75,000,000.00 SECURED REDUCING REVOLVING LINE OF CREDIT FROM COMPASS BANK TO

FIRST AMENDED, RESTATED, AND COMBINED LOAN AGREEMENT

$75,000,000.00
SECURED REDUCING REVOLVING LINE OF CREDIT

FROM

COMPASS BANK

CARRIZO OIL & GAS, INC.

August 28, 1997
2
TABLE OF CONTENTS

PAGE

ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II. THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.01 The Revolving Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.02 Advances and Payments of Principal Under the Note . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.03 Prepayment and Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.04 Interest Rate and Payments of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.05 Increased Cost of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.06 Substitute Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.07 Change of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.08 Advances to Satisfy Obligations of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.09 Mandatory Prepayment of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.10 Borrowing Base Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.11 Assignment of Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.12 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.13 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.14 Addition of Borrowing Base Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.15 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.16 Repayment of Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.17 Letter of Credit Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

ARTICLE III. CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.01 Receipt of Note, Agreement and Certificate of Compliance . . . . . . . . . . . . . . . . . . . . . . 22
3.02 Proceeds from Initial Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.03 Receipt of Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.04 Receipt of Certified Copy of Corporate Proceedings and Certificates of Incumbency . . . . . . . . . 23
3.05 Receipt of Certificates of Authority and Certificates of Good Standing . . . . . . . . . . . . . . . 23
3.06 UCC Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.07 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.08 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.09 Request for Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.10 Accuracy of Representations and Warranties and No Event of Default . . . . . . . . . . . . . . . . . 23
3.11 Legal Matters Satisfactory to Counsel to Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.12 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.13 Status of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.14 Security Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.15 Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.16 Documents Required for Subsequent Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . 24

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PAGE
ARTICLE IV. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.01 Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.02 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.03 Valid and Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.04 Completion of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.05 Title to Borrowing Base Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.06 Oil and Gas Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.07 Interest in the Borrowing Base Oil and Gas Properties . . . . . . . . . . . . . . . . . . . . . . . 26
4.08 Oil and Gas Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.09 Producing ▇▇▇▇▇ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.10 Purchasers of Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.11 Scope and Accuracy of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.12 Liabilities, Litigation and Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.13 Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.14 Authorizations and Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.15 Compliance with Laws, Rules, Regulations and Orders . . . . . . . . . . . . . . . . . . . . . . . . 28
4.16 Proper Filing of Tax Returns and Payment of Taxes Due . . . . . . . . . . . . . . . . . . . . . . . 28
4.17 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.18 Investment Company Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.19 Public Utility Holding Company Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.20 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

ARTICLE V. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.01 Use of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.02 Maintenance and Access to Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.03 Quarterly Unaudited Financial Statements of Borrower . . . . . . . . . . . . . . . . . . . . . . . . 30
5.04 Annual Audited Financial Statements of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.05 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.06 Monthly Borrowing Base Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.07 Statement of Material Adverse Change in Condition . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.08 Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.09 Compliance with Laws and Payment of Assessments and Charges . . . . . . . . . . . . . . . . . . . . 31
5.10 Maintenance of Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.12 Initial Expenses of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.13 Subsequent Expenses of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.14 Maintenance of Tangible Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.15 Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.16 Inspection of Tangible Assets/Right of Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.17 Payment of Note and Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

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PAGE
----

5.18 ERISA Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.19 Tangible Net Worth Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.20 Cash Flow to Debt Service Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.21 Compliance with Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.22 Hazardous Substances Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.23 Changes in Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.24 Operating Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

ARTICLE VI. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.01 Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.02 Guaranty of Payment or Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.03 Loans, Advances or Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.04 Mortgages or Pledges of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.05 Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.06 Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.07 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.08 Payment of Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.09 Cancellation of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.10 Changes in Business Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.11 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.12 Hedging Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

ARTICLE VII. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.01 Enumeration of Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.02 Rights Upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

ARTICLE VIII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.01 Security Interests in Deposits and Right of Offset or Banker's Lien . . . . . . . . . . . . . . . . 39
8.02 Survival of Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . . 39
8.03 Notices and Other Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.04 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.05 Renewals and Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.06 No Waiver by Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.07 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.08 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.09 Incorporation of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.10 Survival Upon Unenforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.11 Rights of Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.12 Amendments or Modifications of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.13 Agreement Construed as an Entirety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.14 Number and Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.16 Controlling Provision Upon Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

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----

8.17 Time, Place and Method of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.18 Counterpart Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.19 Amended, Restated and Combined Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

EXHIBITS

EXHIBIT A Compliance Certificate
EXHIBIT B Note
EXHIBIT C Security Instruments
EXHIBIT D Form of Request for Advance
EXHIBIT E Form of Monthly Borrowing Base Certificate

SCHEDULES

1.01(a) Borrowing Base Oil and Gas Properties
4.10 Purchasers of Production
4.12 Litigation

6
FIRST AMENDED, RESTATED AND COMBINED LOAN AGREEMENT

THIS FIRST AMENDED, RESTATED, AND COMBINED LOAN AGREEMENT, is
entered into as of the 28th day of August 1997, by and among CARRIZO OIL & GAS,
INC., a Texas corporation (the "Borrower"), on behalf of itself and as
successor to and survivor by merger with ENCINITAS PARTNERS LTD., formerly a
Texas limited partnership ("Encinitas") and COMPASS BANK, a Texas chartered
bank (the "Bank").

W I T N E S S E T H

WHEREAS, Borrower and Bank are parties to that certain Loan
Agreement dated December 6, 1996, as amended by the First Amendment thereto
dated April 4, 1997, the Second Amendment thereto dated May 15, 1997, the Third
Amendment thereto dated June 26, 1997, and the Fourth Amendment thereto dated
June 27, 1997 (collectively the "Existing Carrizo Loan Agreement"); and

WHEREAS, Encinitas and Bank are parties to that certain Loan
Agreement dated June 26, 1996, as amended by the First Amendment thereto dated
December 6, 1996 (the "Existing Encinitas Loan Agreement"); and

WHEREAS, Carrizo Production, Inc., a Texas corporation, which
was the general partner of Encinitas, has been merged with and into Borrower,
Borrower has acquired all of the limited partner interests in Encinitas, and
Encinitas has been merged with and into Borrower, with Borrower being the
survivor of such mergers; and

WHEREAS, as the result of such mergers, Borrower has succeeded
to the rights and obligations of Encinitas under the Existing Encinitas Loan
Agreement and the Loan Documents defined therein; and

WHEREAS, in order to simplify the administration of the
Existing Carrizo Loan Agreement and the Existing Encinitas Loan Agreement and
the Loans that have been advanced and that may hereafter be advanced to
Borrower in accordance with the terms thereof, and to effect certain amendments
to each of such Loan Agreements, Borrower and Bank desire to amend, restate and
combine both the Existing Carrizo Loan Agreement and the Existing Encinitas
Loan Agreement into this First Amended, Restated and Combined Loan Agreement;

7
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and the mutual benefits to be derived herefrom,
Bank and Borrower agree as follows:

ARTICLE I. DEFINITIONS

As used in this Agreement, the following terms shall have the
meanings indicated:

"Affiliate" means, as applied to any Person, any other Person,
directly or indirectly, controlling, controlled by, or under common control
with, that Person. For purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling", "controlled by", and "under
common control with"), as applied to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of that Person, whether through the ownership of voting
securities, by contract, or otherwise.

"Agreement" means this Loan Agreement, as the same may be
amended or supplemented from time to time.

"Bank" has the meaning set forth in the preamble hereof.

"Borrower" has the meaning set forth in the preamble hereof.

"Borrowing Base" means the maximum loan amount supported by
the Borrowing Base Properties, as determined by Bank from time to time in
accordance with Section 2.10 of this Agreement.

"Borrowing Base Properties" means the Borrowing Base Oil and
Gas Properties and the Borrowing Base Cash.

"Borrowing Base Oil and Gas Properties" means those Oil and
Gas Properties of Borrower that are to be made subject to the liens created by
certain of the Security Instruments to secure the Obligations, which initial
Borrowing Base Oil and Gas Properties are described in Schedule 1.01(a)
attached hereto and made a part hereof, together with such additional Oil and
Gas Properties as are subsequently added to the Borrowing Base Properties
pursuant to Section 2.14.

8
"Borrowing Base Cash" means the Cash and Cash Equivalent of
Borrower that, pursuant to Section 2.14, is hereafter made subject to the liens
created by certain of the Security Instruments to secure the Obligations.

"Business Day" shall mean: (a) for all purposes, a day other
than a Saturday, Sunday or legal holiday for commercial banks under the laws of
the State of Texas or the laws of the United States of America, and (b) in
addition, for purposes of any LIBOR Loan, a day that satisfies the requirements
of clause (a) and is a day on which commercial banks in London, England are
open for domestic or international business.

"Cash" means legal tender of the United States of America.

"Cash Equivalent" means certificates of deposit issued by the
Bank and/or other certificates of deposit approved by the Bank in its sole
discretion.

"Compliance Certificate" means the certificate of the
president or vice president of Borrower required to be submitted to Bank from
time to time pursuant to this Agreement, which certificate shall be in the form
attached hereto as Exhibit "A."

"Environmental Laws" means (a) the following federal laws as
they may be cited, referenced and amended from time to time: the Clean Air Act,
the Clean Water Act, the Safe Drinking Water Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Endangered Species
Act, the Resource Conservation and Recovery Act, the Occupational Safety and
Health Act, the Hazardous Materials Transportation Act, the Superfund
Amendments and Reauthorization Act, and the Toxic Substances Control Act; (b)
any and all environmental statutes of any state in which property of Borrower
is situated, as they may be cited, referenced and amended from time to time;
(c) any rules or regulations promulgated under or adopted pursuant to the above
federal and state laws; and (d) any other federal, state or local statute or
any requirement, rule, regulation, code, ordinance or order adopted pursuant
thereto, including, without limitation, those relating to the generation,
transportation, treatment, storage, recycling, disposal, handling or release of
Hazardous Substances.

9
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations and published
interpretations thereof.

"ERISA Affiliate" means any trade or business (whether or not
incorporated) which together with Borrower would be treated as a single
employer under Section 4001 of ERISA.

"Event of Default" means any of the events specified in
Section 7.01 of this Agreement.

"Existing Carrizo Loan Agreement" has the meaning set forth in
the recitations of this Agreement.

"Existing Encinitas Loan Agreement" has the meaning set forth
in the recitations of this Agreement.

"Financial Statements" means the statements of the financial
condition of the indicated Person, as at the point in time and for the period
indicated and consisting of at least a consolidated balance sheet, income
statement and statement of cash flows, and, when the foregoing are audited,
accompanied by the certification of such Person's independent certified public
accountants and footnotes to any of the foregoing, all of which shall be
prepared in accordance with GAAP applied on a basis consistent with that of the
preceding year.

"Floating Rate" means the Index Rate in effect from time to
time.

"GAAP" means generally accepted accounting principles, applied
on a consistent basis, as set forth in Opinions of the Accounting Principles
Board of the American Institute of Certified Public Accountants and/or in
statements of the Financial Accounting Standards Board and/or their respective
successors and which are applicable in the circumstances as of the date in
question. Accounting principles are applied on a "consistent basis" when the
accounting principles observed in a current period are comparable in all
material respects to those accounting principles applied in a preceding period.

"Hazardous Substances" means flammables, explosives,
radioactive materials, hazardous wastes, asbestos or any material containing
asbestos, polychlorinated biphenyls (PCBs), toxic

10
substances or related materials, petroleum and petroleum products and
associated oil or natural gas exploration, production and development wastes or
any substances defined as "hazardous substances", "hazardous materials",
"hazardous wastes" or "toxic substances" under the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, the Superfund Amendments
and Reauthorization Act, as amended, the Hazardous Materials Transportation
Act, as amended, the Resource Conservation and Recovery Act, as amended, the
Toxic Substances Control Act, as amended, or any other Environmental Laws now
or hereafter enacted or promulgated by any regulatory authority or governmental
body.

"Hedging Transaction" means a swap, collar, floor, cap,
forward, futures or other similar contract (including sales contracts for a
term of greater than one year with fixed prices) entered into by Borrower with
any other Person, which is intended to reduce or eliminate the risk of
fluctuations in the price of oil or gas.

"Indebtedness" means, as to any Person, (a) all items of
indebtedness or liability (other than capital, surplus, deferred credits and
reserves, as such) which in accordance with GAAP would be included in
determining total liabilities as shown on the liability side of a balance sheet
as at the date as of which Indebtedness is to be determined, (b) indebtedness
secured by any mortgage, pledge or lien existing on or encumbering property
owned by the Person whose Indebtedness is being determined, whether or not the
indebtedness secured thereby shall have been assumed, and (c) all indebtedness
of others which such Person has directly or indirectly guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of business),
discounted with recourse, agreed (contingently or otherwise) to purchase or
repurchase or otherwise acquire, or in respect of which such Person has agreed
to supply or advance funds (whether by way of loan, purchase of securities or
capital contribution, through a commitment to pay for property or services
regardless of the nondelivery of such property or the nonfurnishing of such
services or otherwise), or in respect of which such Person has otherwise become
directly or indirectly liable, contingently or otherwise, whether now existing
or hereafter arising.

"Index Rate" means, at any time, the prime rate established in
The Wall Street Journal's "Money Rates" or similar table. If multiple prime
rates are quoted in the table, then the

11
highest prime rate will be the Index Rate. In the event that the prime rate is
no longer published by The Wall Street Journal in the "Money Rates" or similar
table, then Bank may select an alternative published index based upon
comparable information as a substitute Index Rate. Upon the selection of a
substitute Index Rate, the applicable interest rate shall thereafter vary in
relation to the substitute index. Such substitute index shall be the same
index that is generally used as a substitute by Bank on all Index Rate loans.
The Index Rate is eight and one-half percent (8.50%) as of the date of this
Agreement.

"Index Rate Loan" means any Loan for which interest thereon is
to be computed at the Floating Rate in accordance with this Agreement.

"Initial Public Offering" means the initial public offering of
stock in Borrower pursuant to that certain Registration Statement on Form S-1
dated June 13, 1997, as amended through the date of this Agreement.

"Interest Rate(s)" means the Floating Rate or the LIBOR Rate, as applicable.

"Interest Period" means as to any LIBOR Loan the period
commencing on and including the date of such Loan (or on the effective date of
the election pursuant to Section 2.04(B) by which such Loan became a LIBOR
Loan) and ending on and including the day preceding the same day (or if there
is no such same day, the day preceding the last day) in the 1st, 2nd, 3rd, or
6th calendar month thereafter, as selected by the Borrower in accordance with
Section 2.04(B), and thereafter such period commencing on and including the day
immediately following the last day of the then ending Interest Period for such
Loan and ending on and including the day preceding the day corresponding to the
first day of such Interest Period (or if there is no such corresponding day,
the day preceding the last day), in the 1st, 2nd, 3rd, or 6th calendar month
thereafter, as so selected by the Borrower; provided, however, that if any such
Interest Period would otherwise end on a day prior to a day that is not a
Business Day it shall be extended so as to end on the day prior to the next
succeeding Business Day unless the same would fall in a different calendar
month, in which case such Interest Period shall end on the day preceding the
first Business Day preceding such next succeeding Business Day.

12
"Investment" in any Person means any stock, bond, note or
other evidence of Indebtedness or any other security (other than current trade
and customer accounts) of, or loan to, such Person.

"Leases" means oil and gas leases and all oil, gas and mineral
leases constituting any part of the Borrowing Base Oil and Gas Properties.

"Letters of Credit" means letters of credit to be issued by
the Bank for the account of the Borrower pursuant to Section 2.15, in the form
acceptable to the Bank, and all extensions, renewals and modifications thereof.

"LIBOR" means, in respect to any Interest Period, the rate per
annum determined by the Bank to be the quotient of (a) the rate quoted, on an
immediately available funds basis, to the Bank, at approximately 10:00 a.m.
local time in Houston, Texas on the date one (1) Business Day prior to the
first day of such Interest Period, for the offering by leading banks in the
London interbank market of Dollars for deposit with the Bank for a period
comparable to such Interest Period and in an amount comparable to the amount of
the Loan determined by the Bank to be outstanding during such Interest Period
and as to which the LIBOR Rate is to be determined, divided by (b) 1.0, minus
the Reserve Percentage expressed as a decimal, for such Interest Period.

"LIBOR Loan" means any Loan from time to time for which
interest thereon is to be computed on the basis of the LIBOR Rate.

"LIBOR Rate" means a rate per annum equal to the sum of LIBOR
for the Interest Period for which interest is to be determined at the LIBOR
Rate, plus two percent (2.00%) per annum.

"Limitation Period" means any period while any amount remains
owing on the Note and interest on such amount calculated at the Floating Rate,
plus any fees payable hereunder and deemed to be interest under applicable law,
would exceed the Maximum Rate.

"Loan" means, singly, any advance by Bank to Borrower pursuant
to this Agreement and "Loans" means, cumulatively, the aggregate sum of all
money advanced by Bank to Borrower pursuant to this Agreement.

13
"Loan Documents" means this Agreement and all promissory
notes, security agreements, guaranties, and other instruments, documents, and
agreements executed and delivered pursuant to or in connection with this
Agreement, as such instruments, documents, and agreements may be amended,
modified, renewed, extended, or supplemented from time to time.

"Loan Excess" means, at any point in time, the amount, if any,
by which the outstanding balance on the Loans evidenced by the Note plus the
aggregate of the face amount of all outstanding Letters of Credit exceeds the
Revolving Commitment then in effect.

"Marketable Title" means good and indefeasible title and
ownership, free and clear of all mortgages, liens and encumbrances, except for
Permitted Encumbrances.

"Maturity Date" means June 1, 1999.

"Maximum Rate" means the maximum non-usurious interest rate
permissible under applicable laws of the State of Texas or those of the United
States of America applicable to Bank.

"Monthly Borrowing Base Certificate" means a certificate of
the President or Chief Financial Officer of Borrower attesting to Borrower's
calculation of the Borrowing Base as of the last day of the month preceding the
month in which such certificate is executed and delivered to the Bank, pursuant
to Section 5.06, in the form attached hereto as Exhibit "E."

"Monthly Borrowing Base Reduction" means the amount of the
automatic monthly reduction to the Borrowing Base, as determined by Bank from
time to time in accordance with Section 2.10 of this Agreement.

"Multi-employer Plan" means a plan described in Section
4001(a)(3) of ERISA which covers employees of Borrower or any ERISA Affiliate.

"Note" means that certain promissory note in the original face
amount of $75,000,000.00, dated of even date herewith, made by Borrower payable
to the order of Bank, in the form attached hereto as Exhibit "B," together with
all deferrals, renewals, extensions, amendments, modifications or
rearrangements thereof, which

14
promissory note shall evidence the advances to Borrower by Bank pursuant to
Section 2.01 hereof.

"Obligations" means all obligations, indebtedness, and
liabilities of Borrower to Bank, now existing or hereafter arising, including,
but not limited to, the indebtedness evidenced by the Note, whether direct,
indirect, related, unrelated, fixed, contingent, specified, unspecified, joint,
several, or joint and several, and all interest and fees accruing thereon and
all attorneys' fees and other expenses incurred in the enforcement or
collection thereof.

"Oil and Gas Properties" means fee, leasehold or other
interests in or under mineral estates or oil, gas and other liquid or gaseous
hydrocarbon leases with respect to properties situated in the United States,
including, without limitation, overriding royalty and royalty interests,
leasehold estate interests, net profits interests, production payment interests
and mineral fee interests, together with all contracts executed in connection
therewith, all oil, gas and other minerals produced and to be produced
therefrom, all proceeds thereof, and all tenements, hereditaments,
appurtenances and properties, real or personal, appertaining, belonging,
affixed or incidental thereto.

"Permitted Encumbrances" means:

(A) Liens for taxes, assessments, or similar charges,
incurred in the ordinary course of business that are not yet
due and payable;

(B) Liens of mechanics, materialmen, warehousemen,
carriers, or other similar liens, securing obligations
incurred in the ordinary course of business that are not yet
due and payable;

(C) Encumbrances consisting of zoning restrictions,
easements, or other restrictions on the use of real property,
none of which materially impairs the use of such property by
Borrower in the operation of its business, and none of which
is violated in any material respect by existing or proposed
operations;

(D) Liens in favor of Bank;

15
(E) The following, if the validity or amount thereof is
being contested in good faith by appropriate and lawful
proceedings, so long as levy and execution thereon have been
stayed and continue to be stayed, and in Bank's sole judgment
they do not, in the aggregate, materially detract from the
value of the property of Borrower or any Subsidiary, or
materially impair the use thereof in the operation of its
business:

(1) Claims or liens for taxes, assessments, or
similar charges; and

(2) Claims or liens of mechanics, materialmen,
warehousemen, carriers, or other similar liens.

"Permitted Hedging Transactions" means Hedging Transactions
that: (a) encumber not more than seventy- five (75%) of Borrower's monthly
production of proved producing reserves as forecast in the most recent
engineering evaluation performed by Bank pursuant to Section 2.10; (b) are
based upon strike prices equal to or higher than the prices utilized by Bank in
its most recent engineering evaluation performed pursuant to Section 2.10; (c)
are placed with a counter-party approved by Bank, in its sole discretion; and
(d) in which Borrower's interest is pledged to Bank pursuant to a security
agreement in form and substance satisfactory to Bank.

"Person" means an individual, company, corporation,
partnership, limited partnership, joint venture, trust, association,
unincorporated organization or a government or any agency or political
subdivision thereof.

"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.

"Prohibited Transaction" means any transaction set forth in
Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1954, as
amended from time to time.

"Proved Reserves" means the estimated quantities of crude oil,
condensate, natural gas liquids and natural gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable by
primary producing mechanisms in future years from known reservoirs underlying
lands or interests

16
therein constituting Oil and Gas Properties, under existing economic and
operating conditions. Reserves which can be produced economically through
application of improved recovery techniques (e.g., fluid injection) will be
included in Proved Reserves when successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the pilot project or installed program was based.
In general, the economic productivity of the estimated proved reserves is
supported by actual production or a conclusive formation test; however, in
certain instances proved reserves are assigned to reservoirs on the basis of a
combination of electrical and other type logs and core analyses which indicate
these reservoirs are analogous to similar reservoirs in the same field which
are producing or have demonstrated the ability to produce on a formation test.

"Reportable Event" means any of the events set forth in
Section 4043 of ERISA.

"Request for Advance" means the written request by Borrower
for an advance by Bank pursuant to this Agreement, which Request for Advance
shall be in a form, and shall include the information and accompanying
supporting documentation, as prescribed in Exhibit "D" attached hereto.

"Required Number" means: in the case of notices hereunder (i)
relative to borrowings, prepayments, elections of the LIBOR Rate, selections of
Interest Periods for, or other transactions in respect of, LIBOR Loans: two
(2) Business Days; or (ii) relative to all transactions in respect of Index
Rate Loans: one (1) Business Day; it being understood, however, that in the
case of notices involving transactions in respect of more than one type of Loan
(such as a change in type of Loan in accordance with Section 2.04(B)),
"Required Number" means that number of days, as indicated above in respect of
the Loans involved, which would constitute the longest applicable period of
time.

"Reserve Percentage" means for any Interest Period, the
average (for such Interest Period) maximum rate at which reserves (including
any marginal, supplemental, or emergency reserves) are required to be
maintained during such Interest Period under Regulation D of the Federal
Reserve Board by member banks of the Federal Reserve System as it applies to
the Bank against "Eurocurrency liabilities" (as such term is used in Regulation
D).

17
Without limiting the effect of the foregoing, the Reserve Percentage shall
reflect any other reserves required to be maintained by member banks by reason
of any regulatory change against (i) any category of liabilities that includes
deposits by reference to which the interest rate for LIBOR Loans is to be
determined as provided in this Agreement or (ii) any category of extensions of
credit or other assets that include LIBOR Loans. As of the date of this
Agreement the Reserve Percentage is zero.

"Revolving Commitment" means the obligation of Bank, subject
to the provisions of this Agreement and existing only through the last Business
Day prior to the Maturity Date, to advance to Borrower funds, not to exceed at
any one time outstanding an amount equal to the lesser of: (a) Twenty-Five
Million Dollars ($25,000,000.00), or (b) the Borrowing Base then in effect.

"Security Instruments" means the security instruments
described on Exhibit "C," in form and substance satisfactory to Bank, to be
executed by Borrower pursuant to Section 3.14, and any and all other
instruments or documents hereafter executed in connection with or as security
for the payment of the Note.

"Subsidiary" means (a) any corporation in which Borrower,
directly or indirectly through its Subsidiaries, owns more than fifty percent
(50%) of the stock of any class or classes having by the terms thereof the
ordinary voting power to elect a majority of the directors of such corporation;
and (b) any partnership, association, joint venture, or other entity in which
Borrower, directly or indirectly through its Subsidiaries, has more than a
fifty percent (50%) equity interest at the time.

"Tangible Net Worth" means the total assets of Borrower
exclusive of (a) those assets classified as intangible, including, without
limitation, goodwill, patents, trademarks, trade names, copyrights, franchises
and deferred charges, (b) treasury stock and minority interests in any Person,
(c) cash set apart and held in a sinking or other analogous fund established
for the purpose of redemption or other retirement of capital stock, (d) to the
extent not already deducted from total assets, allowances for depreciation,
depletion, obsolescence and/or amortization of properties, uncollectible
accounts, and contingent but probable liabilities as to which an amount can be
established, (e) deferred taxes and (f) all assets arising from advances to
officers, former

18
officers or sales representatives of Borrower made outside of the ordinary
course of business; less total liabilities of Borrower; all of the above being
determined in accordance with GAAP.

"Unmatured Event of Default" means any event or occurrence
which solely with the lapse of time or the giving of notice or both will ripen
into an Event of Default.

Undefined financial accounting terms used in this Agreement
shall be defined in accordance with GAAP.

ARTICLE II. THE LOAN

2.01 The Revolving Line. Upon the terms and conditions
(including, without limitation, the right of Bank to terminate the Revolving
Commitment hereunder upon an Event of Default or an Unmatured Event of Default)
and relying on the representations and warranties contained in this Agreement,
Bank agrees, for a period from and after the date hereof through the last
Business Day prior to the Maturity Date, to make advances for the account of
Borrower from time to time following receipt of a Request for Advance;
provided, however, that the aggregate principal amount of all Loans plus the
aggregate face amount of all Letters of Credit at any one time outstanding
shall not exceed the Revolving Commitment.

Through the last Business Day prior to the Maturity Date,
Borrower may use this revolving credit by borrowing, prepaying and reborrowing,
all in accordance with the terms and conditions of this Agreement. The
borrowings made by Borrower pursuant to the Revolving Commitment shall be made
at the principal office of Bank and shall be evidenced by the Note. The entire
principal amount of the Note is due on the Maturity Date.

2.02 Advances and Payments of Principal Under the Note.
Each time an advance is made against or payment is made on the Note, Bank is
hereby irrevocably authorized by Borrower to make appropriate entries of such
in its records in accordance with the usual and customary practices of
accounting for advances and payments on notes; provided, however, the failure
of Bank to do so shall not relieve Borrower of its correct liability hereunder
or under the Note.

The aggregate unpaid amount of advances reflected by the
notations by Bank on its records or the ledger sheets affixed to

19
the Note shall be deemed rebuttably presumptive evidence of the principal
amount owing on the Note. The liability for payment of principal and interest
evidenced by the Note shall be limited to principal amounts actually advanced
to Borrower and outstanding under this Agreement and interest on such amounts
calculated in accordance with this Agreement. Interest provided for in the
Note and herein shall be calculated on unpaid sums actually advanced and
outstanding under the Note pursuant to the terms of this Agreement and only for
the period from the date or dates of such advances until repayment.

2.03 Prepayment and Conversion. Upon the Required Number
of days notice to the Bank, the Borrower may: (a) without the payment of
penalty or premium, prepay the principal of the Loans, or (b) voluntarily
convert the applicable Interest Rate of any Loan prior to the termination of
the applicable Interest Period in whole or in part, from time to time; any
partial payment or conversion to be made in the sum of not less than $500,000
or any $100,000 increment in addition thereto; provided that with respect to
any such prepayment or conversion of any Loan upon which interest is being
calculated at the LIBOR Rate the Borrower shall reimburse the Bank on demand
for any costs, including administrative costs, incurred by the Bank as a result
of such prepayment or conversion and any loss incurred or to be incurred by the
Bank in the redeployment of the funds released by any such prepayment. Such
loss shall be the difference, as reasonably determined by Bank, between (i)
Bank's gross return hereunder with respect to that portion of the Loans which
is prepaid, based on the applicable Interest Rate for such portion of the Loans
and (ii) any lesser amount realized by Bank in deploying the funds received in
repayment, or otherwise realized from that portion of the Loans so prepaid,
during the period from the date of the prepayment until the end of the Interest
Period for that portion of the Loans prepaid; provided that Bank shall use its
best efforts to redeploy such funds in a commercially reasonable manner.

2.04 Interest Rate and Payments of Interest.

(A) Interest on Index Rate Loans shall be calculated on
the basis of a year of 365 or 366 days, as appropriate.
Interest on LIBOR Loans shall be calculated on the basis of a
360-day year, counting the actual number of days elapsed.
Interest on the outstanding principal balance of the Loans
shall accrue for each day at either the

20
Floating Rate for such day or the LIBOR Rate for the Interest
Period which includes such day, all as elected and specified
(including specification as to length of Interest Period, as
permitted by the definition of that term, with respect to any
election of the LIBOR Rate) by the Borrower in accordance with
Section 2.04(B); provided that:

(i) In the absence of an election by the Borrower
of the LIBOR Rate, or, having made such election but
upon the Required Number of days prior to the end of
the then current Interest Period the Borrower fails
or is not entitled under the terms of this Agreement
to elect to continue such Interest Rate and specify
the applicable Interest Period therefor, then upon
the expiration of such then current Interest Period,
interest on the Loans shall accrue for each day at
the Floating Rate for such day, until the Borrower,
pursuant to Section 2.04(B), elects a different
Interest Rate and specifies the Interest Period for
the Loans.

(ii) Interest accruing on any LIBOR Loan during any
Interest Period shall be payable on the last
Business Day of such then current Interest Period;
provided, however, that with respect to LIBOR Loans
for which the Interest Period selected by the
Borrower pursuant to Section 2.04(B) is greater than
three (3) months, interest shall be payable
quarterly on the last Business Day of such quarterly
period with the first such quarterly period
commencing on the first day of the applicable
Interest Period with any remaining unpaid interest
being due and payable on the last day of such
Interest Period; provided further that all accrued
interest on any LIBOR Loan converted or prepaid
pursuant to Section 2.03 shall be paid immediately
upon such prepayment or conversion.

(B) By at least the Required Number of days prior to the
advance of any Loan hereunder, Borrower shall select the
initial Interest Rate to be charged on such Loan, and from
time to time thereafter the Borrower may elect, on at least
the Required Number of days' irrevocable prior

21
written (or telephoned, promptly confirmed by written) notice to the Bank, to
change the Interest Rate on any Loan to any other Interest Rate (including,
when applicable, the selection of the Interest Period); provided that; (i) the
Borrower shall not select an Interest Period that extends beyond the
Termination Date; (ii) except as otherwise provided in Section 2.03 no such
change from the LIBOR Rate to another Interest Rate shall become effective on a
day other than the day, which must be a Business Day, next following the last
day of the Interest Period last effective for such LIBOR Loan; (iii) any
elections made by the Borrower pursuant to this Section 2.04(B) shall be in the
amount of $100,000, plus any additional increment of $100,000; (iv)
notwithstanding anything herein to the contrary, the Borrower may not make any
election under this Section 2.04(B) that would result in Loans outstanding at
more than three (3) different LIBOR Rates without the written agreement of the
Bank to do so; and (v) the first day of each Interest Period as to a LIBOR Loan
shall be a Business Day.

(C) Interest on Index Rate Loans shall be paid monthly in arrears on the
first day of each calendar month commencing with any month during which
interest begins to accrue at the Floating Rate, as elected by Borrower pursuant
to Section 2.04(B), and on the date the principal of such Loans shall be due
(at stated maturity, on acceleration, or otherwise).

(D) Interest on past-due principal shall accrue at the greater of the
applicable Floating Rate plus three percent (3.00%) or LIBOR plus five percent
(5.00%) until such principal is paid in full, and shall be payable upon demand
by the Bank.

(E) The Bank shall notify the Borrower of the current Index Rate and of
the current LIBOR Rate from time to time upon request by the Borrower.

(F) It is the intention of the parties hereto to conform strictly to
applicable usury laws as in effect from time to time. Accordingly, if any
transactions contemplated hereby would be usurious under applicable

22
Law (including the laws of the United States of America, or of any other
jurisdiction whose laws may be mandatorily applicable), then, in that event,
notwithstanding anything to the contrary in this Agreement, or any other
agreement entered into in connection with this Agreement, it is agreed the
aggregate of all consideration that constitutes interest under applicable law
that is contracted for, charged, or received under this Agreement, or under any
of the other aforesaid agreements or otherwise in connection with this
Agreement shall under no circumstances exceed the Maximum Rate, and any excess
shall be credited to the Borrower by Bank (or, if such consideration shall have
been paid in full, such excess refunded to the Borrower by Bank). All sums
paid, or agreed to be paid, to the Bank for use, forbearance, and detention of
the indebtedness of the Borrower by the Bank shall, to the extent permitted by
applicable laws, be amortized, pro rated, allocated, and spread throughout the
full term of such indebtedness until such indebtedness is paid in full so that
the actual rate of interest is uniform, but does not exceed the Maximum Rate,
throughout the full term thereof. If at any time the applicable Interest Rate,
which shall be deemed for purposes of this Section 2.04(F), only, to include
any other fees, charges, or other forms of consideration which constitute
interest under applicable law that is contracted for, charged, or received
under this Agreement or any other agreement entered into in connection with
this Agreement, exceeds the Maximum Rate, the rate of interest to accrue
pursuant to this Agreement shall be limited, notwithstanding anything to the
contrary in this Agreement, to the Maximum Rate, but any subsequent reductions
in the Interest Rate otherwise provided for herein shall not reduce the
interest to accrue pursuant to this Agreement below the Maximum Rate until the
total amount of interest accrued pursuant to this Agreement equals the amount
of interest that would have accrued if a varying rate per annum equal to the
otherwise applicable Interest Rate had at all times been in effect. If the
total amount of interest paid or accrued pursuant to this Agreement under the
foregoing provisions is less than the total amount of interest that would have
accrued if a varying rate per annum equal to the otherwise applicable Interest
Rate had at all times

23
been in effect, then the Borrower agrees to pay upon final
maturity of the Loans an amount equal to the difference between
(a) the lesser of (i) the amount of interest that would have
accrued if the Maximum Rate had at all times been in effect or
(ii) the amount of interest that would have accrued if a
varying rate per annum equal to the otherwise applicable
Interest Rate had at all times been in effect, and (b) the
amount of interest accrued in accordance with the other
provisions of this Agreement.

2.05 Increased Cost of Loans.

(A) Notwithstanding any other provisions herein, if as a
result of any regulatory change

(i) the basis of taxation of payments to Bank of
the principal of, or interest on, any LIBOR Loan or
any other amounts due under this Agreement in
respect of any such LIBOR Loan (except for taxes
imposed on the overall net income or receipts of
Bank, and franchise or other taxes imposed generally
on Bank), by the jurisdiction (or any political
subdivision therein) in which Bank has its principal
office (if such other taxes do not specifically
affect the cost to Bank of making the Loans) is
changed;

(ii) any reserve, special deposit, or similar
requirement (including without limitation any
reserve requirement under regulations of the Board
of Governors of the Federal Reserve System) against
assets of, deposits with, or for the account of, or
credit extended by Bank, is imposed, increased,
modified, or deemed applicable; or

(iii) any other condition affecting this Agreement
or any LIBOR Loan is imposed on Bank or (in the case
of LIBOR Loans) the London interbank market;

and the result of any of the foregoing is to increase the
actual direct cost to Bank of making or maintaining any

24
such LIBOR Loan or to reduce the amount of any sum received by
Bank hereunder in respect thereof (and such increase or
reduction shall not have been compensated by a corresponding
increase in the interest rate applicable to the respective
Loans), by an amount deemed by Bank to be material (such
increases in cost and reductions in amounts receivable being
herein called "Increased Costs"), then the Borrower shall pay
to Bank, within thirty (30) days after its demand, such
additional amount or amounts as will compensate Bank for those
Increased Costs. The Bank will not demand to be compensated by
Borrower for such Increased Costs unless the Bank generally
makes such demands to its other LIBOR Loan customers who are
similarly situated. A certificate of Bank setting forth the
basis for the determination of such amount necessary to
compensate the Bank as aforesaid, accompanied by documentation
showing reasonable support for such increased costs or reduced
sums received by Bank, shall be delivered to the Borrower and
shall be conclusive, save for manifest error, as to such
determination and such amount.

(B) Notwithstanding the foregoing provisions of this
Section 2.05, in the event that by reason of any regulatory
change the Bank either (i) incurs Increased Costs based on, or
measured by, the excess above a specified level of the amount
of a category of deposits or other liabilities of Bank that
includes deposits by reference to which the interest rate on
LIBOR Loans is determined as provided in this Agreement or a
category of extensions of credit or other assets of such Bank
that includes LIBOR Loans or (ii) becomes subject to
restrictions on the amount of such a category of liabilities
or assets that it may hold, then, if Bank so elects by notice
to the Borrower, the obligation of Bank to make or convert
Loans of any other type into LIBOR Loans hereunder shall be
suspended until the earlier of the date such regulatory change
ceases to be in effect or the date the Borrower and Bank agree
upon an alternative method of determining the interest rate
payable by the Borrower on LIBOR Loans, and all LIBOR Loans of
Bank then outstanding shall be converted into an Index Rate
Loan (if not otherwise prohibited under the terms of this
Agreement) at the Borrower's option.

25
(C) Bank agrees that upon the occurrence of any
regulatory change giving rise to the operation of the first
paragraph of this Section 2.05, it will, if requested by the
Borrower and to the extent permitted by law or by the relevant
government authority, for a period of thirty (30) days
endeavor in good faith to avoid or minimize the increase in
cost or reduction in amount receivable resulting from such
regulatory change; provided, however, that such change can be
made in such a manner that Bank, in its sole determination,
suffers no economic, legal, regulatory, or other disadvantage.
Any expense incurred by Bank in so doing shall be paid by the
Borrower on delivery to the Borrower of a certificate as to
the amount of such expense, which certificate shall be
conclusive in the absence of manifest error. Nothing in this
paragraph shall affect or postpone the obligations of the
Borrower set forth in any other paragraph of this Section
2.05.

2.06 Substitute Rate. Anything herein to the contrary
notwithstanding, if within two (2) Business Days prior to the first day of any
Interest Period for a LIBOR Loan the Bank is not, for any reason whatsoever,
quoted rates for the offering of Dollars for deposit with it in the London
interbank market for a period and amount relevant to the computation of the
rate of interest on LIBOR Loans for such Interest Period, the Bank shall give
the Borrower prompt notice thereof and on what would otherwise be the first day
of such Interest Period such Loans shall be made as Index Rate Loans (if not
otherwise prohibited under the terms of this Agreement), at the Borrower's
option in accordance with the election procedures set forth in Section 2.04(B);
provided, however, that prior to the effective date of such election, interest
shall be calculated at the Floating Rate.

2.07 Change of Law. Notwithstanding any other provision
herein, in the event that any change in any applicable law, rule or regulation
or in the interpretation or administration thereof shall make it unlawful for
the Bank to (i) honor any commitment it may have hereunder to make any LIBOR
Loan, then such commitment shall terminate, or (ii) maintain any LIBOR Loan,
then all LIBOR Loans of the Bank then outstanding shall be repaid and converted
to Index Rate Loans (if not otherwise prohibited under the terms of this
Agreement) at the Borrower's option in accordance with the election procedures
set forth in Section 2.04(B); provided, however, that

26
prior to the effective date of such election, interest shall be calculated at
the Floating Rate. Any remaining commitment of Bank hereunder to make LIBOR
Loans (but not other Loans) shall terminate forthwith. Upon the occurrence of
any such change, the Bank shall promptly notify the Borrower thereof, and shall
furnish to the Borrower in writing evidence thereof certified by the Bank.

Any repayment or conversion of any LIBOR Loan which is
required under this Section 2.07 or under 2.05(B) shall be effected by payment
thereof, together with accrued interest thereon, on demand, and concurrently
there shall occur the borrowing of the corresponding Index Rate Loan as
provided herein.

If any repayment to Bank of any LIBOR Loan (including
conversions thereof) is made under this Section 2.07 on a day other than a day
otherwise scheduled for a payment of principal of or interest on such Loan, the
Borrower shall pay to Bank upon its request such amount or amounts as will
compensate it for the amount by which the rate of interest on such Loan
immediately prior to such repayment exceeds the stated rate of interest on
relending or reinvesting the funds received in connection with such prepayment,
in each case for the period from the date of such prepayment to the Business Day
next succeeding the last day of such then current Interest Period, all as
determined by Bank in its good faith discretion.

2.08 Advances to Satisfy Obligations of Borrower. Bank
may, but shall not be obligated to, make advances hereunder and apply same to
the satisfaction of any condition, warranty, representation or covenant of
Borrower contained in this Agreement, and the funds so advanced and applied
shall be part of the Loan proceeds advanced under this Agreement and evidenced
by the Note.

2.09 Mandatory Prepayment of the Notes. In the event
that Bank or Borrower determine that a Loan Excess exists, Borrower shall
immediately, but in no event later than thirty (30) days following the earlier
of either: (a) Borrower becoming aware that a Loan Excess exists, or (b) notice
from Bank of any such determination, (i) prepay the principal of the Note in an
aggregate amount at least equal to such Loan Excess or (ii) add to the
Borrowing Base Properties additional Oil and Gas Properties, Cash and/or Cash
Equivalent of Borrower sufficient in value, as determined by Bank in its sole
discretion pursuant to Section 2.10,

27
to increase the Borrowing Base to equal the unpaid principal amount of the Note
plus all accrued, unpaid interest.

2.10 Borrowing Base Determination.

a. Borrowing Base Oil and Gas Properties. The
initial Borrowing Base attributable to the Borrowing Base Oil and Gas
Properties is hereby established at $4,750,000.00 effective as of the date
hereof. Subject to the other provisions of this Agreement, the Borrowing Base
shall be automatically reduced commencing on October 1, 1997, by the Monthly
Borrowing Base Reduction, which is initially established at $250,000.00. On or
before October 1, 1997, Borrower shall furnish to Bank information sufficient
to update to an effective date of July 1, 1997, the most recent petroleum
engineering reports and geological data provided to Bank prior to Closing
relative to the Proved Reserves that are attributable to the Oil and Gas
Properties that constitute part of the Borrowing Base Oil and Gas Properties,
as well as such other information as Bank may request regarding volumes of
production produced and sold, contracts, pricing, gross revenues, expenses, and
other information and engineering and geological data as may relate to the
Borrowing Base Oil and Gas Properties (collectively the "Borrowing Base
Property Data"). Upon receipt of such Borrowing Base Property Data, Bank
shall, in the normal course of business, redetermine the Borrowing Base and the
Monthly Borrowing Base Reduction attributed to the Borrowing Base Oil and Gas
Properties, which redetermination shall become effective upon written
notification from Bank to Borrower, and which, subject to the other provisions
of this Agreement, shall be the basis on which the Borrowing Base shall
thereafter be calculated until the effective date of the next redetermination
of the Borrowing Base and the Monthly Borrowing Base Reduction as set forth in
this Section. Thereafter, on or before each succeeding April 1 and October 1
until the Maturity Date, Borrower shall furnish to Bank a report, in form and
substance satisfactory to Bank, which report shall set forth, as of each
preceding January 1 or July 1, as applicable, such Borrowing Base Property Data
as Bank may request attributable to the Borrowing Base Oil and Gas Properties.
Each report to be provided on or before each April 1 shall be a complete report
relating to the Borrowing Base Property Data, prepared by an independent
petroleum engineer or firm of engineers satisfactory to Bank. Each report to
be provided on or before each October 1 shall simply update the previous
complete report, and may be prepared by Borrower's own engineers and shall be
certified by the President of

28
Borrower. Upon receipt of each such report, Bank shall, in the normal course
of business, make a determination of the Borrowing Base and the Monthly
Borrowing Base Reduction which shall become effective upon written notification
from Bank to Borrower, and which, subject to the other provisions of this
Agreement, shall be the basis on which the Borrowing Base attributable to the
Borrowing Base Oil and Gas Properties shall thereafter be calculated until the
effective date of the next redetermination of the Borrowing Base and the
Monthly Borrowing Base Reduction as set forth in this Section.

At Closing, Borrower shall pay to Bank an engineering fee of
$7,212.50 in connection with the Borrowing Base evaluation performance by the
Bank prior to the execution of this Agreement. Beginning with the delivery of
the Borrowing Base Property Data due by October 1, 1997, and continuing as and
when Borrower is required to provide to Bank each semi-annual report, as
required by the provisions of this Section, Borrower shall contemporaneously
pay an engineering fee of $7,500.00 to Bank for Bank's analysis of such report
and redetermination of the Borrowing Base and the Monthly Borrowing Base
Reduction. At any time engineering reviews are requested by Borrower in
connection with a Borrowing Base redetermination, other than the semi-annual
reviews required by Bank, an additional fee of $7,500.00 shall be paid to Bank
for Bank's analysis of such report and redetermination of the Borrowing Base.

b. Borrowing Base Cash. At each time that the
Bank redetermines the Borrowing Base attributable to the Borrowing Base Oil and
Gas Properties, as set forth in subsection 2.10(a), it shall also include in
the Borrowing Base calculation the face value of all Borrowing Base Cash that
is in the Bank's possession and is subject to one or more of the applicable
Security Agreements.

c. Equity Cushion. The Borrowing Base shall
represent Bank's determination, in accordance with its customary lending
practices in effect from time to time, of the maximum loan amount that may be
supported by the Borrowing Base Properties. Borrower and Bank acknowledge that
(a) due to the uncertainties of the oil and gas extraction process, the
Borrowing Base Oil and Gas Properties are not subject to evaluation with a high
degree of accuracy and are subject to potential rapid deterioration in value,
and (b) for this reason and the difficulties and expenses involved in
liquidating and collecting against the Borrowing Base Oil and

29
Gas Properties, Bank's determination of the maximum loan amount with respect to
the Borrowing Base Oil and Gas Properties contains an equity cushion, which
equity cushion is acknowledged by Borrower as essential for the adequate
protection of Bank.

d. Unscheduled Borrowing Base Redeterminations.
In addition to scheduled redeterminations of the Borrowing Base, the Bank may
redetermine the Borrowing Base and the Monthly Borrowing Base Reduction at any
time, and from time to time, which redetermination shall become effective upon
written notification from Bank to Borrower and which, subject to the other
provisions of this Agreement, shall be the basis on which the Borrowing Base
shall thereafter be calculated until the effective date of the next
redetermination of the Borrowing Base and the Monthly Borrowing Base Reduction,
as set forth in this Section.

2.11 Assignment of Production. Certain of the Security
Instruments covering the Borrowing Base Oil and Gas Properties contain an
assignment unto and in favor of Bank of all oil, gas and other minerals
produced and to be produced from or attributable to the Oil and Gas Properties
that constitute part of the Borrowing Base Oil and Gas Properties, together
with all of the revenues and proceeds attributable to such production, and such
Security Instruments further provide that all such revenues and proceeds which
may be so collected by Bank pursuant to the assignment shall be applied to the
payment of the Note and the satisfaction of all other Indebtedness to be
secured by such Security Instruments. Such Security Instruments further
provide that the Bank grants to Borrower a license to receive and collect the
revenues and proceeds attributable to such production unless and until an Event
of Default shall occur, and upon the occurrence of an Event of Default, the
Bank, acting in its sole discretion, shall have the right to terminate
Borrower's license to collect such revenues and proceeds. Borrower hereby
appoints Bank as its agent and attorney-in-fact for all purposes deemed by Bank
to be necessary or desirable in connection with such assignment of production,
including, but not limited to, completing the letter transfer orders delivered
to Bank pursuant to Sections 3.17 and/or 3.19 hereof, which power is coupled
with an interest and is not revocable.

2.12 Commitment Fee. As consideration for the commitment
of Bank to make Loans to Borrower through the Maturity Date pursuant to this
Agreement, Borrower agrees to pay to Bank within

30
five (5) Business Days of receipt of Bank's statement as to quarterly periods
ending March 31, June 30, September 30 and December 31 of each year (except the
first period shall be for a period of time from the Closing to September 30,
1997) during the period commencing on the date of this Agreement to and
including the Maturity Date and at the Maturity Date, a fee equal to:

(a) 1/2 of 1% per annum (computed on the basis of
365 or 366 days, as the case may be) multiplied by an amount equal to the daily
average excess, if any, of the Borrowing Base over the sum of: (x) the
aggregate principal amount outstanding on the Note, plus (y) the aggregate face
amount of all outstanding Letters of Credit, throughout the period from the
date of this Agreement or previous calculation date provided above, whichever
is later, to the relevant calculation date or the Maturity Date, as the case
may be, plus

(b) 1/4 of 1% per annum (computed on the basis of
365 or 366 days, as the case may be) multiplied by an amount equal to the daily
average excess, if any, of $25,000,000.00 over the amount of the Borrowing Base
throughout the period from the date of this Agreement or previous calculation
date provided above, whichever is later, to the relevant calculation date or
the Maturity Date, as the case may be.

2.13 Facility Fee. As consideration for the commitment
of Bank to make Loans to Borrower pursuant to this Agreement, if the Revolving
Commitment is ever increased to an amount exceeding $11,800,000.00, Borrower
shall pay to Bank at the time such increase becomes effective a fee ("Facility
Fee") equal to one-half of one percent (.5%) of the amount by which such
increased Revolving Commitment exceeds either: (a) $11,800,000.00, or (b) the
highest Revolving Commitment amount previously in effect, if greater than
$11,800,000.00.

2.14 Addition of Borrowing Base Properties. Borrower
may, from time to time upon thirty (30) days prior written notice to Bank,
propose to add Oil and Gas Properties, Cash, and/or Cash Equivalent of Borrower
to the Borrowing Base Properties. Any such proposal to add Oil and Gas
Properties of Borrower to the Borrowing Base Properties shall be accompanied by
an engineering report applicable to such Oil and Gas Properties that conforms
to the requirements of Section 2.10, evidence sufficient to establish that
Borrower has Marketable Title to such Oil and Gas Properties, and

31
such other data as Bank may reasonably request. Any such additions shall
become effective at such time as: (a) Bank has made its determination in the
ordinary course of business of the amount by which the Borrowing Base would be
increased as the result of such addition and (b) the conditions set forth in
Article III hereof, to the extent they are applicable to such additional
Borrowing Base Properties of Borrower, have been satisfied.

2.15 Letters of Credit. Subject to the terms and
conditions of this Agreement, the Bank agrees to issue standby Letters of
Credit for the account of the Borrower from time to time following receipt of a
Request for Advance three (3) Business Days prior to the requested date of
issuance in such amount as the Borrower may request in an aggregate amount of
up to (i) One Million Dollars ($1,000,000.00), but (ii) not to exceed at any
time the unborrowed portion of the Revolving Commitment. The amount of any
such Letters of Credit issued under the Revolving Commitment shall be deemed to
be a Loan and to reduce the amount available under the Revolving Commitment and
shall be governed by the terms of this Agreement. The Bank may require in
connection with the issuance of any Letter of Credit that Borrower execute the
Bank's then-current form of application for a Letter of Credit, but if there is
any conflict between the terms of any such application and the terms of this
Agreement, the terms of this Agreement shall control. No Letter of Credit
shall have an expiration date that is later than one year from the date of its
issuance, or, if sooner, beyond the Maturity Date.

2.16 Repayment of Letters of Credit. If drawn upon by
the beneficiary of a Letter of Credit, all amounts so drawn shall be due and
payable by the Borrower immediately upon receipt of Bank's statement therefor.

2.17 Letter of Credit Fee. As consideration for the
issuance by the Bank of Letters of Credit for the account of the Borrower, the
Borrower agrees to pay to the Bank a fee of one percent (1.0%), per annum, of
the amount of each such Letter of Credit (subject to a $300.00 minimum fee per
year on each Letter of Credit), the first such per annum fee for each Letter of
Credit to be payable in advance of the issuance of such Letter of Credit, with
successive per annum fees to be paid in advance of the anniversary date of the
issuance of such Letter of Credit if it is to remain in effect beyond such
anniversary date.

32
ARTICLE III. CONDITIONS

The obligation of Bank to make advances of the Loans and/or to
issue Letters of Credit referred to in Article II of this Agreement is subject
to the prior or contemporaneous satisfaction of the following conditions
precedent stated in this Article III.

3.01 Receipt of Note, Agreement and Certificate of
Compliance. Bank shall have received the Note, multiple counterparts of this
Agreement, as requested by Bank, and the Certificate of Compliance duly
executed by an authorized officer for Borrower.

3.02 Proceeds from Initial Public Offering. Borrower
shall have closed the Initial Public Offering and shall have received net cash
proceeds therefrom of not less than $20,000,000.00

3.03 Receipt of Organizational Documents. Bank shall
have received from Borrower its Articles of Incorporation, its bylaws, and its
Certificates and Agreements of Merger with Carrizo Production, Inc. and
Encinitas Partners Ltd., certified as being true and correct by the secretary
or an assistant secretary of Borrower.

3.04 Receipt of Certified Copy of Corporate Proceedings
and Certificates of Incumbency. Bank shall have received from Borrower copies
of all resolutions of its board of directors authorizing the transactions set
forth in this Agreement, and the execution of this Agreement, the Note, and
those of the Security Instruments to which it is a party, such copy or copies
to be certified by the secretary or an assistant secretary as being true and
correct and in full force and effect as of the date hereof. In addition, Bank
shall have received from Borrower a certificate of incumbency signed by the
secretary or an assistant secretary of Borrower setting forth (a) the names of
the officers executing this Agreement, the Note, and those of the Security
Instruments to which it is a party, (b) the office(s) to which such Persons
have been elected and in which they presently serve and (c) an original
specimen signature of each such person.

3.05 Receipt of Certificates of Authority and
Certificates of Good Standing. Bank shall have received

33
certificates, as of the most recent dates practicable, of the Secretary of
State of the state in which Borrower is incorporated attesting to Borrower's
existence, and of each state in which Borrower is qualified to do business as a
foreign corporation attesting to such qualification, and from the department of
revenue or taxation of each of the foregoing states, as to the good standing of
Borrower;

3.06 UCC Search. The results of a Uniform Commercial
Code search showing all financing statements and other documents or instruments
on file against Borrower in the Offices of the Secretaries of State of the
State of Texas and in the counties in which Borrowing Base Oil and Gas
Properties are located, such search to be as of a date no more than ten (10)
days prior to the date of the Closing.

3.07 Fees. Bank shall have contemporaneously received
the fees required by Section 2.10.

3.08 Financial Statements. Bank shall have received the
Financial Statements of Borrower as of June 30, 1997, showing financial
information consistent with that previously provided to Bank.

3.09 Request for Advance. Bank shall have received from
Borrower a Request for Advance.

3.10 Accuracy of Representations and Warranties and No
Event of Default. The representations and warranties contained in Article IV
of this Agreement shall be true and correct in all material respects on the
date of the making of such Loans or advances with the same effect as though
such representations and warranties had been made on such date; and no Event of
Default shall have occurred and be continuing or will have occurred at the
completion of the making of such Loans or advances.

3.11 Legal Matters Satisfactory to Counsel to Bank. All
legal matters incident to the consummation of the transactions hereby
contemplated shall be satisfactory to counsel for Bank.

3.12 No Material Adverse Change. No material adverse
change shall have occurred since the date of this Agreement in the condition,
financial or otherwise, of Borrower.

34
3.13 Status of Title. Bank shall have been satisfied
that Borrower has Marketable Title to its Borrowing Base Properties, and that
Borrower owns record title to an undivided net revenue interest in the
production from each Oil and Gas Property that is a Borrowing Base Property
that is not less than the net revenue interest therein attributed to Borrower
in the Loan Documents, as amended from time to time, as well as an undivided
working interest in each such Oil and Gas Property that is not greater than the
working interest therein attributed to Borrower in the Loan Documents, as
amended from time to time (unless there is a corresponding increase in the net
revenue interest attributed to such party therein).

3.14 Security Instruments. As security for the payment
of the Note and the performance of the Obligations of Borrower under this
Agreement, Bank shall have received the Security Instruments, duly executed by
Borrower.

3.15 Legal Fees. All legal fees and disbursements owed
to Bank's special counsel who provided representation to the Bank in connection
with this Agreement or any amendment hereto and in connection with the review
of title to the Borrowing Base Oil and Gas Properties shall have been paid.

3.16 Documents Required for Subsequent Disbursements. As
of the time of funding any additional advances to Borrower that are made in
conjunction with the addition to the Borrowing Base Properties of Oil and Gas
Properties, Cash, and/or Cash Equivalent, owned by Borrower, Borrower shall
have duly delivered to Bank: (i) the Security Instruments that are necessary or
appropriate, in the opinion of Bank, relating to such additional Borrowing Base
Properties, (ii) Transfer Order Letters applicable to the production of oil and
gas from any additional Oil and Gas Properties added to the Borrowing Base
Properties, and (iii) possession of any such additional Borrowing Base Cash.

ARTICLE IV. REPRESENTATIONS AND WARRANTIES

To induce Bank to enter into this Agreement and to make the
Loan hereunder, Borrower represents and warrants to Bank (which representations
and warranties will survive the delivery of the Note) that:

35
4.01 Existence and Good Standing. Borrower is a
corporation, duly organized, legally existing and in good standing under the
laws of its jurisdiction of incorporation and is duly qualified and in good
standing as a foreign corporation in all jurisdictions wherein the property
owned or the business transacted by it makes such qualification necessary,
other than those jurisdictions wherein the failure to so qualify does not have
a material adverse effect on Borrower.

4.02 Due Authorization. As to Borrower, the execution
and delivery by Borrower of this Agreement and the borrowings hereunder; the
execution and delivery by Borrower of the Note and the Security Instruments;
and the repayment by Borrower of Indebtedness evidenced by the Note and
interest and fees provided in the Note and this Agreement are (a) within the
corporate power of Borrower; (b) have been duly authorized by all necessary
corporate action; and (c) do not and will not (i) require the consent of any
regulatory authority, governmental body, or any other Person, (ii) violate any
provision of law, the certificate of incorporation, the articles of
incorporation, or the bylaws of Borrower, (iii) cause a default to occur under
the terms and provisions of any indenture, instrument or other agreement to
which Borrower is a party or by which its property may be presently bound or
encumbered, or (iv) result in or require the creation or imposition of any
mortgage, lien, pledge, security interest, charge or other encumbrance in, upon
or of any of the properties or assets of Borrower under any such indenture,
instrument or other agreement, other than under any of the Security
Instruments.

4.03 Valid and Binding Obligations. This Agreement, the
Note, and the Security Instruments are the legal, valid and binding obligations
of and enforceable against Borrower in accordance with their respective terms
(subject to any applicable bankruptcy, insolvency or other laws of general
application affecting creditors' rights and judicial decisions interpreting any
of the foregoing).

4.04 Completion of Merger. Borrower is the survivor and
successor by merger to Carrizo Production, Inc. and Encinitas Partners Ltd.,
and the Existing Encinitas Agreement and all of the Loan Documents executed by
Encinitas Partners Ltd., pursuant thereto, as hereby amended, are the legal,
valid and binding obligations of and enforceable against Borrower in accordance
with their respective terms (subject to any applicable bankruptcy,

36
insolvency or other laws of general application effecting creditors' rights and
judicial decisions interpreting any of the foregoing).

4.05 Title to Borrowing Base Properties. Borrower has
Marketable Title to all of its Borrowing Base Properties, including those
Borrowing Base Properties formerly owned by Encinitas.

4.06 Oil and Gas Leases. The Leases which constitute any
part of the Borrowing Base Properties are in full force and effect, are valid,
subsisting leases covering the entire estates to which they pertain and all
rentals, royalties and other amounts due and payable in accordance with the
terms of the Leases, overriding royalties, net profits or other production
burdens have been duly paid or provided for; the obligations to be performed
under the Leases have been duly performed; and Borrower is not aware of any
default by any third party under any of the Leases with respect to such third
party's obligations.

4.07 Interest in the Borrowing Base Oil and Gas
Properties. With respect to each of the Borrowing Base Oil and Gas Properties,
the ownership of Borrower in such property will, with respect to the ▇▇▇▇▇,
units and/or tracts of land described in Schedule 1.01(a) hereto in connection
with such property, (i) entitle Borrower to receive (subject to the terms and
provisions of this Agreement) a decimal share of the oil and gas produced from,
or allocated to, such ▇▇▇▇▇, units and/or tracts equal to not less than the
decimal share set forth in Schedule 1.01(a) in connection with such ▇▇▇▇▇,
units and/or tracts, and (ii) cause Borrower to be obligated to bear a decimal
share of the cost of exploration, development and operation of such ▇▇▇▇▇,
units and/or tracts of land not greater than the decimal share set forth in
Schedule 1.01(a) in connection with such ▇▇▇▇▇, units and/or tracts, unless any
increase in Borrower's share of costs is accompanied by a pro-rata increase in
Borrower's share of revenue. Except as set forth in the instrument and
agreements, if any, more particularly described in Schedule 1.01(a), all such
shares of production which Borrower is entitled to receive, and shares of
expenses which Borrower is obligated to bear, are not subject to change, except
for changes attributable to future elections by Borrower not to participate in
operations proposed pursuant to customary forms of applicable joint operating
agreements, and except for changes attributable to changes in participating
areas under any federal units wherein participating areas may be formed,
enlarged or

37
contracted in accordance with the rules and regulations of the applicable
governmental authority.

4.08 Oil and Gas Contracts. Borrower is not obligated,
by virtue of any prepayment under any contract providing for the sale by
Borrower of hydrocarbons which contains a "take-or-pay" clause or under any
similar prepayment agreement or arrangement, including, without limitation, "gas
balancing agreements", to deliver a material amount of hydrocarbons produced
from the Borrowing Base Oil and Gas Properties at some future time without then
or thereafter receiving full payment therefor (i.e., in the case of oil, not in
excess of sixty (60) days, and in the case of gas, not in excess of ninety (90)
days). The Borrowing Base Oil and Gas Properties are not subject to any
contractual, or other arrangement for the sale of crude oil which cannot be
cancelled on ninety (90) days' (or less) notice, unless the price provided for
therein is equal to or greater than the prevailing market price in the
vicinity. The Borrowing Base Oil and Gas Properties are not subject to any gas
sales contract that contains any material terms which are not customary in the
industry within the region in which the Borrowing Base Oil and Gas Properties
affected thereby are located. The Borrowing Base Oil and Gas Properties are not
subject to any regulatory refund obligation and no facts exist which might cause
the same to be imposed.

4.09 Producing ▇▇▇▇▇. All producing ▇▇▇▇▇ located on the
Borrowing Base Oil and Gas Properties have been, during all times that such
were under the direction or control of Borrower and, to the knowledge of
Borrower, at all other times, drilled, operated and produced in conformity with
all applicable Laws, rules, regulations and orders of all regulatory
authorities having jurisdiction, are subject to no penalties on account of past
production, and are bottomed under and are producing from, and the well bores
are wholly within, the Borrowing Base Oil and Gas Properties or on Oil and Gas
Properties which have been pooled, unitized or communitized with the Borrowing
Base Oil and Gas Properties.

4.10 Purchasers of Production. The persons who are
purchasing Borrower's interests in oil and gas produced from the Borrowing Base
Oil and Gas Properties as of the calendar month during which the Loans are made
hereunder are identified on Schedule 4.10 attached hereto.

38
4.11 Scope and Accuracy of Financial Statements. All
Financial Statements submitted and to be submitted to Bank hereunder are and
will be complete and correct in all material respects; are and will be prepared
in accordance with GAAP and practices consistently applied; and do and will
fairly reflect the financial condition and the results of the operations of
Borrower in all material respects as of the dates and for the period stated
therein (subject only to normal year-end audit adjustments with respect to such
unaudited interim statements); and no material adverse change has since
occurred in the condition, financial or otherwise, of Borrower or its
Subsidiaries (taken as a whole).

4.12 Liabilities, Litigation and Restrictions. Except as
disclosed in the Financial Statements, Borrower has no liabilities, direct or
contingent, which may materially and adversely affect its business or assets.
Except as described on Schedule 4.12, there is no litigation or other action of
any nature pending before any court, governmental instrumentality, regulatory
authority or arbitral body or, to the knowledge of Borrower, threatened against
or affecting Borrower, or any of its Subsidiaries, which might reasonably be
expected to result in any material, adverse change in the business or assets of
Borrower or its Subsidiaries (taken as a whole). No unusual or unduly
burdensome restriction, restraint or hazard exists by contract, law,
governmental regulation or otherwise relative to the business or material
properties of Borrower other than such as relate generally to Persons engaged in
the business activities conducted by Borrower.

4.13 Margin Stock. None of the proceeds of the Loans
will be used for the purpose of buying or carrying margin stock.

4.14 Authorizations and Consents. No authorization,
consent, approval, exemption, franchise, permit or license of, or filing with,
any governmental or public authority or any third party is required to
authorize, or is otherwise required in connection with the valid execution and
delivery by Borrower of this Agreement, the Note, and the Security Instruments
to which it is a party or any instrument contemplated hereby, the repayment by
Borrower of advances against the Note and interest and fees provided in the
Note and this Agreement, or the performance by Borrower of its obligations
under any of the foregoing.

33
39

4.15 Compliance with Laws, Rules, Regulations and Orders.
To the best of the knowledge and belief of Borrower, neither the business nor
any of the activities of Borrower, as presently conducted, violates any law or
any rule, regulation or directive of any applicable judicial, administrative or
other governmental instrumentality (including, but not by way of limitation,
any law or any rule, regulation or directive of any judicial, administrative or
other governmental instrumentality relating to zoning, to any Environmental
Law, to the stabilization of wages or prices or to the development, production,
transportation or purchase or sale of oil, gas or other hydrocarbons) the
result of which violation would have a material adverse effect on Borrower or
its Subsidiaries (taken as a whole), and Borrower possesses all licenses,
approvals, registrations, permits and other authorizations necessary to enable
it to carry on its business in all material respects as now conducted, and all
such licenses, approvals, registrations, permits and other authorizations are
in full force and effect; and Borrower has no reason to believe that it will be
unable to obtain the renewal of any such licenses, approvals, registrations,
permits and other authorizations.

4.16 Proper Filing of Tax Returns and Payment of Taxes
Due. Borrower has duly and properly filed all United States Income Tax returns
and all other tax returns which are required to be filed, and has paid all
taxes due pursuant to said returns or pursuant to any assessment received,
except such taxes, if any, as are being contested in good faith and as to which
adequate provisions and disclosures have been made; and the respective charges
and reserves on the books of Borrower with respect to any taxes or other
governmental charges are adequate.

4.17 ERISA. Borrower is in compliance in all material
respects with all applicable provisions of ERISA. Neither a Reportable Event
nor a Prohibited Transaction has occurred and is continuing with respect to any
plan; no notice of intent to terminate a plan has been filed, nor has any plan
been terminated; no circumstances exist which constitute grounds under Section
4042 of ERISA entitling the PBGC to institute proceedings to terminate, or
appoint a trustee to administrate a plan, nor has the PBGC instituted any such
proceedings; neither Borrower nor any ERISA Affiliate has completely or
partially withdrawn under Sections 4201 or 4204 of ERISA from a Multi-employer
plan; Borrower and each ERISA Affiliate have met their minimum funding
requirements under

40
ERISA with respect to all of their plans and the present value of all vested
benefits under each plan exceeds the fair market value of all plan assets
allocable to such benefits, as determined on the most recent valuation date of
the plan and in accordance with the provisions of ERISA and the regulations
thereunder for calculating the potential liability of Borrower or any ERISA
Affiliate to the PBGC or the plan under Title IV of ERISA; and neither Borrower
nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA.

4.18 Investment Company Act Compliance. Borrower is not,
nor is it directly or indirectly controlled by or acting on behalf of any
person or entity which is, an investment company or an "affiliated person" of
an investment company within the meaning of the Investment Borrower Act of
1940.

4.19 Public Utility Holding Company Act Compliance.
Borrower is not a "holding company", or an "affiliate" of a "holding company"
or of a "subsidiary company" of a "holding company", within the meaning of the
Public Utility Holding Company Act of 1935, as amended.

4.20 Environmental Laws. To the best of the knowledge
and belief of Borrower:

(a) no property of Borrower is currently on, or has ever
been on, any federal or state list of superfund sites as listed on the
Environmental Protection Agency National Priority List or any
comparable state registries or list in any state of the United States
(collectively "Superfund Sites");

(b) no Hazardous Substances have in the past been
generated, transported, and or disposed of, by Borrower at any
Superfund Site;

(c) except in accordance with a valid permit, license,
certificate or approval of the relevant regulatory authority or
governmental body, there has been no emission, spill, release,
disposal or discharge of any Hazardous Substance into or upon (i) the
air, (ii) soils or any improvements located thereon, (iii) surface
water or groundwater, or (iv) the sewer, septic system or waste
treatment, storage or disposal system servicing any property of
Borrower; and

41
(d) no complaint, order, directive, claim, citation,
notice of environmental report, notice of investigation or other
notice by any regulatory authority or governmental body or any other
Person with respect to (i) air emissions, (ii) spills, releases or
discharges to soils or any improvements located thereon, surface
water, groundwater or the sewer, septic system or waste treatment,
storage or disposal systems servicing any property of Borrower, (iii)
solid or liquid waste disposal, (iv) the use, generation, storage,
transportation or disposal of any Hazardous Substance, or (v) other
environmental, health or safety matters affecting any property of
Borrower, any improvements located thereon, or the business thereon
conducted, has been received by Borrower, nor has Borrower been given
oral or written notice thereof;

provided, however, that the representations and warranties set forth in
subparagraphs (c) and (d) above shall apply only to events and conditions which
either resulted in (i) a continuing lien or encumbrance on the property of
Borrower or (ii) otherwise materially affect Borrower's use or operation of its
property or Borrower's ability to repay the Indebtedness evidenced by the Note.

ARTICLE V. AFFIRMATIVE COVENANTS

Borrower covenants, so long as any Indebtedness of Borrower to
Bank remains unpaid under this Agreement or Bank remains obligated to make
advances hereunder, to:

5.01 Use of Funds. Use the proceeds advanced under the
Loan to acquire Oil and Gas Properties, conduct developmental drilling, and use
as working capital for other ordinary business activities of Borrower, and
furnish Bank such evidence as it may reasonably require with respect to such
use.

5.02 Maintenance and Access to Records. Keep adequate
records in accordance with good accounting practices, of all of Borrower's
transactions so that at any time, and from time to time, its true and complete
financial condition may be readily determined and, at Bank's reasonable
request, make all financial records and records relating to the Borrowing Base
Properties available for Bank's inspection and permit Bank to make and take
away copies thereof for Bank's internal use only and subject to such
confidentiality agreements as Borrower may reasonably require.

42
5.03 Quarterly Unaudited Financial Statements of
Borrower. Deliver to Bank, on or before the forty-fifth (45th) day after the
end of each of the first three calendar quarters of each fiscal year, unaudited
Financial Statements of Borrower as at the end of such period and from the
beginning of such fiscal year to the end of the respective period, as
applicable, which Financial Statements shall be certified by the president or
chief financial officer of Borrower as being true and correct, subject to
changes resulting from year-end audit adjustments.

5.04 Annual Audited Financial Statements of Borrower.
Deliver to Bank, on or before the one hundred and twentieth (120th) day after
the close of each fiscal year of Borrower, a copy of the annual audited
Financial Statements of Borrower.

5.05 Compliance Certificate. Deliver to Bank a
Compliance Certificate: (a) at the time of Borrower's execution of this
Agreement, and (b) at the time of delivery of each of the Financial Statements
pursuant to Sections 5.03 and 5.04 above.

5.06 Monthly Borrowing Base Certificate. Deliver to Bank
on or before the 15th day of each month, during any period when Borrowing Base
Cash is included in the Borrowing Base Properties, a Monthly Borrowing Base
Certificate evidencing Borrower's calculation of the Borrowing Base according
to the parameters described in Section 2.10, effective as of the first day of
such month.

5.07 Statement of Material Adverse Change in Condition.
Deliver to Bank, promptly upon any officer of the Borrower having knowledge of
any material adverse change in the condition, financial or otherwise, of
Borrower or its Subsidiaries (or any event or circumstance that would result in
any such material adverse change in condition including, but not limited to,
litigation and changes in business), a statement of the president or vice
president of Borrower, setting forth the change in condition or event or
circumstance likely to result in any such change and the steps being taken by
Borrower or the applicable Subsidiary with respect to such change in condition
or event or circumstance.

5.08 Additional Information. Furnish to Bank, promptly
upon Bank's reasonable request, such additional financial or other information
concerning the assets, liabilities, operations, and

43
transactions of Borrower, in its possession or to which it has access,
including, without limitation, information concerning the Borrowing Base
Properties.

5.09 Compliance with Laws and Payment of Assessments and
Charges. Comply with all applicable statutes and government regulations,
including, without limitation, ERISA, and pay all taxes, assessments,
governmental charges, claims for labor, supplies, rent, its share of all costs
and expenses incurred under any joint operating agreement, and other
obligations which, if unpaid, might become a lien against its property, except
any of the foregoing being contested in good faith and as to which satisfactory
accruals have been provided and unless failure to comply or pay would not have
a material adverse effect on the assets of Borrower and its Subsidiaries (taken
as a whole).

5.10 Maintenance of Existence and Good Standing.
Maintain Borrower's corporate existence and good standing in the jurisdiction
of its incorporation, and in all jurisdictions wherein the property now owned
or hereafter acquired or business now or hereafter conducted necessitates same,
other than those jurisdictions wherein the failure to so qualify will not have
a material adverse effect on Borrower.

5.11 Further Assurances. Promptly cure any defects in
the execution and delivery of this Agreement, the Note, the Security
Instruments, or any other instrument referred to herein or executed in
connection with the Note, and upon notice, immediately execute and deliver to
Bank, all such other and further instruments as may be reasonably required or
desired by Bank from time to time in compliance with the covenants and
agreements made in this Agreement.

5.12 Initial Expenses of Bank. Pay all fees and expenses
of special legal counsel for Bank, incurred in connection with the negotiation
and preparation of this Agreement, the Note, the Security Instruments, or any
other instrument referred to herein or executed in connection with the Note,
the satisfaction of the conditions precedent set forth in Article III of this
Agreement and the consummation of the transactions contemplated in this
Agreement.

5.13 Subsequent Expenses of Bank. Upon request, promptly
reimburse Bank for all reasonable amounts expended,

44
advanced or incurred by Bank to collect the Note or to enforce the rights of
Bank under this Agreement, the Note, the Security Instruments, or any other
instrument referred to herein or executed in connection with the Note, which
amounts shall be deemed compensatory in nature and liquidated as to amount upon
notice to Borrower by Bank and which amounts will include, but not be limited
to, (a) all court costs, (b) attorneys' fees, (c) fees of auditors and
accountants, (d) investigation expenses, (e) internal fees of Bank's in-house
legal counsel, (f) fees and expenses incurred in connection with Bank's
participation as a member of the creditors' committee in a case commenced under
Title 11 of the United States Code or other similar law of the United States,
the State of Texas or any other jurisdiction, (g) fees and expenses incurred in
connection with lifting the automatic stay prescribed in Sections 362 Title 11
of the United States Code, and (h) fees and expenses incurred in connection
with any action pursuant to Sections 1129 Title 11 of the United States Code,
incurred by Bank in connection with the collection of any sums due under this
Agreement, together with interest at the Floating Rate per annum, calculated on
a basis of a year of three hundred sixty-five (365) or three hundred sixty-six
(366) days, on each such amount from the date of notification to Borrower that
the same was expended, advanced or incurred by Bank until the date it is repaid
to Bank, with the obligations under this Section 5.13, surviving the
non-assumption of this Agreement in a case commenced under Title 11 of the
United States Code or other similar law of the United States, the State of
Texas or any other jurisdiction and being binding upon Borrower or a trustee,
receiver or liquidator of any such party appointed in any such case.

5.14 Maintenance of Tangible Property. Maintain all of
Borrower's tangible property in good repair and condition and make all
necessary replacements thereof and operate such property in a good and
workmanlike manner in accordance with standard industry practices, unless the
failure to do so would not have a material adverse effect on Borrower and its
Subsidiaries (taken as a whole) or the value of the Borrowing Base Oil and Gas
Properties.

5.15 Maintenance of Insurance. Continue to maintain, or
cause to be maintained, insurance with respect to the properties and business
of Borrower against such liabilities, casualties, risks and contingencies and
in such amounts as is customary in the industry, in an amount and form, and
underwritten by an insurer or insurers, as are acceptable to Bank in its sole
discretion, and

45
furnish to Bank, at the execution of this Agreement and annually thereafter,
certificates evidencing such insurance.

5.16 Inspection of Tangible Assets/Right of Audit.
Permit (or cause to be permitted) any authorized representative of Bank, to
visit and inspect (at the risk of Bank and/or such representative) any tangible
asset of Borrower, and/or to audit the books and records of Borrower during
normal business hours.

5.17 Payment of Note and Performance of Obligations. As
to Borrower, pay the Note according to the reading, tenor and effect thereof,
as modified hereby, and do and perform every act and discharge all of the
obligations provided to be performed and discharged hereunder.

5.18 ERISA Reports. Promptly after the filing or
receiving thereof, copies of all reports, including annual reports, and notices
which Borrower files with or receives from the PBGC or the U.S. Department of
Labor under ERISA; and promptly after Borrower knows or has reason to know that
any Reportable Event or Prohibited Transaction has occurred with respect to any
plan or that the PBGC or Borrower has instituted or will institute proceedings
under Title IV of ERISA to terminate any plan, Borrower will deliver to Bank a
certificate of the chief financial officer of Borrower setting forth details as
to such Reportable Event or Prohibited Transaction or plan termination and the
action Borrower proposes to take with respect thereto.

5.19 Tangible Net Worth Requirement. Borrower shall
maintain a total Tangible Net Worth of not less than the greater of: (a)
$20,000,000.00, or (b) the Tangible Net Worth of Borrower at the closing of the
Initial Public Offering, less $3,000,000.00; increasing by: (x) fifty percent
(50%) of net income (excluding losses) of Borrower subsequent to September 30,
1997, and (y) one hundred percent (100%) of any increases in shareholders'
equity resulting from the sale or issuance of stock in Borrower subsequent to
September 30, 1997.

5.20 Cash Flow to Debt Service Ratio. Borrower will
maintain (calculated in accordance with GAAP) a ratio of quarterly Cash Flow to
quarterly Debt Service of not less than 1.25 to 1.0. For the purposes of
calculating this ratio:

46
(a) "Cash Flow" shall be defined as the sum of net income plus
depreciation and other non-cash charges less non-cash income of
Borrower, and

(b) "Debt Service" shall be defined as the sum of (i) actual
principal amounts paid by Borrower during such quarter on Indebtedness
other than in connection with this Loan; and (ii) principal amounts
required to be paid by Borrower during such quarter in connection with
this Loan.

5.21 Compliance with Environmental Laws. Comply in all
material respects with any and all requirements of law, including, without
limitation, Environmental Laws, (a) related to any natural or environmental
resource or media located on, above, within, in the vicinity of, related to or
affected by any Borrowing Base Oil and Gas Properties or any other property of
Borrower, or (b) required for the performance or conduct of its operations,
including, without limitation, all permits, licenses, registrations, approvals
and authorizations, and, in this regard, comply fully and in a timely manner
with, and cause all employees, crew members, agents, contractors,
subcontractors and future lessees (pursuant to appropriate lease provisions) of
Borrower while such Persons are acting within the scope of their relationship
with Borrower, to so comply with, all requirements of law, including, without
limitation, Environmental Laws, and other requirements with respect to the
property of Borrower and the operation thereof necessary or appropriate to
enable Borrower to fulfill its obligations under all requirements of law,
including, without limitation, Environmental Laws, applicable to the use,
generation, handling, storage, treatment, transport and disposal of any
Hazardous Substances now or hereafter located or present on or under any such
property.

5.22 Hazardous Substances Indemnification. Indemnify and
hold Bank harmless from and against any and all claims, losses, damages,
liabilities, fines, penalties, charges, administrative and judicial proceedings
and orders, judgments, remedial actions, requirements and enforcement actions
of any kind, and all costs and expenses incurred in connection therewith
(including, without limitation, attorneys' fees and expenses), arising directly
or indirectly, in whole or in part, out of (a) the presence of any Hazardous
Substances on, under or from its property, whether prior to or during the term
hereof, or (b) any activity carried on or undertaken on or off its property,
whether prior to or during the

47
term hereof, and whether by Borrower or any predecessor in title or any
employees, agents, contractors or subcontractors of Borrower or any predecessor
in title, or any third Persons at any time occupying or present on such
property, in connection with the handling, treatment, removal, storage,
decontamination, cleanup, transportation or disposal of any Hazardous
Substances at any time located or present on or under such property; with the
foregoing indemnity further applying to any residual contamination on or under
the property of Borrower, or any property of any other Person, or affecting any
natural resources, and to any contamination of any property or natural
resources arising in connection with the generation, use, handling, storage,
transportation or disposal of any Hazardous Substances, irrespective of whether
any of such activities were or will be undertaken in accordance with applicable
requirements of law, including, without limitation, Environmental Laws, and
surviving satisfaction of all Indebtedness of Borrower to Bank and the
termination of this Agreement, provided, further, that the claims and other
actions of any kind against Bank which give rise to such indemnity are not
barred by the applicable statute of limitations at the time such claims or
actions are instituted and such indemnity shall not extend to any act or
omission by Bank or any Affiliate of Bank or any of Bank's employees or agents
with respect to the relevant property subsequent to Bank becoming the owner of,
taking possession of to the exclusion of Borrower or assuming operations of any
property previously owned by Borrower and with respect to which property such
claim, loss, damage, liability, fine, penalty, charge, proceeding, order,
judgment, action or requirement arises subsequent to the acquisition of title
thereto, taking possession thereof or assumption of operations thereon by Bank
or any Affiliate of Bank or any of Bank's employees or agents. Notwithstanding
anything herein to the contrary, the provisions of this Section 5.22 shall
survive any termination of this Agreement and shall survive the payment and
performance in full of all Obligations owed by Borrower to Bank.

5.23 Changes in Management. Notify Bank of any change in
the senior management of Borrower existing as of the date hereof.

5.24 Operating Accounts. Maintain all principal
operating accounts of Borrower with Bank.

48
ARTICLE VI. NEGATIVE COVENANTS

Without the prior written consent of Bank and so long as any
part of the principal or interest on the Note shall remain unpaid or Bank
remains obligated to make advances hereunder, Borrower and its Subsidiaries
will not:

6.01 Other Indebtedness. Incur, create, assume or suffer
to exist any Indebtedness, whether by way of loan or the issuance or sale of
securities except (a) Loans hereunder, (b) loans by Bank under other credit
arrangements, (c) Indebtedness owed to Bank by any Affiliates of Borrower, and
(d) unsecured accounts payable incurred in the ordinary course of business
which are not overdue or if overdue, are acceptable to Bank and are being
contested in good faith by appropriate proceedings.

6.02 Guaranty of Payment or Performance. Guaranty any
contract or obligation of any Person, except for any Indebtedness owed to Bank
by any Affiliates of Borrower, and except that the foregoing restriction shall
not apply to endorsements of instruments for collection in the ordinary course
of business.

6.03 Loans, Advances or Investments. Make or agree to
make or allow to remain outstanding any loans or advances to, or Investments
in, or purchase or otherwise acquire all or substantially all of the assets of,
or any shares of stock or similar interest in, any Person, including Affiliates
of Borrower, in amounts which exceed $100,000 in the aggregate, except advances
or extensions of credit in the form of accounts receivable incurred in the
ordinary course of business and ownership of the stock of Borrower's
Subsidiaries.

6.04 Mortgages or Pledges of Assets. Create, incur,
assume or permit to exist, any mortgage, pledge, security interest, lien or
encumbrance on any of its properties or assets (now owned or hereafter
acquired), except that the foregoing restrictions shall not apply to any
matters that would constitute or result in Permitted Encumbrances.

6.05 Nature of Business. Permit any material change to
be made in the character of its business as conducted as of the date hereof, or
permit any Subsidiary to permit any material change to be made in the character
of such Subsidiary's business as conducted as of the date hereof.

49
6.06 Sales of Assets. Sell, lease, assign, transfer or
otherwise dispose of, in one or any series of related transactions, all or any
part of its assets, if such transfer is material to Borrower's operations, nor
enter into any arrangement, directly or indirectly, with any Person to sell and
rent or lease back such assets or any part thereof which are intended to be
used for substantially the same purpose or purposes as the assets sold or
transferred; provided, however, that Bank will consent to sales of assets
representing not more than ten percent (10%) of the net present value, as
calculated by Bank in its sole discretion, of the Oil and Gas Properties that
are included in the Borrowing Base Properties at any time, subject to a
contemporaneous reduction in the Borrowing Base, in an amount determined by
Bank in its sole discretion, as the result of the removal of such Oil and Gas
Properties from the Borrowing Base Properties, and if a Loan Excess would
result from such reduction in the Borrowing Base, such Loan Excess shall be
repaid contemporaneously with the consummation of such sale.

6.07 Dividends and Distributions. Declare or pay any
dividend from Borrower or make any distribution on, or purchase, redeem or
otherwise acquire for value, any interest in Borrower or its Subsidiaries.

6.08 Payment of Accounts Payable. Allow any account
payable to remain unpaid after its due date, except such as are overdue that
are acceptable to Bank, are being contested in good faith, and as to which
adequate provision or accrual has been made.

6.09 Cancellation of Insurance. Allow any insurance
policy required to be carried hereunder to be terminated or lapse or expire
without provision for adequate renewal thereof.

6.10 Changes in Business Structure. Consolidate or merge
with, or purchase (for cash or securities) all or substantially all of the
assets or all or any part of the capital stock of any corporation, firm,
association or enterprise, or allow any such entity to be merged into Borrower,
nor shall Borrower dissolve or liquidate.

6.11 Transactions with Affiliates. Enter into any
transaction between or among Borrower and/or any Subsidiaries with any
Affiliate on terms that are less favorable than could be obtained in an
arms-length transaction with a Person that is not an Affiliate.

50
6.12 Hedging Transactions. Enter into any Hedging
Transactions other than Permitted Hedging Transactions.

ARTICLE VII. EVENTS OF DEFAULT

7.01 Enumeration of Events of Default. Any of the
following events shall be considered an Event of Default as that term is used
herein:

(a) Default shall be made by Borrower in the payment of
any installment of principal on the Note,

(b) Default shall be made by Borrower in the payment of
any installment of interest on the Note, or any fees or other monetary
obligation payable hereunder, and such default shall remain unremedied
in excess of three (3) days after notice being given by Bank,

(c) Default shall be made by Borrower in the due
observance or performance of any affirmative covenant required in this
Agreement, the Note, or any Security Instrument, and such default
shall remain unremedied for in excess of thirty (30) days after the
earlier of: (i) such default becoming known to Borrower, or (ii)
notice being given by Bank.

(d) Default shall be made by Borrower in the due
observance or performance of any negative covenant required in this
Agreement, the Note, or any Security Instruments.

(e) Any representation or warranty herein made by
Borrower proves to have been untrue in any material respect, or any
representation, statement (including Financial Statements),
certificate or data furnished or made by Borrower to Bank in
connection herewith proves to have been untrue in any material respect
as of the date the facts therein set forth were stated or certified;

(f) Default shall be made by Borrower (as principal or
guarantor or other surety) in payment or performance of any bond,
debenture, note or other evidence of Indebtedness for borrowed money,
or any other credit agreement, loan agreement, indenture, promissory
note or similar agreement or instrument executed in connection with
any of the foregoing in excess of $25,000 in the aggregate; and such
default shall remain unremedied for in excess of the period of grace,
if any, with

51
respect thereto, with the effect of accelerating the maturity of any
such Indebtedness;

(g) Borrower applies for or consents to the appointment
of a receiver, trustee or liquidator of it or all or a substantial
part of its assets, or (ii) files a voluntary petition commencing a
case under Title 11 of the United States Code, seeking liquidation,
reorganization or rearrangement or taking advantage of any bankruptcy,
insolvency, debtor's relief or other similar law of the United States,
the State of Texas or any other jurisdiction, or (iii) makes a general
assignment for the benefit of creditors, or (iv) is unable, or admits
in writing its inability to pay its debts generally as they become
due, or (v) files an answer admitting the material allegations of a
petition filed against it in any case commenced under Title 11 of the
United States Code or any reorganization, insolvency, conservatorship
or similar proceeding under any bankruptcy, insolvency, debtor's
relief or other similar law of the United States, the State of Texas
or any other jurisdiction;

(h) An order, judgment or decree shall be entered
against Borrower by any court of competent jurisdiction or by any
other duly authorized authority, on the petition of a creditor or
otherwise, granting relief under Title 11 of the United States Code or
under any bankruptcy, insolvency, debtor's relief or other similar law
of the United States, the State of Texas or any other jurisdiction,
approving a petition seeking reorganization or an arrangement of its
debts or appointing a receiver, trustee, conservator, custodian or
liquidator of it or all or any substantial part of its assets, and the
failure to have such order, judgment or decree dismissed within ten
(10) days of its entry;

(i) Borrower has concealed, removed, or permitted to be
concealed or removed, any part of its property, with intent to hinder,
delay or defraud its creditors or any of them; or has made or suffered
a transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or has made any
transfer of its property to or for the benefit of a creditor at a time
when other creditors similarly situated have not been paid; or has
suffered or permitted, while insolvent, any creditor to obtain a lien
upon any of its property through legal proceedings or distraint

52
which is not vacated within thirty (30) days from the date thereof.

7.02 Rights Upon Default. Upon the happening of an Event
of Default specified in Subsections 7.01 (g) or (h), the entire aggregate
principal amount of all Indebtedness then outstanding hereunder and the
interest accrued thereon shall automatically become immediately due and
payable, and upon the happening and continuation of any other Event of Default,
Bank may declare the entire aggregate principal amount of all Indebtedness then
outstanding hereunder and the interest accrued thereon immediately due and
payable. In either case, the entire principal and interest shall thereupon
become immediately due and payable, without notice (including, without
limitation, notice of intent to accelerate maturity or notice of acceleration
of maturity) and without presentment, demand, protest, notice of protest or
other notice of default or dishonor of any kind, except as provided to the
contrary elsewhere herein, all of which are hereby expressly waived by
Borrower.

Upon the happening and continuation of any Event of Default,
all obligations (if any) of Bank hereunder shall immediately cease and
terminate unless and until Bank shall reinstate the same in writing.

ARTICLE VIII. MISCELLANEOUS

8.01 Security Interests in Deposits and Right of Offset
or Banker's Lien. Borrower hereby transfers, assigns and pledges to Bank
and/or grants to Bank a security interest (as security for the payment and/or
performance of the obligations of Borrower under this Agreement and the Note,
with such interest of Bank to be retransferred, reassigned and/or released by
Bank at the expense of Borrower upon payment in full and/or complete
performance by Borrower of all such obligations) and the right, exercisable at
such time as any obligation hereunder shall mature, whether by acceleration of
maturity or otherwise of offset or banker's lien against all funds or other
property of Borrower now or hereafter or from time to time on deposit with or
in the possession of Bank, including, without limitation, all certificates of
deposit and other depository accounts.

8.02 Survival of Representations, Warranties and
Covenants. All representations and warranties of Borrower and all covenants
and agreements herein made shall survive the execution

53
and delivery of the Note and this Agreement and shall remain in force and
effect so long as any debt is outstanding under the Note, or any renewal or
extension of this Agreement or the Note, or Bank remains obligated to make
advances hereunder.

8.03 Notices and Other Communications. Notices, requests
and communications hereunder shall be in writing and shall be sufficient in all
respects if delivered to the relevant address indicated below (including
delivery by registered or certified United States mail, telex, telegram or
hand):

(a) If to Bank:

COMPASS BANK
▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attention: Energy Lending
Fax: (▇▇▇) ▇▇▇-▇▇▇▇

(b) If to Borrower:

CARRIZO OIL & GAS, INC.
▇▇▇▇▇ ▇▇. ▇▇▇▇'▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇

Any party may, by proper written notice hereunder to the
other, change the individuals or addresses to which such notices to it shall
thereafter be sent.

8.04 Parties in Interest. All covenants and agreements
herein contained by or on behalf of Borrower shall be binding upon Borrower and
its successors and assigns and inure to the benefit of Bank and its successors
and assigns.

8.05 Renewals and Extensions. All provisions of this
Agreement relating to the Note shall apply with equal force and effect to each
and all promissory notes hereafter executed which in whole or in part represent
a renewal, extension, amendment, modification or rearrangement of any part of
the Indebtedness originally represented by the Note.

8.06 No Waiver by Bank. No course of dealing on the part
of Bank, its officers or employees, nor any failure or delay

54
by Bank with respect to exercising any of its rights, powers or privileges
under this Agreement, the Note, the Security Instruments or any other
instrument referred to herein or executed in connection with the Note shall
operate as a waiver thereof. The rights and remedies of Bank under this
Agreement, the Note, the Security Instruments or any other instrument referred
to herein or executed in connection with the Note shall be cumulative and the
exercise or partial exercise of any such right or remedy shall not preclude the
exercise of any other right or remedy. In the event that Borrower is unable to
satisfy any covenant, warranty or condition herein, no advance of loan proceeds
by Bank shall have the effect of precluding Bank from thereafter declaring any
such continuing inability to be an Event of Default as hereinabove provided.

8.07 INDEMNIFICATION. BORROWER HEREBY RELEASES AND
AGREES TO INDEMNIFY AND HOLD BANK AND ITS OFFICERS, EMPLOYEES, DIRECTORS,
AGENTS AND ATTORNEYS (COLLECTIVELY THE "BANK PARTIES") HARMLESS, FROM AND
AGAINST ALL CLAIMS, DAMAGES, LIABILITIES AND EXPENSES, KNOWN OR UNKNOWN,
ACCRUED AND UNACCRUED, INCLUDING ANY OF THE FOREGOING ALLEGED TO HAVE RESULTED
FROM NEGLIGENCE OF ANY OF THE BANK PARTIES, UNLESS ATTRIBUTABLE TO BANK
PARTIES' OWN GROSS NEGLIGENCE OR WILFUL MISCONDUCT, THAT MAY NOW OR HEREAFTER
BE ASSERTED AGAINST ANY OF BANK PARTIES IN CONNECTION WITH OR ARISING OUT OF
ANY INVESTIGATION, LITIGATION OR PROCEEDING DIRECTLY OR INDIRECTLY RELATING TO
OR ARISING OUT OF ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

8.08 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL BE
DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF TEXAS.

8.09 Incorporation of Exhibits. The Exhibits attached to
this Agreement are incorporated herein for all purposes and shall be considered
a part of this Agreement.

8.10 Survival Upon Unenforceability. In the event any
one or more of the provisions contained in this Agreement, the Note, the
Security Instruments or in any other instrument referred to herein or executed
in connection with the Note shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof or of any other
instrument referred to herein or executed in connection herewith.

55
8.11 Rights of Third Parties. All provisions herein are
imposed solely and exclusively for the benefit of Bank and Borrower and no
other Person shall have standing to require satisfaction of such provisions in
accordance with their terms or be entitled to assume that Bank will refuse to
make advances in the absence of strict compliance with any or all thereof and
any or all of such provisions may be freely waived in whole or in part by Bank
at any time if in its sole discretion it deems it advisable to do so.

8.12 Amendments or Modifications of this Agreement.
Neither this Agreement nor any provision hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against whom enforcement of the change, waiver, discharge or
termination is sought.

8.13 Agreement Construed as an Entirety. This Agreement,
for convenience only, has been divided into Articles and Sections and it is
understood that the rights, powers, privileges, duties and other legal
relations of the parties hereto shall be determined from this Agreement as an
entirety and without regard to the aforesaid division into Articles and
Sections and without regard to headings prefixed to said Articles or Sections.

8.14 Number and Gender. Whenever the context requires,
reference herein made to the single number shall be understood to include the
plural and likewise the plural shall be understood to include the singular.
Words denoting sex shall be construed to include the masculine, feminine, and
neuter, when such construction is appropriate, and specific enumeration shall
not exclude the general, but shall be construed as cumulative.

8.15 AGREEMENT SUPERSEDES ALL PRIOR AGREEMENTS. THIS
AGREEMENT, TOGETHER WITH THE NOTE AND THE SECURITY INSTRUMENTS, CONSTRUED
TOGETHER WITH THE REVOLVING CREDIT AGREEMENT AND ALL INSTRUMENTS EXECUTED
PURSUANT THERETO, REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE
PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE
PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

8.16 Controlling Provision Upon Conflict. In the event
of a conflict between the provisions of this Agreement and those of

56
the Note, the Security Instruments or any other instrument referred to herein
or executed in connection with the Note, the provisions of this Agreement shall
control.

8.17 Time, Place and Method of Payments. All payments
required pursuant to this Agreement or the Note shall be made in immediately
available funds; shall be deemed received by Bank on the next Business Day
following receipt if such receipt is after 3:00 p.m., on any Business Day, and
shall be made at the principal banking quarters of Bank.

8.18 Counterpart Execution. This Agreement may be
executed as one instrument signed by all parties or in separate counterparts
hereof, each of which counterparts shall be considered an original and all of
which shall be deemed to be one instrument, and any signed counterpart shall be
deemed delivered by the party signing it if sent to any other party hereto by
electronic facsimile transmission.

8.19 Amended, Restated and Combined Agreement. This
Agreement amends, restates and combines the Existing Carrizo Loan Agreement and
the Existing Encinitas Loan Agreement, as each has been heretofore amended.
All Security Instruments previously executed pursuant to both the Existing
Carrizo Loan Agreement, as amended, and the Existing Encinitas Loan Agreement,
as amended, shall continue to secure all indebtedness and obligations evidenced
by and/or arising under this Agreement, the Note, and the other Loan Documents
executed pursuant hereto. Upon the Closing, the Guarantors, as defined in the
Existing Carrizo Loan Agreement, shall thereupon be released from their
respective guarantees, the security agreements that they have heretofore
executed securing such guarantees and the Indebtedness of Borrower to the Bank
shall be terminated, and all collateral in the possession of the Bank pursuant
to each such security agreement shall be returned to the respective Guarantor
who delivered such collateral to the Bank. Upon the Closing, the Guarantor, as
defined in the Existing Encinitas Loan Agreement, shall also thereupon be
released from its guaranty.

IN WITNESS WHEREOF, this Agreement is executed as of the date
first above written.

51
57
BORROWER:

CARRIZO OIL & GAS, INC.

By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Vice President and Chief
Financial Officer

BANK:

COMPASS BANK

By:/s/ ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
------------------------
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Vice President

58
SCHEDULE 1.01(a)

Borrowing Base Oil and Gas Properties

This Schedule 1.01(a) sets forth the description of the initial Borrowing Base
Oil and Gas Properties covered by the Agreement to which this Schedule 1.01(a)
is attached. All of the terms defined in the Agreement are used in this
Schedule 1.01(a) with the same meanings given therein.

The Borrowing Base Oil and Gas Properties include:

(a) All of Borrower's right, title and interest in and to the oil,
gas and mineral leases described herein and/or lands described in and subject
to such oil, gas and mineral leases (regardless, as to such leases and/or
lands, of any surface acreage and/or depth limitations set forth in any
description of any of such oil, gas and mineral leases), and all of Borrower's
right, title and interest in and to any of the oil, gas and minerals in, on or
under the lands, if any, described on this Schedule 1.01(a), including, without
limitation, all contractual rights, fee interests, leasehold interests,
overriding royalty interests, non-participating royalty interests, mineral
interests, production payments, net profits interests, or any other interest
measured by or payable out of production of oil, gas or other minerals from the
oil, gas and mineral leases and/or lands described herein; and

(b) All of the foregoing interests of Borrower as such interests
may be enlarged by the discharge of any payments out of production or by the
removal of any charges or encumbrances together with Borrower's interests in,
to and under or derived from all renewals and extensions of any oil, gas and
mineral leases described herein, it being specifically intended hereby that any
new oil and gas lease (i) in which an interest is acquired by Borrower after
the termination or expiration of any oil and gas lease, the interests of
Borrower in, to and under or derived from which are subject to the lien and
security interest hereof, and (ii) that covers all or any part of the property
described in and covered by such terminated or expired leases, shall, to the
extent, and only to the extent such new oil and gas lease may cover such
property, be considered a renewal or extension of such terminated or expired
lease; and

Page 1.01(a)-1

59
agreements, assignments and subleases, whether or not described in this
Schedule 1.01(a), to the extent, and only to the extent, that such agreements,
assignments and subleases (i) cover or include any of Borrower's present right,
title and interest in and to the leases and/or lands described in this Schedule
1.01(a), or (ii) cover or include any other undivided interests now or
hereafter held by Borrower in, to and under the described leases and/or lands,
including, without limitation, any future operating, farmout and bidding
agreements, assignments, subleases and pooling, unitization and communitization
agreements and the units created thereby (including, without limitation all
units formed under orders, regulations, rules or other official acts of any
governmental body or agency having jurisdiction) to the extent and only to the
extent that such agreements, assignments, subleases, or units cover or include
the described leases and/or lands; and

(d) All right, title, and interest of Borrower in, to and under or
derived from all presently existing and future advance payment agreements, oil,
casinghead gas and gas sales, exchange, and processing contracts and agreements
including, without limitation, those contracts and agreements that are
described on this Schedule 1.01(a) to the extent, and only to the extent, those
contracts and agreements cover or include the described leases and/or lands
herein; and

(e) All right, title and interest of Borrower in, to and under or
derived from all existing and future permits, licenses, easements and similar
rights and privileges that relate to or are appurtenant to any of the described
leases and/or lands.

Notwithstanding the intention of this Agreement to cover all of
the right, title and interest of Borrower in and to the described leases and/or
lands, Borrower hereby specifically warrants and represents that the interests
covered by this Schedule 1.01(a) are not greater than the working interest nor
less than the net revenue interest, overriding royalty interest, net profit
interest, production payment interest or other interest payable out of or
measured by production set forth in connection with each oil and gas well
described in this Schedule 1.01(a). In the event Borrower owns any other or
greater interest, such additional interest shall also be covered by and
included in this Agreement. The designation "Working Interest" or "W.I." means
an interest owned in an oil, gas, and mineral lease that determines the cost
bearing percentage of the owner of such interest. The designation "Net Revenue
Interest" or "NRI" means net revenue interest, or that

Page 1.01(a)-2

60
portion of the production attributable to the owner of a working interest after
deduction for all royalty burdens, overriding royalty burdens, or other burdens
on production, except severance, production, windfall profits and other similar
taxes. The designation "Overriding Royalty Interest" or "ORRI" means an
interest in production which is free of any obligation for the expense of
exploration, development and production, bearing only its pro rata share of
severance, production, windfall profits and other similar taxes.

Page 1.01(a)-3

61
PROPERTY DESCRIPTION

Ranier Field
Starr County, Texas
Subject Leases
--------------

Lessor Lessee Lease Date Book/Page
------ ------ ---------- ---------

▇▇▇▇▇▇▇ Nominee Corporation Edge Joint Venture II 03/22/96 754/772*

La Brisa Ranch Partnership, et al. Edge Joint Venture II 12/12/96 755/204*

Texas Commerce Bank, N.A., Trustee Edge Joint Venture II 03/21/96 754/762*

▇.▇. ▇▇▇▇▇▇ Land Trust Edge Joint Venture II 04/10/96 754/768*

* Recording data of the Memorandum of Oil and Gas Lease.

Subject ▇▇▇▇▇
-------------

===================================================================================================
Working Net Revenue
▇▇▇▇▇ Interest Interest
---------------------------------------------------------------------------------------------------

La Brisa Ranch #1A (Ranier) .50000 .37600
===================================================================================================

Page 1.01(a)-4

▇▇
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇
Subject Leases
--------------

Lessor Lessee Lease Date Book/Page
------ ------ ---------- ---------

La Brisa Ranch Partnership, et al. Edge Joint Venture II 02/12/96 755/201*

▇▇▇▇▇▇▇ Nominee Corporation Edge Joint Venture II 03/22/96 754/775*

▇.▇. ▇▇▇▇▇▇ Land Trust Edge Joint Venture II 04/03/96 754/765*

Texas Commerce Bank, N.A., Trustee Edge Joint Venture II 03/21/96 754/760*

▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 03/19/96 754/796

The ▇▇▇▇▇▇▇▇▇ Family Trust ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 03/18/96 754/785

▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 03/19/96 754/793

Estate of Merium Vessels ▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 03/10/96 754/790

National Audubon Society ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 04/03/96 754/788

▇▇▇▇▇▇▇, Jr., ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 03/10/96 754/782

* Recording data of the Memorandum of Oil and Gas Lease.

Subject ▇▇▇▇▇
-------------

La Brisa Land & Cattle #1 (▇▇▇▇▇▇▇▇) .37500 .28225
===================================================================================================

Page 1.01(a)-5

▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇
Subject Leases
--------------

Lessor Lessee Lease Date Book/Page
------ ------ ---------- ---------

La Brisa Ranch Partnership, et al. Edge Joint Venture II 05/21/96 765/411*

▇▇▇▇▇▇▇ Nominee Corporation Edge Joint Venture II 05/21/96 765/421*

▇.▇. ▇▇▇▇▇▇ Land Trust Edge Joint Venture II 07/09/96 765/415*

Texas Commerce Bank, N.A., Trustee Edge Joint Venture II 05/21/96 765/418*

NOTE: The ▇▇▇▇▇▇▇ Prospect leases are limited in depth to sub-surface depths
below 4,600'.

* Recording data of the Memorandum of Oil and Gas Lease.

Subject ▇▇▇▇▇
-------------

La Brisa Ranch #1 Belco (▇▇▇▇▇▇▇) - 5590' .25000 .18050
---------------------------------------------------------------------------------------------------
La ▇▇▇▇▇ ▇▇▇▇▇ #▇ ▇▇▇▇▇ (▇▇▇▇▇▇▇) - ▇▇▇▇' .25000 .18050
===================================================================================================

Page 1.01(a)-6

▇▇
▇▇▇▇▇/▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇
Subject Leases
--------------

Lessor Lessee Lease Date Book/Page
------ ------ ---------- ---------

▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, ▇▇. Individually ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 03/07/96 754/777
and as Independent Executor of
the Estate of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Deceased,
and as Independent Trustee of
the Testamentary Trust under Will of
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Deceased

The State of Texas, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 11/17/95 744/121
by ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, et al.

▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇., ▇▇., Exec. ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 03/07/96 754/777

State of Texas ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 11/17/95 1360/5
(Relinquishment Act Lease No. M-97044)

* Recording data of the Memorandum of Oil and Gas Lease.

Subject ▇▇▇▇▇
-------------

▇▇▇▇▇▇ ▇▇▇▇▇▇▇ State No. 1 .50000 .38100
---------------------------------------------------------------------------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ State No. 2 .50000 .38100
---------------------------------------------------------------------------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ State No. 3 .50000 .38100
---------------------------------------------------------------------------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ State No. 5 .50000 .38100
===================================================================================================

Page 1.01(a)-7

▇▇
▇▇▇▇▇▇▇▇▇/▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇
--------------------

SUBJECT LEASES:

1. Oil and Gas Mining Lease dated May 15, 1934, from ▇▇▇▇▇ Land & Cattle
Company to The Texas Company, recorded in Volume 5, Page 332 of the real
property records of ▇▇▇▇▇▇ County, Texas.

2. Oil, Gas and Mineral Lease dated May 2, 1958, from ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇, et vir., to The Texas Company, recorded in Volume 49, Page 203 of the
real property records of ▇▇▇▇▇▇ County, Texas effective January 1, 1995.

===============================================================================================================
Working Net Revenue
Interest Interest
---------------------------------------------------------------------------------------------------------------

Interest in the Subject Leases and Existing Zones in Existing ▇▇▇▇▇ (as .50000000 .43000000
described in Assignment 1, below)
---------------------------------------------------------------------------------------------------------------
Existing ▇▇▇▇▇ identified below for which recompletions are undertaken to .40000000 .33400000
perforate intervals after July 1, 1994 in zones or intervals above or below
existing intervals in the wellbores of the Existing ▇▇▇▇▇ (as described in
Assignment 2, below) - Before Payout
---------------------------------------------------------------------------------------------------------------
Existing ▇▇▇▇▇ identified for which recompletions are undertaken to .29000000 .24215000
perforate intervals after July 1, 1994 in zones or intervals above or below
existing intervals in the wellbores of the Existing ▇▇▇▇▇ (as described in
Assignment 2, below) - After Payout
---------------------------------------------------------------------------------------------------------------
New ▇▇▇▇▇; Sidetracks and Deepening of Existing ▇▇▇▇▇ (as described in the .27500000 .22742500
Assignment 3, below)
---------------------------------------------------------------------------------------------------------------
Existing Wellbores; 320-Acre Operating Area (as described in Assignment 4, .36055150 .31007420
below)
===============================================================================================================

Page 1.01(a)-8

66
▇▇▇▇▇

Field Lease and Well
----- --------------

Encinitas McGill Bros. NCT-1 #19
Encinitas McGill Bros. NCT-1 #21
Encinitas McGill Bros. NCT-1 #23
Encinitas McGill Bros. NCT-1 #25
Encinitas McGill Bros. NCT-1 #25
Encinitas McGill Bros. NCT-1 #27
Encinitas McGill Bros. NCT-1 #28
Encinitas McGill Bros. NCT-1 #33
Encinitas McGill Bros. NCT-1 #34
Encinitas McGill Bros. NCT-1 #35
Encinitas McGill Bros. NCT-1 #47F
Encinitas McGill Bros. NCT-1 #47H
Encinitas ▇.▇. ▇▇▇▇▇ #1
Encinitas ▇.▇. ▇▇▇▇▇ #2U
Encinitas ▇.▇. ▇▇▇▇▇ #2L
Encinitas ▇.▇. ▇▇▇▇▇ #4
Encinitas McGill Bros. O/A #1U
Encinitas McGill Bros. O/A #1L
Encinitas McGill Bros. O/A #2D
Encinitas McGill Bros. O/A #2F
Encinitas McGill Bros. O/A #3U
Encinitas McGill Bros. O/A #3L
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #2
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #3
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #38F
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #38H
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #39F
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #39H
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #39J
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #45
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #50
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #51
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #52
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #53F
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #53H
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #56
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #57D
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #56
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #59
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #60
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #62
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #63

Page 1.01(a)-9

▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #64
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #65
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #65
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #68
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #73
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #74
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #75
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #77
▇▇▇▇▇▇ ▇▇▇▇▇▇ Bros. NCT-1 #78

Permitted Encumbrances

1. Pooling Agreement between Humble Oil & Refining Company and Texaco
Inc. et al., filed for record on September 9, 1960 and recorded in
Volume 54, Page 133 of the Records of ▇▇▇▇▇▇ County, Texas.

2. Operating Agreement, dated September 9, 1960 and any and all
amendments thereto, between Texaco Inc. and Humble Oil & Refining
Company.

3. Gas Unit Designation, dated December 8, 1960, executed by Texaco Inc.
and Humble Oil & Refining Company, recorded in Volume 54, Page 452 of
the Records of ▇▇▇▇▇▇ County, Texas.

4. Operating Agreement dated July 1, 1994, and any and all amendments
thereto by and among Texaco Exploration and Production Inc. and Edge
Joint Venture II, a Texas general partnership and Carrizo Oil & Gas,
Inc., a Texas corporation.

5. Letter Agreement dated December 6, 1994 between Edge joint Venture II
and Carrizo Production, Inc. pertaining to the Subject Leases.

6. Purchase and Exploration Agreement dated December 21, 1994, effective
July 1, 1994 by and among Edge Joint Venture II, a Texas general
partnership and Carrizo Oil & Gas, Inc., a Texas corporation.

Referenced Assignments
----------------------

1. Assignment of Overriding Royalty Interest (Existing Perforations of
Existing Wellbores Only) dated effective July 1, 1994, from Carrizo
Oil & Gas, Inc. to Edge Petroleum

Page 1.01(a)-10

68
Corporation recorded under Clerk's File ▇▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇.

2. Assignment of Overriding Royalty Interest (Wellbores Only;
Recompletions) dated effective July 1, 1994, from Carrizo Oil & Gas,
Inc. to Edge Petroleum Corporation recorded under Clerk's File ▇▇.
▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇.

3. Assignment of Overriding Royalty Interest (New ▇▇▇▇▇; Sidetracks and
Deepening of Existing ▇▇▇▇▇) dated effective July 1, 1994, from
Carrizo Oil & Gas, Inc. to Edge Petroleum Corporation recorded under
Clerk's File ▇▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇.

4. Assignment, Conveyance and ▇▇▇▇ of Sale (Existing Wellbores - ▇▇. ▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇) dated effective July 1, 1994, from Edge Joint
Venture II to Carrizo Oil & Gas, Inc. recorded under Clerk's File ▇▇.
▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇, said 320 Acre Operation Area being more
particularly described in that certain Pooling Agreement dated
effective September 9, 1960, recorded in Volume ▇▇, ▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇.

Page 1.01(a)-11

▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇ County, Texas
----------------------

Oil & Gas Lease dated January 24, 1930 between A.M. McFaddin, et al., to Lion
Oil Refining Company, recorded in Book 127, Page 88 of the Real Property
Records of Victoria County, Texas, and being more particularly described as
5,000 acres of land, more or less, a part of ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Survey, of
one league, Abstract 114, Patent 66, Volume 17, the ▇. ▇. ▇▇▇▇▇▇ Survey of
1-1/4 leagues, Abstract 115, Patent 65, Volume 17, the C. O. ▇▇▇▇▇▇▇ Survey of
1280 acres, Abstract 526, Patent 231, Volume 8, and the ▇. ▇. ▇▇▇▇ Survey of
640 acres, Abstract 528, Patent 533, Volume 9 and being a part of the ▇▇▇▇▇▇▇▇
Ranch in Victoria County, Texas, except however, the following tracts
aggregating 320 acres, more or less, to wit:

(a) Beginning at the northwest corner of said 5,000 acre lease at a point
in a sand lake which is the intersection of the dividing point between
said Traviesa Grant and the ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ and a northward
prolongation of the west line of said ▇. ▇. ▇▇▇▇ Survey;

Thence with the west line of said lease and said prolongation of said
west line of ▇. ▇. ▇▇▇▇ Survey S. 15 deg. W. 2473.25 minutes to a
point in said line for the SW corner of this 160 acre tract:

Thence N. 56 deg. E. 2473.26 minutes to a point for the SE corner of
this 160 acre tract;

Thence N. 15 deg. E. 2473.26 minutes to a point in the dividing line
between said Traviesa and ▇▇▇▇▇▇ Grants for the northeast corner of
this 160 acre tract;

Thence with said line S. 56 deg. W. 2473.26 minutes to a place of
beginning.

(b) Beginning at the most southern southwest corner of said 5,000 acre
lease in the south line of said ▇. ▇. ▇▇▇▇ Survey;

Thence N. 15 deg. E. with the most southern west line of said 5,000
acre lease 5376 minutes to a point in the north line of said ▇. ▇.
▇▇▇▇ survey, which is an inside corner of said 5,000 acre lease for
the northwest corner of this 160 acre tract;

Page 1.01(a)-12

70
Thence with the north line of said ▇. ▇. ▇▇▇▇ Survey S. 75 deg. E.
1296 minutes to a point for the northeast corner of this 160 acre
tract;

Thence S. 15 deg. W. 5376 minutes to a point in the south line of said
▇. ▇. ▇▇▇▇ survey for the southeast corner of this 160 acre tract;

Thence with said line N. 75 deg. W. 1296 minutes to the place of
beginning.

(NOTE: THE LEASE SHOWS 5,000 ACRES WHEREAS ONLY 4,680 ACRES ARE
COVERED BY SURVEY.)

Prior ▇▇▇▇▇
-----------

▇-▇▇ ▇-▇▇ ▇-▇▇ ▇-▇▇
▇-▇▇ ▇-▇▇ ▇-▇▇ ▇-▇▇
▇-▇▇ ▇-▇▇ ▇-▇▇ ▇-▇▇
▇-▇▇ ▇-▇▇ ▇-▇▇ ▇-▇▇
▇-▇▇ ▇-▇▇ ▇-▇▇ ▇-▇▇
▇-▇▇ ▇-▇▇ ▇-▇▇ ▇-▇▇
▇-▇▇ ▇-▇▇ ▇-▇▇ A-40
▇-▇▇ ▇-▇▇ ▇-▇▇ ▇-▇▇
▇-▇▇ ▇-▇▇ A-30 A-34
▇-▇▇ ▇-▇▇ ▇-▇▇ ▇-▇▇
▇-▇▇ ▇-▇▇ ▇-▇▇ ▇-▇▇
▇-▇▇ ▇-▇▇ ▇-▇▇ A-04
A-05 A-06

Subsequent ▇▇▇▇▇
----------------

▇▇▇▇▇▇ #1
▇▇▇▇▇▇ #3

Prior ▇▇▇▇▇ - Before Payout pursuant to the Letter of Intent described .40000000 .33100000
below.
---------------------------------------------------------------------------------------------------------------
Prior ▇▇▇▇▇ - After Payout pursuant to the Letter of Intent described .20000000 .16550000
below.
---------------------------------------------------------------------------------------------------------------

Page 1.01(a)-13

---------------------------------------------------------------------------------------------------------------
Subsequent ▇▇▇▇▇ drilled in the East McFaddin Field pursuant to the Letter .20000000 .16550000
of Intent described below.
===============================================================================================================

PERMITTED ENCUMBRANCES:

Letter of Intent by and among Edge Joint Venture II and Carrizo Oil &
Gas, Inc. dated January 30, 1995.

Page 1.01(a)-14

72
SCHEDULE 4.10

Purchasers of Production
------------------------

73
SCHEDULE 4.12

Litigation
----------
None

74
EXHIBIT "A"

COMPLIANCE CERTIFICATE

[bracketed information need not be included
in Certificate delivered at Closing]

I, ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Vice President of CARRIZO OIL & GAS, INC.,
(the "Company"), pursuant to Section 5.05 of the Loan Agreement dated as of
August 28, 1997, by and among COMPASS BANK, ("Bank") and the Company (the
"Agreement") do hereby certify, as of the date hereof, that to my knowledge:

1. No Event of Default (as defined in the Agreement) has occurred
and is continuing, and no Unmatured Event of Default (as
defined in the Agreement) has occurred and is continuing[,
except for the following events (include actions taken to cure
such situations):

-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-----------------------------------------------------];

2. No material adverse change has occurred in the business
prospects, financial condition, or the results of operations
of the Company since the date of the previous Financial
Statements (as defined in the Agreement) provided to Bank[,
except for the following changes (include actions taken to
cure such situations):

-------------------------------------------------------
-----------------------------------------------------];

3. Each of the representations and warranties of the Company
contained in Article IV of the Agreement is true and correct
in all respects[, except for the following matters (include
actions taken to cure such situations):

-------------------------------------------------------
-----------------------------------------------------];
and

A-1

75
[4. The Company's financial condition for the quarter ending
__________ is as follows:

Date or Required Actual
Time Ratio or Ratio or
Financial Covenant Period Amount Amount
------------------ ------ -------- --------

(a) Tangible Net Worth At all times not less than the greater --------
of: (a) $20,000,000.00,
or (b) the Tangible Net
Worth of Borrower at
the closing of the
Initial Public Offering,
less $3,000,000.00,
plus 50% of net
income (excluding
losses) subsequent
to 09/30/97, plus
100% of any increases
in shareholders' equity
resulting from the sale
or issuance of any
stock of Borrower
subsequent to 09/30/97

(b) Ratio of quarterly Each quarter not less than 1.25:1.00 -------
Cash Flow to beginning
quarterly Debt with the
Service quarter ending
3/31/97
]
(c) Additional At all times -0- -------
Debt

This certificate is executed this ______ day of ____, 199_.

-------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇

A-2

76
EXHIBIT "B"

NOTE

$75,000,000.00 Houston, Texas August 28, 1997

On the dates hereinafter prescribed, for value received, CARRIZO OIL &
GAS, INC., a Texas corporation (the "Borrower"), having an address at ▇▇▇▇▇ ▇▇.
▇▇▇▇'▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇, promises to pay to the order of
COMPASS BANK (herein called "Bank"), at its principal offices at ▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇, (i) the principal
amount of SEVENTY-FIVE MILLION AND NO/100 DOLLARS ($75,000,000.00) or the
principal amount advanced pursuant to the terms of the Loan Agreement (defined
herein) as of the date of maturity hereof, whether by acceleration or
otherwise, whichever may be the lesser, and (ii) interest on the principal
balance from time to time advanced and remaining unpaid from the date of the
advance until maturity at a rate of interest equal to lesser of (a) the
"Interest Rate" (as defined in the Loan Agreement), or (b) the Maximum Rate (as
hereinafter defined). Any increase or decrease in interest rate resulting from
a change in the Maximum Rate shall be effective immediately when such change
becomes effective, without notice to Borrower, unless Applicable Law (as
defined below) requires that such increase or decrease not be effective until a
later time, in which event such increase or decrease shall be effective at the
earliest time permitted under the provisions of such law.

Notwithstanding the foregoing, if during any period the Interest Rate
exceeds the Maximum Rate, the rate of interest in effect on this Note shall be
limited to the Maximum Rate during each such period, but at all times
thereafter the rate of interest in effect on this Note shall be the Maximum
Rate until the total amount of interest accrued on this Note equals the total
amount of interest which would have accrued hereon if the Floating Rate had at
all times been in effect.

All payments on this Note shall be applied first to accrued interest
and the balance, if any, to principal.

This Note is a revolving credit note and it is contemplated that by
reason of prepayments hereon there may be times when no indebtedness is owing
hereunder; but notwithstanding such occurrence, this Note shall remain valid
and in full force and effect as to each principal advance made hereunder
subsequent to each such occurrence. Each principal advance and each payment
hereof made pursuant to this Note shall be reflected by Bank's records and the
aggregate unpaid amounts reflected by such records shall constitute rebuttably
presumptive evidence of the principal and unpaid, accrued interest remaining
outstanding on this Note.

"Maximum Rate" means the Maximum Rate of non-usurious interest
permitted from day to day by applicable law, including as to Article 5069-1.04,
Vernon's Texas Revised Civil Statutes Annotated (and as the same may be
incorporated by

B-1

_______________
INITIAL FOR
INDENTIFICATION
77
reference in other Texas statutes), but otherwise without limitation, that rate
based upon the "indicated weekly rate ceiling."

"Applicable Law" means that law in effect from time to time and
applicable to this Note which lawfully permits the charging and collection of
the highest permissible lawful, non-usurious rate of interest on this Note,
including laws of the State of Texas and laws of the United States of America.
It is intended that Article 1.04, Title 79, Revised Civil Statutes of Texas,
1927, as amended (Article 5069-1.04, as amended, Vernon's Texas Civil Statutes)
shall be included in the laws of the State of Texas in determining Applicable
Law; and for the purpose of applying said Article 1.04 to this Note, the
interest ceiling applicable to this Note under said Article 1.04 shall be the
indicated weekly rate ceiling from time to time in effect. Borrower and Bank
hereby agree that Chapter 15 of Subtitle 3, Title 79, Revised Civil Statutes of
Texas, 1925, as amended, shall not apply to this Note or the loan transaction
evidenced by, and referenced in, the Loan Agreement (hereinafter defined) in
any manner, including without limitation, to any account or arrangement
evidenced or created by, or provided for in, this Note.

"Business Day" shall mean any day on which banks are open for general
banking business in the State of Texas, other than a Saturday, a Sunday, a
legal holiday or any other day on which banks in the State of Texas are
required or authorized by law or executive order to close.

The principal sum of this Note, after giving credit for unadvanced
principal, if any, remaining at final maturity, shall be due and payable on or
before the Maturity Date, as prescribed in the Loan Agreement defined below;
interest to accrue upon the principal sum from time to time owing and unpaid
hereunder shall be due and payable in monthly installments, as it accrues, with
the first such monthly installment of interest hereon being due and payable on
the first day of September 1997, and with such subsequent installments of
interest being due and payable on the first day of each succeeding month
thereafter; provided, however, the final installment of interest hereunder
shall be due and payable not later than the maturity of the principal sum
hereof, howsoever such maturity may be brought about.

When the first (1st) day of a calendar month falls upon a Saturday,
Sunday or legal holiday, the payment of interest and principal, if any, due
upon such date shall be due and payable upon the next succeeding Business Day.

In no event shall the aggregate of the interest on this Note, plus any
other amounts paid in connection with the loan evidenced by this Note which
would under Applicable Law be deemed "interest," ever exceed the maximum amount
of interest which, under Applicable Law, could be lawfully charged on this
Note. Bank and Borrower specifically intend and agree to limit contractually
the interest payable on this Note to not more than an amount determined at the
Maximum Rate. Therefore, none of the terms of this Note or any other
instruments pertaining to or securing this Note shall ever be construed to
create a contract to pay interest at a rate in excess of the Maximum Rate, and
neither Borrower nor any other party liable herefor shall ever be liable for
interest in excess of

B-2

______________
INITIAL FOR
IDENTIFICATION
78

that determined at the Maximum Rate, and the provisions of this paragraph shall
control over all provisions of this Note or of any other instruments pertaining
to or securing this Note. If any amount of interest taken or received by Bank
shall be in excess of the maximum amount of interest which, under Applicable
Law, could lawfully have been collected on this Note, then the excess shall be
deemed to have been the result of a mathematical error by the parties hereto
and shall be refunded promptly to Borrower. All amounts paid or agreed to be
paid in connection with the indebtedness evidenced by this Note which would
under Applicable Law be deemed "Interest" shall, to the extent permitted by
Applicable Law, be amortized, prorated, allocated and spread throughout the
full term of this Note.

This Note is secured by all security agreements, collateral
assignments, mortgages and lien instruments executed by Borrower (or by any
other party) in favor of Bank, including those executed simultaneously
herewith, those executed heretofore and those hereafter executed, and including
specifically and without limitation the "Security Instruments" described and
defined in the Loan Agreement of even date between Borrower and Bank (the "Loan
Agreement").

This Note is the Revolving Note issued pursuant to the Loan Agreement.
It amends, restates, combines, rearranges and extends those two certain
promissory notes, one dated December 6, 1996 in the face amount of
$25,000,000.00, executed by Borrower and payable to the order of Bank, and the
other dated June 26, 1996, in the face amount of $10,000,000.00, executed by
Encinitas Partners Ltd., which has been merged into and is survived by
Borrower, and made payable to the order of Bank. All liens and security
interests held by or benefiting Bank to secure the indebtedness evidenced by
such prior notes shall continue to secure the indebtedness evidenced by this
Note. Reference is hereby made to the Loan Agreement for a statement of the
rights and obligations of the holder of this Note and the duties and
obligations of Borrower in relation thereto; but neither this reference to the
Loan Agreement nor any provisions thereof shall affect or impair the absolute
and unconditional obligation of Borrower to pay any outstanding and unpaid
principal of and interest on this Note when due, in accordance with the terms
of the Loan Agreement. Each advance and each payment made pursuant to this
Note shall be reflected by notations made by Bank on its records and the
aggregate unpaid amounts reflected by the notations on the records of Bank
shall be deemed rebuttably presumptive evidence of the principal amount owing
under this Note.

In the event of default in the payment when due of any of the
principal of or any interest on this Note, or in the event of default under the
terms of the Loan Agreement or any of the Security Instruments, or if any event
occurs or condition exists which authorizes the acceleration of the maturity of
this Note under any agreement made by Borrower, Bank (or other holder of this
Note) may, at its option, without presentment or demand or any notice to
Borrower or any other person liable herefor, declare the unpaid principal
balance of and accrued interest on this Note to be immediately due and payable.

If this Note is collected by suit or through the Probate or Bankruptcy
Court, or any judicial proceeding, or if this Note is not paid at maturity,

B-3

______________
INITIAL FOR
IDENTIFICATION

79
however such maturity may be brought about, and is placed in the hands of an
attorney for collection, then Borrower agrees to pay reasonable attorneys'
fees, not to exceed 10% of the full amount of principal and interest owing
hereon at the time this Note is placed in the hands of an attorney.

Borrower and all sureties, endorsers and guarantors of this Note waive
demand, presentment for payment, notice of nonpayment, protest, notice of
protest, notice of intent to accelerate maturity, notice of acceleration of
maturity, and all other notices, filing of suit and diligence in collecting
this Note or enforcing any of the security herefor, and agree to any
substitution, exchange or release of any such security or the release of any
party primarily or secondarily liable hereon and further agrees that it will
not be necessary for Bank, in order to enforce payment of this Note by them, to
first institute suit or exhaust its remedies against any Borrower or others
liable herefor, or to enforce its rights against any security herefor, and
consent to any one or more extensions or postponements of time of payment of
this Note on any terms or any other indulgences with respect hereto, without
notice thereof to any of them. Bank may transfer this Note, and the rights and
privileges of Bank under this Note shall inure to the benefit of Bank's
representatives, successors or assigns.

Executed this 28th day of August 1997.

CARRIZO OIL & GAS, INC.

By:
----------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Vice President

B-4

80
EXHIBIT "C"

SECURITY INSTRUMENTS

The Security Instruments securing the obligations of Borrower and
Indebtedness to Bank shall include the following, each in form and substance
satisfactory to Bank:

1. PRIOR SECURITY INSTRUMENTS all Security Instruments executed pursuant
to, and as defined in, the Existing Carrizo Loan Agreement and the Existing
Encinitas Loan Agreement shall continue in force and effect to secure the
Indebtedness and Obligations of Borrower arising pursuant to this Agreement,
with such amendments thereof to be executed by Borrower as are necessary or
appropriate from time to time, in the good faith opinion of Bank, to evidence
the fact that Borrower is successor by merger to Encinitas Partners Ltd. and
that such Security Instruments continue to relate to all Indebtedness and
Obligations arising under this Agreement.

2. DEED OF TRUST, MORTGAGE, SECURITY AGREEMENT, AND ASSIGNMENT OF
PRODUCTION covering Borrower's interest in any additional Borrowing Base Oil
and Gas Properties, the personal property and equipment therein and thereon,
the production of oil, gas, and other minerals therefrom, and all of the
products and proceeds thereof.

3. SECURITY AGREEMENT granting Bank a first priority security interest in
all of Borrower's accounts, equipment, machinery, fixtures, inventory, chattel
paper, documents, contracts, instruments and general intangibles relating to or
arising out of any additional Borrowing Base Properties, whether now owned or
hereafter acquired, and all products and proceeds thereof.

4. SECURITY AGREEMENT (PLEDGE) granting Bank a first priority security
interest in all of Borrower's Borrowing Base Cash, and all products and
proceeds thereof, if, as and when Borrowing Base Cash is added to the Borrowing
Base Properties.

5. FINANCING STATEMENTS in connection with the Security Instruments
described in the preceding paragraphs, in form and number satisfactory to Bank
as Bank, from to time, may specify (including additional or supplemental
financing statements, amendments thereto, and continuation statements thereof).

C-1

81
6. LETTERS IN LIEU OF TRANSFER ORDERS covering Borrower's interest in oil
and gas produced from any additional Borrowing Base Oil and Gas Properties and
in the proceeds from the sale thereof, pursuant to the assignment of production
included in the Deeds of Trust referenced above.

7. OTHER SECURITY INSTRUMENTS. Such other instruments as are necessary
or appropriate from time to time, in the good faith opinion of Bank, to perfect
to the satisfaction of Bank Bank's liens, security interests, and other rights
in the Borrowing Base Properties and in any and all other collateral covered by
or described in (or, as evidenced by the Agreement, intended to have been
covered by) any of the other Security Instruments described above.

POWER OF ATTORNEY. To the fullest extent permitted by Law, Borrower hereby
appoints Bank as its attorney-in-fact (without requiring Bank to act as such)
to execute any Security Instrument in the name of Borrower, and to perform all
other acts that Bank deems appropriate to perfect and continue its liens,
security interests, and other rights in, and to protect and preserve, the
Borrowing Base Properties and other collateral covered by or described in (or,
as evidenced by the Agreement, intended to have been covered by) any of the
Security Instruments described above, but only to the extent required of
Borrower under the terms of this Agreement. This power of attorney is coupled
with an interest and shall be irrevocable until the full and final payment and
performance of all of Borrower's Indebtedness and Obligations to Bank.

C-2

82
EXHIBIT "D"

FORM OF REQUEST FOR ADVANCE, CONTINUATION OR CONVERSION

COMPASS BANK
▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇

Attention: Energy Lending Group

RE: First Amended, Restated and Combined Loan Agreement
dated as of August 28, 1997, by and between Carrizo
Oil & Gas, Inc. and Compass Bank (as amended,
restated, or supplemented from time to time, the
"Credit Agreement")

Ladies and Gentlemen:

Pursuant to the Credit Agreement, the Borrower hereby makes
the requests indicated below:

[ ] 1. Loans:

(a) Amount of new Loan: $______________

(b) Requested funding date: _______, 19__

$_____________ of such Loan is to be a LIBOR Loan.

Requested Interest Period for LIBOR Loan: ___ months.

[ ] 2. Continuation or conversion of LIBOR Loan maturing on _______,
19__:

(a) Amount to be continued as a LIBOR Loan is $______________,
with an Interest Period of ___ months;

(b) Amount to be converted to an Index Rate Loan is $___________.

[ ] 3. Conversion of Index Rate Loan:

(a) Requested conversion date: __________, 19____.

(b) Amount to be converted to a LIBOR Loan is $___________, with
an Interest Period of ______ months.

The undersigned certifies that he is the Vice President of the
Borrower, has obtained all consents necessary, and as such he is authorized to
execute this request on behalf of the Borrower. The undersigned further
certifies, represents, and warrants on behalf of the Borrower that the Borrower
is entitled to receive the requested borrowing, continuation, or conversion
under the terms and conditions of the Credit Agreement.

83
Each capitalized term used but not defined herein shall have
the meaning assigned to such term in the Credit Agreement.

Very truly yours,

CARRIZO OIL & GAS, INC.

By:
------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Vice President

D-2

84
EXHIBIT "E"

FORM OF MONTHLY BORROWING BASE CERTIFICATE

I, the undersigned officer of CARRIZO OIL & GAS, INC. (the "Company"),
pursuant to Section 5.06 of the Loan Agreement dated as of August 28, 1997, as
amended from time to time, by and between COMPASS BANK (the "Bank") and the
Company (the "Agreement"), do hereby certify that:

The Borrowing Base, calculated in accordance with the
Agreement as of the first day of the month preceding the month
in which this certificate is executed and delivered to the
Bank (the "Effective Date"), is $___________. Such Borrowing
Base is the sum of the following Borrowing Base components
calculated as of the Effective Date:

a. Borrowing Base Cash in the amount of
$___________; plus

b. Borrowing Base Oil and Gas Properties valued,
pursuant to Section 2.10 of the Agreement, at $___________,
inclusive of the Monthly Borrowing Base Reduction most
recently established by the Bank pursuant to Section 2.10.

This certificate is executed this ____ day of ___________, 199____.

CARRIZO OIL & GAS, INC.

By:
---------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Vice President

E-1

75,000,000.00 SECURED REDUCING REVOLVING LINE OF CREDIT FROM COMPASS BANK TO

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