Page 7 of 210

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                              SETTLEMENT AGREEMENT

                              --------------------



     THIS  SETTLEMENT  AGREEMENT  (together  with  all  appendices, exhibits and

schedules hereto, the "Agreement") entered into as of the ___ day of March, 2001

(the  "Execution Date"),  between CPSC International, Inc., a Texas corporation,

as  a  Debtor  and  Debtor  in  Possession ("CPSC" or "Debtor"), Cowboy Pipeline

Service  Company, a Texas corporation ("Cowboy"), and Penn Octane Corporation, a

Delaware  corporation  ("POC").



                             R  E  C  I  T  A  L  S:

                             -  -  -  -  -  -  -  -



     WHEREAS,  on  November  24,  1998,  POC  and CPSC entered into that certain

Lease/Installment  Purchase  Agreement  for  Two  (2)  15-Mile  Pipelines  (said

Lease/Installment Purchase Agreement, together with all amendments thereto being

herein  called  the  "15 Mile Agreement") for the construction of an 8" pipeline

and  a  6"  pipeline  each approximately 15 miles in length extending from POC's

terminal  in  Brownsville, Texas to a prescribed location on the Mexican side of

the  Rio  Grande  west  of Matamoros, Tamaulipas, Mexico, a copy of said 15 Mile

Agreement  being  attached  hereto as  Exhibit "A" hereto (the "U.S. Pipeline");

and



     WHEREAS,  on  February  16,  1999,  POC  and CPSC entered into that certain

Lease/Installment  Purchase  Agreement for Two (2) 7-Mile Pipelines and Transfer

Terminal  (said  Lease/Installment  Purchase  Agreement,  together  with  all

amendments  thereto  being  herein  called  the  "7  Mile  Agreement")  for  the

construction  of  an 8" pipeline and a 6" pipeline each approximately 7 miles in

length  extending  from  the  Mexican  side of the Rio Grande to and including a

terminal  in  Matamoros,  Tamaulipas,  Mexico,  a  copy of said 7 Mile Agreement

being  attached  hereto  as  Exhibit  "B" hereto (the "Mexico Pipeline").    The

U.S.  Pipeline  and  the  Mexico  Pipeline  are  collectively referred to as the

"Pipelines";  and





                                  Page 8 of 210

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     WHEREAS,  on  September  15,  1999,  CPSC  and  POC entered into a separate

Agreement  (the  "Houston  Agreement") providing POC three additional options to

purchase  percentage  interests  in  the  Pipelines;  and



     WHEREAS,  on  September 16, 1999, POC and CPSC entered into Amendment No. 2

to  Lease/Installment  Purchase  Agreement  for  Two (2) 15-Mile Pipelines Dated

November  24,  1998, and to Lease/Installment Agreement for Two (2) 10-Kilometer

Pipelines  providing  for  the substitution of a pledge of 500,000 shares of POC

common  stock  owned  by  Jerome B. Richter (the "Pledged Stock") in lieu of the

letters  of credit specified in section 3.3 of each of the 15 Mile Agreement and

the  7  Mile  Agreement;  and



     WHEREAS,  on  December 14, 1999, POC and CPSC entered into an Addendum (the

"Addendum").  The  Addendum references and incorporates the 7 Mile Agreement and

the  15  Mile  Agreement, as well as the Houston Agreement.  Under the Addendum,

CPSC  granted  POC  an option to purchase 50% of the Pipelines together with the

Transfer  Terminals  (as  hereinafter defined) and the CPSC/Cowboy Agreements(as

hereinafter  defined)  and  a  40%  interest  in  any  revenues generated by the

Pipelines  upon  POC's  payment  of  $3,000,000 into an escrow account (the "50%

Option  Payment").  Also  on  December  14,  1999,  POC and CPSC entered into an

Escrow  Agreement pursuant to which the 50% Option Payment was delivered to Bank

One  N.A.  as  escrow  agent  into  escrow  account  #83-000-757-01 (the "Escrow

Account"), escrowed to pay outstanding and accumulating expenses associated with

CPSC's  construction  of  the  Pipelines;  and





                                  Page 9 of 210

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     WHEREAS,  on  February  24,  2000, Dr. Lieven Van Reit ("Van Reit") filed a

Petition  in  the  State  District  Court  of  Cameron  County, Texas, Cause No.

2000-02-843-E  and  moved  for  a  temporary  restraining  order and preliminary

injunction  to  enjoin  the operation of a portion of the U.S. Pipeline that was

built  on his property, alleging that such construction was a trespass (the "Van

Reit  Suit").  On  March 14, 2000, POC, CPSC, Cowboy and Van Reit entered into a

Rule  11 settlement agreement (the "Van Reit Settlement") that provided for POC,

among  other  things,  to  purchase approximately 477 acres owned by Van Reit in

Cameron  County, Texas, as more particularly described on Exhibit "C" hereto, on

which the U.S. Pipeline was built (the "Van Reit Property").  On April 17, 2000,

POC  purchased  the Van Reit Property in accordance with the Van Reit Settlement

and  executed  that  certain promissory note dated April 17, 2000 payable to Van

Reit  in  the  original principal sum of $1,908,000.00 (the "Van Reit Note); and



     WHEREAS,  the  Estate  of Mae Dean Wheeler, Deceased (the "Wheeler Estate")

similarly  alleges  that a portion of the U.S. Pipeline was built on the Wheeler

Estate's  property  and  constitutes a trespass, and since, following mediation,

the  Wheeler  Estate's  dispute has been tentatively settled, subject to closing

the  settlement;  and



     WHEREAS, on March 14, 2000, CPSC filed its voluntary petition under chapter

11  of  title  11, United States Code, in the United States Bankruptcy Court for

the  Southern  District  of  Texas,  Corpus  Christi  Division,  under  Case No.

00-020805-C-11  (the  "Case");  and



     WHEREAS, Cowboy, CPSC and POC have reached an agreement with respect to the

complete  and  final  settlement of all claims against each other that have been

alleged  or  could  have  been  alleged,  whether  by  lawsuit  or  otherwise.





                                  Page 10 of 210

{PAGE}

     NOW,  THEREFORE,  in  consideration of the mutual promises contained herein

and  other  good  and valuable consideration, and subject to the approval of the

Bankruptcy  Court,  the  Parties  (as  hereinafter  defined)  agree  as follows:





                                    ARTICLE I

                                   DEFINITIONS



     As  used in this Agreement, the terms defined above shall have the meanings

ascribed  above.  In  addition,  the following terms shall have the meanings set

forth  below:



     1.1     "Acquired  Assets"  shall  mean  the  CPSC/Cowboy  Agreements,  the

              ----------------

Pipelines,  the  Transfer  Terminals,  the  Facilities,  the  Permits  and  the

Easements, together with any and all assets of every type and description, real,

personal  and  mixed,  tangible,  choate or inchoate, known or unknown, fixed or

unfixed,  accrued,  absolute,  contingent or otherwise, wheresoever located, and

whether  or not specifically referred to in this Agreement,  owned by CPSC or in

which  CPSC  has any rights, titles, interests or privileges, that are necessary

for  or  used  in  connection  with  the  construction,  ownership,  operation,

maintenance,  monitoring or repair of the Pipelines, the Transfer Terminals, the

Facilities  and/or  the  Easements, including as-built drawings of the Pipelines

certified  by  an engineer of qualifications standard in the industry, alignment

sheets,  permits,  licenses,  easements,  plot  plans  and  similar  engineering

documents,  but  excluding  the  Retained  Assets  (as  hereinafter  defined).

"Acquired  Assets"  shall also include any property of whatever description that

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