MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT, FIXTURE FILING AND FINANCING STATEMENT

NOTICE OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE OR STRIKE ANY OF THE FOLLOWING INFORMATION FROM THIS INSTRUMENT BEFORE IT IS FILED FOR RECORD IN THE PUBLIC RECORDS: YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVER’S LICENSE NUMBER.

A CARBON, PHOTOGRAPHIC, FACSIMILE OR OTHER REPRODUCTION OF THIS INSTRUMENT IS SUFFICIENT AS A FINANCING STATEMENT.

A POWER OF SALE HAS BEEN GRANTED IN THIS INSTRUMENT. IN CERTAIN STATES, A POWER OF SALE MAY ALLOW THE TRUSTEE OR THE MORTGAGEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS INSTRUMENT.

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.

THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES.

THIS INSTRUMENT COVERS PROCEEDS OF MORTGAGED PROPERTY.

THIS INSTRUMENT COVERS AS EXTRACTED COLLATERAL, MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE EXTRACTED FROM THE EARTH (INCLUDING WITHOUT LIMITATION OIL AND GAS) AND ACCOUNTS RESULTING FROM THE SALE OF AS EXTRACTED COLLATERAL AND WHICH WILL BE FINANCED AT THE WELLHEADS OF THE WELL OR WELLS LOCATED ON THE PROPERTIES DESCRIBED IN EXHIBIT A HERETO. THIS FINANCING STATEMENT IS TO BE FILED OR FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS OR SIMILAR RECORDS OF THE COUNTY RECORDERS OF THE COUNTIES LISTED ON EXHIBIT A HERETO. THE MORTGAGOR HAS AN INTEREST OF RECORD IN THE REAL ESTATE CONCERNED, WHICH INTEREST IS DESCRIBED IN EXHIBIT A ATTACHED HERETO.

PORTIONS OF THE MORTGAGED PROPERTY ARE GOODS WHICH ARE OR ARE TO BECOME AFFIXED TO OR FIXTURES ON THE LAND DESCRIBED IN OR REFERRED TO IN EXHIBIT A HERETO. THIS FINANCING STATEMENT IS TO BE FILED FOR RECORD OR RECORDED, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS OR SIMILAR RECORDS OF EACH COUNTY IN WHICH SAID LAND OR ANY PORTION THEREOF IS LOCATED. THE MORTGAGOR IS THE OWNER OF RECORD INTEREST IN THE REAL ESTATE CONCERNED. THIS INSTRUMENT IS ALSO TO BE INDEXED IN THE INDEX OF FINANCING STATEMENTS.

This MORTGAGE, DEED OF TRUST, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT, FIXTURE FILING AND FINANCING STATEMENT (this “ Mortgage ”) is entered into as of the Effective Date (as hereinafter defined) by SOUTHERN TEXAS OIL COMPANY , a Texas corporation, 300 E. Sonterra Blvd., Suite 1220, San Antonio, Texas 78258 (“ Mortgagor ”), to WALTER H. WALNE, III , an individual, as Trustee, whose address for notice is c/o Walne & Timby, LLP, 17 South Briar Hollow Lane, Suite 208, Houston, Texas 77027 (“ Trustee ”), for the benefit of Viking Asset Management, LLC, a California limited liability company, whose address for notice is 600 Montgomery Street, 44th Floor, San Francisco, California 94111, acting in its capacity as Collateral Agent (together with its successors and assigns in such capacity, the “ Mortgagee ”) on behalf of the Buyers (as defined in the Purchase Agreement referred to below).

A.   Pursuant to that certain Securities Purchase Agreement dated as of September 19, 2008 (as amended, restated, supplemented or otherwise modified from time to time, the “ Purchase Agreement ”), by and among South Texas Oil Company, a Nevada corporation (“ Borrower ”), and the “Buyers” party thereto, Borrower has, among other things, agreed to issue to Buyers, and Buyers have agreed to purchase from Borrower, the Bridge Notes (as defined in the Purchase Agreement), subject in each case to the terms and conditions set forth in the Purchase Agreement.

B.   Mortgagor and the other “Guarantors” party thereto have executed and delivered to Mortgagee that certain Guaranty dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the “ Guaranty ”), pursuant to which Mortgagor has guaranteed the payment and performance of all of the “Obligations” under (and as defined in) the Guaranty, which includes, without limitation, all obligations, liabilities and indebtedness of Borrower under the Purchase Agreement and the Bridge Notes.

C.   Mortgagor has agreed that all of the Indebtedness (as defined in Section 1.03 hereof) is intended to be secured in part by this Mortgage and recorded in those jurisdictions as set forth on Exhibit A of this Mortgage.

D.   The entering into of the Purchase Agreement by the Buyers and the satisfaction of their obligations thereunder were conditioned upon the execution and delivery by Mortgagor of this Mortgage, and Mortgagor has agreed to enter into this Mortgage.

THEREFORE, in order to comply with the terms and conditions of the Purchase Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mortgagor hereby agrees with Trustee and Mortgagee as follows:

Section 1.01   Grant of Liens . To secure payment of the Indebtedness and the performance of the covenants and obligations herein contained and contained in the Guaranty and any other Loan Document (as defined below) to which Mortgagor is a party, Mortgagor does by these presents hereby GRANT, BARGAIN, SELL,

ASSIGN, MORTGAGE, PLEDGE, HYPOTHECATE, TRANSFER and CONVEY unto Trustee and Trustee’s successors and substitutes in trust hereunder, WITH A POWER OF SALE, for the use and benefit of Mortgagee (on its behalf and on behalf of the Buyers), the real and personal property, rights, titles, interests and estates described in the following paragraphs (a) through (g) (collectively called the “ Mortgaged Property ”):

(a)   All rights, titles, interests and estates now owned or hereafter acquired by Mortgagor in and to the oil and gas leases and/or oil, gas and other mineral leases, other mineral properties, mineral servitudes and/or mineral rights, “as extracted collateral” as defined in the Applicable UCC (as defined in Section 1.02) and other interests and estates and the lands and premises covered or affected thereby which are described on Exhibit A hereto without regard to any limitations as to specific lands or depths that may be set forth in Exhibit A (collectively called the “ Hydrocarbon Property ”) or which Hydrocarbon Property is otherwise referred to herein, and specifically, but without limitation, the undivided interests of Mortgagor which are more particularly described on attached Exhibit A .

(b)   All rights, titles, interests and estates now owned or hereafter acquired by Mortgagor in and to (i) the properties now or hereafter pooled or unitized with any Hydrocarbon Property; (ii) all presently existing or future unitization, communitization, pooling agreements and designations, orders or declarations of pooled units and the units created thereby (including, without limitation, all units created under orders, regulations, rules or other official acts of any Federal, State or other governmental body or agency having jurisdiction and any units created solely among working interest owners pursuant to operating agreements or otherwise) which may affect all or any portion of the Hydrocarbon Property including, without limitation, those units which may be described or referred to on attached Exhibit A ; (iii) all operating agreements, production sales or other contracts, processing agreements, transportation agreements, gas balancing agreements, farmout agreements, farm-in agreements, salt water disposal agreements, area of mutual interest agreements, equipment leases and other agreements described or referred to in this Mortgage or which relate to any of the Hydrocarbon Property or interests in the Hydrocarbon Property described or referred to herein or on attached Exhibit A or to the production, sale, purchase, exchange, processing, handling, storage, transporting or marketing of the Hydrocarbons (as defined in Section 1.01(c) hereof) from or attributable to such Hydrocarbon Property or interests; (iv) all geological, geophysical, engineering, accounting, title, legal, and other technical or business data concerning the Hydrocarbon Property, the Hydrocarbons, or any other item of Hydrocarbon Property which are in the possession of Mortgagor or in which Mortgagor can otherwise grant a security interest, and all books, files, records, magnetic media, computer records, and other forms of recording or obtaining access to such data; and (v) the Hydrocarbon Property described on attached Exhibit A and covered by this Mortgage even though Mortgagor’s interests therein be incorrectly described or a description of a part or all of such Hydrocarbon Property or Mortgagor’s interests therein be omitted; it being intended by Mortgagor and Mortgagee herein to cover and affect hereby all interests which Mortgagor may now own or may hereafter acquire in and to the Hydrocarbon Property notwithstanding that the interests as specified on Exhibit A may be limited to particular lands, specified depths or particular types of property interests.

(c)   All rights, titles, interests and estates now owned or hereafter acquired by Mortgagor in and to all oil, gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined therefrom and all other minerals (collectively called the “ Hydrocarbons ”) in and under and which may be produced and saved from or attributable to the Hydrocarbon Property, the lands pooled or unitized therewith and Mortgagor’s interests therein, including all oil in tanks and all rents, issues, profits, proceeds, products, revenues and other income from or attributable to the Hydrocarbons, the Hydrocarbon Property, the lands pooled or unitized therewith and Mortgagor’s interests therein.

(d)   All tenements, hereditaments, appurtenances and properties in anywise appertaining, belonging, affixed or incidental to the Hydrocarbon Property, and any and all rights, titles, interests and estates described or referred to in paragraphs (a) and (b) above, which are now owned or which may hereafter be acquired by Mortgagor, including, without limitation, any and all property, real or personal, now owned or hereafter acquired and situated upon, used, held for use, or useful in connection with the operating, working, extraction, treatment, marketing, gathering, transmission or development of any of such Hydrocarbon Property or the lands pooled or unitized therewith (excluding drilling rigs, trucks, automotive equipment or other personal property which may be taken to the premises for the purpose of drilling a well or for other similar temporary uses) and including any and all oil wells, gas wells, injection wells or other wells, buildings, structures, field separators, liquid extraction plants, plant compressors, pumps, pumping units, pipelines, sales and flow lines, gathering systems, field gathering systems, salt water disposal facilities, tanks and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, meters, apparatus, goods, inventory, equipment, appliances, tools, implements, cables, wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements, servitudes, licenses and other surface and subsurface rights together with all additions, substitutions, replacements, accessions and attachments to any and all of the foregoing properties.

(e)   Any property that may from time to time hereafter, by delivery or by writing of any kind, be subjected to the lien and security interest hereof by Mortgagor or by anyone on Mortgagor’s behalf; and Trustee or Mortgagee is hereby authorized to receive the same at any time as additional security hereunder.

(f)   All of the rights, titles and interests of every nature whatsoever now owned or hereafter acquired by Mortgagor in and to the Hydrocarbon Property rights, titles, interests and estates and every part and parcel thereof, including, without limitation, the Hydrocarbon Property rights, titles, interests and estates as the same may be enlarged by the discharge of any payments out of production or by the removal of any charges or encumbrances to which any of the Hydrocarbon Property rights, titles, interests or estates are subject, or otherwise; all rights of Mortgagor to liens and security interests securing payment of proceeds from the sale of production from the Mortgaged Property, including, but not limited to, those liens and security interests provided in §9.343 of the Applicable UCC, as amended from time to time, any other statute enacted in the jurisdiction in which the Hydrocarbon Property is located or statute made applicable to the Hydrocarbon Property under federal law (or some combination of federal and state law); together with any and all renewals and extensions of any of the Hydrocarbon Property rights, titles, interests or estates; all contracts and agreements supplemental to or amendatory of or in substitution for the contracts and agreements described or mentioned above; and any and all additional interests of any kind hereafter acquired by Mortgagor in and to the Hydrocarbon Property rights, titles, interests or estates.

(g)   All accounts, contract rights, inventory, choses in action (i.e., rights to enforce contracts or to bring claims thereunder), commercial tort claims, general intangibles, insurance contracts and insurance proceeds (regardless of whether the same arose, and/or the events which gave rise to the same occurred, on or before or after the date hereof) and all proceeds and products of all such portions of the Hydrocarbon Property and payments in lieu of production, whether such proceeds or payments are goods, money, documents, instruments, chattel paper, securities, accounts, general intangibles, fixtures, real property, or other assets and regardless of whether such payments accrued, and/or the events which gave rise to such payments occurred, on or before or after the date hereof, including, without limitation, “take or pay” payments and similar payments, payments received in settlement of or pursuant to a judgment rendered with respect to take or pay or similar obligations or other obligations under a production sales contract, payments received in buyout or buydown or other settlement of a production sales contract, and payments received under a gas balancing or similar agreement as a result of (or received otherwise in settlement of or pursuant to judgment rendered with respect to) rights held by Mortgagor as a result of Mortgagor (and/or its predecessors in title) taking or having taken less gas from lands covered by a

Hydrocarbon Property (or lands pooled or unitized therewith) than its ownership of such Hydrocarbon Property would entitle it to receive.

(h)   Without limitation of the generality of the foregoing, any rights and interests of Mortgagor under any present or future hedge or swap agreements, caps, floors, collars, exchanges, forwards or other hedge or protection agreements or transactions relating to crude oil, natural gas or other Hydrocarbons, or any option with respect to any such agreement or transaction now existing or hereafter entered into by or on behalf of Mortgagor.

(i)   All licenses, permits and other regulatory approvals held by Mortgagor relating to the Mortgaged Property.

(j)   All proceeds of all of the rights, titles and interests of Mortgagor described in the foregoing paragraphs (a) through (i), regardless of whether such proceeds or payments are goods, money, documents, instruments, chattel paper, securities, accounts, payment intangibles, general intangibles, fixtures, real/immovable property, personal/movable property or other assets.

(k)   In addition to the rights granted to Trustee and/or Mortgagee in Section 1.01(f) of this Mortgage, any and all liens, security interests, financing statements or similar interests of Mortgagor attributable to its interest in the Hydrocarbons and proceeds of runs therefrom arising under or created by any statutory provision, judicial decision or otherwise.

(l)   All of Mortgagor’s rights and interests pursuant to the provisions of § 9.343 of the Applicable UCC and of any similar state or local jurisdiction statute in any state wherein the Mortgaged Property is located, hereby vesting in Trustee and/or Mortgagee all of Mortgagor’s rights as an interest owner to the continuing security interest in and liens upon the Mortgaged Property.

Any fractions or percentages specified on attached Exhibit A in referring to Mortgagor’s interests are solely for purposes of the warranties made by Mortgagor pursuant to Sections 3.01 and 3.05 hereof and shall in no manner limit the quantum of interest affected by this Section 1.01 with respect to any Hydrocarbon Property or with respect to any unit or well identified on said Exhibit A .

TO HAVE AND TO HOLD the Mortgaged Property unto Trustee and to his successors and assigns forever to secure the payment of the Indebtedness and to secure the performance of the covenants, agreements, and obligations of Mortgagor herein contained.

Section 1.02   Grant of Security Interest . To further secure the Indebtedness, Mortgagor hereby grants to Mortgagee a security interest in and to the Mortgaged Property (whether now or hereafter acquired by operation of law or otherwise) insofar as the Mortgaged Property consists of equipment, accounts, contract rights, general intangibles, insurance contracts, insurance proceeds, inventory, Hydrocarbons, fixtures and any and all other personal property of any kind or character defined in and subject to the provisions of the Uniform Commercial Code presently in effect in the jurisdiction in which the Mortgaged Property is situated (“ Applicable UCC ”), including the proceeds and products from any and all of such personal property. Upon the happening of any of the Events of Default (as defined in Section 4.01), Mortgagee is and shall be entitled to all of the rights, powers and remedies afforded a secured party by the Applicable UCC with reference to the personal property and fixtures in which Mortgagee has been granted a security interest herein, or Trustee or Mortgagee may proceed as to both the real and personal property covered hereby in accordance with the rights and remedies granted under this Mortgage in respect of the real property covered hereby. Such rights, powers and remedies shall be cumulative and in addition to those granted to Trustee or

Mortgagee under any other provision of this Mortgage or under any other security instrument. Written notice mailed to Mortgagor as provided herein at least five (5) Business Days (as defined in the Bridge Notes) prior to the date of public sale of any part of the Mortgaged Property which is personal property subject to the provisions of the Applicable UCC, or prior to the date after which private sale of any such part of the Mortgaged Property will be made, shall constitute reasonable notice. Except as otherwise expressly provided in this Mortgage, all terms in this Mortgage relating to the Mortgaged Property and the grant of the foregoing security interest which are defined in the Applicable UCC shall have the meanings assigned to them in Article 9 (or, absent definition in Article 9, in any other Article) of the Applicable UCC, as those meanings may be amended, revised or replaced from time to time. Notwithstanding the foregoing, the parties intend that the terms used herein which are defined in the Applicable UCC have, at all times, the broadest and most inclusive meanings possible. 

Section 1.03   Indebtedness Secured . This Mortgage is executed and delivered by Mortgagor to secure and enforce the following (the “ Indebtedness ”):

(a)   Payment of and performance of any and all indebtedness, obligations and liabilities of Mortgagor pursuant to the Guaranty including the “Obligations” under and as defined in such Guaranty.

(b)   Payment of and performance of any and all “Obligations” as defined in that certain Security Agreement dated as of September 19, 2008 (as amended, restated, supplemented or otherwise modified from time to time, the “ Security Agreement ”) by and among Mortgagor, the other “Debtors” party thereto, Mortgagee and, for the limited purposes set forth therein, the Buyers.

(c)   Payment of and performance of any and all other indebtedness, obligations and liabilities of Mortgagor, Borrower and any direct or indirect subsidiary of Borrower (collectively, the “ Mortgagor Parties ” and each, individually, a “ Mortgagor Party ”) under, evidenced by or pursuant to the Purchase Agreement, the Bridge Notes or any other Transaction Document (as defined in the Purchase Agreement) and all of the other agreements, documents and instruments contemplated thereby and executed in connection therewith (collectively, the “ Loan Documents ”), including, without limitation, (i) principal and interest (including without limitation, interest accruing subsequent to the filing of a petition or other action concerning bankruptcy or other similar proceeding, whether or not an allowed claim) on the Bridge Notes, (ii) reimbursement obligations under any letters of credit, (iii) obligations under any hedging agreements with Mortgagee or its affiliates, and (iv) obligations owing under any other Loan Document; and all renewals, extensions, rearrangements and/or other modifications of any of the foregoing.

(d)   Any sums which may be advanced or paid by Mortgagee or Trustee under the terms hereof or under any other Loan Document on account of the failure of Mortgagor or any other Mortgagor Party to comply with the covenants contained herein or in any other Loan Document.

(e)   Without limiting the generality of the foregoing, all post-petition interest, expenses and other duties and liabilities with respect to indebtedness, liabilities or other obligations described above in this Section 1.03, which would be owed but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding.

Section 1.04   Fixture Filing, Etc . Without in any manner limiting the generality of any of the other provisions of this Mortgage: (i) some portions of the goods described or to which reference is made herein are or are to become fixtures on the land described or to which reference is made herein or on attached Exhibit A ; (ii) the

security interests created hereby under applicable provisions of the Applicable UCC will attach to Hydrocarbons (minerals including oil and gas), as extracted collateral or the accounts resulting from the sale thereof at the wellhead or minehead located on the land described or to which reference is made herein; (iii) this Mortgage is to be filed of record in the real estate records as a financing statement, and (iv) Mortgagor is the record owner of the real estate or interests in the real estate comprised of the Mortgaged Property.

Section 1.05   Defined Terms . Any capitalized term used in this Mortgage and not defined in this Mortgage shall have the meaning assigned to such term in the Purchase Agreement.

Section 2.01   Assignment . Mortgagor has absolutely and unconditionally assigned, transferred, and conveyed, and does hereby absolutely and unconditionally assign, transfer and convey unto Mortgagee, its successors and assigns, all of the Hydrocarbons and all products obtained or processed therefrom, and the revenues and proceeds now and hereafter attributable to the Hydrocarbons and said products and all accounts arising therefrom or in connection therewith and all payments in lieu of the Hydrocarbons such as “take or pay” payments or settlements (all of the foregoing, the “ Production Proceeds ”), together with the immediate and continuing right to collect and receive such Production Proceeds. The Hydrocarbons and products are to be delivered into pipe lines connected with the Mortgaged Property, or to the purchaser thereof, to the credit of Mortgagee (to the extent of the Mortgagor’s interest therein); and all such Production Proceeds shall be paid directly to a deposit account subject to a deposit account control agreement, in form and substance acceptable to Mortgagee, among Mortgagor, Mortgagee and the applicable financial institution where the deposit account is maintained, with no duty or obligation of any party paying the same to inquire into the rights of Mortgagee to receive the same, what application is made thereof, or as to any other matter. Mortgagor directs and instructs any and all purchasers of any Hydrocarbons to pay to such deposit accounts all of the Production Proceeds accruing to Mortgagor’s interest until such time as such purchasers have been furnished with evidence that all Indebtedness has been paid in full in cash and that this Mortgage has been released. Mortgagor agrees that no purchasers of the Hydrocarbons shall have any responsibility for the application of any funds paid to Mortgagee. Mortgagor agrees to perform all such acts, and to execute all such further assignments, transfer orders and division orders, and other instruments as may be required or desired by Mortgagee or any party in order to have the Production Proceeds paid to Mortgagee. Upon the occurrence and during the continuance of an Event of Default, Mortgagee is fully authorized to receive and receipt for the Production Proceeds; to endorse and cash any and all checks and drafts payable to the order of Mortgagor or Mortgagee for the account of Mortgagor received from or in connection with the Production Proceeds and to hold the Production Proceeds in a bank account as additional collateral securing the Indebtedness; and to execute transfer and division orders in the name of Mortgagor, or otherwise, with warranties binding Mortgagor. All Production Proceeds received by Mortgagee pursuant to this assignment shall be applied as provided in the other Loan Documents. Mortgagee shall not be liable for any delay, neglect or failure to effect collection of any Production Proceeds or to take any other action in connection therewith or hereunder; but Mortgagee shall have the right, exercisable at its election at any time after an Event of Default has occurred and is continuing, in the name of Mortgagor or otherwise, to prosecute and defend any and all actions or legal proceedings deemed advisable by Mortgagee in order to collect such funds and to protect the interests of Mortgagee and/or Mortgagor, with all costs, expenses and attorneys’ fees incurred in connection therewith being paid by Mortgagor and until so paid being a part of the Indebtedness secured by this

Mortgage. Mortgagor agrees to perform all such acts, and to execute all such further assignments, transfer orders and division orders, and other instruments as may be required or desired by Mortgagee or any party in order to effectuate the provisions contained in this Section 2.01. Mortgagor hereby appoints Mortgagee as its attorney-in-fact to pursue any and all rights of Mortgagor to liens on and security interests in the Hydrocarbons securing payment of proceeds of runs attributable to the Hydrocarbons, provided Mortgagee shall only be permitted to exercise such power of attorney granted pursuant to this sentence after the occurrence and during the continuance of an Event of Default. The power of attorney granted to Mortgagee in this Section 2.01, being coupled with an interest, shall be irrevocable so long as the Indebtedness or any part thereof remains unpaid.

Section 2.02   [Reserved]. 

Section 2.03   No Modification of Payment Obligations . Nothing herein contained shall modify or otherwise alter, limit or modify the absolute obligation of Mortgagor and the other Mortgagor Parties to make prompt payment of all principal, interest and other amounts owing on the Indebtedness when and as the same become due regardless of whether the Production Proceeds are sufficient to pay the same and the rights provided in accordance with the foregoing assignment provision shall be cumulative of all other security of any and every character now or hereafter existing to secure payment of the Indebtedness.

Section 2.04   Effectuating Payment of Production Proceeds to Mortgagee . If under any existing sales agreements, other than division orders or transfer orders, any Production Proceeds are required to be paid by the purchaser to Mortgagor so that under such existing agreements payment cannot be made of such Production Proceeds to Mortgagee, Mortgagor’s interest in all Production Proceeds under such sales agreements and in all other Production Proceeds which for any reason may be paid to Mortgagor shall, when received by Mortgagor, constitute trust funds in Mortgagor’s hands and shall be immediately paid over to Mortgagee. Without limitation upon any of the foregoing, Mortgagor hereby constitutes and appoints Mortgagee as Mortgagor’s special attorney-in-fact (with full power of substitution, either generally or for such periods or purposes as Mortgagee may from time to time prescribe) in the name, place and stead of Mortgagor to do any and every act and exercise any and every power that Mortgagor might or could do or exercise personally with respect to all Hydrocarbons and Production Proceeds expressly inclusive, but not limited to, giving and granting unto said attorney-in-fact full power and authority to do and perform any and every act and thing whatsoever necessary and requisite to be done as fully and to all intents and purposes, as Mortgagor might or could do if personally present (provided such power of attorney granted pursuant to this sentence shall only be exercisable by Mortgagee upon the occurrence and during the continuance of an Event of Default); and Mortgagor shall be bound thereby as fully and effectively as if Mortgagor had personally executed, acknowledged and delivered any of the foregoing certificates or documents. The powers and authorities herein conferred upon Mortgagee may be exercised by Mortgagee through any person who, at the time of the execution of the particular instrument, is an officer of Mortgagee. The power of attorney herein conferred is granted for valuable consideration and hence is coupled with an interest and is irrevocable so long as the Indebtedness, or any part thereof, shall remain unpaid or any commitment to lend under the Purchase Agreement remains outstanding. All persons dealing with Mortgagee or any substitute shall be fully protected in treating the powers and authorities conferred by this paragraph as continuing in full force and effect until advised by Mortgagee that all the Indebtedness is fully and totally paid. Mortgagee may, but shall not be obligated to, in accordance with the provisions of Section 2.01 above, take such action as it deems appropriate in an effort to collect the Production Proceeds and any reasonable expenses

(including reasonable attorney’s fees) so incurred by Mortgagee shall be a demand obligation of Mortgagor and shall be part of the Indebtedness, and shall bear interest each day, from the date of such expenditure or payment until paid, at a per annum rate equal to the default rate of interest charged under the Bridge Notes plus 2%. 

Section 2.05   Application of Production Proceeds . The Production Proceeds received by Mortgagee during each calendar month shall be paid directly into a deposit account in accordance with Section 2.01 hereof. After an Event of Default hereunder has occurred, all Production Proceeds from time to time in the hands of Mortgagee shall be applied to the payment of the Indebtedness at such times and in such manner and order as Mortgagee determines in Mortgagee’s sole and absolute discretion.

Section 2.06   Release from Liability; Indemnification . Mortgagee and its successors and assigns are hereby released and absolved from all liability for failure to enforce collection of the Production Proceeds and from all other responsibility in connection therewith, except the responsibility to account to Mortgagor for funds actually received. Mortgagor agrees to indemnify and hold harmless Mortgagee (for purposes of this paragraph, the term “Mortgagee” shall include the directors, officers, partners, employees and agents of Mortgagee and any persons or entities owned or controlled by or affiliated with Mortgagee and any other Indemnified Party as defined in Section 4.16 hereof) from and against all claims, demands, liabilities, losses, damages (including without limitation consequential damages), causes of action, judgments, penalties, costs and expenses (including without limitation reasonable attorneys’ fees and expenses) imposed upon, asserted against or incurred or paid by Mortgagee by reason of the assertion that Mortgagee received, either before or after payment in full of the Indebtedness, funds from the production of oil, gas, other hydrocarbons or other minerals claimed by third persons (and/or funds attributable to sales of production which were made in violation of laws, rules, regulations and/or orders governing such sales), and Mortgagee shall have the right to defend against any such claims or actions, employing attorneys of its own selection, and if not furnished with indemnity satisfactory to it, Mortgagee shall have the right to compromise and adjust any such claims, actions and judgments, and in addition to the rights to be indemnified as herein provided, all amounts paid by Mortgagee in compromise, satisfaction or discharge of any such claim, action or judgment, and all court costs, reasonable attorneys’ fees and other expenses of every character expended by Mortgagee pursuant to the provisions of this section shall be a demand obligation (which obligation Mortgagor hereby expressly promises to pay) owing by Mortgagor to Mortgagee and shall bear interest, from the date expended until paid, at a per annum rate equal to the default rate of interest charged under the Bridge Notes plus 2%. The foregoing indemnities shall not terminate upon the release, foreclosure or other termination of this Mortgage but will survive the release, foreclosure of this Mortgage or conveyance in lieu of foreclosure, and the repayment of the Indebtedness and the discharge and release of this Mortgage and the other documents evidencing and/or securing the Indebtedness. WITHOUT LIMITATION, IT IS THE INTENTION OF MORTGAGOR AND MORTGAGOR AGREES THAT THE FOREGOING RELEASES AND INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PARTY WITH RESPECT TO ALL CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES (INCLUDING WITHOUT LIMITATION CONSEQUENTIAL DAMAGES), CAUSES OF ACTION, JUDGMENTS, PENALTIES, COSTS AND EXPENSES (INCLUDING WITHOUT LIMITATION REASONABLE ATTORNEYS’ FEES AND EXPENSES) WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY OTHER) INDEMNIFIED PARTY. However, such indemnities shall not apply to any particular indemnified party (but shall apply to the other indemnified parties) to the extent the subject of the indemnification is caused by or arises out of the gross negligence or willful misconduct of such particular indemnified party.

Mortgagor hereby represents, warrants and covenants as follows:

Section 3.01   Title . Except as set forth on Schedule 3.01 attached hereto, Mortgagor owns an undivided working interest in each well included in the Mortgaged Property of not more than the working interest set forth in Exhibit A attached hereto (to the extent the interest of Mortgagor is a working interest as opposed to an overriding royalty interest) and Mortgagor owns an undivided net revenue interest or overriding royalty interest in each well included in the Mortgaged Property of not less than the net revenue interest or overriding royalty interest set forth in Exhibit A attached hereto. With respect to the Mortgaged Property, Mortgagor represents and warrants that (i) Mortgagor has good, marketable and indefeasible title in fee simple to all Mortgaged Property constituting real property owned (rather than leased) by it, in each case free and clear of all Liens other than Permitted Liens, except as set forth in Exhibit A , (ii) Mortgagor has good and valid title to all Mortgaged Property constituting personal property owned by it that is material to the business of the Mortgagor, free and clear of all Liens other than Permitted Liens, (iii) Mortgagor is the legal and equitable owner of a leasehold interest in all of the leased Mortgaged Property that is producing oil, gas, minerals and/or other Hydrocarbons, and possesses good, marketable and defensible title thereto, free and clear of all Liens (other than Permitted Liens) and other matters affecting title to such leasehold that could impair the ability of the Mortgagor to realize the benefits of the rights provided to it under any lease pertaining thereto and (iv) Mortgagor is the legal and equitable owner of a leasehold interest in all of the leased Mortgaged Property that is not producing oil, gas, minerals and/or other Hydrocarbons and possesses good, marketable and defensible title thereto, free and clear of all Liens (other than Permitted Liens) and other matters affecting title to such leasehold that could impair the ability of Mortgagor to realize the benefits of the rights provided to it under any lease pertaining thereto.

Section 3.02 Defend Title . This Mortgage is, and always will be kept as, a direct first lien and security interest upon the Mortgaged Property subject only to Permitted Liens and Mortgagor will not create or suffer to be created or permit to exist any lien, security interest or charge prior or junior to or on a parity with the lien and security interest of this Mortgage upon the Mortgaged Property or any part thereof or upon the rents, issues, revenues, profits and other income therefrom. Mortgagor will warrant and defend the title to the Mortgaged Property against the claims and demands of all other persons whomsoever and will maintain and preserve the lien created hereby so long as any of the Indebtedness secured hereby remains unpaid. Should an adverse claim be made against or a cloud develop upon the title to any part of the Mortgaged Property, Mortgagor agrees it will immediately defend against such adverse claim or take appropriate action to remove such cloud at Mortgagor’s cost and expense, and Mortgagor further agrees that Trustee and/or Mortgagee may take such other action as they deem advisable to protect and preserve their interests in the Mortgaged Property, and in such event Mortgagor will indemnify Trustee and Mortgagee against any and all costs, attorney’s fees and other expenses which they may incur in defending against any such adverse claim or taking action to remove any such cloud.

Section 3.03   Not a Foreign Person . Mortgagor is not a “foreign person” within the meaning of the Internal Revenue Code of 1986, as amended (hereinafter called the “ Code ”), Sections 1445 and 7701 (i.e. Mortgagor is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and any regulations promulgated thereunder).

Section 3.04   Rentals, Taxes, Insurance and Fees Paid; Leases in Effect . All rentals and royalties due and payable in accordance with the terms of any leases or subleases comprising a part of the Hydrocarbon Property and all severance and production taxes payable with respect to the production therefrom have been duly paid or provided for and all leases or subleases comprising a part of the Hydrocarbon Property are in full force and effect. In addition to the foregoing, Mortgagor shall pay or shall cause to be paid when due, all taxes, permits, licenses, insurance premiums and other similar amounts with respect to the Mortgaged Property, the Hydrocarbon Property and the Hydrocarbons.

Section 3.05   Operation By Third Parties . As to any part of the Mortgaged Property which is not a working interest (if any), Mortgagor agrees to take all such action and to exercise all rights and remedies as are available to Mortgagor to cause the owner or owners of the working interest in such properties to comply with the covenants and agreements contained herein; and as to any part of the Mortgaged Property which is a working interest operated by a party other than Mortgagor, Mortgagor agrees to take all such action and to exercise all rights and remedies as are reasonably available to Mortgagor (including, but not limited to, all rights under any operating agreement) to cause the operator of such property to comply with the covenants and agreements contained herein. 

Section 3.06   Failure to Perform . Mortgagor agrees that if Mortgagor fails to perform any act or to take any action which Mortgagor is required to perform or take hereunder or pay any money which Mortgagor is required to pay hereunder, each of Mortgagee and Trustee in Mortgagor’s name or its or their own name may, but shall not be obligated to, perform or cause to be performed such act or take such action or pay such money, and any expenses so incurred by either of them and any money so paid by either of them shall be a demand obligation owing by Mortgagor to Mortgagee or Trustee, as the case may be, and each of Mortgagee and Trustee, upon making such payment, shall be subrogated to all of the rights of the person or entity receiving such payment. Each amount due and owing by Mortgagor to each of Mortgagee and Trustee pursuant to this Mortgage shall bear interest from the date of such expenditure or payment or other occurrence which gives rise to such amount being owed to such Person until paid at a rate per annum equal to the default rate of interest charged under the Bridge Notes plus 2%, and all such amounts together with such interest thereon shall be a part of the Indebtedness described in Section 1.03 hereof. 

Section 3.07   Sale, Encumbrance or Removal . Mortgagor will not at any time during the existence hereof, sell, assign, transfer, mortgage, encumber, or otherwise dispose of any Mortgaged Property, except (i) sales of Hydrocarbons in the ordinary course of business and only then in compliance with the terms of this Mortgage, (ii) the sale of obsolete or worn out equipment or personal property in the ordinary course of business, and Mortgagor shall not remove or permit to be removed, any personal or other removable property at any time covered hereby from the premises upon which the same may be situated unless moved to other portions of the Mortgaged Property or replaced with property of equal value in which Mortgagee has a first priority perfected security interest and (iii) the sale of Hydrocarbon Property if and to the extent all of the following conditions are satisfied: (A) such Hydrocarbon Property to be sold does not constitute a material portion of the collateral securing the Indebtedness, is not currently producing Hydrocarbons and such Hydrocarbon Property has not been proven, consistent with prudent customs and practices in the industry in which Mortgagor operates, to contain Hydrocarbons which may be extracted in the ordinary course of Mortgagor’s business, (B) such sale occurs in the ordinary course of Mortgagor’s business in

connection with the disposition of non-producing and non-proven Hydrocarbon Property, (C) no Event of Default has occurred and is continuing at the time of such sale or would arise as a result thereof and no event has occurred which, with the passing of time or the giving of notice, would constitute an Event of Default, (D) such sale is to a third-party not affiliated with the Mortgagor and on an arms-length basis, (E) if Mortgagor or any other Mortgagor Party is the operator with respect to such Hydrocarbon Property, such Mortgagor Party remains the operator with respect thereto, and (F) Mortgagee has given its prior written consent to such sale, such consent not to be unreasonably withheld.  

Section 3.08   Sale of Production . No Mortgaged Property is or will become subject to any contractual or other arrangement (a) whereby payment for production is or can be deferred for a substantial period after the month in which such production is delivered (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) or (b) whereby payments are made to Mortgagor other than by checks, drafts, wire transfer advises or other similar writings, instruments or communications for the immediate payment of money. Except for transportation, gathering, processing, compression or dehydration agreements (or other agreements relating to the marketing of Hydrocarbons) from time to time disclosed to Mortgagee in writing (in connection with the Mortgaged Property to which they relate), and, with respect to the immediately succeeding clause (i), except for agreements entered into by Mortgagor in the ordinary course of business consistent with prudent customs and practices in the industry in which Mortgagor operates, (i) no Mortgaged Property is or will become subject to any contractual or other arrangement for the sale, processing or transportation of production (or otherwise related to the marketing of Hydrocarbons) which cannot be cancelled on ninety (90) days’ (or less) notice and (ii) all contractual or other arrangements for the sale, processing or transportation of Hydrocarbons (or otherwise related to the marketing of Hydrocarbons) shall be bona fide arm’s length transactions and shall be at generally prevailing market prices. Mortgagor is presently receiving a price for all production from (or attributable to) each Mortgaged Property covered by a production sales contract disclosed in writing to Mortgagee as computed in accordance with the terms of such contract, and is not having deliveries of production from such Mortgaged Property curtailed substantially below such property’s delivery capacity. Neither Mortgagor, nor any of