ASSET EXCHANGE AGREEMENT

Exhibit 10.1

Asset Exchange Agreement

by and between

Arrow River Energy, L.P.

and

The Exploration Company of Delaware, Inc.

dated

FEBRUARY 11, 2005

ARTICLE ONE
DEFINITIONS

1.1

Defined Terms

1

ARTICLE TWO
EXCHANGE OF THE PROPERTIES

2.1

Exchange of the Properties

9

2.2

Closing

9

2.3

Production, Proceeds, Expenses and Taxes

11

ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF TXCO

3.1

Organization and Standing

13

3.2

Authority

13

3.3

Validity of Agreement

13

3.4

No Violation

13

3.5

Litigation

13

3.6

Environmental Liabilities and Requirements

14

3.7

Affiliate Transactions

14

3.8

Compliance with Laws and Permits

14

3.9

Material Contracts; Status of Contracts

14

3.10

Tax Matters

14

3.11

Current Commitments

14

3.12

Foreign Person

15

3.13

Hedging

15

3.14

Royalties; Bonuses; Delay Rentals

15

3.15

Imbalances

15

3.16

Drilling Obligations

15

3.17

Non-Consent Operations

15

3.18

Seismic Data; Permits

15

3.19

Oil and Gas Operations

16

3.20 

Investment

16

3.21

Knowledgeable

16

3.22

Reliance; Independent Investigation

16

3.23

No Liens

16

ARTICLE FOUR
REPRESENTATIONS AND WARRANTIES OF ARROW RIVER

4.1

Organization and Standing

17

4.2

Authority

17

4.3

Validity of Agreement

17

4.4

No Violation

17

4.5

Litigation

17

4.6

Environmental Liabilities and Requirements

18

4.7

Affiliate Transactions

18

4.8

Compliance with Laws and Permits

18

4.9

Material Contracts; Status of Contracts

18

4.10

Tax Matters

18

4.11

Current Commitments

19

4.12

Foreign Person

19

4.13

Hedging

19

4.14

Royalties; Bonuses; Delay Rentals

19

4.15

Imbalances

19

4.16

Drilling Obligations

19

4.17

Non-Consent Operations

19

4.18

Seismic Data; Permits

20

4.19

Oil and Gas Operations

20

4.20

Investment

20

4.21

Knowledgeable

20

4.22

Reliance; Independent Investigation

20

4.23

No Liens

20

ARTICLE FIVE
AGREEMENTS OF THE PARTIES

5.1

Announcements

21

5.2

Confidentiality

21

5.3

Further Assurances and Cooperation

23

5.4

Cooperation and Exchange of Information

23

5.5

Deceptive Trade Practices Act

23

ii

5.6

Arrow River Facilities

23

5.7

Amended and Restated Comanche Ranch Deep Rights JOA

24

5.8

Amended and Restated Pena Creek JOA

24

5.9

Southern Ranches Prospect JOA

24

ARTICLE SIX
SURVIVAL OF WARRANTIES; INDEMNIFICATION

6.1

Survival of Representations and Warranties

24

6.2

Indemnification

24

6.3

Limitations on Liability; Limitations on Damages

26

6.4

Notice of Claims

26

6.5

Defense of Claims

27

6.6

Disclosure Schedule

27

6.7

Express Negligence; Conspicuousness

28

6.8

Exclusive Remedy

28

ARTICLE SEVEN
MISCELLANEOUS

7.1

Notices

28

7.2

Modification

29

7.3

Governing Law

29

7.4

Assignment

29

7.5

Counterparts

29

7.6

Invalidity

30

7.7

Entire Agreement and Construction

30

7.8

Expenses

30

7.9

Waivers and Amendments

30

7.10

Section Headings

30

7.11

Third-Party Beneficiaries

30

ii

LIST OF SCHEDULES AND EXHIBITS
TO BE ATTACHED TO THIS AGREEMENT

Exhibit A

Arrow River Oil and Gas Interests

Exhibit B

Cage Ranch Excluded Wells; Cage Ranch Excluded Units

Exhibit B-8

Cage Ranch 118H Unit

Exhibit B-9

Cage Ranch "A" Unit

Exhibit B-10

Cage Mineral Ltd. 1-26

Exhibit B-11

Cage Ranch "D" Unit 1-63H

Exhibit C

TXCO Oil and Gas Interests

Exhibit D

Maverick-Dimmit Pipeline

Schedule 1.1(a)

Amended and Restated Comanche Ranch Deep Rights JOA

Schedule 1.1(b)

Amended and Restated Pena Creek JOA

Schedule 1.1(c)

Arrow River Assignment

Schedule 1.1(d)

CMR Assignment

Schedule 1.1(e)

Comanche Ranch Shallow Rights JOA

Schedule 1.1(f)

Southern Ranches Prospect JOA

Schedule 1.1(g)

TXCO Assignment

Schedule 2.2(b)

TXCO Non-Foreign Status Affidavit

Schedule 2.2(c)

Arrow River Non-Foreign Status Affidavit

Schedule 3.4

TXCO No Violations

Schedule 3.5

TXCO Litigation

Schedule 3.7

TXCO Affiliate Transactions

Schedule 3.9

TXCO Contracts

Schedule 3.11

TXCO Current Commitments

Schedule 3.16

TXCO Drilling Obligations

Schedule 3.18

TXCO Seismic Data

Schedule 4.4

Arrow River No Violations

Schedule 4.5

Arrow River Litigation

Schedule 4.7

Arrow River Affiliate Transactions

Schedule 4.11

Arrow River Current Commitments

Schedule 4.16

Arrow River Drilling Obligations

Schedule 4.18

Arrow River Seismic Data

Note:

Only Schedule 1.1(c) is included with the filing of this agreement. Other schedules and exhibits will be provided to the Securities and Exchange Commission upon request.

iv

ASSET EXCHANGE AGREEMENT

     THIS ASSET EXCHANGE AGREEMENT (this " Agreement ") is made and entered into as of this 11th day of February, 2005, by and between Arrow River Energy, L.P., a Texas limited partnership (" Arrow River "), and The Exploration Company of Delaware, Inc., a Delaware corporation (" TXCO "). Arrow River or TXCO may be periodically referred to herein as a " Party ," and Arrow River and TXCO may be periodically referred to herein as the " Parties ."

     WHEREAS, Arrow River owns the Arrow River Properties and TXCO owns the TXCO Properties; and

     WHEREAS, Arrow River desires to exchange the Arrow River Properties for the TXCO Properties and TXCO desires to exchange the TXCO Properties for the Arrow River Properties, all on the terms set forth in this Agreement;

     NOW THEREFORE, for and in consideration of the mutual covenants herein contained, the Parties have agreed as follows:

ARTICLE ONE

DEFINITIONS

1.1      Defined Terms . The following capitalized terms have the following assigned meanings throughout this Agreement:

" Affiliate " means with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person; for purposes of this definition, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities or otherwise.

" Amended and Restated Comanche Ranch Deep Rights JOA " means an operating agreement in the form of Schedule 1.1(a) attached hereto.

" Amended and Restated Peña Creek JOA " means an operating agreement in the form of Schedule 1.1(b) attached hereto.

" Applicable Time " means the Official United States of America time for the Central Time Zone as calculated by the National Institute of Standards and Technology and the U.S. Naval Observatory.

" Arrow River " is defined in the Preamble.

" Arrow River Assignment " means the Assignment from Arrow River to TXCO, which shall be substantially in the form attached hereto as Schedule 1.1(c) .

" Arrow River Confidential Information " is defined in Section 5.2(c).

" Arrow River Derivative Information " is defined in Section 5.2(c).

" Arrow River Facilities " means the pipelines, surface equipment and other central facilities owned by Arrow River that are used for the purpose of transporting, treating and/or processing gas production from any two (2) or more of the Cage Ranch Excluded Wells and that are not used exclusively in connection with a single Cage Ranch Excluded Well.

" Arrow River Group " is defined in Section 5.2(b).

" Arrow River Indemnified Parties " means Arrow River, its Affiliates, and its directors, stockholders, officers, partners, employees, agents, consultants, attorneys, representatives, and to the extent permitted hereunder successors, transferees and assignees.

" Arrow River Information and Data " means all (1) abstracts, title opinions, title reports, title policies, lease and land files, surveys, analyses, compilations, correspondence, filings with and reports to regulatory agencies, other documents and instruments that relate specifically to the Arrow River Oil and Gas Interests; (2) computer databases that are owned by or licensed to Arrow River that relate specifically to the Arrow River Oil and Gas Interests; and (3) all other books, records, files and magnetic tapes containing financial, title or other information that relate to the Arrow River Oil and Gas Interests.

" Arrow River Oil and Gas Interests " means all of the oil and gas leasehold interests described in Exhibit A attached hereto, to the extent, and only to the extent, that the lands covered thereby are NOT included within the Cage Ranch Excluded Units.

" Arrow River Properties " means the Arrow River Oil and Gas Interests, the Arrow River Information and Data and the Arrow River Proprietary Data.

" Arrow River Proprietary Data " means all proprietary data owned by Arrow River relating to the Arrow River Oil and Gas Interests which shall include, without limitation, (a) all privileged or confidential data, (b) all seismic data and information and licenses thereto, (c) all interpretive geological and geophysical information which may reveal the methods used by Arrow River in interpreting geological and geophysical information, economic analysis, and any information or other similar proprietary data which might reveal Arrow River's economic guidelines or other methods or systems by which Arrow River conducts its economic analysis, and (d) any similar proprietary data.

" Business Day " means each calendar day consisting of twenty-four (24) hours from midnight to midnight, except each such day when federally chartered banks are required to be closed.

" Cage Ranch Excluded Wells " means those wells located on the Cage Ranch described in Exhibit B attached hereto that are owned by Arrow River and not included within the Arrow River Properties.

" Cage Ranch Excluded Units " means the production and/or pooled units for the Cage Ranch Excluded Wells described in Exhibit B attached hereto.

" Cage Ranch Excluded Wells JOA " means that certain Amended and Restated Operating Agreement dated February 1, 2005, among CMR, as Operator, and Arrow River and Doughtie, as non-operators, as amended from time to time.

2

" Chemical Substances " means any chemical substances, including, but not limited to, any sort of pollutants, contaminants, chemicals, raw materials, intermediates, products, industrial, solid, toxic materials or Hazardous Materials, wastes, petroleum products (including crude oil or any component thereof), salt water, brine, asbestos, or Naturally Occurring Radioactive Materials (" NORM ").

" Claims " means any and all direct or indirect demands, claims, notices of violation, filings, investigations, administrative proceedings, actions, causes of action, suits, other legal proceedings, payments, charges, judgments, assessments, liabilities, damages, deficiencies, penalties, fines, obligations, responsibilities, costs and expenses paid or incurred, or diminutions in value of any kind or character (whether or not asserted prior to the date hereof, and whether in law or in equity, tort, contract or statutory, known or unknown, fixed or unfixed, conditional or unconditional, based on negligence, strict liability or otherwise, choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise), including, without limitation, (a) penalties and interest on any amount payable to a third party as a result of the foregoing, (b) any legal or other expenses reasonably incurred in connection with investigating or defending any claim, demand or legal proceeding, whether or not resulting in any liability, and (c) all amounts paid in settlement of claims, demands, or legal proceedings.

" Claim Notice " is defined in Section 6.4.

" Closing " means the consummation of the transactions described in this Agreement, by transfer of the Arrow River Properties from Arrow River to TXCO, the transfer of the TXCO Properties from TXCO to Arrow River, and completion of all matters ancillary thereto as provided in this Agreement.

" Closing Date " is defined in Section 2.2(a).

" CMR " means CMR Energy, L.P., a Texas limited partnership.

" CMR Assignment " means the Assignment and Bill of Sale from TXCO to CMR, which shall be substantially in the form attached hereto as Schedule 1.1(d) .

" Code " means the Internal Revenue Code of 1986, as amended, along with the related treasury regulations.

" Comanche Ranch Shallow Rights JOA " means an operating agreement in the form of Schedule 1.1(e) attached hereto.

" Damages " means causes of action, assessments, losses, damages, liabilities, costs and expenses, including, without limitation, interest, penalties and reasonable attorneys' fees, disbursements and expenses, and excluding , specifically, punitive, treble, exemplary, special, indirect, consequential, remote or speculative damages of either Arrow River or TXCO.

" Disclosure Schedules " means the schedules, attachments and exhibits attached to this Agreement.

" Doughtie " means Doughtie Exploration Company, a Texas corporation.

" DTPA " is defined in Section 5.5.

3

" Effective Time " means 7:00 a.m., Applicable Time, on February 1, 2005.

" Encumbrance " means any charge, claim, interest, condition, lien, option, pledge, security interest, right of first refusal, or restriction of any kind.

" Environmental Claim " means any and all claims, demands, losses, liabilities (including, without limitation, STRICT LIABILITIES), judgments, settlements, suits, causes of action or proceedings for the personal injury, disease or death of any person (including, without limitation, directors, officers, employees, agents and representatives), damage to, loss or destruction of any of the Arrow River Properties, the TXCO Properties, or other personal property and assets, real or personal, damage to the environment, or damage to natural resources, whether arising by statutory authority or made, asserted or prosecuted by or on behalf of any Third Party (whether based on any theory of tort including, but not limited to, negligent acts or omissions, contract, statutory liability, or strict liability without fault or otherwise) which arise or are alleged to arise under or relate to any Environmental Law. Environmental Claim includes any damages, settlement amounts, fines and penalties assessed or costs of complying with any orders or decrees of courts, administrative tribunals or other governmental entities (other than those compliance costs related to Environmental Cleanup Liability) associated with resolving such claims, demands, liabilities (including, without limitation, STRICT LIABILITIES), actions, suits or proceedings and any costs, expenses and fees, including, without limitation, reasonable attorneys', consultants', experts' and engineers' fees and costs, incurred in the investigation, defense and resolution of such claims, demands, liabilities (including, without limitation, STRICT LIABILITIES), actions, suits and proceedings.

" Environmental Cleanup Liability " means the Lowest Cost Response currently required to be incurred in order to comply with the provisions of any Environmental Law in effect on the date of this Agreement or the provisions of any order or decree in effect on the date of this Agreement of any court or administrative or regulatory tribunal or agency enforcing any Environmental Law, to contain, remove, remediate, respond to, clean up, or abate any release of Chemical Substances or other contamination or pollution of the air, surface water, groundwater, land surface or subsurface strata related to the operation, use, possession, maintenance, ownership or abandonment of the Arrow River Properties or the TXCO Properties, as applicable, whether such release, contamination or pollution is located on, within, under or above real property included in such assets ("on site") or is located off site, including, but not limited to, any release of Chemical Substances or other contamination or pollution arising out of or resulting from the manufacture, generation, formulation, processing, labeling, distribution, introduction into commerce, or on site or off site use, treatment, handling, storage, disposal, or transportation of any Chemical Substances. Environmental Cleanup Liability includes, without limitation, any judgments, damages, settlements, costs or expenses (including, without limitation, attorneys', consultants' and experts' fees and expenses) incurred with respect to (a) any investigation, study, assessment, legal representation, cost recovery by a governmental agency or Third Party, or monitoring or testing in connection therewith, (b) the Arrow River Properties or the TXCO Properties as a result of actions or measures necessary to implement or effectuate any such containment, removal, investigation, remediation, response, cleanup or abatement, and (c) the resolution of such liabilities.

4

" Environmental Laws " means all statutes, rules, regulations, controlling judicial decisions or legal requirements relating to health or the protection of the environment, including, without limitation, those pertaining to the protection, preservation or regulation of endangered species, wetlands or other protected lands, and those regulating emission, releases or discharges of Chemical Substances, the pollution, protection or cleanup of the environment or damage to removal or remediation (including, without limitation, the sampling, testing and other investigation relating to any Environmental Claim that leads to Environmental Cleanup Liability) of real property and natural resources (including, but not limited to, ambient air, surface water, groundwater, and land surface or subsurface strata) including, without limitation, legal requirements contained in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601 et seq., as amended (" CERCLA "); the Resources Conservation and Recovery Act of 1976, 42 U.S.C. § 6901, et seq., as amended (" RCRA "); the Superfund Amendments and Reauthorization Act of 1986, Pub. L. 99-499, as amended (" SARA "); the Clean Air Act, 42 U.S.C. § 7401, et seq., as amended; the Federal Water Pollution Control Act, 33 U.S.C. § 2601 et seq., as amended; the National Environmental Policy Act, 42 U.S.C. § 4321, et seq., as amended (" NEPA "); and the Safe Drinking Water Act, 42 U.S.C. § 300 j-l, et seq., as amended; and/or any other federal, state or local laws, statutes, ordinances, rules, regulations or orders (including decisions of any court or administrative body) relating to emissions, release or discharges of Chemical Substances, the pollution, protection or cleanup of the environment as specified above. "Environmental Laws" shall also mean the Toxic Substance Control Act, 25 U.S.C. § 1502, et seq., as amended (" TSCA ") and/or any other federal, state (including, without limitation, laws with respect to trespass, nuisance and other torts or similar legal theories which may be applied to establish liability or responsibility for Environmental Cleanup Liability or Environmental Claims) or local laws, statutes, ordinances, rules, regulations or orders (including decisions of any court or administrative body) relating to the following (solely as they pertain to the pollution, protection or cleanup of the environment or environmental damage to or remediation of environmental damage to real property and natural resources including, but not limited to, ambient air, surface water, groundwater, and land surface or subsurface strata): (i) release, containment, management, use, storage, disposal, removal, remediation, response, cleanup or abatement of any sort of Chemical Substances, including, without limitation, asbestos, asbestos-containing materials and/or polychlorinated biphenyls; (ii) the manufacture, generation, formulation, processing, labeling, distribution, introduction into commerce, use, treatment, handling, storage, disposal or transportation of any Chemical Substances; (iii) exposure of persons, including employees of the parties hereto, to any Chemical Substances and other occupational safety or health matters; or (iv) the physical structure or condition of a building, facility, fixture or other structure.

" Flournoy " means Flournoy Family Properties, Ltd., a Texas limited partnership.

" Governmental Authority " shall mean any court, tribunal or federal, state or local (including, without limitation, tribal) commission, board, bureau or agency.

" Hazardous Materials " means any substance now or hereafter defined as a "Hazardous Substance" or a "Hazardous Waste" under CERCLA or RCRA.

5

" Hydrocarbons " means all severed crude oil, natural gas, casinghead gas, drip gasoline, natural gasoline, petroleum, natural gas liquids, condensate, products, liquids and other hydrocarbons and other minerals or materials of every kind and description.

" Indemnity Claim Notice " is defined in Section 6.4.

" Law " shall mean any applicable statute, law (including common law), ordinance, regulation, rule, ruling, order, award, ruling, writ, injunction, judgment, decision, determination, decree or other official act of or by any Governmental Authority.

" Lien " means any Encumbrance, mortgage, lien, pledge, charge, security interest, claim, easement, right, agreement, instrument, obligation, burden or defect.

" LLOG " means LLOG Texas Exploration, L.P., a Texas limited partnership

" Lowest Cost Response " means a response to an Environmental Cleanup Liability that is reasonably expected to provide the lowest cost necessary for the reporting, investigation, monitoring, removal, cleanup, remediation, restoration or correction of such condition, to bring such condition into compliance with Environmental Laws in effect at the time of such response to the reasonable satisfaction of any Governmental Authorities with jurisdiction.

" Net Profits Interest " means the net profits interest reserved by Arrow River in the Arrow River Assignment.

" Organizational Documents " means, with respect to an entity, the certificate of incorporation, charter, by-laws, certificate of limited partnership, partnership agreement, certificate of formation, limited liability company agreement, operating agreement or other similar organizational document or instrument governing such entity.

" Original Arrow River Properties JOA " means, collectively, those two certain Operating Agreements dated effective April 25, 2002, (1) among Saxet (predecessor to CMR), as Operator, and Flournoy, as non-operator, and (2) among Saxet (predecessor to CMR), as Operator, and LLOG and Doughtie, as non-operators, as amended from time to time.

" Original Comanche Ranch Deep Rights JOA " means that certain Operating Agreement dated effective February 1, 2001, among Saxet (predecessor to CMR), as Operator, and TXCO, Doughtie, Brian E. O'Brien, Tom Brown, Inc., and Flournoy, as non-operators, as amended from time to time.

" Original Peña Creek JOA " means that certain Operating Agreement dated effective September 1, 2002, among Saxet (predecessor to CMR), and TXCO, as Operators, and LLOG, Doughtie, and Flournoy, as non-operators, as amended from time to time.

" Party " or " Parties " is defined in the Preamble.

" Person " means any natural person, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, business, Governmental Authority or other entity.

6

" Preamble " shall mean the introductory paragraph of this Agreement.

" Saxet " means Saxet Energy, Ltd., a Texas limited partnership.

" Southern Ranches Prospect JOA " means an operating agreement in the form of Schedule 1.1(f) attached hereto.

" Tax " or " Taxes " means all taxes, charges, fees, levies or other assessments, including but not limited to, all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, social security, unemployment, excise, estimated, severance, property or other taxes, duties, fees, assessments or charges of any kind whatsoever, including any interest, penalties or additional amounts attributable thereto imposed by any federal, state, local or foreign Governmental Authority.

" Third Party " means any Person other than Arrow River or TXCO, or any of their Affiliates.

" Third Party Claim " means any Claim that is initiated by a Third Party.

" Transaction Documents " means this Agreement, the Arrow River Assignment, the CMR Assignment, the TXCO Assignment the Arrow River Disclosure Schedules, the TXCO Disclosure Schedules, all other agreements, instruments, and assignments among the Parties executed and delivered in connection with the transactions described in any of the foregoing agreements and instruments, and all exhibits and attachments to such agreements and instruments.

" TXCO " is defined in the Preamble.

" TXCO Assignment " means the Assignment and Bill of Sale from TXCO to Arrow River, which shall be substantially in the form attached hereto as Schedule 1.1(g) .

" TXCO Confidential Information " is defined in Section 5.2(b).

" TXCO Contracts " means the contracts, agreements and commitments described on Schedule 3.9 attached hereto.

" TXCO Derivative Information " is defined in Section 5.2(b).

" TXCO Equipment " means all equipment, fixtures, physical facilities or interests therein (including, but not limited to, gathering lines, pipelines, platforms and gas plants) of every type and description to the extent that the same are used or held for use in connection with the exploration, production or development of the TXCO Oil and Gas Interests, but expressly excluding that certain pipeline system commonly known as the "Maverick-Dimmit Pipeline" owned by Maverick-Dimmit Pipeline, Ltd. (" Maverick-Dimmit "), and described as follows: an approximately 69-mile natural gas pipeline system and appurtenant easements, rights-of-way, fixtures, equipment, meters and compressors, situated in Maverick and Dimmit Counties, Texas, as shown on Exhibit D attached hereto and as more particularly described in that certain Conveyance, Assignment and Bill of Sale dated effective June 1, 2002, from Aquila Southwest Pipeline Corporation, as "Assignor," to Maverick-Dimmit, as "Assignee," recorded in Book 679, Pages 486 through 495 of the Official Public Record of Maverick County, Texas.

7

" TXCO Group " is defined in Section 5.2(b).

" TXCO Hydrocarbons " means all Hydrocarbons produced from the TXCO Oil and Gas Interests and either (a) in storage tanks as of the Effective Time or (b) sold on or after the Effective Time.

" TXCO Indemnified Parties " means TXCO, its Affiliates, and its directors, stockholders, managers, officers, partners, employees, agents, consultants, attorneys, representatives, and to the extent permitted hereunder successors, transferees and assignees.

" TXCO Information and Data " mean all (1) abstracts, title opinions, title reports, title policies, lease and land files, surveys, analyses, compilations, correspondence, filings with and reports to regulatory agencies, other documents and instruments that relate specifically to the TXCO Properties; (2) computer databases that are owned by or licensed to TXCO that relate specifically to the TXCO Oil and Gas Interests; and (3) all other books, records, files and magnetic tapes containing financial, title or other information that relate to the TXCO Oil and Gas Interests.

" TXCO Oil and Gas Interests " means all of the oil and gas leasehold interests described on Exhibit C attached hereto.

" TXCO Payment Rights " means all (a) accounts, instruments and general intangibles (as such terms are defined in the Uniform Commercial Code of Texas) attributable to the TXCO Oil and Gas Interests or the Hydrocarbons produced therefrom with respect to any period of time on or after the Effective Time; and (b) liens and security interests in favor of TXCO, whether choate or inchoate, under any law, rule or regulation or under any of the TXCO Contracts (i) arising from the ownership, operation or sale or other disposition on or after the Effective Time of any of the TXCO Oil and Gas Interests or the Hydrocarbons produced therefrom or (ii) arising in favor of TXCO as the operator of the TXCO Oil and Gas Interests.

" TXCO Permits " means all franchises, licenses, permits, approvals, consents, certificates and other authorizations and other rights granted by governmental authorities and all certificates of convenience or necessity, immunities, privileges, grants and other rights, that relate to the TXCO Oil and Gas Interests or the ownership or operation of any thereof.

" TXCO Properties " means the TXCO Oil and Gas Interests, TXCO Contracts, TXCO Hydrocarbons, TXCO Payment Rights and TXCO Related Assets.

" TXCO Proprietary Data " means all proprietary data owned by TXCO relating to the TXCO Oil and Gas Interests which shall include, without limitation, (a) all privileged or confidential data, (b) all seismic data and information and licenses thereto, (c) all interpretive geological and geophysical information which may reveal the methods used by TXCO in interpreting geological and geophysical information, economic analysis, and any information or other similar proprietary data which might reveal TXCO's economic guidelines or other methods or systems by which TXCO conducts its economic analysis, and (d) any similar proprietary data.

8

" TXCO Related Assets " means all realty and personalty related to, used in connection with or held for use in connection with, the TXCO Oil and Gas Interests, including, without limitation, the TXCO Wells, the TXCO Equipment, the TXCO Surface Contracts, the TXCO Information and Data, the TXCO Permits and the TXCO Proprietary Data.

" TXCO Surface Contracts " means all leases, easements, privileges, right-of-way, agreements, licenses or other agreements relating strictly to the use or ownership of surface and sub-surface properties and structures that are used or held for use in connection with the exploration, production or development of the TXCO Oil and Gas Interests.

" TXCO Wells " means all oil, condensate or natural gas wells, water source wells, and water and other types of injection wells either located on the TXCO Oil and Gas Interests or used or held for use in connection with the TXCO Oil and Gas Interests under a TXCO Surface Contract, whether producing, operating, shut-in or temporarily abandoned.

" USD " means United States Dollars, the official currency of the United States of America.

ARTICLE TWO

EXCHANGE OF THE PROPERTIES

2.1      Exchange of the Properties .

     (a)     On the Closing Date and upon the terms and subject to the conditions set forth herein, and effective as of the Effective Time, (i) subject to the reservation by Arrow River of the Net Profits Interest in the Arrow River Assignment, Arrow River agrees to transfer, assign, and deliver to TXCO, the Arrow River Properties, and TXCO agrees to accept and assume from Arrow River, the Arrow River Properties, and (ii) TXCO agrees to transfer, assign, and deliver to Arrow River, an undivided ninety-eight percent (98%) interest in and to the TXCO Properties, and Arrow River agrees to accept and assume from TXCO, such undivided ninety-eight percent (98%) interest in and to the TXCO Properties.

     (b)      On the Closing Date and upon the terms and subject to the conditions set forth herein, and effective as of the Effective Time, (i) CMR agrees to execute the Southern Ranches Prospect JOA and the Amended and Restated Pena Creek JOA, pursuant to which TXCO will be designated as operator thereunder, (ii) TXCO agrees to transfer, assign, and deliver to CMR, an undivided two percent (2%) interest in and to the TXCO Properties, and CMR agrees to accept and assume from TXCO, such undivided two percent (2%) interest in and to the TXCO Properties and (iii) TXCO agrees to execute the Comanche Ranch Shallow Rights JOA and the Amended and Restated Comanche Ranch Deep Rights JOA, pursuant to which CMR will be designated as operator thereunder.

2.2      Closing .

     (a)     Closing shall occur at the offices of Locke Liddell & Sapp LLP, 600 Travis Street, Suite 3400, Houston, Texas 77002, at 10:00 a.m., on February 11, 2005 (the " Closing Date ").

     (b)     At Closing, Arrow River shall deliver, or cause to be delivered, as applicable:

9

     (i)     To TXCO, five (5) counterpart originals of the Arrow River Assignment, executed and acknowledged by Arrow River, pursuant to which Arrow River assigns to TXCO, the Arrow River Properties and reserves the Net Profits Interest;

     (ii)     To TXCO, three (3) counterpart originals of the Southern Ranches Prospect JOA and three (3) counterpart originals of a memorandum thereof, executed by CMR;

     (iii)     To TXCO, three (3) counterpart originals of the Amended and Restated Pena Creek JOA and three (3) counterpart originals of a memorandum thereof, executed by Arrow River and CMR;

     (iv)     To TXCO, three (3) counterpart originals of the Comanche Ranch Shallow Rights JOA and three (3) counterpart originals of a memorandum thereof, executed by Arrow River and CMR;

     (v)     To TXCO, three (3) counterpart originals of the Amended and Restated Comanche Ranch Deep Rights JOA and three (3) counterpart originals of a memorandum thereof, executed by CMR;

     (vi)     To TXCO, a certificate, as to Arrow River's non-foreign status as set forth in Treasury Regulation 1.1445-2(b), in the form of Schedule 2.2(b) , executed by Arrow River;

     (vii)     To TXCO, certificates, dated the Closing Date and signed by the Secretary or an Assistant Secretary of the general partner of Arrow River, certifying as to (A) the completeness and correctness of attached copies of Arrow River's Organizational Documents, (B) resolutions of the board of directors and stockholders of the general partner of Arrow River and/or such other authorizations as may be required pursuant to Arrow River's Organizational Documents, approving the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby and (C) the incumbency and signatures of the officers of the general partner of Arrow River who executed or who will be executing, as the case may be, this Agreement and any other certificate or document delivered in connection herewith;

     (vii)     To TXCO, certificates, dated as of a date not more than ten (10) days prior to the Closing Date, duly issued by the appropriate governmental authorities in the State of Texas, showing that Arrow River is validly existing, in good standing and authorized to do business in the State of Texas;

     (ix)     To TXCO, copies of the Arrow River Information and Data and the Arrow River Proprietary Data; and

     (x)     To TXCO, such other documents, instruments, agreements and certificates as TXCO may reasonably request in connection with the consummation of the transactions contemplated by this Agreement on the terms set forth herein.

     (c)     At Closing, TXCO shall deliver, or cause to be delivered, as applicable:

     (i)     To Arrow River, five (5) counterpart originals of the TXCO Assignment, executed and acknowledged by TXCO, pursuant to which TXCO assigns to Arrow River, an undivided ninety-eight percent (98%) interest in and to the TXCO Properties;

     (ii)     To CMR, five (5) counterpart originals of the CMR Assignment, executed and acknowledged by TXCO, pursuant to which TXCO assigns to CMR, an undivided two percent (2%) interest in and to the TXCO Properties;

     (iii)     To Arrow River, three (3) counterpart originals of the Southern Ranches Prospect JOA and three (3) counterpart originals of a memorandum thereof, executed by TXCO;

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     (iv)     To Arrow River, three (3) counterpart originals of the Amended and Restated Pena Creek JOA and three (3) counterpart originals of a memorandum thereof, executed by TXCO;

     (v)     To Arrow River, three (3) counterpart originals of the Comanche Ranch Shallow Rights JOA and three (3) counterpart originals of a memorandum thereof, executed by TXCO;

     (vi)     To Arrow River, three (3) counterpart originals of the Amended and Restated Comanche Ranch Deep Rights JOA and three (3) counterpart originals of a memorandum thereof, executed by TXCO;

     (vii)     To Arrow River, a certificate, as to TXCO's non-foreign status as set forth in Treasury Regulation 1.1445-2(b), in the form of Schedule 2.2(c) , executed by TXCO;

     (viii)     To Arrow River, certificates, dated the Closing Date and signed by the Secretary or an Assistant Secretary of TXCO, certifying as to (A) the completeness and correctness of attached copies of TXCO's certificate of incorporation and bylaws (including amendments thereto), (B) resolutions of the board of directors and stockholders of TXCO and/or such other authorizations as may be required pursuant to TXCO's Organizational Documents, approving the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby and (C) the incumbency and signatures of the officers of TXCO who executed or who will be executing, as the case may be, this Agreement and any other certificate or document delivered in connection herewith;

     (ix)     To Arrow River, certificates, dated as of a date not more than ten (10) days prior to the Closing Date, duly issued by the appropriate governmental authorities in the State of Texas, showing that TXCO is validly existing, in good standing and authorized to do business in the State of Texas;

     (x)     To Arrow River, copies of the TXCO Information and Data and the TXCO Proprietary Data; and

     (xi)     To Arrow River, such other documents, instruments, agreements and certificates as Arrow River may reasonably request in connection with the consummation of the transactions contemplated by this Agreement on the terms set forth herein.

2.3      Production, Proceeds, Expenses and Taxes .

     (a)      Division of Ownership .

     (i)     After the Closing, all Hydrocarbons produced from the Arrow River Oil and Gas Interests and either (a) in storage tanks as of the Effective Time or (b) sold on or after the Effective Time shall be owned by TXCO. All Hydrocarbons produced and sold from the Arrow River Oil and Gas Interests prior to the Effective Time shall be owned by Arrow River.

     (ii)     After the Closing, all Hydrocarbons produced from the TXCO Oil and Gas Interests and either (a) in storage tanks as of the Effective Time or (b) sold on or after the Effective Time shall be owned by Arrow River and CMR. All Hydrocarbons produced and sold from the TXCO Oil and Gas Interests prior to the Effective Time shall be owned by TXCO.

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      (b)      Division of Expenses .

     (i)     All costs and expenses incurred in connection with the Arrow River Properties prior to the Effective Time shall be borne by Arrow River. All costs and expenses incurred in connection with the Arrow River Properties on and after the Effective Time shall be borne by TXCO.

     (ii)     All costs and expenses incurred in connection with the TXCO Properties prior to the Effective Time shall be borne by TXCO. All costs and expenses incurred in connection with the TXCO Properties on and after the Effective Time shall be borne by Arrow River and CMR.

      (c)      Tax Prorations .

     (i)     Real and personal property taxes for the Arrow River Properties shall be prorated between Arrow River and TXCO as of the Effective Time. If the actual taxes are not known on the Closing Date, Arrow River's share of such taxes shall be determined by using (a) the rates and millages for the year prior to the year in which the Closing occurs, with appropriate adjustments for any known and verifiable changes thereto and (b) the assessed values for the year prior to the year in which Closing occurs. When TXCO receives the actual tax statements for the Arrow River Properties from the appropriate taxing authorities, TXCO shall deliver to Arrow River a copy of such statements, together with the amount, if any, by which Arrow River's proration exceeds the proration that would have been made had actual tax statements been used to calculate Arrow River's proration. If the proration for Arrow River that would have been made using actual tax statements exceeds that made at Closing, Arrow River shall pay to TXCO such difference within five (5) days of receipt of such statement.

     (ii)     Real and personal property taxes for the TXCO Properties shall be prorated between TXCO and Arrow River and CMR as of the Effective Time. If the actual taxes are not known on the Closing Date, TXCO's share of such taxes shall be determined by using (a) the rates and millages for the year prior to the year in which the Closing occurs, with appropriate adjustments for any known and verifiable changes thereto and (b) the assessed values for the year prior to the year in which Closing occurs. When Arrow River receives the actual tax statements for the TXCO Properties from the appropriate taxing authorities, Arrow River shall deliver to TXCO a copy of such statements, together with the amount, if any, by which TXCO's proration exceeds the proration that would have been made had actual tax statements been used to calculate TXCO's proration. If the proration for TXCO that would have been made using actual tax statements exceeds that made at Closing, TXCO shall pay to Arrow River and CMR such difference within five (5) days of receipt of such statement.

      (d)      Payments and Obligations . If monies are received by either party hereto which, under the terms of this Section 2.3, belong to the other party, the same shall immediately be paid over to the proper party. If an invoice is received by either party hereto which under the terms of this Section 2.3 is the obligation of the other party, then the party receiving the invoice shall promptly forward such invoice to such other party. If an invoice is received by either party which under the terms of this Section 2.3 is partially the obligation of Arrow River and partially the obligation of TXCO, then the parties shall consult with each other and each shall promptly pay its portion of such obligation to the obligee.

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ARTICLE THREE

REPRESENTATIONS AND WARRANTIES OF TXCO

TXCO represents and warrants to Arrow River that:

3.1      Organization and Standing . TXCO has been duly organized and is validly existing in good standing under the Laws of its state of organization and is authorized to conduct business as a foreign corporation (or other entity) in the State of Texas.

3.2      Authority . TXCO has the power and authority to enter into and perform this Agreement and all agreements and transactions contemplated hereby. The execution, delivery and performance by TXCO of this Agreement and all agreements and transactions contemplated hereby, including the exchange and delivery by TXCO of the TXCO Properties as contemplated hereby, have been duly authorized by all requisite action on the part of TXCO, and this Agreement has been duly executed and delivered by TXCO.

3.3      Validity of Agreement . This Agreement is, and the other agreements contemplated by this Agreement, when executed and delivered, will each constitute a legal, valid and binding obligation of TXCO, enforceable against TXCO in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or other similar Laws affecting the enforcement of creditors' rights in general. The enforceability of TXCO's obligations under this Agreement and the other agreements contemplated by this Agreement is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at Law).

3.4      No Violation . Except for consents to assignment under the TXCO Contracts and the TXCO Leases and as set forth on Schedule 3.4 , neither the execution, delivery nor performance by TXCO of this Agreement and all other agreements contemplated hereby to which TXCO is a party, will (a) conflict with or result in a breach of the terms, conditions or provisions of; (b) constitute a default (or event which, with notice or lapse of time or both, would constitute a default) under; (c) result in the creation of any Lien upon TXCO's capital stock (or other ownership interests) or assets pursuant to; (d) give any Third Party the right to terminate or accelerate any obligation under; (e) result in a violation of; or (f) trigger any preferential purchase rights or require any authorization, consent, approval, exemption or other action (including a waiver of preferential rights to purchase) by or notice to any Person or Governmental Authority pursuant to: (i) the Organizational Documents of TXCO; (ii) any contract, agreement, instrument, order, judgment or decree to which TXCO is a party or is subject; (iii) any contract, agreement, instrument, order, judgment or decree to which the TXCO Properties is subject; (iv) any permits required to operate the TXCO Properties as presently conducted; or (v) any law, statute, rule or regulation to which TXCO or the TXCO Properties is subject in connection with the ownership of the Properties. No notice to or consent or waiver is required from, any Person in connection with either the execution, delivery or performance of this Agreement or any other agreements contemplated hereby.

3.5      Litigation . Except as set forth on Schedule 3.5 , there are no actions, suits, or proceedings pending, or to the knowledge of TXCO, threatened against the TXCO, or the TXCO Properties.

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3.6      Environmental Liabilities and Requirements . TXCO has no knowledge of any Environmental Claims or Environmental Cleanup Liabilities or similar non-compliance with Environmental Laws in connection with the TXCO Properties.

3.7      Affiliate Transactions . Except as set forth on Schedule 3.7 , no Affiliate of TXCO is a party to any contract with, or has any current business dealings with or financial interests in any transaction with, TXCO pertaining to the TXCO Properties.

3.8      Compliance with Laws and Permits . The TXCO Properties have been, and currently are, operated, and TXCO, and the TXCO Properties are, in material compliance with the provisions and requirements of all Laws affecting the TXCO Properties or the ownership or operation of any thereof (other than Environmental Laws; TXCO's sole and exclusive representations and warranties with respect to Environmental Laws are set forth in Section 3.6). All necessary material governmental permits, licenses and other authorizations with regard to the ownership or operation of the TXCO Properties have been obtained and maintained in effect. No material violations exist in respect of such permits, licenses or other authorizations.

3.9      Material Contracts; Status of Contracts .

     (a)     Attached hereto as Schedule 3.9 is a list of all contracts and agreements pertaining to the TXCO Oil and Gas Interests. All of the TXCO Contracts described on Schedule 3.9 are in full force and effect and TXCO is not, and no other party to any such TXCO Contract is, in breach of, or with the lapse of time or the giving of notice, or both, would be in breach of, any of its obligations thereunder.

     (b)     TXCO is not obligated, by virtue of any prepayment arrangement, a "take or pay" or other prepayment arrangement, a production payment, or any other arrangement, to deliver any volume of hydrocarbons owned by TXCO and/or allocable to TXCO in a lease from which such hydrocarbons were produced, or permit any other Person to take any volume of such hydrocarbons produced from or attributable to the TXCO Oil and Gas Interests at some future time without then or thereafter being entitled to full payment therefore.

3.10      Tax Matters . All ad valorem, property, production, severance and other taxes based on or measured by the ownership of the TXCO Properties, or the production of oil and gas therefrom, have been properly and timely paid. There are no Liens or Encumbrances for Taxes upon, pending against or threatened against, any of the TXCO Properties except for Liens or Encumbrances for Taxes not yet due or payable.

3.11      Current Commitments . Schedule 3.11 contains a true and complete list as of the date of this Agre