respective document. -----------------------------------------------------------
27.4 The changes or modifications that occur in the contractual relationships
of THE ASSOCIATE with the Empresa Colombiana de Petroleos, ECOPETROL, as a
consequence of direct total or partial negotiations of interests, quotas or
shares in THE ASSOCIATE will also be subject to the process for approval by the
Ministry of Mines and Energy and the President of the Empresa Colombiana de
Petroleos, ECOPETROL. ----------------------------------------------------------
27.5 Nevertheless, said changes or modifications will not require the
authorization by the Ministry of Mines and Energy and the Empresa Colombiana de
Petroleos in the following cases: ----------------------------------------------
27.5.1 When the transactions are done on the open stock exchange or market. --
27.5.2 If dealing with assignments or transfers resulting from events beyond
the power of THE ASSOCIATE or of the companies that control or direct it, such
as government decisions, judicial
<PAGE> 43

sentences, partition and awarding of assets and auctions. ----------------------
27.5.3 When the negotiations are entered into between the companies that
control or direct THE ASSOCIATE, or the affiliates or subsidiaries of these, or
between companies that make up one same economic group, in which cases it will
be sufficient to report the assignment or transfer in a timely manner to the
Ministry of Mines and Energy and the Empresa Colombiana de Petroleos,
ECOPETROL. ---------------------------------------------------------------------
27.6 Except for the above cases, the realization of any of the assignments,
transfers, negotiating, transactions or operations dealt with in this clause
without the prior approval of the Ministry of Mines and Energy and the president
of the Empresa Colombiana de Petroleos, ECOPETROL, when this is needed, will
give rise to the application of that set forth in Clause 25 of the association
contract. ----------------------------------------------------------------------
27.7 The operations that are carried out in fulfillment of this clause, and
that, in conformity with the Colombian tax laws, are taxable, will pay the
corresponding taxes. -----------------------------------------------------------
CLAUSE 28 - DISAGREEMENTS ------------------------------------------------------
28.1 In every case in which a discrepancy or contradiction in the
interpretation of the clauses of this contract with regards to those contained
in Appendix "B" called "Operating Agreement", the stipulations of the former
will prevail. ------------------------------------------------------------------
28.2 The disagreements that arise between the parties on matters of law
related to the interpretation and execution of the contract and that cannot be
settled in a friendly manner, will be submitted to the hearing and decision of
the jurisdictional branch of the Colombian public power. -----------------------
28.3 Every difference of fact or of a technical nature that occurs between the
parties from the interpretation or application of this contract and that cannot
be settled in a friendly manner, will be submitted to the final decision of
experts, named as follows: one by each party and the third, by mutual agreement
of the principal

<PAGE> 44

experts named. If these cannot reach an agreement on the designation of the
third, the latter will be named by request of either of the Parties, by the
Board of Directors of the Colombian Society of Engineers "CSE", which has its
offices in Santafe de Bogota. --------------------------------------------------
28.4 Every difference of an accounting nature that arises between the Parties
and that cannot be settled in a friendly manner, will be submitted to the
decision of experts, who must be certified public accountants, as follows: one
by each Party and the third, by mutual agreement of the two main experts and,
failing an agreement between the latter and upon request by either of the
Parties, said third expert will be named by the Central Board of Accountants of
Bogota. ------------------------------------------------------------------------
28.5 Both Parties state that the decision of the experts will have the
effect of a settlement between them and, in consequence, said decision will be
final. -------------------------------------------------------------------------
28.6 In the case of a disagreement between the Parties on the technical,
accounting or legal nature of the dispute, this will be deemed legal and Clause
28 (Paragraph 28.2) will be applied. -------------------------------------------
CLAUSE 29 - LEGAL REPRESENTATION -----------------------------------------------
Without prejudice to the rights that THE ASSOCIATE legally has as a result of
legal dispositions or the clauses of this contract, ECOPETROL will represent the
Parties before the Colombian authorities for that referring to the exploitation
of the Contracted Area provided that this must be done, and it will supply to
the government functionaries and entity all the data and reports that they may
legally require. The Operator will be obligated to prepare and supple to
ECOPETROL the corresponding reports. The expenses that ECOPETROL incurs in order
to attend to any matter to which this clause refers, will be charged to the
Joint Account and when said expenses exceed two thousand five hundred United
States dollars (US$2,500) or its equivalent in Colombian currency, the prior
approval of the Operator is required. The Parties state, for
<PAGE> 45

any relationship with third parties, that neither that which is established in
this clause, nor in any other contract, implies the granting of a general power
nor that the Parties have constituted a civil or commercial partnership or other
relationship under which, either of the Parties may be deemed as jointly
responsible for the acts or omissions of the other Party or have the authority
or mandate that can commit the other Party with regards to any obligation
whatsoever. This contract is related to the operations within the territory of
the Republic of Colombia and although ECOPETROL is an industrial and commercial
enterprise of the Colombian State, the Parties are in agreement that THE
ASSOCIATE, in such case, may elect to be excluded from the application of all
the dispositions in Sub-Chapter K, titled PARTNERS AND PARTNERSHIPS of the
Internal Revenue Code of the United States of America. THE ASSOCIATE will make
said election in its name in the appropriate manner. ---------------------------
CLAUSE 3 - RESPONSIBILITIES ----------------------------------------------------
30.1 The Operator will carry out the operations subject of this contract in an
efficient and adequate manner and in accordance to the practices of the oil
industry internationally recognized for this type of operations, being
understood that at no time will it be responsible for errors of judgement or for
losses or damage that were not the result of gross negligence of the
Operator. ----------------------------------------------------------------------
30.2 The responsibilities that ECOPETROL and THE ASSOCIATE contract with
regards to this contract vis-a-vis third parties will not be joint and several
and, in consequence, each Party will be separately responsible for its share in
expenses, investments and obligations that are a consequence of these. ---------
30.2 For the amount of the expenses which the Operator incurs and the
contracts that it enters into for amounts greater then forty thousand United
States dollars (US$40,000) or it equivalent in Colombian pesos without their
having been authorized in a timely manner by the Executive Committee, except
for the suppositions
<PAGE> 46

regulated in Clause 11 (Paragraph 11.7), the only one responsible to third
parties will be the Operator, who therefore will assume the entirety of the
corresponding amount. When the expense in question is accepted by the Executive
Committee, the Operator will paid for the value of the work, study or purchase,
in accordance with the norms that the Executive Committee defines. In the event
that the expense or good is not accepted by the Executive Committee, the
Operator, if possible, may remove the good in question, reimbursing the partners
for any cost that its removal may cause to the operation. When it is not
possible for the Operator to remove said goods, or it declines to do so, the
benefit or capital increase resulting from these expenses or contracts will
belong to the parties in proportion to their Interest in the Operation. --------
30.4 Ecological Control. THE ASSOCIATE, in performing all the activities of
the contract, must comply with that disposed by the National Code on Renewable
Natural Resources and Protection of the Environment and other legal dispositions
on the matter. To this end, THE ASSOCIATE is obligated to execute a permanent
plan of a preventive nature in order to guarantee the preservation and
restoration of the natural resources within the areas in which Exploration,
Exploitation and Transport Works object of this contract are carried out. ------
Said plans and programs must be divulged by THE ASSOCIATE to the communities and
entities of a national and regional order related to this manner. --------------
Likewise, specific contingency plans must be established to meet the emergencies
that may occur and carry out the remedial actions that may be relevant. To this
effect, THE ASSOCIATE must coordinate said plans and actions with the competent
entities. ----------------------------------------------------------------------
The programs and respective budgets must be prepared by THE ASSOCIATE in
conformity with the corresponding clauses of this contract. --------------------
<PAGE> 47

All the costs that are caused will be assumed by THE ASSOCIATE in the
Exploration Period and by both Parties charged to the Joint Account in the
Exploitation period. -----------------------------------------------------------
CLAUSE 31 - TAXES, ASSESSMENTS AND OTHERS---------------------------------------
The assessments and rates that are caused after the establishment of the Joint
Account and before the parties receive their share in production which are
imputable to the exploitation of the Oil, will be charged to the Joint Account.
Income, capital and complementary taxes will be charged exclusively to each of
the Parties for the part corresponding to each. --------------------------------
CLAUSE 32 - PERSONNEL ----------------------------------------------------------
32.1 After consultation with ECOPETROL, THE ASSOCIATE will designate the
Manager of the Operator. -------------------------------------------------------
32.2 In accordance with the terms of this contract and subject to the norms
that are established, the Operator will have the autonomy to designate the
personnel that is required for the operations referred to in this contract,
begin able to set their remuneration, functions, categories, number and
conditions. The Operator will adequately and diligently train the Colombian
personnel that is required to replace the foreign personnel that the Operator
deems necessary for the realization of the operations of this contract. In
every case the Operator must comply with the legal dispositions that set the
proportion of domestic and foreign employees and workers. ----------------------
32.3 Technology Transfer. THE ASSOCIATE is obligated to proceed with a
training program, at its cost, directed towards professionals from EXOPETROL
in areas related to the development of the contract. ---------------------------
For fulfilling this obligation in the Exploration period, the training may be,
among others, in the areas of geology, geophysics and related areas, evaluation
of reserves and characterization of deposits, drilling and production. The
training will be carried out during the entire initial exploration period and
its extension,
<PAGE> 48

by means of integrating the professionals that ECOPETROL designates to the work
group that THE ASSOCIATE organizes for the Contracted Area or for other related
activities of THE ASSOCIATE. ---------------------------------------------------
In order to opt for the withdrawal dealt with in Clause 5 of this contract, THE
ASSOCIATE must have fulfilled the training programs contemplated herein. -------
In the Exploitation Period, the scope, duration, place, participants, training
conditions and other aspects will be established by the Executive Committee of
the Association. ---------------------------------------------------------------
All the costs of the training, with the exception of labor costs that are caused
to the favor of the professionals who receive them, will be assumed by THE
ASSOCIATE in the Exploration Period and by both Parties charged to the Joint
Account in the Exploitation Period. --------------------------------------------
PARAGRAPH: In order to fulfill the obligations on Technology Transfer in
accordance with that set forth herein, during the first three years of the
Exploration Period and for each year, THE ASSOCIATE is committed to carrying out
training programs directed towards professionals from ECOPETROL and whose cost
does not exceed US$40,000 per year. The topic and type of program will be agreed
to beforehand by ECOPETROL and THE ASSOCIATE. In the event that the Exploration
Period is extended, the training will consist of programs similar to those set
forth herein. ------------------------------------------------------------------
32.4 Pursuant to this contract, the Operator, during the Exploitation Period,
will have the right to execute any work by means of contractors, subject to the
faculty that the Executive Committee has to approve the contracts whose value
exceeds forty thousand United States dollars (US$40,000) or its equivalent in
Colombian currency. ------------------------------------------------------------
The Operator will take all the insurance that Colombian laws require. Likewise,
it will require of each contractor that performs any work in developing this
contract, the obtaining and
<PAGE> 49

maintaining in effect the insurance that the Operator deems necessary. In like
manner, the Operator will take the other insurance that the Executive Committee
deems convenient. --------------------------------------------------------------
CLAUSE 34 - FORCE MAJEURE OR ACT OF GOD ----------------------------------------
The obligations referred to in this contract will be suspended during the time
in which either of the Parties is unable to fulfill them, in whole or in parte,
due to unforeseen events that constitute force majeure or acts of God, such as
strikes, closings, wars, earthquakes, floods or other catastrophes, governmental
laws or regulations or decrees that impede the obtaining of indispensable
material and, in general, any non-financial reason that truly impedes the works,
even when they have not been listed above, but which affect the Parties and
which are beyond their control. If one of the Parties cannot, due to force
majeure or act of God, comply with the obligations of this contract, it must
notify the other Party immediately, for its considerations specifying the causes
of the impediment. In no case may occurrences of force majeure or acts of God
extend or prolong the total period of exploration and exploitation for more than
twenty-eight (28) calendar years counted starting from the Effective Date as
stipulated in Clause 23, but any impediment from force majeure during the six
(6) years period of exploration indicated in Clause 5 whose duration is more
than thirty (30) consecutive days will extend this six (6) year period for the
same amount of time that the impediment lasts. ---------------------------------
CLAUSE 35 - APPLICATION OF COLOMBIAN LAWS --------------------------------------
For all effects of this contract, the Parties set as domicile the city of Santa
Fe de Bogota, Republic of Colombia. This contract is governed in all its party
by Colombian laws and THE ASSOCIATE is subject to the jurisdiction of the
Colombian courts and renounces attempting diplomatic claims for everything
touching on its rights and obligations arising from this contract, except in the
case of denial of justice. It is understood that there will be no denial

<PAGE> 50

of justice when THE ASSOCIATE as Party or Operator has had all the recourse and
means of action in a timely manner that, in conformity with Colombian law, may
be used before the jurisdictional branch of the public power. ------------------
CLAUSE 36 - NOTICES ------------------------------------------------------------
The notices or communications between the Parties in relation to this contract
will require for their validity the stating of the relevant clauses and will be
sent to the Parties at the following addresses: TO ECOPETROL: Carrera 13 No.
36-24, Santa Fe de Bogota, Colombia. TO THE ASSOCIATE: Carrera 13 No. 36-24,
Santa Fe de Bogota, Colombia. TO THE ASSOCIATE: Carrera 7 No. 71-52,
Torre A, Piso 12, Santa Fe de Bogota, Colombia. Any change of address will be
advised beforehand to the other Party. -----------------------------------------
CLAUSE 37 - VALUATION OF THE OIL -----------------------------------------------
The payments or reimbursements dealt with in Clauses 9 (Paragraphs 9.2 and 9.4)
and 22 (Paragraph 22.5) will be made in United States dollars, or in Oil and the
basis of the current price and the limitations established in Colombian
legislation for the sale of the portion payable in dollars of Oil or Natural Gas
from the Contracted Are whose destination is refining in national territory. ---
CLAUSE 38 - PRICES OF THE OIL --------------------------------------------------
38.1 The Oil that corresponds to THE ASSOCIATE in developing this contract,
which is destined for internal refining or supply, will be paid placed at the
refinery that must process it or at the receiving station that the Parties agree
upon, in the following manner: -------------------------------------------------
38.1.1 Gas will be paid in accordance with Resolution No. 029 of 1995, issued
by the Commission for Regulating Energy and Gas or the governmental regulations
that substitute it. ------------------------------------------------------------
38.1.2 Crude oil will paid in accordance with Resolution No. 013 of
December 14, 1992, issued by the National Energy Commission, or the
governmental regulations that substitute it. -----------------------------------
38.2 The differences that arise from the application of this
<PAGE> 51

clause will be settled by the systems established in this contract. ------------
CLAUSE 39 - DELEGATION AND ADMINISTRATION --------------------------------------
The PRESIDENT of the EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL - delegates to
the Vice-president of Associate Operations the administration of this contract,
in conformity with the regulatory statutes and dispositions of ECOPETROL, with
powers to execute all the matters inherent in the performance of the
contract. ----------------------------------------------------------------------
CLAUSE 40 - VALIDITY -----------------------------------------------------------
This contract requires for its validity the approval of the Ministry of Mines
and Energy. --------------------------------------------------------------------
In witness hereof it is signed in Santa Fe de Bogota, before witnesses on the
twenty-one (20th) day of the month of September of nineteen hundred ninety-five
(1995). ------------------------------------------------------------------------

EMPRESA COLOMBIANA DE PETROLEOS
ECOPETROL

Signed (illegible)
LUIS BERNARDO FLORES ENCISO
President

ARGOSY ENERGY INTERNATIONAL

Signed (illegible)
DOUGLAS 2. FRY
Legal Representative

NEO ENERGY INC.

Signed (illegible)
ROLAND SUTTILL
Manager
<PAGE> 52

INDEX

<TABLE>
<CAPTION>
Page
<S> <C>
CHAPTER I - GENERAL PROVISIONS.......................................................... 2

CLAUSE 1 - OBJECT OF THE CONTRACT....................................................... 2

CLAUSE 2 - APPLICATION OF THE CONTRACTS................................................. 3

CLAUSE 3 - CONTRACTED AREA.............................................................. 3

CLAUSE 4 - DEFINITIONS.................................................................. 5

CHAPTER II - EXPLORATION................................................................ 6

CLAUSE 5 - TERMS AND CONDITIONS......................................................... 8

CLAUSE 6 - SUPPLY OF INFORMATION DURING EXPLORATION..................................... 9

CLAUSE 7 - EXPLORATION BUDGET AND PROGRAMS.............................................. 10

CLAUSE 8 - RETURN OF AREAS.............................................................. 10

CHAPTER III - EXPLOITATION.............................................................. 11

CLAUSE 9 - TERMS AND CONDITIONS......................................................... 11

CLAUSE 10 - TECHNICAL CONTROL OF THE OPERATIONS......................................... 15

CLAUSE 11 - EXPLOITATION PROGRAMS AND BUDGETS........................................... 15

CLAUSE 12 - PRODUCTION.................................................................. 17

CLAUSE 13 - ROYALTIES................................................................... 19

CLAUSE 14 - DISTRIBUTION AND AVAILABILITY OF THE OIL.................................... 19

CLAUSE 15 - USE OF GAS.................................................................. 24

CLAUSE 16 - UNIFICATION................................................................. 24

CLAUSE 17 - SUPPLYING OF INFORMATION AND INSPECTION DURING EXPLOITATION................. 25

CHAPTER IV - EXECUTIVE COMMITTEE........................................................ 25
</TABLE>
<PAGE> 53

<TABLE>
<S> <C>
CLAUSE 18 - CONSTITUTION................................................................ 25

CLAUSE 19 - FUNCTIONS................................................................... 26

CLAUSE 20 - DECISION IN THE EVENT OF DISAGREEMENT IN THE OPERATION...................... 28

CLAUSE 21 - OPERATION UNDER THE RISK OF ONE OF THE PARTIES.............................. 28

CHAPTER V - JOINT ACCOUNT............................................................... 31

CLAUSE 22 - MANAGEMENT.................................................................. 31

CHAPTER VI - DURATION OF THE CONTRACT................................................... 35

CLAUSE 23 - MAXIMUM DURATION............................................................ 35

CLAUSE 24 - TERMINATION................................................................. 36

CLAUSE 25 - CAUSES FOR UNILATERAL TERMINATION........................................... 36

CLAUSE 26 - OBLIGATIONS IN THE EVENT OF TERMINATION..................................... 37

CHAPTER VII - MISCELLANEOUS PROVISIONS.................................................. 38

CLAUSE 27 - RIGHTS OF ASSIGNMENT........................................................ 38

CLAUSE 28 - DISAGREEMENTS............................................................... 40

CLAUSE 29 - LEGAL REPRESENTATION........................................................ 41

CLAUSE 30 - RESPONSIBILITIES............................................................ 42

CLAUSE 31 - TAXES, ASSESSMENTS AND OTHERS............................................... 44

CLAUSE 32 - PERSONNEL................................................................... 44

CLAUSE 33 - INSURANCE................................................................... 45

CLAUSE 34 - FORCE MAJEURE OR ACT OF GOD................................................. 46

CLAUSE 35 - APPLICATION OF COLOMBIAN LAWS............................................... 46

CLAUSE 36 - NOTICES..................................................................... 47

CLAUSE 37 - VALUATION OF THE OIL........................................................ 47

CLAUSE 38 - PRICES FOR THE OIL.......................................................... 47
</TABLE>
<PAGE> 54

<TABLE>
<S> <C>
CLAUSE 39 - DELEGATION AND ADMINISTRATION............................................... 48

CLAUSE 40 - VALIDITY.................................................................... 48
</TABLE>
<PAGE> 55

EMPRESA COLOMBIANA DE PETROLEOS

Calculation of Area, Direction and Distance starting from Gauss
Coordinates. Origin 3 degree WEST OF SANTA FE DE BOGOTA

Table of Data and Results for the YURUYACO Sector
Jurisdiction Municipalities of .............
Departments of .................

<TABLE>
<CAPTION>
POINT NORTH COORD. EAST COORD. DISTANCE DIF. NORTHS DIF. EASTS DIRECTION
<S> <C> <C> <C> <C> <C> <C>
A 618500.00 1098000.00 6000.000 6000.000 0.000 0 0'0''.000 mil.N

B 624500.00 1098000.00 8139.410 5500.000 6000.000 47 29'22''0.391mil.NE

C 630000.00 1104000.00 4000.000 0.000 4000.000 90 0'0''0.000 mil.E

D 630000.00 1108000.00 6000.000 -6000.000 0.000 0 0'0''0.000 mil.S

E 624000.00 1108000.00 4000.000 0.000 4000.000 90 0'0''0.000 mil.E

F 624000.00 1112000.00 6000.000 -6000.000 0.000 0 0'0''0.000 mil.S

G 618000.00 1112000.00 6000.000 0.000 -6000.000 90 0'0''0.000 mil.W

H 618000.00 1106000.00 10801.899 -7258.170 -8000.000 47 47'0''0.404 mil.SW

I 610741.83 1098000.00 7758.170 7758.170 0.000 0 0'0''0.000 mil.N

A 618500.00 1098000.00
</TABLE>

AREA OF THE POLYGON 15,653 HAS 2,680 M2

<TABLE>
<S> <C> <C>
VERTEX: YAPURAMIA-1323 TO POINT "A":
Lat. 01 degree 09'28''.651 DISTANCE: 5,291.29 m.
Long. 76 degrees 14'49''.675 DIRECTION: S 79 degrees 04'30''.597 E

North 619,502,81 meters
East 1,092,804.61 meters

Prepared: C. Zapata B. June-95
</TABLE>
<PAGE> 56

EMPRESA COLOMBIANA DE PETROLEOS
ECOPETROL

ANNEX B OPERATING AGREEMENT
ATTACHED TO THE ASSOCIATION CONTRACT FOR THE "YURUYACO" SECTOR

Entered into between the Empresa Colombiana de Petroleos - ECOPETROL, ARGOSY
ENERGY INTERNATIONAL, NEO ENERGY INC. with an effective date of the nineteenth
(19th) of November of nineteen hundred and ninety-five (1995) which hereinafter
will be called The Contract. ---------------------------------------------------

PART I - TECHNICAL ASPECTS
Section One - Exploration
CLAUSE 1 - SUPPLYING OF INFORMATION DURING EXPLORATION. The geological and
geophysical information that THE ASSOCIATE must deliver to ECOPETROL must be
given following international standards accepted by the industry, compatible
with the standards used by ECOPETROL in order to allow regional evaluations of
the sedimentary basins. As a complement to that which is established in Clause 6
(Paragraph 6.2) of The Contract, the Operator will remit to ECOPETROL, as it is
obtained, the following information related to the exploratory activities that
THE ASSOCIATE carries out. -----------------------------------------------------
1.1 Programs and Budgets to be developed, before they are executed. ----------
1.2 Seismic sections processed for each line, obtained on two scales, along
with an interpretation report which contains: information used, background,
seismic programs, geological information and geophysical, geological and
economic considerations that support the conclusions and technical
recommendations. ---------------------------------------------------------------
1.3 Two (2) sets of magnetic tapes corresponding to the seismic lines, one
with de-multiplexed data and the other with stacked data, with their supporting
documentation and processing report. In the case of vibrators, a copy of the
field tape must be sent
<PAGE> 57

instead of the de-multiplexed one.
1.4 Map of the trigger points of the seismic programs, in reproducible sepia
and a copy, with the data on coordinates and elevations. This information must
also be delivered on magnetic tapes. -------------------------------------------
1.5 Magnetic, gravimetric profiles and residual maps in reproducible
originals, copies and magnetic tapes with all the supporting data generated.
1.6 Seismic, gravimetric and magnetometric interpretation report, along with
all the sections, profiles and maps interpreted, presented in accordance with
the standards that ECOPETROL established for this information. -----------------
1.7 Geological, structural, isopaque, isolith, face, seismic, etc. maps of the
area of The Contract, in reproducible sepia and copies to the scales established
by ECOPETROL for each basis. ---------------------------------------------------
1.8 For drilling of the wells: before commencing drilling of the well:
intention to drill (Form 4 CR), drilling program, map locating the well, and
geological prognosis, duly approved by the Ministry of Mines and Energy. The
location of the Exploration Wells must be referenced to the seismic maps that
served to define the prospect. In each Exploration or stratigraphic well that
is drill in the Contract Area, geodesic precision point must be given, accepted
by the Agustin Codazzi Geographical Institute - "IGAC", obtained by satellite
and with its respective azimuth line. ------------------------------------------
1.9 Daily drilling reports. --------------------------------------------------
These reports must be sent preferably by facsimile and will contain the basic
information on the well, the drilling conditions, the properties of the drilling
fluid, the results that are obtained and the daily and accumulated cost. -------
1.10 Copy of the fortnightly reports sent to the Ministry of Mines and Energy
(Form 5CR). --------------------------------------------------------------------
The Exploration Management will receive them daily and they may be communicated
by telephone, telex or facsimile. ----------------------------------------------
<PAGE> 58

1.12 Final geological report. ------------------------------------------------
This report is obligatory for any well that is drilled in the country whether
exploratory, stratigraphic or development, and must be presented in Spanish, by
a registered geologist, no later than ninety (90) days after the ending date or
abandonment of the well; it must include the following information by
chapters: ----------------------------------------------------------------------
1.12.1 Summary of all the activities carried out during drilling. ------------
1.12.2 Locating of the well and maps at a scale of 1:250,000. ----------------
1.12.3 Stratigraphy: it must include stratigraphic column, determination of
environments and age of each of the formations drilled. ------------------------
1.12.4 Biostratigraphic: it must present the dispersion charts, analysis done
and possible correlations ------------------------------------------------------
1.12.5 Geochemical: it must include all the analyses done for trench samples
as well as each of the cores recovered. ----------------------------------------
1.12.6 Electrical records: they must include all the calculations done to
determine RW, SW. The analysis of the speed record must be included in this
chapter. -----------------------------------------------------------------------
1.12.7 Formation tests: they must present all the results obtained in each of
the tests done as well as the results of the water and oil analyses done in
laboratories.-------------------------------------------------------------------
1.12.8 The report must contain the following appendices: ---------------------
Appendix A: detailed description of the trench samples every ten (10) feet. ----
Appendix B: detailed description of the cores and wall samples that have been
recovered. ---------------------------------------------------------------------
Appendix C: all the laboratory analyses that were done on the cores and well
samples. -----------------------------------------------------------------------
Appendix D: compound graphic record, in reproducible sepia and copy at a scale
of 1:500. For the different lithologies included in the compound graphic record,
the symbols that the American Association of Petroleum Geologists (AAPG) uses
for these cases must be used. --------------------------------------------------
<PAGE> 59

Appendix E: final report of the company that did the logging at the well,
including the "Grapholog" record. ----------------------------------------------
1.13 Reproducible sepias and copies of each and every one of the records run
on the well, including the speed record, at scales of 1:200 and 1:500. In
addition, magnetic tapes of all the records accompanied by the computer
tabulations on the formats established by ECOPETROL for these cases must be
delivered. ---------------------------------------------------------------------
1.14 Report of the formation and/or production tests done, including bottom
pressure analysis (well open and closed).---------------------------------------
1.15 A set of unwashed trench samples taken every ten (10) feet with the
detailed lithological description of the same must be delivered to ECOPETROL.---
1.16 Report on coring, when done, including the detailed description of the
same as well as all the analyses done. THE ASSOCIATE must send to ECOPETROL
photographs and fifty percent (50%) of the core with this report.---------------
1.17 Report on all the materials used during drilling. -----------------------
1.18 Biostratigraphic analyses with their dispersion chart. ------------------
These analyses must be done for the Exploration and stratigraphic wells since
the sedimentation environments and age of each of the drilled formations are
determined with this information. This type of analysis may also be done on the
different cores recovered. -----------------------------------------------------
1.19 Geochemical analysis done on the trench, wall and core samples. ---------
1.20 Official report of completion, plugging or abandonment of the well (Form
6CR or 10 A CR). ---------------------------------------------------------------
1.21 Final well report. It must include all the engineering data and a summary
of the final geological report. It must be presented in Spanish, no later than
ninety (90) days following the finishing or abandonment of the well, with the
approval of the duly registered petroleum engineer. ----------------------------
1.22 While the first contractual year is being fulfilled, a quarterly report
on geological and geophysical operations done and
<PAGE> 60

programmed, short and long term job estimates as well as the budget executed and
programmed. --------------------------------------------------------------------
1.23 Copy of the annual technical reports presented to the Ministry of Mines
and Energy, with its respective supporting documentation. ----------------------
1.24 At the end of each calendar year, the total amount of investment and
direct expenses, itemized by seismic, geology and by well drilled. -------------
1.25 Any engineering or geology study done. ----------------------------------
CLAUSE 2 - RETURN OF AREAS -----------------------------------------------------
The areas that THE ASSOCIATE will return to ECOPETROL in lots with a minimum
area of five thousand (5,000) hectares each, mut be, when possible, regular lots
in a polygonal shape, trying to facilitate the marking of boundaries without
prejudice to commercial areas. -------------------------------------------------

Section Two - Exploitation

CLAUSE 3 - EXTENSIVE PRODUCTION TESTS ------------------------------------------
The following is the procedure established for the execution and handling of the
crude from extensive production tests, prior to the acceptance of the
commercialness of a hydrocarbon producing field: -------------------------------
3.1 For the handling and transfer of the volumes obtained, the tests must
have the corresponding permit from the Ministry of Mines and Energy and the
acceptance of ECOPETROL. -------------------------------------------------------
3.2 The production obtained during the tests will be distributed in accordance
with the proportions established in The Contract, Clause 14 (Paragraph 14.2),
deducting twenty percent (20%) for the royalty fund; payment of these will be
charged to ECOPETROL. ----------------------------------------------------------
3.3 The volumes produced in these tests will be those recovered from the well
during the maximum test time approved by the Ministry of Mines and Energy, in
the corresponding permit, deducting any volume of crude used for consumption in
operations.
<PAGE> 61

3.4 THE ASSOCIATE will be responsible for one hundred percent (100%) of the
disbursements incurred during the production test. ECOPETROL will reimburse THE
ASSOCIATE for fifty percent (50%) of all expenses, including those for the
production tests with the percentage of production that corresponds to it, in
the event that the test is positive for commercialness. It is understood that
the reimbursement of the costs made in Colombian pesos which is done with
production will be applied in dollars at the representative market exchange rate
on the date on which THE ASSOCIATE made said disbursements (Clause 9, Paragraphs
9.2.3 and 9.2.4 of The Contract). ----------------------------------------------
3.5 THE ASSOCIATE or the Operator must enter into the necessary agreements
with the transporter for the transport of the extensive test crude to the
Barrancabermeja refinery or receiving site that is determined. The transport of
crude corresponding to ECOPETROL plus the royalties will be paid by ECOPETROL
once the corresponding invoices with their respective support are received. ----
3.6 ECOPETROL must see the draft of the oil transport contract beforehand and
give its approval before starting the production tests. ------------------------
3.7 THE ASSOCIATE or the Operator must inform ECOPETROL in a timely manner of
the development of the production test program and send the permits granted by
the Ministry of Mines and Energy as well as any other information, as it is
obtained. ----------------------------------------------------------------------
3.8 In the event that reimbursement is made in crude oil, the billing, will be
presented each month, starting from the commencement of the exploitation of the
well. --------------------------------------------------------------------------
CLAUSE 4 - COMMERCIAL FIELD ----------------------------------------------------
4.1 THE ASSOCIATE, once sufficient data related to the development of the
field has been obtained, must make a study in order to define the criteria on
the petrophysical parameters, better marking of the productive area and,
calculation of reserves. The study must be done by THE ASSOCIATE using the
technical methods available
<PAGE> 62

in or outside the country; when circumstances require it, the pertinent
revisions will be done. --------------------------------------------------------
4.2 For new installations, expansions or modifications, the basic production
and detail engineering designs will be presented to the consideration of the
Technical Sub-Committee. -------------------------------------------------------
4.3 The engineering for the production facilities must be contracted with
domestic companies unless, in the judgement of the Technical Sub-Committee, its
technological complexity requires the aid of a foreign company, preferentially
in consortium with a domestic company. -----------------------------------------
4.4 The final mechanical completing of the wells that become the property of
the Joint Account must be agreed upon by the Technical Sub-Committee and will
be an indispensable requirement so that the well begins production in an optimum
state. The reimbursement of this completing for the Exploration Wells will be
done as indicated in Clause 9 (Paragraphs 9.2.2, 9.2.3 and 9.2.4) of The
Contract. ----------------------------------------------------------------------
CLAUSE 5 - SINGLE RISK MODE ----------------------------------------------------
5.1 The reimbursement corresponds to two hundred percent (200%) of the
investment directly linked to each producing well and the total cost of the work
done to the account and risk of THE ASSOCIATE in the respective field and up to
fifty percent (50%) of the direct exploration costs that have been carried by
THE ASSOCIATE before discovery, in conformity with that set forth in Clause 9
(Paragraph 9.2.2) of The Contract. ECOPETROL will do an audit which will
determine the amount of the reimbursable investments. --------------------------
5.2 As a field under the Single Risk Clause is being developed, the Operator
must send to ECOPETROL all the technical, economic, legal and administrative
information, such as the entering into and execution of contracts, completion of
the wells, flow lines, production facilities, metering systems, storage
capacity, producing wells, restricted holes, production reports, economic
studies, etc. It is understood that the different clauses of The Contract and
the clarifications of this document are fully

<PAGE> 63

applicable to Clause 21 of The Contract, Operations under Risk to one of the
Parties, for purposes of timely information, technical control of reserves and
other administrative aspects. --------------------------------------------------
CLAUSE 6 - INSPECTION OF THE OPERATIONS ----------------------------------------
For the inspection of the Commercial Fields, ECOPETROL may send its
representatives to the same. The Operator must facilitate the conditions for
lodging equal to those that his engineers have to the functionary that ECOPETROL
designates, when possible. -----------------------------------------------------
CLAUSE 7 - PRODUCTION ----------------------------------------------------------
7.1 The Operator must also transmit to the Parties any information on
improvements in production techniques that it develops during the Exploitation
Period. ------------------------------------------------------------------------
7.2 For the control and prevention of petroleum losses and damage to the
environment, the Operator and ECOPETROL will take all appropriate measures, with
the methods in use generally accepted by the oil industry for preventing oil
losses or spills in any way during the drilling, production, transport and
storage operations. ------------------------------------------------------------
7.3 The Operator must keep a daily control of the consumption of crude oil for
the operation and will present a monthly report on this. -----------------------
CLAUSE 8 - DISTRIBUTION AND AVAILABILITY OF THE OIL ----------------------------
In accordance with Clause 14 (Paragraph 14.1) of The Contract, the measuring of
the crude oil will be done in the following manner: ----------------------------
8.1 Corrections for temperature and pressure. --------------------------------
The volumes of crude will be determined at sixty degrees Fahrenheit
(60 degrees F) and at atmospheric pressure, whatever the temperature and
pressure at which it is measured may be. To make the corrections, the tables
called Petroleum Measurement Tables Volume Correction Volume I Table 5A
Generalized Crude Oils Correction of Observed API Gravity to API Gravity at
60 degrees F (ASTM D-1250-80) and Table 6A Generalized Crude Oils Correction of
Volume to 60 degrees F Against API Gravity at 60 degrees F will be used. In
order to correct crude pressure, Table No. 2 Compressibility Factors per Pound
per Square Inch of
<PAGE> 64

the API Standard 1101 will be used. --------------------------------------------
8.2 Measurement: -------------------------------------------------------------
The volumes of crudes that the Operator accepts for transport will be determined
by the meters that for this purpose the Operator will have installed at the
receiving stations or delivery points and, lacking these, by the direct
measurement of the level of the respective tanks, in accordance with the
measurement approved by the Ministry of Mines and Energy and API Standard
1101. --------------------------------------------------------------------------
For liquidating the net volumes of crude received and delivered, the Operator
will do the analysis of the water and sediment content, using the Water by
Distillation Method (ASTM D-95) (API 2560) for water content and to determine
sediment content, the Sediments by Extraction ASTM D-473 method, latest
revision, will be used in conformity with that set forth in Resolution
No. 002297 of October 21, 1993 issued by the Ministry of Mines and Energy. -----
CLAUSE 9 - SUPPLYING OF CRUDE FOR EXPORT ---------------------------------------
For effects of Clause 14 of The Contract, in order to proceed with the
exportation of crude, THE ASSOCIATE will have as priority the internal needs of
the country before doing any exporting of crude, in conformity with the legal
dispositions that govern the matter. -------------------------------------------

PART II - ACCOUNTING AND FINANCIAL ASPECTS
Section One - Programs and Budgets

CLAUSE 10 - EXPLORATION BUDGET AND PROGRAMS ------------------------------------
10.1 Before the commencement of each calendar year THE ASSOCIATE must present
the exploration budgets and programs, itemized by: geology, seismic and drilling
of Exploratory Wells, indicating the currency in which the costs of the work
will be incurred. --------------------------------------------------------------
10.2 THE ASSOCIATE must present a comparison on a quarterly basis of the
budget and the true execution. -------------------------------------------------
CLAUSE 11 - EXPLOITATION BUDGETS AND PROGRAMS ----------------------------------
11.1 For effects of Clause 11 of The Contract, the Operator must
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present the development plan and the budget and program for works by quarters in
order to facilitate the execution of the different controls. -------------------
11.2 THE ASSOCIATE must present to ECOPETROL the organizational letter for the
operation of the Commercial Field which must be agreed upon at the level of the
Technical Sub-Committee and approved by the Executive Committee. ---------------
CLAUSE 12 - BUDGET MANUAL ------------------------------------------------------
The standards and procedures that are stated below constitute the budget manual
applicable to the preparation, presentation and control of the Budgets that the
performance of The Contract implies. this manual comprises three (3) parts, that
is: ----------------------------------------------------------------------------
12.1 Income Budget -----------------------------------------------------------
12.2 Expense Budget ----------------------------------------------------------
12.3 Other dispositions ------------------------------------------------------
CLAUSE 13 - INCOME BUDGET ------------------------------------------------------
This budget is divided, in turn, into two (2) sections: current income budget
and capital contributions. -----------------------------------------------------
13.1 Current income: ---------------------------------------------------------
These are all the monies that are earned in a regular manner to the benefit of
the Joint Account and that may be foreseen by the Operator. They comprise the
following items, when they occur: ----------------------------------------------
13.1.1 Sale of Products: -----------------------------------------------------
This is income from the sale of crude or gas that the Operator makes to one of
the Parties or to others in behalf of the Association (it should be understood
that these sales are different from those made as participation in the
Association of each of the Parties). -------------------------------------------
13.1.2 Services Provided: ----------------------------------------------------
This contemplates all those services that the Operator provides to one of the
Parties or to others, in accordance with the rates established by the
Sub-Committees and approved by the Executive Committee. ------------------------
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13.1.3 Sale of Assets or Materials. ------------------------------------------
This comprises the sales made by the Operator, to the Parties or others, of
equipment or materials in agreement with that set forth in Clause 20 (Paragraph
20.2) of this Agreement. -------------------------------------------------------
13.1.4 Other Income: ---------------------------------------------------------
This includes those monies that the Operator receives for the Joint Account for
earnings on temporary investments. ---------------------------------------------
13.2 Capital Contributions: --------------------------------------------------
These are all those monies that the Operator receives as advance payments made
by each one of the partners in accordance with their participation in the Budget
approved by the Association. This income receives the name of advance payments
or cash call and will be processed in accordance with the procedures established
in Clause 15 (Paragraph 15.5) of this Agreement. -------------------------------
CLAUSE 14 - EXPENSE BUDGET -----------------------------------------------------
The expense or appropriations budget is composed of the operating expenses
budgets will be prepared in accordance with the monetary origin of their
disbursement in pesos and dollars, and will be classified by programs and
projects. The programs in numerical order in each budget will represent the
different groups of homogeneous activities that the Association will execute
through the Operator. The projects in numerical order and continuous within each
program will present the objective itself of the expense and will be duly
supported and explained. -------------------------------------------------------
14.1 Operating Expenses Budget. ----------------------------------------------
The operating expenses budget will be prepared by the Operator in accordance
with the policies that the Executive Committee of the Association (Clause 19 of
The Contract) sets on this matter and taking into account the parameters and
economic indicators that the Association has defined as the most representative
for the budget year. -----------------------------------------------------------
14.1.1 Preparation Procedure. ------------------------------------------------
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The Operator will present the operating expense budget identifying the needs of
the Association and will itemize the expenses according to the classification
indicated in Clause 14 (Paragraph 14.1.2) of this Agreement. -------------------
The cost factors for the evaluation of the different activities that are
scheduled to be done in the year to which the budget refers will correspond to
the real figures that are known at the time it is prepared or, to the best
information available. ---------------------------------------------------------
In every case, the operating expense budget will be calculated taking into
account the costs that the offices that directly provide services to the Joint
Operation require and that, therefore, must be assumed by the Joint Account one
hundred percent (100%) and charged to the Parties in the proportion dealt with
in Clause 22 (Paragraph 22.6.1) of The Contract. The indirect costs that the
Joint Account must assume will be charged to the Parties and will be determined
in accordance with that which is stipulated in Clause 22 (Paragraph 22.6.2) of
The Contract. The evaluation of the operating expenses will be done in the
currency in which the disbursement is to be made (United States of American
dollars or Colombian pesos). For control purposes, the Budget will be presented
in three columns, that is: -----------------------------------------------------
Cause Dollar Origin ------------------------------------------------------------
Cause Peso Origin --------------------------------------------------------------
Consolidated in dollars, using the projection of the rate of exchange for the
respective year ----------------------------------------------------------------
14.1.2 Classification by expense item ----------------------------------------
14.1.2.1 Organizational Chart Personnel Expenses -----------------------------
Wages --------------------------------------------------------------------------
Benefits -----------------------------------------------------------------------
14.1.2.2 Materials and Supplies ----------------------------------------------
Repair and Maintenance ---------------------------------------------------------
Tools --------------------------------------------------------------------------
Other materials and supplies ---------------------------------------------------
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14.1.2.2.3 Third Party Services ----------------------------------------------
Technical services for the field -----------------------------------------------
Public utilities ---------------------------------------------------------------
Other services -----------------------------------------------------------------
14.1.2.4 General expenses ----------------------------------------------------
Leasing of equipment and offices -----------------------------------------------
Other general expenses ---------------------------------------------------------
14.1.2.5 Services of the Operator --------------------------------------------
Indirect Expenses --------------------------------------------------------------
Other services provided by the Operator ----------------------------------------
14.1.2.6 Other Disbursements -------------------------------------------------
Housing loans ------------------------------------------------------------------
Community Aid ------------------------------------------------------------------
14.1.3 Basis for Calculation -------------------------------------------------
The operating expense budget will have as the bases for calculation the
following: ---------------------------------------------------------------------
The wages and benefits budget will be calculated in accordance with the
organizational charts approved for the Association and its estimating will be
done in agreement with that set forth in Clause 18 (Paragraph 18.1.1) of this
Agreement. The calculation of the wages, benefits and other special,
extra-legal, bonuses that arise for domestic or foreign personnel will be
presented separately in accordance with the origin of the disbursement, for the
knowledge of the Sub-committees of the Association and the Executive
Committee. ---------------------------------------------------------------------
The estimation of the cost of materials and supplies will be done based on real
prices or updated quotations and, in general, with the best information
available. ---------------------------------------------------------------------
The import expenses will have as the basis for calculation the FOB prices of the
materials and/or equipment that is to be imported and the following factors will
be taken into account when preparing it: freight, insurance, taxes for use of
Colombian ports, import taxes and other import expenses. -----------------------
<PAGE> 69

The value of maintenance and operating services will be estimated in accordance
with the formalized contracts or those to be formalized which the Association
has at the time budget is prepared. --------------------------------------------
The Indirect Expenses that the Joint Account must assume for services that the
Operator provides or may provide will be calculated in agreement with the
procedure established in Clause 22 (Paragraph 22.6.2) of The Contract. ---------
General expenses will be calculated taking into account the concrete needs that
the Joint Operation requires in the normal course of its activities. The
community aid will be budgeted in accordance with the requests from the
interested parties and as a function of the policies that to this effect the
Executive Committee determines. In special situations that merit it, the
Operator may meet the requests in accordance with its procedures, with prior
notification to each of the Parties. -------------------------------------------
14.1.4 Execution of the Budget -----------------------------------------------
The execution of the operating expense budget will be done in agreement with the
following considerations: ------------------------------------------------------
14.1.4.1 All the services, purchase or contracts that are charged to the Joint
Account, as operating expenses, must be budgeted and fully justified. ----------
14.1.4.2 When the service or act to be contracted does not imply a
disbursement greater than the limits established for the Association, the
Operator will have full autonomy to contract in agreement with the internal
procedures of responsibility and authority. ------------------------------------
14.1.4.3 The purchases, contracts or any other act that partially or globally
implies a cost greater than the established limits, they must be presented to
the Technical Sub-Committee of the Association for study and recommendation. ---
14.1.5 Control of Execution of the Budget ------------------------------------
The control of execution of the expense budget will be the
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responsibility of the Operator who must oversee the correct accounting of the
expenses. ----------------------------------------------------------------------
Every quarter the Operator will prepare a budget report explaining the results
obtained in its execution, which will contain: ---------------------------------
14.1.5.1 Accumulated expenses to date itemized according to the expenses items
indicated in Clause 14 (Paragraph 14.1.2). -------------------------------------
14.1.5.2 Special comments for those items whose execution shows significant
deviations with regard to the budgetary average or estimate per quarter. -------
14.1.5.3 Projection of estimated expenses to be disbursed by quarter or for
the rest of the year. ----------------------------------------------------------
14.1.5.4 Justification of the possible budgetary additions, adjustments or
transfers that the Operator deems convenient or are proposed by one of the
Parties. -----------------------------------------------------------------------
14.2 Investment Budget -------------------------------------------------------
This constitutes the basic tool for the planning, execution and control of each
of the investment programs and projects that are to be carried out by the Joint
Operation and act as a means for estimating the funds required in the execution
of the different programs approved by the Executive Committee. -----------------
As a basis prior to its preparation, the Executive Committee, through the
respective Sub-Committees, will set the general policies and parameters that the
investment plan must contemplate. ----------------------------------------------
14.21 The investment budget will be made up of appropriated line items for the
following: ---------------------------------------------------------------------
14.2.1.1 Acquisition of durable goods, materials and services needed for the
execution of the different projects set by the Association. --------------------
14.2.1.2 Acquisition of equipment and large tools for maintenance to be used
in the shops of the Association, in order to guarantee the normal course of the
operations. --------------------------------------------------------------------
14.2.1.3 Equipment for social services and other constructions and/or
expansion of buildings that the operation requires,
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including the facilities to be used by the workers of the Joint Account. -------
14.2.2 Classification of the investment budget -------------------------------
For all effects of presentation of the investment budget, it will be grouped
into programs and projects in the following manner: Development wells,
production facilities, civil works, other assets, special studies, warehouse and
other projects. These in turn will be subdivided into projects in the following
manner: ------------------------------------------------------------------------
14.2.2.1 Development wells ---------------------------------------------------
Pumping or surface equipment and completing ------------------------------------
Production wells ---------------------------------------------------------------
Locations ----------------------------------------------------------------------
14.2.2.2 Production facilities -----------------------------------------------
Crude collection system --------------------------------------------------------
Storage system -----------------------------------------------------------------
Crude treatment system ---------------------------------------------------------
Improved recovery system -------------------------------------------------------
Pumping stations ---------------------------------------------------------------
Transfer lines -----------------------------------------------------------------
Others -------------------------------------------------------------------------
14.2.2.3 Civil works ---------------------------------------------------------
Highways -----------------------------------------------------------------------
Bridges ------------------------------------------------------------------------
Buildings (camp, shops, warehouses and offices) --------------------------------
14.2.2.4 Other assets --------------------------------------------------------
Automotive equipment -----------------------------------------------------------
Fire Fighting equipment --------------------------------------------------------
Communications equipment -------------------------------------------------------
Office equipment ---------------------------------------------------------------
Electromechanical maintenance equipment ----------------------------------------
Large tools --------------------------------------------------------------------
Cleaning or workover equipment -------------------------------------------------
14.2.2.5 Special Studies -----------------------------------------------------
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Environmental Impact -----------------------------------------------------------
Deposits Studies ---------------------------------------------------------------
Simulation Studies -------------------------------------------------------------
Interference Tests -------------------------------------------------------------
14.2.2.6 Warehouses ----------------------------------------------------------
Fluctuation of materials stock -------------------------------------------------
14.2.2.7 -----------------------------------------------------------------------
Each of these projects may be divided into as many sub-projects as are needed,
always maintaining a uniform identification and their final presentation will be
done by project, in accordance with the above classification and using forms two
(2) and four (4) for this purpose which may be adapted pursuant to an agreement
between the parties, through the Financial Sub-Committee. In order to achieve
greater clarity in the preparation and writing of the investment budget, the
following considerations must be taken into account: ---------------------------
14.2.2.7.1 Maintenance Projects ----------------------------------------------
These correspond to all those investments in equipment, materials and
constructions to be used for the preservation of the facilities in efficient
operating conditions, maintaining the capacity limits and original yield. ------
14.2.2.7.2 Expansion projects ------------------------------------------------
The investments whose objective is to increase the capacity of the facilities,
increase the authorized automotive equipment, office equipment, etc. will be
called thus. -------------------------------------------------------------------
14.2.2.7.3 Special projects --------------------------------------------------
This will comprise all those projects that due to their amount, importance in
industrial activities, or their impact on the social or ecological level merit
being classified as special. ---------------------------------------------------
14.2.3 Preparation and presentation of the budget. ---------------------------
Each and every one of the projects that make up the investment budget must be
fully justified and analyzed before being included in the general budget. In
this sense, the Operator must prepare a draft of the investment project which
contains the following
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general information: -----------------------------------------------------------
Analysis of needs --------------------------------------------------------------
Justification of the project ---------------------------------------------------
General description of the project ---------------------------------------------
Estimated amount of the investment ---------------------------------------------
Execution time -----------------------------------------------------------------
Economic evaluating ------------------------------------------------------------
The draft of the project with the above information, plus any other that is
deemed necessary for its evaluation, will be studied jointly by the
Sub-committees of the Association which will recommend or oppose the viability
of the project in accordance with the policies drawn by the Executive
Committee. ---------------------------------------------------------------------
Once said Sub-Committee recommends the resulting of a specific project, this
will be included in the general budget to be approved by the Executive Committee
of the Association. ------------------------------------------------------------
All the general information presented in the justification of each project will
form a Technical-Financial Appendix which will serve as supporting documentation
in the presentation and approval of the budget by the Executive Committee. -----
14.2.4 Consolidation of the investment budget --------------------------------
The needs of the Joint Operation having been determined, the Operator will
consolidate the investment budget in accordance with the classification of
Clause 14 of this Agreement (Paragraph 14.2.2) and will present it for its
final approval to the Executive Committee of the Association. The expense budget
as well as the investment budget at the program level will be presented in three
columns, which will contain origin in dollars, origin in pesos and consolidated
in dollars. --------------------------------------------------------------------
In addition, the Operator will prepare, as informative in nature, a schedule of
disbursements that indicates the cash needs by quarter and by currency origin,
at the program level for the case of investments and total expenses for
operating expenses. ------------------------------------------------------------
14.2.5 Execution of the budget -----------------------------------------------
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19

The execution of the investment budget will be done by the Operator through his
different offices and in accordance with the schedules for schedules for
execution established beforehand. ---------------------------------------------
The appropriations assigned to each project will be identified with a
previously defined code which will be used in all documents originating in the
process of the budgetary execution. -------------------------------------------
14.2.6 Budgetary control ----------------------------------------------------
The Operator will be responsible for carrying out each one of the investment
programs and projects, and will be responsible for the execution of the same
within the conditions under which they were approved. -------------------------
Likewise, he will be responsible for verifying that the processes corresponding
to the realization of the projects are carried out adequately and timely. In
the event that he finds some problem that impedes the normal course of the
projects, he must report this immediately in writing to each of the Parties in
order to find a solution to the difficulty that occurred. The Operator, as the
one responsible for the projects, will prepare the quarterly reports relative
to budget and technical advance of the same which must be sent to each of the
Parties with due anticipation to the date set for the ordinary meeting of the
Executive Committee. ----------------------------------------------------------
The quarterly report which the Operator must prepare through his offices, will
contain the following information: -------------------------------------------
Period that the report covers -------------------------------------------------
Code and description of the project -------------------------------------------
Total budget for the project --------------------------------------------------
Financial progress from its commencement to the closing date. -----------------
Investments per project for the current year accumulated to date. -------------
Technical progress of the work ------------------------------------------------
Projection of the works to be done on a quarterly basis for the rest of the
year, as informative in nature. -----------------------------------------------
CLAUSE 15 - OTHER DISPOSITIONS ------------------------------------------------
15.1 Budgetary additions ----------------------------------------------------
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In all cases, the Operator is empowered to pay all operating expenses and make
the investments that the Joint Operation requires in accordance with the
approved budget, without exceeding ten percent (10%) of the appropriations
assigned to each project for the respective period (Clause 11, Paragraph 11.5
of The Contract). However, when during the execution of the budget it is
necessary to add to the amount of the appropriations approved by the Executive
Committee, the corresponding modifications may be requested. -------------------
Periodically, requests for budgetary transfers or additions for expenses and
investments may be presented, studied and approved whenever the Executive
Committee meets in an ordinary session. However, the Executive Committee may
meet in an extraordinary session to deal with budgetary matters whenever a
special situation merits it. ---------------------------------------------------
Therefore, each time that a budgetary review is requested, the Operator must
initiate, with due anticipation, the corresponding processes, presenting the
requests to the respective Sub-Committee for study and later recommendation to
the Executive Committee. -------------------------------------------------------
In every case, the requests for budgetary additions must be fully justified,
explaining the reasons that gave rise to the variation of the appropriated
monies with the respective technical and financial appendices contemplated in
Clause 14 (Paragraph 14.2.3) of this Agreement. --------------------------------
15.2 Budgetary Transfers -----------------------------------------------------
Budgetary transfers will be deemed to be the movements of funds that are made
from one year to another, for those projects that could not be concluded in the
period for which they were budgeted (for reasons such as lack of availability
of equipment, import processing, bad weather, etc.). ---------------------------
The value of the project not executed in its entirety will pass to form part of
the budget for the immediately following year and will be submitted to the
ratification of the Executive Committee. The presentation of these projects
in the budget will be done expressly
<PAGE> 76
21

and will be taken into account in writing the schedule for disbursements dealt
with in Clause 15 (Paragraph 15.4) of this Agreement. Furthermore, the
budgetary transfers or carry-over projects will lead to an appendix in which
the cause of the budgetary transfer and the manner in which it will be executed
in the following period will be explained. ------------------------------------
If a project was not executed by more than 80% in a specific period, it must be
included again in the budget and its treatment will be similar to that of a new
project and, therefore, must be accompanied by the information contemplated in
Clause 14 (Paragraph 14.2.3) of this Agreement. ------------------------------
15.3 Approvals -------------------------------------------------------------
The Executive Committee will be the organism in charge of approving the budget
recommended by the Sub-Committees of the Association and authorizing the
Operator to purchase or contract, in behalf of the Association, all those goods
and services that the Joint Operation requires. ------------------------------
15.4 Schedule of Disbursements ---------------------------------------------
Along with the budget recommended by the Sub-Committees of the Association, the
Executive Committee will approve the quarterly budget that the Operator
presents and which will be the basis on which the monthly advance payment of
funds will be calculated. ----------------------------------------------------
15.5 Advance Payment of Disbursements ---------------------------------------
The requests for advance payments of funds will be formulated by the Operator
to each of the Parties based on the obligations contracted by the Association
for the month immediately following that in which the request is made,
consulting for this the budget approved by the Executive Committee and the
project Cash Flow. In the preparation and presentation of the request, the
following requirements must be met: ------------------------------------------
15.5.1 Preparation ---------------------------------------------------------
Based on the approved budget and the obligations contracted by the Association
for the following month, the Operator will prepare the

<PAGE> 77

requests for advance payments taking into account the following conditions:----
15.5.1.1 The request will be made by the operator separately for expenses and
investments and, in each of them, will designate pesos and dollars in
accordance with the origin in which the disbursement is planned. --------------
15.5.1.2 The request must be by programs and projects in the case of
investments and by cost center or expense item, in the case of expenses, in
the same manner in which it appears in the budget approved by the Executive
Committee. --------------------------------------------------------------------
15.5.1.3 In order for each of the projects listed in the request for advance
payments be considered, it must appear in the budget; to the contrary, the
total amount requested will be deducted. --------------------------------------
15.5.1.4 The projects must have sufficient budget. Nevertheless, in special
cases, the amount appropriated for the period can be exceeded by ten percent
(10%) in accordance with Clause 11 (Paragraph 11.5) of The Contract. ----------
15.5.2 Presentation-----------------------------------------------------------
Every request for advance payment will be presented for its processing on the
format agreed on beforehand by the Parties in the Financial Sub-Committee and
will show the actual and estimated charges to investments and expenses and will
be composed of the following documents:----------------------------------------
15.5.2.1 Letter of request ---------------------------------------------------
15.2.2.2 Request format where the financial status of each of the programs or
projects as of the date on which the request is made is shown. ----------------
15.5.2.3 When deemed necessary, general comments of a technical nature that
identify the use of the funds requested. --------------------------------------

Section Two - Accounting Procedure

CLAUSE 16 - ACCOUNTING PROCEDURE ----------------------------------------------

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23

The bases for making the credits and charges incurred among the interested
Parties which cover the operations related to the properties that are defined
in The Contract are detailed below. All the charges will be made to the Joint
Account that will be started in accordance with that set forth in Clause 22 of
The Contract. The Joint Account defined in Clause 4 (Paragraph 4.5) of The
Contract will be divided into three principal records, as follows: ------------
16.1 Joint Account (clarification, charges and entries). This account will be
affected by all the movements, as detailed below, and will be distributed
monthly in its entirety in the proportions of fifty percent (50%) for ECOPETROL
and fifty percent (50%) for THE ASSOCIATE, for that corresponding to
investments and in the proportion dealt with in Clause 22 (Paragraphs 22.6.1
and 22.6.2) of The Contract for the direct expenses and indirect expenses, that
is, which will serve as the basis for the monthly billing, in conformity with
that established in this procedure, leaving a zero (0) balance every month. All
the accounting operations related to the Joint Account will be recorded by the
Operator in Colombian pesos, but the Operator may, in turn, keep auxiliary
records where the disbursements which he incurs are shown in any currency other
than Colombian pesos. ---------------------------------------------------------
16.2 Joint current operating account. The advance payments received from the
Parties and the charges or credits corresponding to the billing of the same
will be carried in this account and it will show at all times a balance to the
favor of or against each one of the Parties, as is the case. This account will
be divided into two sub-accounts, according to the monetary origin of the
transaction, that is, pesos and dollars. --------------------------------------
16.3 Records of joint property. Through the Joint Account, the Operator will
keep a record of all the goods acquired subject to inventory, indicating in
detail the type of asset, date of acquisition, and its original cost. ---------
<PAGE> 79

The accounts mentioned in Clause 16 (Paragraphs 16.1, 16.2 and 16.3) of this
Agreement will form part of the official accounting records of the Operator, but
without being mixed in with the other accounting records of the Joint Account.
All three will be subject to Clause 22 of this Agreement. ----------------------
CLAUSE 17 - ADVANCE PAYMENTS, BILLING AND ADJUSTMENTS --------------------------
17.1 Advance payments. Notwithstanding the fact that the Operator will pay and
discharge, in the first place, all costs and expenses incurred in accordance
with The Contract, charging to each Party the percentage of its participation,
it is agreed that in order to finance said participation, each Party, upon
request from the Operator and as stipulated below, will advance to the operator,
starting from the acceptance by the Parties of the existence of a Commercial
Field and no later than within the first five (5) calendar days of each month,
the proportion of the expenses that were estimated for the operations of the
respective month. The request for advance payment must be accompanied by an
itemized report in conformity with that set forth in Clause 15.5.1.2 of this
Agreement. These advance payments will be made in United States dollars and in
Colombian pesos, in accordance with the needs consigned in the budgets and in
the requests for funds prepared by the Operator. The Operator will make the
request for funds within the first twenty (20) calendar days of the month
immediately prior to that in which the contribution must be made. If the
Operator had to make extra disbursements, not contemplated when requesting the
monthly advance of funds, he must request in writing from the non-operators,
special advance payments covering the participation of said disbursements. Each
participant will pay his proportional part in advance within fifteen (15)
calendar days following the request from the Operator. ------------------------
17.2 Billing ----------------------------------------------------------------
17.2.1 The Operator will prepare an initial bill for ECOPETROL after the
acceptance of a Commercial Field, for fifty percent (50%)
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of the expenses and costs of the seismic acquisition, drilling of stratigraphic
wells and drilling of exploratory wells. Among the costs of the exploratory
wells that have become producers, all expenses caused by the drilling, such as
tests, finishing and well equipment, as well as the flow lines, separators and
costs of the extensive production tests, will be included. Said bill will also
include fifty percent (50%) of the cost of the additional workers referred to
in Clause 9 (Paragraph 9.3) of The Contract and will be paid in conformity with
said clause. This billing will include a summary of the costs stating
separately the currency in which the investments and expenses were made, that
is, in Colombian pesos or United States dollars. -----------------------------
17.2.2 From the date of the initial bill on, the Operator will bill the
Parties, within thirty (30) calendar days following the last day of each month,
their proportional share of the costs and expenses during that month. In the
bills the details that exist in the accounting procedures of the Operator,
including a detailed summary of accounts, will be noted, stating the costs and
expenses originated in pesos and those originated in dollars separately.-------
17.3 Adjustments. The bills will be adjusted between the Operator and the
Parties after deducting the advance payments in dollars and pesos. ------------
When the advance payments made by either of the Parties differ from their
participation in the effective costs determined for each period, the difference
in pesos and/or dollars will be adjusted in the bills for the following month. -
17.4 Acceptance of bills. The payment of the bills does not affect the right
of the Parties to object to the accuracy of the same in accordance with the
terms of Clause 22 (Paragraph 22.7) of The Contract. --------------------------
CLAUSE 18 - CHARGES -----------------------------------------------------------
Subject to the limitations that are described below, the Operator will charge
the Joint Account and will bill to each Party, in
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conformity with the percentages established in Clause 16 (Paragraph 16.1) of
this Agreement, the following expenses: --------------------------------------
18.1 Labor -----------------------------------------------------------------
18.1.1 Domestic and foreign employees --------------------------------------
18.1.1.1 The wages of the employees or workers of the Operator that are
working directly to the benefit of the Joint Operation, including payment of
overtime, night hours, Sundays and holidays and their respective compensatory
rests and, in general, every payment that constitutes wages. -----------------
18.1.1.2 Benefits, indemnizations, insurance, subsidies, bonuses and, in
general, any benefit that is not salary and that is granted to the workers
and/or to their families or dependents, either granted individually or
collectively, or that they are granted by virtue of a work contract, by law, or
collective agreements and/or arbitration settlements, with the exception of the
housing plans, in relation to which a special agreement will be required. Among
the above, one can mention, as a simple example, the following: severance pay,
vacation, retirement and disability pensions, benefits for pensioners and their
families, benefits and subsidies caused by occupational or non-occupational
illness and accidents, service bonus, life insurance indemnizations for
cancellation of contract, union subsidies, all kinds of bonuses and subsidies
for savings, health, education, and in general, social security. Furthermore
the quotas to the Colombian Institute for Family Welfare, National
Apprenticeship Service Institute of Social Security and other similar ones
that are established. --------------------------------------------------------
18.1.1.3 All the expenses incurred in the benefit to the Joint Operation with
regards to the maintenance and operation of the camp, its offices and service
facilities of the same in the field. Among these expenses are also included,
but are not limited to, those that are indicated below, whether the services
are provided gratis or for remuneration, or for the workers, their dependents
or families, or are dispensed voluntarily or obligatory. ---------------------

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27

Among these services are: ----------------------------------------------------
18.1.1.3.1 Medical, pharmaceutical, surgical and hospital. ------------------
18.1.1.3.2 Camp and complete services for the same, including its repair and
clean-up. ---------------------------------------------------------------------
18.1.1.3.3 Training expenses. -----------------------------------------------
18.1.1.3.4 Recreation for the workers. --------------------------------------
18.1.1.3.5 Maintenance of schools for the workers, their children and
dependent relatives. ----------------------------------------------------------
18.1.1.3.6 Security or social aid plans and camp guards. --------------------
18.1.1.4 It is understood that the expenses and services noted in Clause 18
(Paragraphs 18.1.1.1, 18.1.1.2 and 18.1.1.3), mentioned above, will be charged
to the Joint Account when by disposition of the law, collective agreements
and/or arbitration decisions or voluntarily, they are applied directly or
jointly to the contractors, sub-contractors, intermediaries and/or their
workers who are working to the benefit of the operation. ----------------------
18.1.1.5 With respect to the retirement pensions and the disability aid, the
Executive Committee must proceed according to that which is stipulated in the
Social Security and Pension System established by Law 100 of 1993 and other
norms that regulate it. -------------------------------------------------------
18.2 Materials, equipment and supplies --------------------------------------
The materials and supplies needed for the performance of the operations will be
charged to the Joint Account. The materials and supplies will be acquired for
warehouse stocks when this is advantageous for the operation and credited to
it, at book value as they leave to be used. The capital equipment will be
charged directly to the Joint Account. The book value is determined below: ---
18.2.1 Book Value -----------------------------------------------------------
It is understood that book value means the last average price of the stocks in
warehouse based on the cost obtained on the importation liquidation sheets or
local cost, as follows: -------------------------------------------------------
18.2.1.1 For imported materials, equipment and supplies, the book value will
include the net price of the manufacturer's or
<PAGE> 83
28

supplier's bills (after deducting all discounts), cost of purchasing, freight
and delivery charges between the point of supply and the shipping point,
freight to the port of delivery, insurance, import duties or any other tax,
handling from the ship to the customs warehouse and transportation to the site
of the operations. ------------------------------------------------------------
18.2.1.2 For materials, equipment and supplies acquired locally, book value
will include the net sale bill (after deducting all discounts), plus sales tax,
purchasing expenses, transportation, insurance and other similar costs paid to
third parties, from the point of purchase to the site of the operations. -----
18.2.1.3 The materials will be charged to the Joint Account in accordance
with the currency origin of their acquisition, so that they likewise be charged
to each Party. ---------------------------------------------------------------
18.2.2 Return of materials to the warehouse from the Joint Operation. ------
The materials, equipment and supplies returned by the operations to the
warehouse of the Joint Operation will be valued in the following manner: -----
18.2.2.1 New materials at book value. --------------------------------------
18.2.2.2 Used materials, in good shape, that can provide service, and the
equipment that can be used later without repairs, the Operator may
reincorporate them to the warehouse of the Association at seventy-five percent
(75%) of their book value giving the credit to the respective project of the
Joint Account. ---------------------------------------------------------------
18.2.2.3 Sales by the Parties. The materials, equipment and supplies sold by
the Parties to the Joint Operation will be valued at the replacement price
agreed upon by the Parties. The corresponding transportation costs will be to
the account of the Joint Operation. In the cases of sales by the Joint
Operation to

<PAGE> 84

one of the Parties, they will be valued at the replacement price agreed upon by
the Parties and the transportation costs will be to the account of the
purchasing Party. --------------------------------------------------------------
18.2.4 Local Transport of Materials ------------------------------------------
18.2.4.1 For materials shipped by an outside hauler, at cost according to the
bill from the transporting company. --------------------------------------------
18.2.4.2 For materials shipped in transportation units owned by the Parties
at rates calculated to cover the real costs, according to the procedure
established in Clauses 18 (Paragraphs 18.4) and 23 (Paragraph 23.1.1) of this
Agreement. ---------------------------------------------------------------------
18.2.5 Materials from canceled, postponed or changed projects. When an
accumulation of stocks occurs in the warehouse due to the change, postponement
or cancellation of projects approved by the Parties, the cost of said materials
will be charged to the warehouse account. These materials may be sold to third
parties according to that set forth in Clause 20 (Paragraph 20.2.1) of this
Agreement and the product will be credited to the Joint Account. ---------------
18.3 Travel expenses ---------------------------------------------------------
All the travel expenses incurred to benefit the Joint Operation by domestic or
foreign personnel, such as transportation, hotels, board, etc. -----------------
18.4 Service units and facilities --------------------------------------------
The value of the service provided by equipment or facilities owned by either of
the Parties will be charged to the Joint Account at reasonable rates as
established in Clause 23 of this Agreement. The rates that are set must be
applied until they are modified by mutual agreement. ---------------------------
18.5 Service -----------------------------------------------------------------
The services supplied by third parties for the Joint Operation, including
contractors, at their real cost. -----------------------------------------------
18.6 Repairs -----------------------------------------------------------------
The expenses for repairs made to the equipment or elements of either of the
Parties, for use in the Joint Operation, except when
<PAGE> 85

these costs have already been charged by means of rentals or any other means. --
18.7 Litigation --------------------------------------------------------------
The expenses for the Joint Operation with regards to effective threats of
litigation (including investigation and obtaining of evidence), lifting of
embargoes, decisions or sentences, legal claims and processing of claims,
compensation for accidents, settlement for death and funeral expenses, provided
that these charges have not been paid by an insurance company or covered by the
proportional surcharges mentioned in Clause 18 (Paragraph 18.1.1) of this
Agreement. When legal services are rendered in said matters by permanent or
outside attorneys, whose total or partial compensation is included in the
indirect expenses, there will be no additional charges for their services, but
rather the direct expenses incurred in said processes will be charged. -------
18.8 Damages and losses to property and equipment of the Joint Operation.
All the costs and expenses necessary to replace or repair damages or losses
caused by fire, flooding, storm, theft, accident or any similar act. The
Operator will communicate in writing to the Parties the damages or losses
occurring as soon as possible. -----------------------------------------------
18.9 Taxes and rentals -----------------------------------------------------
The amount of all taxes paid or incurred in developing the Joint Operation will
be charged to the Joint Account. ----------------------------------------------
The amount of the rentals, easements and indemnizations for improvements, soil
use, etc. will also be charged to the Joint Account. --------------------------
18.10 Insurance -------------------------------------------------------------
18.10.1 The premiums paid for insurance taken to benefit the operations to
which The Contract refers, along with all the expenses and indemnizations
incurred and paid, and all the losses, claims and other expenses that have not
been covered by the insurance companies, including the legal services mentioned
in

<PAGE> 86

Clause 18 (Paragraph 18.7) of this Agreement, will be charged to the Joint
Account. ---------------------------------------------------------------------
18.10.2 When there is no insurance, the real expenses incurred, stated above,
and paid by the Operator will also be charged to the Joint Account. ----------
CLAUSE 19 - CREDITS ----------------------------------------------------------
19.1 The Operator will credit the Joint Account for income from the
following: --------------------------------------------------------------------
19.1.1 Insurance collection with regards to the Joint Operation, whose
premiums have been charged to said operation. --------------------------------
19.1.2 The sales of geological information authorized beforehand by the
Parties, provided that the collections related to these have been charged to
the Joint Operation. ---------------------------------------------------------
19.1.3 Sale of property, plants, equipment and materials of the Joint
Operation. -------------------------------------------------------------------
19.1.4 The rental fees received, returns for custom or transport tax claims,
etc. must be credited to the Joint Operation if said rentals or returns belong
to said operation. -----------------------------------------------------------
19.1.5 Any other income from operations or contracts authorized by the
Executive Committee. ---------------------------------------------------------
19.2 Guarantee --------------------------------------------------------------
In the event of defective equipment, when the Operator has received the
corresponding adjustment from the manufacturer or his agents, this will be
credited to the Joint Operation. ---------------------------------------------
CLAUSE 20 - DISPOSITION OF EXCESS MATERIALS AND EQUIPMENT --------------------
20.1 Excess materials and equipment -----------------------------------------
The Operator will inform ECOPETROL in writing of the excess materials and
equipment of the Joint Operation. Each of the Parties will designate a
representative to inspect the state and determine which materials or equipment
can be sold. For the purchase of the usable materials or equipment, ECOPETROL
will have the first option and THE ASSOCIATE the second; these options must be
exercised within sixty (60) days following the date of
<PAGE> 87

notification. In the event that these are not purchased by them, the Operator
will report this in writing and will auction them off. -------------------------
20.2 Disposition of capital equipment and materials --------------------------
20.2.1 The sales by the Operator to third parties of major materials and
capital equipment that had been charged to the Joint Account will be done only
with the approval of the Executive Committee. The product will be credited to
the Joint Account. Major materials are defined solely for this purpose as any
asset that has an estimated sale value greater than five thousand United States
dollars (US$5,000) or its equivalent in Colombian currency. --------------------
20.2.2 The minor materials charged to the Joint Account that are not required
in the operation or reincorporated into the warehouse may be sold by the
Operator and their product credited to the Joint Account. ----------------------
20.2.3 For every abandonment and dismantling of the assets that have an
estimated cost or value of five thousand United States dollars (US$5,000), or
more, or its equivalent in Colombian currency, will require prior authorization
from the Executive Committee. --------------------------------------------------
20.2.4 Neither of the Parties will be obligated to purchase the interest of
the other in excess material, be it new or used. The removal of the major items
of excess materials, such as stacks, tanks, motors, pumping units and piping,
will be subject to the approval of the Executive Committee. However, the
Operator will have the right to discard in any way damaged or unusable
material. ----------------------------------------------------------------------
CLAUSE 21 - INVENTORY ----------------------------------------------------------
Upon request by ECOPETROL, the Operator will present the information needed to
make an analysis of inventory in warehouses and the Parties will agree to the
joint participation for inventory control. The Operator must provide the
facilities that ECOPETROL to do a physical inventory of fixed assets in the
Association's installations, prior agreement in the Financial Sub-Committee, on
the date, hour and number of people who will do the inventory. -----------------
<PAGE> 88
33

21.1 Inventory and auditing -------------------------------------------------
With reasonable intervals, inventories of all the assets of the Joint Operation
must be done by the Operator. -------------------------------------------------
21.2 The notice of intent to do an inventory will be given by the Operator in
writing to the Parties one (1) month prior to the starting date of the same, so
that they may be represented. But starting date of the same, so that they may
be represented. But the non-attendance by one of them at the inventory does
not take away the validity and effectiveness of the inventory taken by the
Operator. ---------------------------------------------------------------------
21.4 The inventory adjustments for excess or shortages will be made known to
the Executive Committee for their consideration and approval. -----------------
21.5 At midnight on the last day of the term of twenty-two (22) years of the
Exploitation Period, the Parties will make an inventory of the materials that
exist in the warehouse and that are owned by the Joint Account, as well as the
products extracted that are in the collection batteries, in the pipes that go
from these to the storage tanks or in the storage tanks, all within the
exploitation area, and said inventories will be distributed between the
Parties, after deducting royalties, in the same manner set forth in Clause 13
of The Contract. --------------------------------------------------------------
CLAUSE 22 - AUDITING ----------------------------------------------------------
Subject to Clause 17 (Paragraph 17.4) of this Agreement, the Parties may
examine and control through their own Auditors, the records of the Operator
related to the joint properties and the operation of the same. However, in
order to facilitate the review of the expenses and costs of the exploration
wells dealt with in Clause 17 (Paragraph 17.2) of this Agreement, once the
Operator advises the non-operator of the ending date of the inventory of any
producing well, the Operator will allow, with prior timely notification, the
auditors of ECOPETROL to periodically examine the drilling accounts of wells in
such a way that when a Commercial Field is declared, the stated review has
already been done under
<PAGE> 89
34

better conditions of time and place. Representatives of the Controller General
of the Republic may take part, in addition to the representatives of the
Parties, in the auditing reviews set out in this Agreement, if said organism
deems it convenient. The expenses and costs of said review will be to the
account of the interested Party. ----------------------------------------------
CLAUSE 23 - RATE TABLES -------------------------------------------------------
23.1 Subject to the limitations described above, the services provided to
the Joint Operation by installations owned exclusively by ECOPETROL or THE
ASSOCIATE will be charged at the corresponding rates, in order to allow the
recovery of the real costs. Said costs must include the normal operating
costs, wages, benefits, depreciation and other operating expenses, taking into
account the following: -------------------------------------------------------
23.1.1 The rate for transportation units that is normally calculated taking
as the basis operating time, must include the time used for loading and
unloading, the time elapsing while waiting to be loaded and the waiting time
while unloading is done. The charges for transportation units assigned to the
operation will include Sundays and holidays, except when they are out of
service due to repairs. ------------------------------------------------------
23.1.2 When the material for the stated operations is transported along with
other material by river or land fleet owned exclusively by ECOPETROL or THE
ASSOCIATE, the charge must be done based on the tonnage transported at rates no
greater than commercial ones. ------------------------------------------------
23.2 Rates for renting equipment and tools ---------------------------------
The procedure for calculating the rental rate for equipment and tools owned by
the Parties, excluding drilling equipment and major equipment whose rates must
be calculated separately and approved by the Executive Committee, will comprise
an amount for depreciation plus an amount for maintenance and will proceed in
the following manner: --------------------------------------------------------
23.2.1 Description, model, number, purchase date and original cost

<PAGE> 90
35

of the equipment. --------------------------------------------------------------
23.2.2 Site where the equipment will be used, reasons for its rental and
estimated time of use. ---------------------------------------------------------
23.2.3 Amount of the annual depreciation of the equipment, calculated based
on the depreciated book value and its estimated remaining useful life (the
minimum book value considered will be ten percent (10%) of the original cost,
that is, salvage value. --------------------------------------------------------
23.2.4 The annual maintenance amount will be a percentage of the original
cost which will vary from five percent (5%) for new equipment to fifteen
percent (15%) for already depreciated equipment, depending on the depreciation
age; for example: -------------------------------------------------------------
EQUIPMENT A: (Five [5] years of life) -----------------------------------------
Time (years) 1, 2, 3, 4, 5: equipment depreciated one hundred percent (100%) ---
Maintenance: 5, 6, 7, 8, 9: 15% ------------------------------------------------
EQUIPMENT B: (Ten [10] years of life) -----------------------------------------
Time (years) 1, 2, 3, 4, 5, 6, 7, 8, 9, 10: equipment depreciated one hundred
percent (100%) -----------------------------------------------------------------
Maintenance: 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15: 15% -----------------------
NOTE: The time of useful life and depreciation will be those established by
accounting techniques applicable to the oil operation. -------------------------
23.2.5 The annual rental rate is equal to the amount stipulated in Clause 23
(Paragraph 23.2.3) of this Agreement plus that set in Paragraph 23.2.4 of this
same clause. -------------------------------------------------------------------
23.2.6 The monthly or daily rental rate of the equipment will be equal to
that established in Clause 23 (Paragraph 23.2.5) of this Agreement divided by
12 or by 365, as is the case. --------------------------------------------------
23.2.7 No rental will be charged for stand-by, but a third party should be
charged for this. --------------------------------------------------------------
23.2.8 The above rental rates to no include transportation, installation,
operating, lubricant and fuel costs which will be charged to the operation in
which the equipment will be used. ----------------------------------------------
<PAGE> 91
36

23.2.9 The above rental rates will be applied to the eventual use of
equipment and tools of the operation one hundred percent (100%) of THE
ASSOCIATE or operator and vice-versa. -----------------------------------
23.2.10 In each case, the Technical Sub-Committee will recommend to the
Executive Committee the need to use rental equipment and the Financial
Sub-Committee may apply the rate system recommended herein. ---------------
23.2.11 The rental rate for equipment will be calculated in dollars; but for
the respective charge, it will be billed in pesos, at the rate agreed upon by
the Parties. --------------------------------------------------------------
23.3 Rental rate for warehouses and fixed assets ------------------------
For calculating the rental rate for warehouses owned by one of the Parties or
the Joint Operation for total or partial use, a procedure will be followed
which will be agreed to in the Financial Sub-Committee. --------------------
CLAUSE 24 - CONTRIBUTIONS IN KIND ------------------------------------------
ECOPETROL or THE ASSOCIATE will contribute, in kind, those materials that it
deems convenient according to the agreements that are entered into between the
Parties. -------------------------------------------------------------------

PART III - ADMINISTRATIVE ASPECTS AND MISCELLANEOUS
DISPOSITIONS

Section One - Executive Committee

CLAUSE 25 - CONDITIONS FOR FUNCTIONING -------------------------------------
For the exercise of its functions, the Executive Committee must meet the
conditions set forth in Clause 19 of The Contract, as indicated below: -----
25.1 The Executive Committee will be presided over alternately by the
Parties, beginning with ECOPETROL. -----------------------------------------
25.2 The Executive Committee will name its Secretary alternating persons
designated by ECOPETROL and THE ASSOCIATE. The President
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37

and Secretary must be from the same Party. -----------------------------------
25.3 The Executive Committee will hold ordinary sessions during the months of
March, July and November and, extraordinary ones each time that the Parties
and/or the Operator deem it necessary. In said meetings, the exploitation
program carried out by the Operator and plans to be followed will be reviewed.
The advisors that each of the parties deems convenient may attend the Executive
Committee, it being understood that each of the companies will take as few
people as possible. ----------------------------------------------------------
25.4 For the ordinary sessions of the Executive Committee, the representative
who will preside the next session will notify the other representatives
(principal and alternates) of the other Party and the Operator ten (10)
calendar days prior to the date of the meeting, of the place and topics to be
dealt with (agenda). ---------------------------------------------------------
25.5 In performing Clause 18 (Paragraph 18.3) of The Contract, for ordinary
as well as extraordinary sessions of the Executive Committee, the topics to be
dealt with that have not been included in the agenda must have been accepted
beforehand by the representatives of the Parties through the Sub-Committees. --

Section Two -- Sub-Committees

CLAUSE 26 - CREATION OF THE SUB-COMMITTEES -----------------------------------
In performing the function set forth in Clause 19 (Paragraph 19.3.8) of The
Contract, the Executive Committee may create the advisory sub-committees that
it deems necessary. In any case, the Executive Committee will name a Technical
Sub-Committee and a Financial Sub-Committee. ---------------------------------
These sub-committees will be the organisms constituted to control and define
the technical, financial and legal recommendations of The Contract before the
Executive Committee and must be governed by The Contract and this Agreement.
Each sub-committee must establish its own internal regulations approved by the
Executive Committee.-----------------------------------------------------------
<PAGE> 93

Section Three - Operator

CLAUSE 27 - RIGHTS AND DUTIES --------------------------------------------------
27.1 In conformity with this Agreement, the Operator has the right to conduct
the Joint Operations himself or through his contractors, under the general
direction of the Executive Committee. In any case, the Operator will be
responsible for the Joint Operation, in accordance with that set forth in The
Contract. ----------------------------------------------------------------------
27.2 Among the duties of the Operator are the following: ----------------------
27.2.1 Preparation, presentation and implementation of the exploration and
exploitation budgets and programs, as well as the approval of expenses (AFES). -
27.2.2 Direct and control all the statistical and accounting services. -------
27.2.3 Plan and obtain all the services and materials required for the good
performance of the Joint Operation. --------------------------------------------
27.2.4 Provide all the technical and consulting required for an efficient
performance of the Joint Operation. --------------------------------------------
27.3 The Operator may not constitute any lien on the property of the Joint
Operation. ---------------------------------------------------------------------
27.4 The resignation or removal of the Operator must be done without
prejudice to any right, obligation or liability acquired during the time in
which the Operator acted as such; if the Operator resigns or is removed before
meeting the obligations established in The Contract, he may not charge the
Joint Account for the costs and expenses that he has incurred due to the
change. But if the Executive Committee approves them, these costs and expenses
may be charged to the Joint Account. -------------------------------------------
27.5 The Operator having been notified of his removal or the acceptance of
his resignation, for the transfer of liabilities, ECOPETROL will audit the
Joint Account and will do an inventory of all the property of the Joint
Operation. Said inventory will be used for purposes of the return and
accounting of the processing of
<PAGE> 94

said transfer of liabilities. All the costs and expenses incurred in relation
to said inventory and auditing will be charged to the Joint Account. ----------
27.6 The operator will not be liable for any loss or damage for effects of
the Joint Operation, unless said damage or losses are the result of: ----------
26.6.1 Gross negligence of the Operator -------------------------------------
27.6.2 His failure to obtain and maintain any of the insurance required in
Clause 33 of The Contract, except when the Operator has made all efforts to
obtain and maintain them and the results of these efforts have been fruitless,
fact which must be reported beforehand in writing to the Parties. -------------

Section Four - Contracting Procedure

CLAUSE 28 - REGISTER OF SUPPLIERS AND LISTS OF BIDDERS ------------------------
28.1 It is the responsibility of the Operator to maintain an updated register
of suppliers, classified by the different activities that the operation
requires and to establish the qualification criteria for the firms to be
included in the bidders list. The Technical Sub-Committee may require a review
of the criteria before approving the list of bidders. -------------------------
28.2 ECOPETROL may review the register of suppliers of the Operator annually
and may suggest through the Technical Sub-Committee the inclusion or exclusion
of suppliers in the register. Notwithstanding the above, ECOPETROL, through a
duly reasoned request, may at any time request the removal of persons or
entities from the register. ---------------------------------------------------
28.3 In all cases that imply requesting bids for contracting, the register of
suppliers must be consulted, accrediting this in the corresponding document. --
28.4 The persons or entities that form part of the register of suppliers must
accredit their technical, moral and economic

<PAGE> 95

solvency, in addition to the experience not only of the company but also of
its partners and that of the technicians joined in a permanent manner. --------
28.5 In accordance with the above criteria, the Operator will establish a
qualified register of suppliers which will be updated periodically according
to the performance of the same. -----------------------------------------------
CLAUSE 29 - BIDDING PROCESS
29.1 Responsibility: The Operator has the responsibility of preparing the
tender and will submit it to the consideration of the Technical
Sub-Committee. ----------------------------------------------------------------
29.2 The list of those invited to bid will be prepared based on the
information in the Register of Suppliers. -------------------------------------
29.3 If the estimated value of the contract that is to be bid exceeds
US$40,000, the Operator must invite at least three companies. If the above is
not possible, certification of the justification will be consigned in the
recommendation report to the Technical Sub-Committee. -------------------------
29.4 One must try to not invite more than six companies to bid in order to
avoid cost overruns in the evaluation of the bids and, likewise, give greater
opportunity to the participating companies of obtaining the contract. ---------
29.5 All other factors being equivalent, the order of priority to be included
in the list of bidders will be: -----------------------------------------------
Corporations constituted and domiciled in the Departments of Cauca and
Caqueta. - Colombian corporations with domicile outside the Departments of
Cauca and Caqueta, but with a branch established in said departments. -
Colombian corporations with principal domicile outside the Departments of Cauca
and Caqueta, with no branch in said departments. - Foreign corporations with
branches in Colombia. - Foreign corporations with no branches in Colombia. ----
29.6 For the list of companies invited to bid, those technically and
commercially qualified companies that have not had the opportunity to
participate in similar bids in the past will also be

<PAGE> 96

taken into account. -----------------------------------------------------------
29.7 The Operator will prepare the bid conditions and will submit them to the
consideration of the Technical Sub-Committee. ---------------------------------
29.8 In the bid conditions, the following will be clearly stated: -----------
29.8.1 The cost will be one of the criteria to be considered, but not the
only one, for awarding and administration of the contract. --------------------
29.8.2 All the bids that surpass the range of real cost for this activity
must be disqualified. ---------------------------------------------------------
29.8.3 The evaluation of the bids will take into account other factors apart
from cost, which will be included in the bid conditions. ----------------------
29.8.4 The bids must be presented in accordance with the terms of the
invitation and the non-observance of this requirement may lead to them being
considered invalid bids. ------------------------------------------------------
29.8.5 The invitation to bid will include an itemized table if the prices
that must be given by the bidders, in order to facilitate the comparison of the
bids. -------------------------------------------------------------------------
29.9 The list of bidders will be reviewed and approved by the Technical
Sub-Committee before being sent to the invitees. -------------------------------
20.10 Once the bid conditions have been distributed, the following rules will
apply: ------------------------------------------------------------------------
29.10.1 Any information, modification or clarification of the original
conditions will be sent to all the bidders. The Purchasing and Supply
Department of the Operator will be responsible for these changes. The changes
must be duly justified in a written document. ---------------------------------
29.10.2 New bidders cannot be added to the list of bidders originally
approved by the Technical Sub-Committee. --------------------------------------
29.10.3 Every bidder that does not comply with the procedures and rules of
the bidding process, or who violates the code of business ethics of the
Operator, will be disqualified immediately. -----------------------------------
29.11 The content and format of all material in an invitation to bid must
comply with the requirements of the "Format for

<PAGE> 97
42

documentation presented to the Technical Sub-Committee" procedure and must be
submitted to the consideration of the Technical Sub-Committee. ----------------
29.12 The internal approvals that the Operator and ECOPETROL require depend
on the estimated value of the contract, in accordance with the internal
procedures of one or the other. -----------------------------------------------
CLAUSE 30 - AWARDING OF CONTRACTS AND PURCHASE ORDERS -------------------------
30.1 The Operator has the responsibility of awarding bids for contracts and
purchase orders. To this effect, he will present his recommendation to the
Technical Sub-Committee which is the organism in charge of approving them and
the Executive Committee will ratify them, when the value of the award is or
exceeds US$40,000. ------------------------------------------------------------
30.2 Value: The awards will be based on the best overall value. The lowest
price is not always the best, since the value will also take into account
scheduling and quality, experience, reputation and the Colombian content of the
bidder. In the event the contract is not awarded to the bid with the least
value, said decision must be justified. ---------------------------------------
30.3 Justification in writing: The Operator will present a written
recommendation to the Technical Sub-Committee justifying each contract or
purchase order award which is or exceeds US$40,000. Said justification must
include a summary of the commercial and technical evaluations of the bids
received and the basis for the Operator's recommendation. ---------------------
30.4 Direct contracting: Direct contracting must be supported in writing,
clearly identifying its justification. The Operator may contract directly,
without the need for a bid process, in any of the following cases: ------------
30.4.1 When only one supplier can be obtained within the time required to
meet the project's schedule; --------------------------------------------------
30.4.2 When an item or service contracted directly before does not have an
equivalent or satisfactory substitute; ----------------------------------------
30.4.3 When the service or work derives from a previous one or is
<PAGE> 98
43

an addition to an existing contract or purchase order opened in the last ninety
days, and the commerical conditions are not modified or when the evidence from
a recent bid justify the awarding without a bidding process; ------------------
30.4.4 When the Operator has standardized a specific item or service for all
the applications within his area of operations and only one known supplier for
said item or service exists; -------------------------------------------------
30.4.5 When only one item or service is deemed to meet the requirements of
the Operator within the specified delivery time; -----------------------------
30.4.6 When there is an emergency, the Operator must notify ECOPETROL in the
Technical Sub-Committee immediately after said emergency. --------------------
30.5 Partial awards: A bid can be partially awarded to two or more bidders
provided that all the following conditions are met: --------------------------
30.5.1 The possibility of partial awarding is expressly indicated in the
Invitation to Bid; -----------------------------------------------------------
30.5.2 The favored bids have met the requirements established in the
Invitation to Bid; -----------------------------------------------------------
30.5.3 The partial award represents the best value for the items or services
that are not to be obtained. -------------------------------------------------
30.5.4 Any change in the scope of the work or in the criteria for awarding
must be communicated clearly to all the bidders before the partial award. ----
30.6 Rejection of bids: The Operator may declare the bid without
participants when the Technical Sub-Committee finds reasons that justify said
decision, when the bids are removed from real costs, or when the scope of the
work has been modified in such a way that it significantly affects the bid. --
30.7 Notification to the Losing Bidders: The results of the award will be
communicated in writing to all participants. ---------------------------------
30.8 Clarification: During the evaluation period, the Operator may request
clarifications from the bidders. The Technical Sub-Committee must approve the
significant commercial clarifications.
<PAGE> 99
44

A new approval from the Technical Sub-Committee will not be required when
referring to techincal clarifications. The clarifications that may affect the
bid must be communicated in writing to all participants. ----------------------
CLAUSE 31 -- ADMINISTRATION OF CONTRACTS AND PURCHASE ORDERS ------------------
31.1 The Operator has the responsibility of administering the contracts and
purchase orders under his execution. ------------------------------------------
31.2 The bases for the administration of contracts or purchase orders is the
execution of the same, which will include the agreed upon costs, schedule and
quality requirements. ---------------------------------------------------------
31.3 The Operator will keep a written record of all the modifications to the
original contract. The impact on costs of each change in the contract will be
evaluated by the Operator and negotiated with the supplier or contractor before
the price of the contract is changed. -----------------------------------------
31.4 If the proposed change is greater than US$40,000 and greater than 10% of
the originally approved value, it will have to be approved by the Technical
Sub-Committee. ----------------------------------------------------------------
31.5 The Operator is responsible for Cost Control. --------------------------
31.6 Any additional work or job under the terms of the contract must be
authorized by the Project or Operations Manager of the Operator, who will
consult with the Purchasing and Logistics Department before making any
modification of the contract. This double responibility insures control of the
integrity of the change process. In the event that the changes imply
modifications to the text of the contract, they will be submitted to the
approval of the Legal Department of the Operator. -----------------------------
31.7 Quality control will be handled by the QA/QC ("Quality Assurance" and
"Quality Control") process which will include an independent inspection and
verification of the work, which must be done at the appropriate time during the
execution of the work. --------------------------------------------------------
31.8 The processes used by the Operator to control costs will be described in
the "Cost Control System" procedure. ------------------------------------------
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45

31.9 The associates will receive a monthly report on the progress of the work
with documentation on costs and schedule including an analysis of the
variations in the budget originally agreed upon for the main contracts and
purchase orders. --------------------------------------------------------------
31.10 Once the main contracts and purchase orders have been fulfilled, an
detailed analysis to evaluate the experiences that can be applied to similar
contracts or purchase orders and in turn allow better control of them will be
made. -------------------------------------------------------------------------
CLAUSE 32 - INSURANCE ---------------------------------------------------------
For effects of Clause 33 of The Contract, as far as Insurance is concerned, the
Operator must deliver to the Vice-Presidency for Operations of ECOPETROL the
following information so that the former insures fifty percent (50%) of the
assets corresponding to the Commercial Field. ---------------------------------
32.1 Description of the assets, broken down when possible, in the following
manner: -----------------------------------------------------------------------
32.1.1 Offices, camps and other non-industrial assets. ----------------------
32.1.2 Collection stations, specifying tanks (quantity and capacity) and
other equipment. --------------------------------------------------------------
32.1.3 Miscellaneous warehouses and other facilities. -----------------------
Note: The external pipelines and oil wells are not insured under the fire
policy since in this case ECOPETROL assumes the risk directly. ----------------
32.2 Value of the assets, indicating only the value of the part that belongs
to ECOPETROL and noting to what percentage of the total value it corresponds. -
32.3 Geographical location. -------------------------------------------------
32.4 Date of receipt, starting from which the risk passes to the Joint
Operation. --------------------------------------------------------------------
CLAUSE 33 - FORCE MAJEURE OR ACT OF GOD ---------------------------------------
Clause 34 of The Contract only suspends the performance of the specific
obligations whose execution becomes impossible for acts constituting force
majeure or acts of God. Likewise, only the
<PAGE> 101
46

obligations on goods, property, production facilities, etc. that are effected
by said circumstances are interrupted. The Operator must notify the end of the
force majeure, detailing the magnitude of the damage and the corrective actions
that affect the system. ------------------------------------------------------
CLAUSE 34 - REVISION OF THE OPERATING AGREEMENT ------------------------------
This Operating Agreement may be revised when the Parties deem it convenient
upon request by either of them; the Executive Committee is fully empowered to
revise and modify it. This Operating Agreement will be in effect until one of
the following events occurs: -------------------------------------------------
34.1 Termination of The Contract -------------------------------------------
34.2 Agreement in writing of the Parties -----------------------------------
34.3 Signing of a new Agreement. -------------------------------------------
In witness hereof, the Parties sign this Operating Agreement, on contract paper
of ECOPETROL, on the 20th day of September, Nineteen hundred ninety-five
(1995). ----------------------------------------------------------------------

<PAGE> 102
47

EMPRESA COLOMBIANA DE PETROLEOS
ECOPETROL
Signed (illegible)
LUIS BERNARDO FLOREZ ENCISO
President

ARGOSY ENERGY INTERNATIONAL
Signed (illegible)
DOUGLAS W. FRY
Legal Representative

NEO ENERGY INC.
Signed (illegible)
ROLAND SUTTILL
Manager

Witnesses:
<PAGE> 103
INDEX

Page No.

PART I - TECHNICAL ASPECTS ................................................ 1

Section One - Exploration ................................................. 1

CLAUSE 1 - SUPPLYING OF INFORMATION DURING EXPLORATION .................... 1

CLAUSE 2 - RETURN OF AREAS ................................................ 5

Section Two - Exploitation ................................................ 5

CLAUSE 3 - EXTENSIVE PRODUCTION TESTS ..................................... 5

CLAUSE 4 - COMMERCIAL FIELD ............................................... 6

CLAUSE 5 - SINGLE RISK MODE ............................................... 7

CLAUSE 6 - INSPECTION OF THE OPERATIONS ................................... 7

CLAUSE 7 - PRODUCTION ..................................................... 7

CLAUSE 8 - DISTRIBUTION AND AVAILABILITY OF THE OIL ....................... 8

CLAUSE 9 - SUPPLYING OF CRUDE FOR EXPORT .................................. 9

PART II - ACCOUNTING AND FINANCIAL ASPECTS ................................ 9

Section One - Programs and Budgets ........................................ 9

CLAUSE 10 - EXPLORATION BUDGET AND PROGRAMS ............................... 9

CLAUSE 11 - EXPLOITATION BUDGETS AND PROGRAMS ............................. 9

CLAUSE 12 - BUDGET MANUAL ................................................. 9

CLAUSE 13 - INCOME BUDGET ................................................. 9

CLAUSE 14 - EXPENSE BUDGET ................................................ 10

CLAUSE 15 - OTHER DISPOSITIONS ............................................ 18

Section Two - Accounting Procedure ........................................ 21

CLAUSE 16 - ACCOUNTING PROCEDURE .......................................... 21

CLAUSE 17 - ADVANCE PAYMENTS, BILLING AND ADJUSTMENTS ..................... 22

<PAGE> 104
CLAUSE 18 - CHARGES........................................ 24

CLAUSE 19 - CREDITS........................................ 29

CLAUSE 20 - DISPOSITION OF EXCESS MATERIALS AND EQUIPMENT.. 30

CLAUSE 21 - INVENTORY...................................... 31

CLAUSE 22 - AUDITING....................................... 31

CLAUSE 23 - RATE TABLES.................................... 32

CLAUSE 24 - CONTRIBUTIONS IN KIND.......................... 34

PART III - ADMINISTRATIVE ASPECTS AND MISCELLANEOUS

DISPOSITIONS............................................... 34

Section One - Executive Committee.......................... 34

CLAUSE 25 - CONDITIONS FOR FUNCTIONING..................... 34

Section Two - Sub-Committees............................... 35

CLAUSE 26 - CREATION OF THE SUB-COMMITTEES................. 35

Section Three - Operator................................... 35

CLAUSE 27 - RIGHTS AND DUTIES.............................. 36

Section Four - Contracting Procedure....................... 37

CLAUSE 28 - REGISTER OF SUPPLIERS AND LISTS OF BIDDERS..... 37

CLAUSE 29 - BIDDING PROCESS................................ 38

CLAUSE 30 - AWARDING OF CONTRACTS AND PURCHASE ORDERS...... 39

CLAUSE 31 - ADMINISTRATION OF CONTRACTS AND PURCHASE ORDERS 40

CLAUSE 32 - INSURANCE...................................... 42

CLAUSE 33 - FORCE MAJEURE OR ACT OF GOD.................... 43

CLAUSE 34 - REVISION OF THE OPERATING AGREEMENT............ 43

<PAGE> 105
This is a faithful and FOURTH PHOTOCOPY COPY reproduced mechanically from its
original number 2782 dated TWENTY-NINTH (29TH) day of the month of SEPTEMBER,
1995 on FORTY-EIGHT (48) sheets of paper.

Issued in Sante Fe de Bogota, D.C., on OCT. 3, 1995.

Signed (illegible)
OTTO BARRIOS GALVIS
SIXTEENTH NOTARY

Seal: REPUBLIC OF COLOMBIA SANTAFE DE BOGOTA OTTO BARRIOS GALVIS
Sixteenth Notary

This is a true and faithful translation of the original of which a copy remains
in this translator's files. October 23, 1995.

<PAGE> 1
Subsidiaries of the Registrant

<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
<S> <C>
Argosy Energy Incorporated Delaware

Argosy Petroleum Company, S.A. Colombia

Garnet Acquisition II, Inc. Texas

Garnet Energy Corporation Delaware

Garnet Oil Corporation Delaware

Garnet Pakistan Corporation Delaware

Garnet PNG Corporation Delaware

Garnet Resources Canada Ltd. British Columbia

Garnet Spain Corporation Delaware

Garnet Sulfur Company Nevada

Garnet Turkey Corporation Delaware
</TABLE>

<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report dated March 18, 1996 included in this Form 10-K, into the Company's
previously filed Registration Statement File No. 33-36999.

Houston, Texas ARTHUR ANDERSEN LLP
March 19, 1996

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,713,191
<SECURITIES> 0
<RECEIVABLES> 1,512,636
<ALLOWANCES> 0
<INVENTORY> 986,532
<CURRENT-ASSETS> 9,251,889
<PP&E> 50,779,355
<DEPRECIATION> (11,384,135)
<TOTAL-ASSETS> 49,959,028
<CURRENT-LIABILITIES> 6,462,028
<BONDS> 20,151,120
<COMMON> 114,922
0
0
<OTHER-SE> 22,151,883
<TOTAL-LIABILITY-AND-EQUITY> 49,959,028
<SALES> 8,635,570
<TOTAL-REVENUES> 8,881,133
<CGS> 3,533,572
<TOTAL-COSTS> 3,533,572
<OTHER-EXPENSES> 6,496,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,491,131
<INCOME-PRETAX> (3,571,474)
<INCOME-TAX> 1,051,848
<INCOME-CONTINUING> (4,623,322)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,623,322)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)

</TABLE>