Stephen R. and Mary K. Herbel - Page 11

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                  the aforesaid disputes, and in order to avoid                       
                  litigation, to limit the hazards and the uncer-                     
                  tainties of litigation and in order to buy their                    
                  peace, the parties have freely and voluntarily                      
                  agreed to settle and compromise all aspects of                      
                  the disputes upon the terms and conditions                          
                  hereinafter set forth;                                              
                       NOW, THEREFORE, for and in consideration                       
                  of the premises and the mutual covenants herein                     
                  contained, Seller and Buyer hereby contract and                     
                  agree as follows:                                                   
                  1.                                                                  
                       Seller and Buyer agree to execute                              
                  simultaneously with the execution of this                           
                  Settlement Agreement a gas purchase contract                        
                  amendment to the Contract in the form of that                       
                  attached hereto as Exhibit B, the provisions of                     
                  which shall govern the relations of the parties                     
                  as to the matters contained therein from its                        
                  effective date forward.  Upon execution of the                      
                  amendment, the obligations imposed by this                          
                  paragraph of the Settlement Agreement shall be                      
                  completed and the Contract and this Settlement                      
                  Agreement shall be completed and the Contract and                   
                  this Settlement Agreement shall be treated as                       
                  separate and independent contracts so that                          
                  ongoing future performance under the Contract                       
                  shall not constitute performance under the                          
                  Settlement Agreement.                                               
                  2.                                                                  
                       Buyer has this date made a lump sum                            
                  prepayment (hereinafter referred to as the                          
                  "Prepayment") to Seller in the total sum of                         
                  $1,850,000.00 which shall constitute a prepayment                   
                  in advance for natural gas to be delivered by                       
                  Seller to Buyer on and after May 1, 1988 from all                   
                  wells subject to the Contract (hereinafter the                      
                  "Subject Wells").  Buyer shall have the right to                    
                  receive and recoup out of all natural gas to the                    
                  extent specified below produced from the Subject                    
                  Wells, attributable to the Gross Working Interest                   
                  of Seller, a volume of natural gas which has a                      
                  value equal to the Prepayment, calculated by                        
                  applying the price per MMBtu in effect under the                    
                  terms of the Contract, as amended this date, at                     





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