Exhibit 10.28
JOINT VENTURE AGREEMENT
HAGERMAN GAS GATHERING SYSTEM
A Joint Venture Formed By
FEAGAN GATHERING COMPANY
PARALLEL PETROLEUM CORPORATION
and
CAPSTONE OIL & GAS COMPANY, L.P.

 

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INDEX

             
Article 1
  Formation of Joint Venture        
 
           
1.1
  Formation of Joint Venture     1  
 
           
Article 2
  Definitions        
 
           
2.1
  Definitions     1  
2.2
  Terms Generally     3  
 
           
Article 3
  The Joint Venture        
 
           
3.1
  Name, Assumed Name Certificates     4  
3.2
  Joint Venture Office and Principal Place of Business     4  
3.3
  Purpose     4  
3.4
  Other Activities     4  
 
           
Article 4
  Ownership and Availability of the System        
 
           
4.1
  Ownership of Joint Venture Facilities     5  
4.2
  Availability of the System     5  
 
           
Article 5
  Representations and Warranties        
 
           
5.1
  Representations, Warranties and Covenants of Parties     5  
 
           
Article 6
  Capital Contributions and Ownership        
 
           
6.1
  Initial Capital Contribution and Ownership     6  
6.2
  Additional Capital Contributions     7  
6.3
  Payment of Capital Contributions     7  
6.4
  Carried Capital Contribution     8  
6.5
  Option to Purchase Additional Interest     8  
6.6
  Voluntary Contributions     8  
 
           
Article 7
  Allocations and Capital Accounts        
 
           
7.1
  Allocations; Capital Accounts     9  

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Article 8
  Distributions and Reimbursements        
 
           
8.1
  Distributions     11  
8.2
  Reimbursement of Expenses     12  
 
           
Article 9
  Accounting; Books and Records; Taxes        
 
           
9.1
  Fiscal Year     12  
9.2
  Location of Records     12  
9.3
  Books of Account     12  
9.4
  Financial Statements     12  
9.5
  Taxation and Reports     13  
9.6
  Governmental Reports and Compliance with Laws     13  
9.7
  Inspection of Facilities and Records     14  
9.8
  Deposit of Funds     14  
9.9
  Tax Matters Partner     14  
 
           
Article 10
  Management; Operator and Conduct of Operations        
 
           
10.1
  Management of the Joint Venture     15  
10.2
  Operator     15  
10.3
  Composition of Management Committee     15  
10.4
  Authority of the Management Committee     15  
10.5
  Approval Requirements; Limitation on Voting Rights     17  
10.6
  Meetings     17  
10.7
  Appointment of Operator; Construction and Operation of the System     17  
10.8
  Conduct of Operations     17  
10.9
  Expenses     18  
10.10
  Personnel     18  
10.11
  Discharge of Expenses     18  
10.12
  Ad Valorem Taxes     18  
10.13
  Rights of Way     18  
10.14
  Removal and Replacement of Operator     19  
 
           
Article 11
  Liability and Indemnification of Joint Venturers; Insurance        
 
           
11.1
  Limitation of Liability of Joint Venturers     19  
11.2
  Insurance     20  
11.3
  Claims     20  
11.4
  Contractors and Subcontractors     21  

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Article 12
  Assignments        
 
           
12.1
  Limitation of Rights to Transfer Joint Venturers' Interests     21  
12.2
  Permitted Transfers by Joint Venturers     22  
12.3
  Effect of Permitted Transfers     22  
12.4
  Effects of Prohibited Transfers     22  
 
           
Article 13
  Term; Termination and Winding Up        
 
           
13.1
  Term     23  
13.2
  Voluntary Withdrawal of a Joint Venturer     23  
13.3
  Automatic Termination     23  
13.4
  Removal for Default     25  
13.5
  Remedies of Non-Withdrawing Party     26  
13.6
  Buy-Sell Procedures     26  
13.7
  Appraisal Procedure     28  
13.8
  Termination and Winding Up     29  
13.9
  Effect of Termination or Withdrawal     31  
 
           
Article 14
  Salvage        
 
           
14.1
  Abandonment     31  
 
           
Article 15
  Confidentiality        
 
           
15.1
  Confidentiality     32  
 
           
Article 16
  Miscellaneous        
 
           
16.1
  Notice     32  
16.2
  Further Assurance     33  
16.3
  Amendment     33  
16.4
  Waiver     33  
16.5
  Exhibits     33  
16.6
  Applicable Laws     34  
16.7
  Counterparts     34  
16.8
  Headings     34  
16.9
  Section Numbers     34  
16.10
  Entirety     34  
16.11
  Severability     34  
16.12
  Binding Effect; Joinder of Additional Parties     34  

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Article 17
  Arbitration        
 
           
17.1
  General     34  
17.2
  Procedures     35  
17.3
  Specific Enforcement     36  
 
           
Exhibit A
  Construction and Operating Agreement        
 
           
Exhibit B
  Project Area        
 
           
Exhibit C
  Gas Gathering Agreement        
 
           
Exhibit D
  Insurance        

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HAGERMAN GAS GATHERING SYSTEM
JOINT VENTURE AGREEMENT
     THIS JOINT VENTURE AGREEMENT (this “Agreement”), dated as of January 16,
2007, to be effective from and after April 1, 2006, is made by and among Feagan
Gathering Company, a Texas corporation (“Feagan”), Parallel Petroleum
Corporation, a Delaware corporation (“Parallel”), and Capstone Oil & Gas
Company, L.P., a Texas limited partnership (“Capstone”). Feagan, Parallel and
Capstone are hereinafter sometimes referred to collectively as “Joint
Venturers”, and each, individually, as a “Joint Venturer”.
WITNESSETH:
     WHEREAS, Feagan, Parallel and Capstone desire to join together for the
purposes of constructing, managing, owning, leasing and operating a natural gas
pipeline located in Chaves County, New Mexico, and further desire to set forth
the terms and conditions upon which such activities will be conducted;
     NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
Feagan, Parallel and Capstone hereby agree as follows:
ARTICLE 1
FORMATION OF JOINT VENTURE
     1.1 Formation of Joint Venture. Feagan, Parallel and Capstone hereby enter
into and form a joint venture for the limited purposes and scope set forth
herein. Except as expressly provided for herein to the contrary, the rights and
obligations of the Joint Venturers and the administration and termination of the
Joint Venture shall be governed by the Texas General Partnership Law (the
“TGPL”), part of the Texas Business Organizations Code. A Joint Venturer’s
interest in the Joint Venture shall be personal property for all purposes. All
real and other property owned by the Joint Venture shall be deemed owned by the
Joint Venture as an entity, and no Joint Venturer, individually shall have any
direct ownership in such property.
ARTICLE 2
DEFINITIONS
     2.1 Definitions. In addition to the terms defined elsewhere in this
Agreement, the following terms shall have the respective meanings set forth
below:

 

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     Capital Contribution. The capital contributed to the Joint Venture by a
Joint Venturer pursuant to Article 6 of this Agreement.
     Code. The Internal Revenue Code of 1986, as amended from time to time, and
any successor statute or statutes.
     Construction and Operating Agreement. The Construction and Operating
Agreement between the Joint Venture and the Person designated as Operator in
accordance herewith, the form of which is attached hereto as Exhibit “A”.
     Cost of a Joint Venture Expansion. All costs, expenses and liabilities
incurred or paid by the Joint Venture for the real and personal property
acquisitions, planning, design, engineering and construction of a Joint Venture
Expansion, and securing necessary governmental authorizations and approvals
therefor.
     Cost of the System. All cost, expenses and liabilities incurred or paid by
the Joint Venture for the real property (excluding the Project Area) and
personal property acquisitions, planning, design, engineering and construction
of the System, and securing necessary governmental authorizations and approvals
therefor.
     Gas. Natural gas having the physical and chemical qualities required for
acceptance by the Joint Venture.
     Joint Venture. The entity created by this Agreement, which the parties
agree is a joint venture.
     Joint Venture Expansion. Any pipelines and appurtenances together with
related facilities and properties (including, but not limited to, rental
compression facilities), which expand the System.
     “Joint Venture Nonrecourse Liabilities” shall have the meaning assigned to
the term “nonrecourse liabilities” in Treasury Regulation section 1.752-1(a)(2).
     Joint Venturer(s). The collective or individual reference, as the case may
be, to each of the Joint Venturers executing this Agreement and any Joint
Venturer admitted to the Joint Venture or substituted in place of an original
Joint Venturer pursuant to Article 12; provided, however, that the term Joint
Venturer shall not include any Person who shall be deemed to have withdrawn from
the Joint Venture pursuant to Section 13.3(b).
     Joint Venture Percentage Interest. For each Joint Venturer, the percentage
ownership of the Joint Venture based upon the proportion that such Joint
Venturer’s

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Capital Contributions bears to the total Capital Contributions made by all Joint
Venturer’s, including, in the case of Feagan, the Carried Capital Contribution
provided for in Section 6.4.
     “Joint Venturer Nonrecourse Debt” shall have the meaning assigned to the
term “partner nonrecourse debt” in Treasury Regulation section 1.704.2(b)(4).
     “Joint Venturer Nonrecourse Deductions” shall have the meaning assigned to
the term “partner nonrecourse deductions” in Treasury Regulation section
1.704-2(i).
     Management Committee. The Management Committee provided for in
Section 10.3.
     “Minimum Gain” shall have the meaning assigned to that term in Treasury
Regulation section 1.704-2(d) and section 1.704-2(i)(3), as applicable.
     Operator. The Operator provided for in Section 10.2.
     Person. An individual, a corporation, voluntary association, joint stock
company, business trust, partnership or other entity.
     Project Area. The leasehold acreage situated in Chaves County, New Mexico
that is subject, from time to time, to the area of mutual interest contained in
that certain Exploration Agreement, dated as of March 1, 2004, between Parallel
and Capstone and that is owned beneficially or of record by Parallel and
Capstone and dedicated by Parallel and Capstone to the System, as further
described on Exhibit “B” attached hereto and made a part hereof.
     System. The pipeline and appurtenant and related facilities owned by the
Joint Venture, including any Joint Venture Expansion.
     “Treasury Regulations” (or any abbreviation thereof used herein) shall mean
temporary or final regulations promulgated under the Code.
     2.2 Terms Generally. The definitions of terms herein shall apply equally to
the singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms. The words “include”, “includes” and “including” shall be deemed to
be followed by the phrase “without limitation”. The word “will” shall be
construed to have the same meaning and effect as the word “shall”. Unless the
context requires otherwise (a) any definition of or reference to any agreement,
instrument or other document herein shall be construed as referring to such
agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments,

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supplements or modifications set forth herein), (b) any reference herein to any
Person shall be construed to include such Person’s successors and assigns,
provided such successors and assigns are permitted by this Agreement, (c) the
words “herein”, “hereof” and “hereunder”, and words of similar import, shall be
construed to refer to this Agreement in its entirety and not to any particular
provision hereof, and (d) all references herein to Articles, Sections, exhibits
and schedules shall be construed to refer to Articles and Sections of, and
exhibits and schedules to, this Agreement.
ARTICLE 3
THE JOINT VENTURE
     3.1 Name; Assumed Name Certificates. The name of the Joint Venture shall be
Hagerman Gas Gathering System. The Joint Venturers shall execute all assumed or
fictitious name certificates required by law to be filed in connection with the
formation of the Joint Venture and the conduct of its business and shall cause
such certificates to be filed in the applicable records of each state where the
Joint Venture conducts business.
     3.2 Joint Venture Office and Principal Place of Business. The principal
offices and principal place of business of the Joint Venture shall be located at
1004 N. Big Spring, Suite 400, Midland, Texas 79701.
     3.3 Purpose. The purpose of the Joint Venture shall be to plan, design,
obtain any necessary governmental approval for, construct, own and operate the
System for the purchase and sale or transport of Gas produced from the Project
Area.
     3.4 Other Activities. Nothing contained in this Agreement shall be
construed to prohibit any Joint Venturer or any firm or corporation controlled
by or controlling any Joint Venturer from owning, operating or investing in any
natural gas pipeline other than the System or from engaging in any business
similar to or in competition with the Joint Venture. Each Joint Venturer agrees
that the other Joint Venturers or any affiliate thereof may engage in or possess
any interest in any other business venture or ventures of any nature and
description independently or with others, including, but not limited to, the
sale and purchase of natural gas, the ownership, financing, leasing,
construction, operation, sale, maintenance, management, syndication, brokerage
and development of natural gas pipeline systems and no Joint Venturer shall have
any rights by virtue of this Agreement in and to said other business venture or
ventures or the income or profits derived therefrom.

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ARTICLE 4
OWNERSHIP AND AVAILABILITY OF THE SYSTEM
     4.1 Ownership of Joint Venture Facilities. Title to Joint Venture property,
whether real, personal or mixed and whether tangible or intangible, shall be
deemed to be owned by the Joint Venture as an entity, and no Joint Venturer,
individually or collectively, shall have any ownership interest in such Joint
Venture property or any portion thereof. Title to any or all of the Joint
Venture property may be held in the name of the Joint Venture or one or more
nominees, as the Management Committee may determine. Upon the withdrawal or
removal of any Joint Venturer or as soon thereafter as practicable, the
withdrawing or removed Joint Venturer holding title to any Joint Venture
property as nominee for the Joint Venture shall transfer to the Joint Venture
record title to such property and, prior to any such transfer, will provide for
the use of such assets in a manner satisfactory to the Joint Venture. All Joint
Venture property shall be recorded as the property of the Joint Venture in its
books and records, irrespective of the name in which record title to such Joint
Venture property is held. Although the Project Area is dedicated to the
facilities included in the System, ownership of the Project Area shall remain
the sole property of each respective Joint Venturer having record or beneficial
ownership thereof, subject to each such Joint Venturer’s right to sell, transfer
and convey all or any portion of the Project Area owned by such Joint Venturer,
at any time and from time to time. As natural gas reserves are developed in the
Project Area by the Joint Venturers or by third parties, the Joint Venturers
anticipate that gathering lines will need to be constructed from time to time to
connect the producing areas within the Project Area. Such facilities are
contemplated by the Joint Venturers to be part of the System. If any such
facilities are acquired or constructed by the Joint Venture, the same will
thereupon become a part of the System. No other facilities, whether existing
facilities owned by any of the Joint Venturers or subsequently acquired or
constructed by any of the Joint Venturers are or shall be the subject of this
Agreement, except for those which are located within the Project Area.
     4.2 Availability of the System. First priority to the availability and
capacity of the System shall be given to the Gas produced in the Project Area by
Parallel and Capstone, and their respective successors and assigns, and gathered
pursuant to that certain Gas Gathering Agreement, dated or to be dated of even
date herewith, among Parallel, Capstone and the Joint Venture, and being in
substantially the form attached hereto as Exhibit “C”.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
     5.1 Representations, Warranties and Covenants of Parties. Each Joint
Venturer represents and warrants to the other, and agrees that:

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     (a) It is a corporation or limited partnership duly organized and validly
existing under the laws of its jurisdiction of organization.
     (b) If it is organized under the laws of a jurisdiction other than Texas,
it is duly qualified or authorized to do business in Texas.
     (c) It will not cause a dissolution or termination of the Joint Venture by
reason of the failure to maintain its corporate or partnership existence, except
as otherwise permitted herein.
     (d) The execution and delivery of this Agreement has been duly authorized,
and this Agreement, when executed and delivered, will be valid and binding on
it.
     (e) The execution and delivery of this Agreement, the formation of the
Joint Venture and the performance hereof will not contravene any provision of,
or constitute a default under, any indenture, mortgage or other material
agreement to which it is a party or by which its assets may be bound, or any
order of any court, commission or governmental agency having jurisdiction.
     (f) The Joint Venture is an “intrastate pipeline”, as defined in the
Natural Gas Policy Act of 1978, as hereto or hereafter amended, and will not,
through any act or omission, cause or contribute to causing itself, the Joint
Venture, or any other Joint Venturers, or any of the facilities of any of them
to become subject in whole or in part to the jurisdiction of the Federal Energy
Regulatory Commission or any successor thereto, under the Federal Energy
Regulatory Commission’s jurisdiction under the Natural Gas Policy Act of 1978
and the Natural Gas Act, as hereto or hereafter amended.
     (g) There are no claims for brokerage or other commission or finder’s or
other similar fees in connection with the transactions covered by this Agreement
insofar as such claims may be based on arrangements or agreements made by or on
its behalf, and each Joint Venturer hereby agrees to indemnify and hold harmless
the other from and against all liabilities, costs, damages and expenses from any
such claims.
ARTICLE 6
CAPITAL CONTRIBUTIONS AND OWNERSHIP
     6.1 Initial Capital Contribution and Ownership. Promptly after receipt of a
written request from the Operator given in accordance with Section 6.3, each
Joint Venturer shall make its respective initial Capital Contribution to the
Joint Venture, including each Joint Venturer’s obligation to contribute a total
amount equal to its Joint Venture Percentage Interest of $5,500,000. Subject to
Section 6.5 hereof, the Joint Venture Percentage Interest of each Joint Venturer
is as follows:

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Feagan
    10.00 %
Parallel
    76.50 %
Capstone
    13.50 %

     6.2 Additional Capital Contributions. From time to time, whenever any part
of the System or a Joint Venture Expansion shall be authorized by the Management
Committee, each Joint Venturer shall contribute additional capital to the Joint
Venture in an amount equal to its Joint Venture Percentage Interest of the Cost
of the System or the Cost of a Joint Venture Expansion, as the case may be. Each
Joint Venturer shall be obligated to make such additional Capital Contributions
in the amount set forth in construction fund schedules prepared from time to
time by the Operator and approved by the Management Committee in connection with
the System and each Joint Venture Expansion pursuant to Section 10.4 hereof.
Additional Capital Contributions to be made pursuant to this Section 6.2 shall
be made in accordance with Section 6.3 hereof.
     6.3 Payment of Capital Contributions. Except as may be otherwise determined
by the Management Committee:
     (a) The Operator shall issue or cause to be issued a written request for
payment of each Capital Contribution to be made in accordance with Sections 6.1
and 6.2, at such times and in such incremental amounts as may be requested by
the Operator from time to time, but only after approval of the Management
Committee.
     (b) Each written request issued pursuant to this Section 6.3 shall contain
the following information:

  (i)   the amount of the Capital Contribution requested from each Joint
Venturer, which amount shall equal such Joint Venturer’s Percentage of the total
Capital Contributions then requested of the Joint Venturers;     (ii)   the
purposes for which the Capital Contributions are to be applied; and     (iii)  
the date on which the Capital Contributions shall be made (which shall not be
less than thirty (30) days following the date the request is made) and the
method of payment, such date and method to be identical for all of the Joint
Venturers.

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     (c) Each Joint Venturer agrees to make payment of its respective Capital
Contributions in accordance with the requests made by the Operator pursuant to
this Agreement.
     6.4 Carried Capital Contribution. Subject to the last sentence of this
Section 6.4, Parallel and Capstone shall pay, or “carry”, for the benefit of
Feagan a portion of the Capital Contribution that would otherwise be required to
be made by Feagan under the terms of this Agreement. The amount required to be
paid, or “carried”, by Parallel and Capstone shall be an amount equal to fifty
percent (50.0%) of the Capital Contributions that would otherwise be required to
be made by Feagan under the terms of this Agreement (the “Carried Capital
Contribution”). The Carried Capital Contribution provided for in this
Section 6.4 shall be allocated between Parallel and Capstone based upon their
respective Joint Venture Percentage Interests (with Parallel initially paying
for eighty five percent (85%) of such Carried Capital Contribution and Capstone
initially paying for the remaining fifteen percent (15%) of such Carried Capital
Contribution). The obligation of Parallel and Capstone to fund and pay for the
Carried Capital Contribution shall be limited to the first ten million dollars
($10,000,000.00) of capital expenditures made by the Joint Venture in connection
with this Agreement.
     6.5 Option to Purchase Additional Interest. Until the close of business on
March 31, 2007, Feagan shall have a one-time option to purchase from Parallel
and Capstone a five percent (5%) interest in the Joint Venture. If Feagan elects
to exercise such option, it shall give written notice thereof to Parallel and
Capstone on or before the close of business on March 31, 2007. The total
purchase price for such interest shall be equal to the sum of (a) (i) the
aggregate Capital Contributions attributable to a five percent (5.0%) ownership
interest (the “Option Purchase Price”) in the Joint Venture up to and including
the date of exercise of the option, and (ii) an additional five and one-half
percent (5.5%) of the Option Purchase Price, less (b) the amount of any
distributions made by the Joint Venture to Feagan prior to the date of exercise
of the option. The purchase price shall be paid within ten (10) days after
Feagan gives notice to Parallel and Capstone of its election to exercise such
option. The five percent (5%) ownership interest in the Joint Venture that is
subject to the option provided for in this Section 6.5 shall be allocated
between Parallel and Capstone based upon their respective Joint Venture
Percentage Interests (with Parallel initially being obligated to deliver and
convey eighty five percent (85%) of the five percent (5%) interest and Capstone
being obligated to deliver and convey the remaining fifteen percent (15%) of the
five percent (5%) interest).
     6.6 Voluntary Contributions. No Joint Venturer shall make any Capital
Contributions to the Joint Venture except pursuant to a request of the Operator
given in accordance with Section 6.3.

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ARTICLE 7
ALLOCATIONS AND CAPITAL ACCOUNTS
     7.1 Allocations; Capital Accounts.
     (a) For accounting and federal and state income tax purposes, except as
herein otherwise specifically provided, or as may be required by Section 704(c)
of the Code and Treasury Regulation section 1.704-1(b)(2)(iv)(f)(4), all costs,
expenditures, income, deductions, credits, gains and losses of the Joint Venture
shall be allocated to the Joint Venturers in accordance with their respective
Joint Venture Percentage Interest. Any item which is stipulated to be an expense
of the Joint Venture under the terms of this Agreement or which would be so
treated in accordance with generally accepted accounting principles shall be
treated as an expense of the Joint Venture for all purposes, whether or not such
item is deductible for purposes of computing net income for federal income tax
purposes. Neither the allocations referred to in this Section 7.1 nor the
utilization of varying tax bases as herein provided shall have any effect
whatsoever upon any Joint Venturer’s Joint Venture Percentage Interest.
     (b) Notwithstanding any of the foregoing provisions of this Section 7.1 to
the contrary:
     (i) If during any fiscal year of the Joint Venture there is a net increase
in Minimum Gain attributable to a Joint Venturer Nonrecourse Debt that gives
rise to Joint Venturer Nonrecourse Deductions, each Joint Venturer bearing the
economic risk of loss for such Joint Venturer Nonrecourse Debt shall be
allocated items of Joint Venture deductions and losses for such year (consisting
first of cost recovery or depreciation deductions with respect to property that
is subject to such Joint Venturer Nonrecourse Debt and then, if necessary, a pro
rata portion of the Joint Venture’s other items of deductions and losses, with
any remainder being treated as an increase in Minimum Gain attributable to Joint
Venturer Nonrecourse Debt in the subsequent year) equal to such Joint Venturer’s
share of Joint Venturer Nonrecourse Deductions, as determined in accordance with
applicable Treasury Regulations.
     (ii) If for any fiscal year of the Joint Venture there is a net decrease in
Minimum Gain attributable to Joint Venture Nonrecourse Liabilities, each Joint
Venturer shall be allocated items of Joint Venture income and gain for such year
(consisting first of gain recognized from the disposition of Joint Venture
property subject to one or more Joint Venture Nonrecourse Liabilities and then,
if necessary, a pro rata portion of the Joint Venture’s other items of income
and gain, and then, if necessary, for subsequent years) equal to such Joint
Venturer’s share

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of such net decrease (except to the extent such Joint Venturer’s share of such
net decrease is caused by a change in debt structure with such Joint Venturer
commencing to bear the economic risk of loss as to all or part of any Joint
Venture Nonrecourse Liability or by such Joint Venturer contributing capital to
the Joint Venture that the Joint Venture uses to repay a Joint Venture
Nonrecourse Liability), as determined in accordance with applicable Treasury
Regulations.
     (iii) If for any fiscal year of the Joint Venture there is a net decrease
in Minimum Gain attributable to a Joint Venturer Nonrecourse Debt, each Joint
Venturer bearing the economic risk of loss for such Joint Venturer Nonrecourse
Debt shall be allocated items of Joint Venture income and gain for such year
(consisting first of gain recognized from the disposition of Joint Venture
property subject to Joint Venturer Nonrecourse Debt, and then, if necessary, a
pro rata portion of the Joint Venture’s other items of income and gain, and if
necessary, for subsequent years) equal to such Joint Venturer’s share of such
net decrease (except to the extent such Joint Venturer’s share of such net
decrease is caused by a change in debt structure or by the Joint Venture’s use
of capital contributed by such Joint Venturer to repay the Joint Venturer
Nonrecourse Debt) as determined in accordance with applicable Treasury
Regulations.
     (c) The losses and deductions allocated pursuant to this Article 7 shall
not exceed the maximum amount of losses and deductions that can be allocated to
a Joint Venturer without causing or increasing a deficit balance in the Joint
Venturer’s adjusted capital account. If, at the end of any fiscal year, as a
result of the allocations otherwise provided for in this Section 7.1, the
adjusted capital account balance of any Joint Venturer shall become negative,
items of deduction and loss otherwise allocable to such Joint Venturer for such
year, to the extent such items would have caused such negative balance, shall
instead be allocated to Joint Venturers having positive adjusted capital account
balances remaining at such time in proportion to such balance.
     (d) If a Joint Venturer unexpectedly receives any adjustment, allocation or
distribution described in Treasury Regulations section
1.704-1(b)(2)(ii)(d)(4)-(6) that causes or increases a deficit balance in such
Joint Venturer’s adjusted capital account, items of Joint Venture income and
gain shall be allocated to that Joint Venturer in an amount and manner
sufficient to eliminate the deficit balance as quickly as possible.
     (e) The allocations set forth in subsections (b), (c) (last sentence), and
(d) (collectively, the “Regulatory Allocations”) are intended to comply with
certain requirements of the Treasury Regulations. It is the intent of the Joint
Venturers that, to the extent possible, all Regulatory Allocations that are made
be offset either with other Regulatory Allocations or with special allocations
pursuant to this Section 7.1(g).

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Therefore, notwithstanding any other provisions of this Article 7 (other than
the Regulatory Allocations), Parallel shall make such offsetting special
allocations in whatever manner it determines appropriate so that, after such
offsetting allocations are made, each Joint Venturer’s adjusted capital account
balance is, to the extent possible, equal to the adjusted capital account
balance such Joint Venturer would have had if the Regulatory Allocations were
not part of this Agreement and all Joint Venture items were allocated pursuant
to the remaining sections of this Article 7.
     (f) In accordance with Section 704(c) of the Code and the Treasury
Regulations thereunder, income and deductions with respect to any property
carried on the books of the Joint Venture at an amount that differs from such
property’s adjusted tax basis shall, solely for federal income tax purposes, be
allocated among the Joint Venturers in a manner to take into account any
variation between the adjusted tax basis of such property to the Joint Venture
and such book value. In making such allocations, Parallel shall use the
“traditional method with curative allocations” pursuant to Treasury Regulations
Section 1-704-3(c).
     (g) All items of income, gain, loss, deduction, and credit allocable to any
Joint Venture Percentage Interest that may have been transferred shall be
allocated between the transferor and transferee based on the portion of the
calendar year during which each was recognized as owning those Joint Venture
Percentage Interests, without regard to whether cash distributions were made to
the transferor or the transferee during that calendar year; provided, however,
that this allocation must be made in accordance with a method permissible under
section 706 of the Code and the applicable Treasury Regulations.
     (h) A capital account shall be maintained for each Joint Venturer, which
account shall be increased (credited) by (i) the cash and adjusted tax basis of
property contributed by it to the Joint Venture (net of liabilities assumed by
the Joint Venture and liabilities to which such contributed property is
subject), and (ii) the distributive share of net income and gain (including
income exempt from tax) allocated to such Joint Venturer, and shall be decreased
(debited) by (iii) the cash and the Joint Venture’s adjusted tax basis of
property distributed to such Joint Venturer (net of liabilities assumed by such
Joint Venturer and liabilities to which such distributed property is subject),
(iv) the amount of net loss allocated to such Joint Venturer, and (v) such Joint
Venturer’s distributive share of expenditures of the Joint Venture.
ARTICLE 8
DISTRIBUTIONS AND REIMBURSEMENTS
     8.1 Distributions. Distributions of excess cash to the Joint Venturers
shall only be made to the Joint Venturers simultaneously in such aggregate
amounts and at such

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times as determined by the Management Committee from time to time. Distributions
of cash shall be made to the Joint Venturers in the same manner that items of
cost, expenditure, income, gain, loss, deduction and credit are allocated to the
Joint Venturers under Section 7.1.
     8.2 Reimbursement of Expenses. The Joint Venture shall pay or reimburse the
Joint Venturers all reasonable direct and indirect costs incurred by them in
managing and conducting the business and affairs of the Joint Venture,
including, without limitation, (i) all costs and expenses incurred in any
business of the Joint Venture, (ii) secretarial, telephone, office rent and
other office expenses, (iii) salaries and other compensation expenses of
employees of any Joint Venturer, (iv) other administrative expenses, (v) travel
expenses, (vi) legal and accounting costs and expenses, and (vii) expenses
incurred in providing or obtaining such other professional, technical,
administrative services and advice as the Management Committee may deem
necessary or desirable. The Management Committee shall determine in good faith
which expenses are allocable to the Joint Venture in a manner which is fair and
reasonable to the Joint Venture.
ARTICLE 9
ACCOUNTING; BOOKS AND RECORDS; TAXES
     9.1 Fiscal Year. The fiscal year of the Joint Venture shall be the calendar
year.
     9.2 Location of Records. The books and records of the Joint Venture shall
be kept and maintained at the Joint Venture’s office.
     9.3 Books of Account. The books of account for the Joint Venture shall be
kept and maintained at the principal place of business of Parallel. The books of
account shall be maintained on an accrual basis in accordance with generally
accepted accounting principles, consistently applied, and shall show all items
of income and expense.
     9.4 Financial Statements. Parallel shall prepare and furnish or cause to be
prepared and furnished to the Joint Venturers, within forty (40) days after the
close of each fiscal quarter of the Joint Venture, financial statements showing
the financial condition and results of operations of the Joint Venture for such
fiscal quarter, which statements shall include the balance in each Joint
Venturer’s Capital Account, the unpaid balance due under all obligations of the
Joint Venture, a statement of profit and loss and all other information,
financial or otherwise, as may be necessary for any Joint Venturer to comply
with various reporting and disclosure requirements of governmental agencies to
which it may be subject, and all other information reasonably requested by a
Joint Venturer. Parallel shall cause to be prepared and furnished, at the
expense of the Joint Venture, to each of the Joint Venturers within seventy-five
(75) days after the end of each

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fiscal year, financial statements showing the financial condition and results of
operations of the Joint Venture as of and for the twelve (12) month period
ending on the last day of December of each year, which year-end statements may,
at the sole election of Parallel, be audited by such independent registered
public accounting firm as Parallel may engage for and on behalf of the Joint
Venture and certified by such independent registered public accounting firm as
having been prepared in accordance with generally accepted accounting principles
consistently applied.
     In addition, Parallel will cause to be prepared and furnished to each Joint
Venturer such other accounting and tax information as shall be necessary for the
preparation by each Joint Venturer of its income tax returns for each fiscal
year.
     9.5 Taxation and Reports.
     (a) Any provision hereof to the contrary notwithstanding, solely for United
States federal income tax purposes, each of the Joint Venturers hereby
recognizes that the Joint Venture will be subject to all provisions of
Subchapter K of Chapter 1 of Subtitle A of the Code; provided, however, the
filing of U.S. Partnership Returns of Income shall not be construed to extend
the purposes of the Joint Venture or expand the obligations or liabilities of
the Joint Venturers. At the request of any Joint Venturer, the Joint Venture
shall file an election under Section 754 of the Code.
     (b) Parallel shall prepare or cause to be prepared all federal and state
income tax returns and related schedules and statements, and cause to be made
all elections, if any, which must be filed on behalf of the Joint Venture with
any taxing authority and shall submit such returns and related schedules and
statements to all the Joint Venturers for their approval on or about March 15 of
each year, and, upon approval thereof by all the Joint Venturers, make timely
filing thereof.
     9.6 Governmental Reports and Compliance with Laws.
     (a) The Operator shall be responsible for all reports required of it by
state and federal authorities on account of operations related to the System.
However, each Joint Venturer shall be and remains solely responsible for all
reports and accounts required by state and federal authorities on account of
production delivered by it to the System, and for the payment of all royalties,
overriding royalties, or payments from production with respect to all production
owned by it and delivered to or handled by the System, and Operator shall have
no rights or duties in connection therewith.
     (b) The Operator, on behalf of the Joint Venture, shall obtain such permits
and approvals from governmental authorities having jurisdiction over the
business and affairs

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of the Joint Venture as may be necessary or advisable to construct and operate
the System and to transport Gas.
     (c) The Operator shall at all times comply with all applicable rules,
regulations, laws, orders, ordinances, decrees or other matters promulgated or
administered by any governmental or quasi-governmental body with jurisdiction
over the System or the ownership or operation thereof.
     9.7 Inspection of Facilities and Records. Each Joint Venturer shall have
the right at all reasonable times during usual business hours to inspect the
facilities of the Joint Venture and to examine, audit and make copies of the
books of account and other records of the Joint Venture. Such right may be
exercised through any agent or employee of a Joint Venturer designated in
writing by it or by an independent public accountant, petroleum engineer,
attorney or other consultant designated by such Joint Venturer. Each Joint
Venturer shall bear all costs and expenses incurred in any inspection,
examination or audit made for such Joint Venturer’s account.
     9.8 Deposit of Funds. The funds of the Joint Venture shall be deposited in
a separate account with such banks or other financial institutions as may be
designated from time to time by the Management Committee. The Management
Committee from time to time shall authorize signatories for such accounts.
     9.9 Tax Matters Partner. Parallel shall act as the “tax matters partner”
under Section 6231 of the Code (Parallel, in this Section, being called the “tax
matters partner”). The tax matters partner shall promptly notify the Joint
Venturers if any tax return or report of the Joint Venture is audited or if any
adjustments are proposed by any governmental body. In addition, the tax matters
partner shall promptly furnish to the Joint Venturers all notices concerning
administrative or judicial proceedings relating to federal income tax matters as
required under the Code. During the pendency of any such administrative or
judicial proceeding, the tax matters partner shall furnish to the Joint
Venturers periodic reports, not less often than monthly, concerning the status
of any such proceeding. Without the consent of the Management Committee, the tax
matters partner shall not extend the statute of limitations, file suit
concerning any tax refund or deficiency relating to any Joint Venture
administrative adjustment or enter into any settlement agreement relating to any
Joint Venture item of income, gain, loss, deduction or credit for any fiscal
year of the Joint Venture.

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ARTICLE 10
MANAGEMENT; OPERATOR AND CONDUCT OF OPERATIONS
     10.1 Management of the Joint Venture. The overall management and control of
the business and affairs of the Joint Venture shall be vested in the Joint
Venturers and, except where herein expressly provided to the contrary, all
decisions with respect to the management and control of the Joint Venture shall
be made and approved by the Management Committee as provided in Section 10.4
below.
     10.2 Operator. The Operator of the System shall devote such time to the
Joint Venture’s business as it deems necessary to manage and supervise the
System in an efficient manner. The Operator shall, subject to the control and
direction of the Management Committee, be responsible for the implementation of
the decisions of and actions approved by the Management Committee, and in
general supervise and control the System and perform all duties and exercise all
powers as the Management Committee may delegate to the Operator from time to
time, subject to the provisions of applicable law, this Agreement and the
Construction and Operating Agreement. In addition, and subject to the provisions
hereof, the Operator shall have and perform the duties and obligations specified
in the Construction and Operating Agreement.
     10.3 Composition of Management Committee. The members of the Management
Committee shall consist of one representative appointed by each Joint Venturer.
Each Joint Venturer shall designate in writing its representative to serve on
the Management Committee. If any representative appointed by a Joint Venturer
fails, refuses or is unable to serve on the Management Committee for any reason,
then the Joint Venturer that appointed such representative may appoint and
designate an alternate representative who shall serve on the Management
Committee in place of the previously appointed representative. Any Joint
Venturer may at any time, by written notice to each other Joint Venturer, remove
its representative on the Management Committee and appoint a new representative.
     10.4 Authority of the Management Committee. Except as otherwise expressly
provided in this Agreement, the approval of the Management Committee shall be
necessary before any action can be taken by the Joint Venture or any Joint
Venturer (including the Operator) on behalf of the Joint Venture. Without
limiting the generality of the foregoing, the Management Committee shall approve
in advance:
     (a) the design of the System, any Joint Venture Expansion or any segment of
the foregoing, and the construction, capital and operating budgets and
construction fund schedules for the System, any Joint Venture Expansion or any
segment of the foregoing;

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     (b) any modification to an approved budget or construction fund schedule
provided for in Section 6.2 hereof;
     (c) the establishment of any requirement for Capital Contributions outside
the scope and coverage of an approved budget and construction fund schedule as
specified in paragraph (a) or paragraph (b) of this Section 10.4;
     (d) a Joint Venture Expansion;
     (e) the transfer by a Joint Venturer of all or any part of its Joint
Venture Percentage Interest, other than as permitted without Management
Committee or Joint Venturer approval pursuant to Article 12 hereof;
     (f) gas contracts and transportation agreements;
     (g) the timing and amounts of distributions to Joint Venturers pursuant to
Section 8.1 hereof;
     (h) engaging in any business other than as contemplated by this Agreement;
     (i) the selection of a successor Operator;
     (j) the sale of all or substantially all of the business and assets of the
Joint Venture;
     (k) any modification to the Construction and Operating Agreement; and
     (l) rules of the Management Committee and any amendments or supplements
thereto concerning the conduct of the business and affairs of the Joint Venture.
     Notwithstanding anything in this Section 10.4 or elsewhere in this
Agreement to the contrary, advance approval of the Management Committee shall
not be required for the Operator to make any single expenditure (or series of
related expenditures) less than $20,000 during any month. In addition, and
notwithstanding anything herein to the contrary, in cases of emergency, the
Operator may proceed with required maintenance or repair work when necessary in
the Operator’s judgment to keep the System operating or to restore the
facilities to operating condition or to minimize damages without prior necessity
for submitting same to the Management Committee. In such event, the Operator
shall as soon as practicable notify the other Joint Venturers of the existence
of occurrence of the emergency, which notice shall set forth the nature of the
emergency, the corrective action taken or proposed to be taken, and the
estimated cost of such corrective action;

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provided that the Operator shall not be required to give such notice when the
cost of the corrective action is reasonably estimated to be less than $20,000.
     10.5 Approval Requirements; Limitation on Voting Rights. Except as
otherwise expressly provided by this Agreement, the business of the Joint
Venture presented at any meeting of the Management Committee shall be decided by
a vote of members of the Management Committee representing a majority of the
Joint Venture Percentage Interests, plus one other member of the Management
Committee. However, any member of the Management Committee representing a Joint
Venturer who is in default in the payment of any Capital Contribution required
to be made to the Joint Venture in accordance with this Agreement shall not have
the right to vote on any matter unless and until such default is remedied. In
addition, if an Affiliate of a Joint Venturer also owns a Joint Venture
Percentage Interest, such Affiliate shall not be entitled to vote on any matter;
provided, however, this limitation on the right to vote shall not apply to any
Affiliate of Parallel, Capstone or Feagan. As used in this Section 10.5,
“Affiliate” means a person that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with,
the person specified.
     10.6 Meetings. The Management Committee may hold such meetings at such
place and at such time as it may determine. No notice shall be required of a
regular meeting if the time and place of such meetings are fixed by the
Management Committee. Notice of a special meeting shall be served not less than
twenty-four (24) hours before the date and time fixed for such meeting by
confirmed facsimile or other written communication or not less than three
(3) days prior to such meeting if notice is provided by overnight delivery
service. A special meeting of the Management Committee may be called by any
Joint Venturer. Any member of the Management Committee may participate in a
meeting by conference telephone or similar communications equipment. Any action
required or permitted to be taken by the Management Committee may be taken
without a meeting if such action is evidenced in writing and signed by the same
number of members of the Management Committee required for a valid act of the
Management Committee as set forth herein.
     10.7 Appointment of Operator; Construction and Operation of the System. The
Joint Venturers have selected and designated Feagan as Operator of the System in
accordance with the terms and conditions herein and in the Construction and
Operating Agreement.
     10.8 Conduct of Operations. The Operator shall conduct all operations in a
careful, diligent, prudent and workmanlike manner, but the Operator shall never
be liable to any party for any acts done or omitted in good faith in the
performance of any of the

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provisions of this Agreement, except for acts or omissions resulting from
Operator’s gross negligence, willful misconduct, breach of fiduciary duty or
breach of this Agreement.
     10.9 Expenses. Subject to the provisions hereof, the Operator shall
purchase or cause to be purchased for the Joint Venture necessary materials and
supplies and incur such expenses and enter into necessary commitments,
including, but not limited to,
     (a) contracts for any approved additions to and replacements for the
System,
     (b) contracts for power, fuel, other utilities and communications
facilities as may be necessary in connection with the proper operation and
maintenance of same; and
     (c) contracts for gathering of Gas for and through the System and the
downstream redelivery or resale thereof.
     10.10 Personnel. Subject to the provisions hereof, the Operator shall
employ such personnel as may be necessary to efficiently operate and maintain
the System, all of which persons shall either be employees of the Operator or an
affiliate of the Operator or independent contractors. To the extent possible,
the Operator shall utilize its own employees or those of its affiliates;
provided, however, that the Operator may engage the services of such independent
contractors as may be necessary to carry out the terms hereof.
     10.11 Discharge of Expenses. Subject to the provisions hereof, the Operator
shall promptly pay and discharge, or cause the Joint Venture to promptly pay and
discharge, all expenses, costs and liabilities incurred in operating and
maintaining the System, and shall be fully responsible for any liens or other
encumbrances which the Operator causes or allows to be affixed or assessed
against the said property and shall fully satisfy same (other than liens and
encumbrances approved in advance by the Management Committee).
     10.12 Ad Valorem Taxes. The Operator shall render, or cause the Joint
Venture to render, for ad valorem tax purposes, all real or personal property
jointly owned hereunder, or such part thereof as may be under existing laws or
may become under future laws subject to ad valorem taxation, and shall pay, or
cause the Joint Venture to pay, all such taxes at the time and in the manner
required by law. All taxes so paid by the Operator or the Joint Venture shall be
charged to the Joint Venturers according to their respective Joint Venture
Percentage Interests at the time of assessment.
     10.13 Rights of Way. The Operator shall acquire in the name of the Joint
Venture the necessary rights-of-way, easements and permits required for the
ownership and operation of the System and any other facilities comprising a
portion thereof. To the

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extent possible, all such rights-of-way, easements and permits shall be acquired
in such form as may allow assignment to the Joint Venturers. The costs of such
rights-of-way, easements and permits shall be charged to the account of each of
the Joint Venturers in accordance with their respective Joint Venture Percentage
Interests. To the extent that any Joint Venturer (or their affiliates) has or
owns rights of way, easements or other permits associated with the Project Area
which may be assigned to or held on behalf of the Joint Venture such as would
assist the Joint Venture in constructing, owning and operating the System, such
Joint Venturer shall use its best efforts to transfer such rights to the Joint
Venture and shall be reimbursed by the Joint Venture for any direct costs
related thereto.
     10.14 Removal and Replacement of Operator. In addition to, but separate and
apart from, the right of a Non-Defaulting Party (as defined in Section 13.4(a)
hereof) to remove the Operator as a Joint Venturer from the Joint Venture
pursuant to the provisions of Section 13.4 hereof, the Operator may be removed
from the office of Operator (without being removed as a Joint Venturer) after
written notice thereof to the Operator by any Joint Venturer in accordance with
Section 9.2 of the Construction and Operating Agreement. If the Operator is
removed from the office of Operator, the Management Committee (excluding the
Operator) shall select a successor Operator.
ARTICLE 11
LIABILITY AND INDEMNIFICATION OF JOINT VENTURERS; INSURANCE
     11.1 Limitation of Liability of Joint Venturers. The Joint Venturers, the
Management Committee, the members of the Management Committee and their
respective affiliates, and their partners, officers, directors, employees and
agents, shall not be liable, responsible or accountable in damages or otherwise
to the Joint Venture or the other Joint Venturers for any acts or omissions that
do not constitute recklessness, gross negligence, willful misconduct, a breach
of fiduciary duty or a breach of the express terms of this Agreement, and the
Joint Venture shall indemnify and save harmless the Joint Venturers, the
Management Committee and the members of the Management Committee and their
respective affiliates, and their partners, officers, directors, employees and
agents (individually, “Indemnitee”) from all liabilities for which
indemnification is not prohibited by the TGPL. Any act or omission performed or
omitted by an Indemnitee on advice of legal counsel or a qualified independent
consultant who has been employed or retained by the Joint Venture shall be
presumed to have been performed or omitted in good faith without gross
negligence or willful misconduct. THE PARTIES RECOGNIZE THAT THIS PROVISION
SHALL RELIEVE ANY SUCH INDEMNITEE FROM ANY AND ALL LIABILITIES, OBLIGATIONS,
DUTIES, CLAIMS, ACCOUNTS AND CAUSES OF ACTION WHATSOEVER ARISING OR TO ARISE OUT
OF ANY ORDINARY NEGLIGENCE BY ANY SUCH

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INDEMNITEE, AND SUCH INDEMNITEE SHALL BE ENTITLED TO INDEMNIFICATION FROM ACTS
OR OMISSIONS THAT MAY CONSTITUTE ORDINARY NEGLIGENCE.
     11.2 Insurance.
     (a) The Operator shall, either in its own name and for the benefit of all
Joint Venturers or in the name of the Joint Venture, secure and maintain in
force the policies of insurance covering the System as set out in Exhibit “D”
hereto, or as may otherwise be authorized and directed by the Management
Committee from time to time. The premiums for all such insurance so carried
shall be paid by the Operator or the Joint Venture, as the case may be, and
charged to the Joint Venturers in accordance with their respective Joint Venture
Percentage Interests. Such insurance shall name each Joint Venturer as an
additional assured.
     (b) Notwithstanding the foregoing, each Joint Venturer, at its own expense,
shall have the right to obtain and maintain for its own account and without
naming any other party as an insured, during the term of this Agreement,
insurance to protect such Joint Venturer from claims. Such insurance may be for
such coverages and in such amounts as each Joint Venturer shall determine.
     11.3 Claims. The administrative responsibility for handling claims, whether
or not covered by insurance carried by the Operator or the Joint Venture, and
the administrative responsibility for handling litigation, including the
employment of attorneys for the System, shall, but only with the unanimous
concurrence of the Joint Venturers parties hereto, belong to the Operator;
provided, however, that any Joint Venturer may have counsel of its own choice to
defend its own interest. Each Joint Venturer who receives any claim or demand
shall promptly give notice of same to the Operator and provide the Operator full
and complete information with respect thereto. The Operator shall promptly give
each other Joint Venturer written notice of any such claim or demand. The
Operator may not settle any losses, damages and claims, whether or not covered
by insurance, without the prior written consent of all Joint Venturers.
     All costs of handling, settling or otherwise discharging such claim or suit
shall be charged to the Joint Venturers according to their respective Joint
Venture Percentage Interests. The Operator shall at any time requested furnish
any Joint Venturer with full information concerning the kind, character and
amounts of insurance carried. The Operator shall promptly notify the Joint
Venturers of any loss, damage or claim not covered by insurance carried by the
Operator or the Joint Venture and of any loss, damage or claim that might be
considered or assumed to be in excess of the insurance coverage provided by the
Operator or the Joint Venture for the benefit of the Joint Venturers.

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     11.4 Contractors and Subcontractors. The Operator shall require its
contractors and subcontractors conducting operations on the System to carry
insurance of the types set out above and in the amounts applicable to the
contractor’s and subcontractor’s operations, and such other insurance in amounts
deemed adequate by the Operator for any particular contract. The Operator shall
require all contractors employed as provided herein, insofar as possible, to
indemnify and hold the Operator and the other Joint Venturers hereto harmless
from and against all claims, demands or causes of action arising out of the
performance of contractor’s work.
ARTICLE 12
ASSIGNMENTS
     12.1 Limitation of Right to Transfer Joint Venturers’ Interests. Each Joint
Venturer may sell, assign or otherwise transfer in any manner all or any part of
its Joint Venture Percentage Interest in the Joint Venture and in this Agreement
without the consent of the Management Committee or the other Joint Venturers,
but the other Joint Venturers shall have a right, but not the obligation, to
sell, assign or transfer a like percentage of their respective Joint Venture
Percentage Interests on the same terms which the transferring Joint Venturer
proposes to sell, assign or otherwise transfer; provided, however, a merger,
consolidation, reorganization or other acquisition of a Joint Venturer shall not
be deemed to be a sale, assignment or transfer of a Joint Venture Percentage
Interest for purposes of this Section 12.1. In such event, the transferring
Joint Venturer shall promptly give written notice to the other Joint Venturers
of its desire to sell, assign or otherwise transfer its Joint Venture Percentage
Interest, furnishing full information concerning the proposed sale, assignment
or transfer, including the name and address of the prospective transferee (who
shall be ready, willing and able to comply with all terms of the proposed sale,
assignment or transfer), the purchase price and other consideration, and all
terms of the offer made by the prospective transferee. Each non-transferring
Joint Venturer shall then have an optional prior right, for a period of fifteen
(15) days after its receipt of notice from the transferring Joint Venturer, to
accept in writing and sell, assign or transfer a like percentage of its Joint
Venture Percentage Interest upon the same terms and conditions which the
transferring Joint Venturer proposes to sell, assign or otherwise transfer its
Joint Venture Percentage Interest. Upon completion of the sale, assignment or
transfer of a Joint Venturer’s Joint Venture Percentage Interest pursuant to
this Section 12.1, the transferee shall be admitted as a Joint Venturer.
Notwithstanding any other provision of this Section 12.1, no Joint Venture
Percentage Interest or other interest in the profits and losses of the Joint
Venture may be transferred if such transfer would result in the Joint Venture or
any Joint Venturer becoming subject to the Public Utility Holding Company Act of
1935. In addition, and notwithstanding anything herein to the contrary, the
provisions of this Section 12.1 shall not apply to the transfer or pledge of an
interest in the Joint Venture made pursuant to Section 12.2 below.

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     12.2 Permitted Transfers by Joint Venturers. Subject to the penultimate
sentence of Section 12.1, nothing in this Agreement shall prevent or require the
consent of any Joint Venturer for:
     (a) the transfer at any time by any Joint Venturer of all its right, title
and interest in the Joint Venture (including indebtedness thereof) and in this
Agreement if all of such right, title and interest is transferred to another
Person by merger, reorganization, consolidation or sale of all or substantially
all of its assets, or a sale or transfer of the stock or other voting securities
of such Joint Venturer, or the sale or transfer of the interest in the Joint
Venture to a subsidiary or parent company, or a subsidiary of a parent company,
or to any company in which the transferring Joint Venturer (or an affiliate)
owns a majority of the voting securities; provided that the transferee assumes
by operation of law or express agreement with the Joint Venture (in form and
substance reasonably satisfactory to the other Joint Venturers) all of the
obligations of the transferor under this Agreement and that no such transfer
(other than pursuant to a merger, reorganization, consolidation or other
combination wherein all obligations and liabilities of the Joint Venturer are
assumed by the successor by operation of law) shall relieve the transferor of
its obligations under this Agreement without the written approval of the other
Joint Venturers, and provided, further, that upon such transfer the transferee
shall be admitted as a Joint Venturer in substitution of the Joint Venturer
which was the transferor; or
     (b) an assignment, pledge or other transfer at any time creating a security
interest (and any transfer made in foreclosure or other enforcement of such
security interest) in all or any portion of a Joint Venturer’s interest in or
distributions from the Joint Venture (as opposed to a pledge or mortgage of
Joint Venture property) under any pledge or other security agreement created by
any Joint Venturer; provided, however, that such assignee, pledgee, or secured
party (i) shall hold the same subject to all the terms of this Agreement and
(ii) shall not have any voice in the management of the Joint Venture as a result
of any such assignment, pledge or other transfer.
     12.3 Effect of Permitted Transfers. No assignment, pledge or other transfer
pursuant to Section 12.2 shall give rise to a right in any Joint Venturer to
wind up the Joint Venture. Except as provided in Section 12.1 and in
Section 12.2(a), no assignment, pledge or other transfer shall give rise to a
right in any transferee to become a Joint Venturer in the Joint Venture, unless
approved by the Management Committee.
     12.4 Effects of Prohibited Transfers. Any transfer or attempted transfer of
an interest in the Joint Venture by a Joint Venturer in violation of the terms
of this Agreement shall be void ab initio and shall not bind or be recognized by
the Joint Venture or the Joint Venturers.

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ARTICLE 13
TERM; TERMINATION AND WINDING UP
     13.1 Term. The Joint Venture shall be in effect for a term beginning on the
date of this Agreement and shall continue until terminated and wound up in
accordance with the provisions hereof. All provisions of this Agreement relative
to termination and winding up shall be cumulative; that is, the exercise or use
of one of the provisions hereof shall not, unless the context requires, preclude
the exercise or use of any other provision hereof.
     13.2 Voluntary Withdrawal of a Joint Venturer. Any Joint Venturer shall
have the right to withdraw from the Joint Venture on the last day of any fiscal
year of the Joint Venture by giving the other Joint Venturers written notice of
intent to withdraw. Such notice shall be given not less than 60 days prior to
the last day of any fiscal year.
     13.3 Automatic Termination.

  (a)   If any of the following shall occur:

  (1)   the Joint Venturers agree unanimously in writing to terminate and wind
up the Joint Venture; or     (2)   an event which makes it unlawful for the
business of the Joint Venture to be carried on; or     (3)   the sale or
abandonment of all or substantially all of the Joint Venture’s business and
assets; or     (4)   the tenth anniversary of the date of this Agreement;

then the Joint Venture and its business shall be promptly wound up, terminated
and liquidated.

  (b)   If any of the following events of withdrawal shall occur:

  (1)   the voluntary withdrawal of a Joint Venturer in accordance with
Section 13.2; or     (2)   the commencement by any Joint Venturer of a voluntary
case under the federal bankruptcy laws, as now constituted or hereafter amended,
or any other applicable federal or state bankruptcy, insolvency or other similar
law, or the consent by any Joint Venturer to, or acquiescence in, the
appointment of or taking possession by a

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      receiver, liquidator, assignee, trustee, custodian, sequestrator (or other
similar official) of said Joint Venturer or for all or any substantial part of
its property or its interest in the Joint Venture (the term “acquiescence” being
deemed to include, but not limited to, the failure to file a petition or motion
to vacate or discharge any order, judgment or decree providing for such
appointment within ten (10) days after the appointment); or     (3)   the entry
of a decree or order for relief by a court having jurisdiction in the premises
in respect of any Joint Venturer in an involuntary case under the federal
bankruptcy laws, as now or hereafter constituted, or any other applicable
federal or state bankruptcy, insolvency, or other similar law, or appointing a
receiver, liquidator, assignee, custodian trustee, sequestrator (or similar
official) of the Joint Venturer or for any substantial part of its property or
its interest in the Joint Venture, or ordering the winding up or liquidation of
the affairs of said Joint Venturer, and said Joint Venturer shall acquiesce in
the entry of such decree or order (the term “acquiesce” being deemed to include,
but not limited to, the failure to file a petition or motion to vacate such
order or decree within ten (10) days of the entry thereof) or any such order or
decree shall continue unstayed and unvacated for a period of sixty
(60) consecutive days from the date of entry thereof; or     (4)   the failure
or inability of any Joint Venturer generally to pay its debts as such debts
become due; or     (5)   any Joint Venturer shall give notice to any
governmental body of insolvency or pending insolvency, or suspension or pending
suspension of operations; or     (6)   any Joint Venturer shall make an
assignment for the benefit of creditors or take any other similar action for the
protection or benefit of creditors; or

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  (7)   any Joint Venturer shall sell or otherwise dispose of all or
substantially all of its assets (other than by reason of a transaction described
in Section 12.2(a)); or     (8)   any Joint Venturer shall take any action in
furtherance or confirmation of the events mentioned in (2) through (7) above; or
    (9)   the death of any Joint Venturer; or     (10)   the removal of a Joint
Venturer from the Joint Venture in accordance with Section 13.4,

then the Joint Venture and its business shall be promptly wound up, terminated
and liquidated and:

  (i)   the Joint Venturer as to whom an event described above has occurred (the
“Withdrawing Party”) shall immediately cease to be a Joint Venturer; and    
(ii)   the Joint Venture and its business shall be wound up and terminated,
unless the remaining Joint Venturers (the “Non-Withdrawing Parties”) shall elect
unanimously in writing to continue the business of the Joint Venture.

     13.4 Removal for Default.
     (a) If any Joint Venturer fails to observe or perform any of its
obligations, covenants or agreements hereunder or set forth herein, then in such
event, any other Joint Venturer (“Non-Defaulting Party”) shall have the right to
give such party (“Defaulting Party”) a notice of default (“Notice of Default”).
The Notice of Default shall set forth the nature of the obligation which the
Defaulting Party has not observed or performed.
     (b) If within the thirty (30) day period following receipt of the Notice of
Default, the Defaulting Party in good faith commences to perform such obligation
and cure such default and thereafter prosecutes to completion with diligence and
continuity the curing thereof and cures such default within a reasonable time,
it shall be deemed that the Notice of Default was not given and the Defaulting
Party shall lose no rights hereunder. If, within such thirty (30) day period,
the Defaulting Party does not commence in good faith the curing of such default
or does not thereafter prosecute to completion with diligence and continuity the
curing thereof, any Non-Defaulting Party shall have the right to remove the
Defaulting Party from the Joint Venture by giving the Defaulting Party and all
other Joint Venturers written notice thereof.

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     (c) The foregoing cure provisions of this Section 13.4 shall not apply to
any default with respect to the payment of any sums of money by or to any Joint
Venturer, which sums of money shall be paid within thirty (30) days after
receipt of a Notice of Default with respect thereto. If such sums are not so
paid within such thirty (30) day period, any Non-Defaulting Party shall have the
right to remove the Defaulting Party from the Joint Venture by giving the
Defaulting Party and all other Joint Venturers written notice thereof.
     13.5 Remedies of Non-Withdrawing Party.
     (a) If the Non-Withdrawing Parties continue the business of the Joint
Venture as contemplated by Section 13.3(b)(ii) hereof, they shall promptly
institute the procedures set forth in Section 13.6 hereof (the “Buy-Sell
Procedures”).
     (b) The rights of a Non-Withdrawing Party under this Article 13 shall not
be the exclusive remedies of the Non-Withdrawing Party, except in the case of a
voluntary termination under Section 13.2, but shall be in addition to all other
rights and remedies, if any, available to the Non-Withdrawing Party at law or in
equity.
     13.6 Buy-Sell Procedures.
     (a) Upon the event specified in Section 13.5(a), the Non-Withdrawing
Party(s) shall give written notice of the institution of the Buy-Sell Procedures
to the Withdrawing Party within thirty (30) days after the event specified in
Section 13.3(b). Within thirty (30) days after receipt of such notice, the
Withdrawing Party shall deliver to each Non-Withdrawing Party an offer (“Offer”)
in writing, stating the cash purchase price under which the Withdrawing Party is
willing to purchase the interest in the Joint Venture of each Non-Withdrawing
Party. Such price shall be stated in terms of the price attributable to 100% of
the Joint Venture. The Non-Withdrawing Party(s) then shall be obligated either
to elect:

  (1)   to purchase the interest of the Withdrawing Party in the Joint Venture
for cash at a price equal to the 100% price stated in the Offer multiplied by
the Withdrawing Party’s Joint Venture Percentage Interest (in the event that
more than one Non-Withdrawing Party elects to purchase the interest of a
Withdrawing Party hereunder, then each Non-Withdrawing Party so electing shall
purchase a fraction of the Withdrawing Party’s Joint Venture ownership interest
equal to that Non-Withdrawing Party’s interest in the Joint Venture divided by
the interest of all Non-Withdrawing Parties in the Joint Venture electing to
purchase the interest of the Withdrawing Party); or

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  (2)   to sell to the Withdrawing Party the interest of the Non-Withdrawing
Party in the Joint Venture for cash at a price equal to the 100% price stated in
the Offer multiplied by the Non-Withdrawing Party’s Joint Venture Percentage
Interest.

The Non-Withdrawing Parties shall exchange written notices with all other
Non-Withdrawing Parties of such election within thirty (30) days after receipt
of the Offer. After receipt of any notice from another Non-Withdrawing Party, a
Non-Withdrawing Party may change its election but must notify all other
Non-Withdrawing Parties in writing of its change prior to notifying the
Withdrawing Party. After final notification to all other Non-Withdrawing
Parties, but not later than one hundred eighty (180) days after receipt of the
Offer, a Non-Withdrawing Party shall give written notice of its election to the
Withdrawing Party. Failure of the Non-Withdrawing Party to give all
Non-Withdrawing and Withdrawing Parties notice that the Non-Withdrawing Party
has elected under Subsection (1) above shall be conclusively deemed to be an
election under Subsection (2) above.
     (b) The closing of a purchase pursuant hereto shall be held at a mutually
acceptable place on a mutually acceptable date not more than thirty (30) days
after receipt by the Withdrawing Party of the written notice of all
Non-Withdrawing Parties’ election under Section 13.6(a) hereof. At such closing,
the selling party shall assign to the purchasing party the interest in the Joint
Venture so sold free and clear of all liens, claims, and encumbrances and, at
the request of the purchasing party, in order to properly set forth the record
title to the assets of the Joint Venture, shall convey and transfer to the
purchasing party, with covenants of special warranty, an undivided percentage
interest in the assets of the Joint Venture owned by it and execute all other
documents that may be necessary to effectuate the purpose of this Agreement and
the purchasing party shall pay the purchase price therefor in cash or by a
cashier’s or certified check from a bank acceptable to the selling party. The
purchasing party shall assume the obligations of the selling party under this
Agreement and under the Joint Venture. As a condition for purchase, the seller
may demand, and shall be entitled, to be indemnified by the Joint Venture from
and against any and all obligations, costs, or expense relating to or arising
under any financing agreement to which the Joint Venture is a party.
     (c) If the Withdrawing Party fails to make an Offer pursuant to
Section 13.6(a) hereof, or if either the Withdrawing Party or Non-Withdrawing
Party elects pursuant to Section 13.6(a), but thereafter does not close the
purchase of such interest pursuant hereto, then the party so failing shall be
deemed to be a non-performing party (“Non-Performing Party”) and the other party
(“Electing Party”), in addition to its other rights and remedies, may
(1) continue the Joint Venture, (2) purchase the interest in the Joint Venture
of the Non-Performing Party at the purchase price determined by multiplying the
Non-Performing Party’s Joint Venture Percentage Interest by the purchase price

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attributable to 100% of the Joint Venture as set forth in the Offer (if one was
so made), or (3) purchase the interest in the Joint Venture of the
Non-Performing Party pursuant to Section 13.7.
     13.7 Appraisal Procedure.
     (a) If an election is made under Section 13.6(c) to proceed under this
Section 13.7 to purchase the interest of the Non-Performing Party in and to the
Joint Venture at the Appraised Value (hereinafter defined) thereof, the Electing
Party shall give the Non-Performing Party written notice thereof within thirty
(30) days after such default, and in such notice shall designate the first
appraiser (“First Appraiser”).
     (b) Within fifteen (15) days after the service of notice referred to in
Section 13.7(a) hereof, the Non-Performing Party shall give written notice to
the Electing Party designating the second appraiser (“Second Appraiser”). If the
Non-Performing Party fails to designate the Second Appraiser within ten
(10) days, then the Electing Party shall designate the Second Appraiser. The
First and Second Appraisers so designated shall meet within ten (10) days after
the Second Appraiser is appointed and if, within thirty (30) days after the
Second Appraiser is appointed, the First and Second Appraisers do not agree upon
Appraised Value, they shall, within fifteen (15) days, appoint a third appraiser
(“Third Appraiser”). In the event of the failure or inability of the First and
Second Appraisers to appoint a Third Appraiser within such fifteen (15) day
period, then the Electing Party shall designate the Third Appraiser. In the
event of the failure, refusal or inability of any appraiser to act, a new
appraiser shall be appointed in his stead, which appointment shall be made by
the party that initially designated such appraiser so failing, refusing or being
unable to act. Each party shall pay an equal share of the fees and expenses of
the appraisers. Any appraiser designated to serve in accordance with the
provisions of this Agreement shall be disinterested and shall be qualified to
appraise property of the type owned by the Joint Venture.
     (c) The appraisers shall determine the value of one hundred percent (100%)
of the Joint Venture, which shall be the amount by which the fair market value,
at the time such appraisal is made, of all the assets of the Joint Venture
exceeds all liabilities of the Joint Venture, including, but not limited to,
liabilities for the repayment of all loans to the Joint Venture (“Appraised
Value”). If the First Appraiser and the Second Appraiser do

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not agree upon the Appraised Value within the thirty (30) day period set forth
above, the Third Appraiser shall determine the Appraised Value of the Joint
Venture within thirty (30) days after his appointment. In such event, the
Appraised Value of the Joint Venture for purposes of this Agreement shall be the
value determined by the First Appraiser or the Second Appraiser which is closest
to the Appraised Value determined by the Third Appraiser; provided, however,
that if the Appraised Values of the First and Second Appraisers differ from the
Appraised Value established by the Third Appraiser by the same amount, the
Appraised Value established by the Third Appraiser shall be the Appraised Value
of the Joint Venture for purposes of this Agreement. After reaching a decision,
the appraisers shall give written notice thereof to all the Joint Venturers.
     (d) The Electing Party may purchase the Non-Performing Party’s interest in
the Joint Venture for a cash price equal to the Appraised Value multiplied by
the Joint Venture Percentage Interest of the Non-Performing Party. The closing
of such purchase shall occur at a mutually acceptable time within thirty
(30) days after notice of the decision of the appraisers has been delivered to
the Joint Venturers, and otherwise shall be conducted in accordance with
Section 13.6(b) hereof.
     (e) If the appraisers fail to reach a decision within ninety (90) days
after the appointment of the Third Appraiser, the Electing Party shall have the
right to withdraw its election to purchase the Withdrawing Party’s interest in
the Joint Venture pursuant to this Section 13.7.
     13.8 Termination and Winding Up.
     (a) As expeditiously as possible following the occurrence of an event
giving rise to a termination and winding up of the Joint Venture pursuant to the
terms hereof, the Management Committee shall designate a “Liquidating Trustee”
who shall promptly proceed to wind up and terminate the business and affairs of
the Joint Venture. Subject to the direction and control of the Management
Committee, the Liquidating Trustee shall have such powers as may be necessary
during the period of winding up to continue operating the System in the normal
course to the extent appropriate for the purpose of winding up the business and
affairs of the Joint Venture and liquidating the assets thereof in an orderly
manner, but the Joint Venture shall not engage in any new business during the
period of winding up. In winding up the Joint Venture, the Liquidating Trustee
shall distribute the assets of the Joint Venture as described below:

  (i)   debts of the Joint Venture, other than to the Joint Venturers, shall be
paid (or adequate provision shall be made for the payment thereof); then

  (ii)   debts owed by the Joint Venture to the Joint Venturers shall be paid;
then

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  (iii)   all remaining assets of the Joint Venture shall be distributed to the
Joint Venturers as follows:

  (1)   all cash on hand representing unexpended Capital Contributions by any
Joint Venturer shall be returned to the contributor, then     (2)   the
Liquidating Trustee may sell any or all Joint Venture property and any resulting
gain or loss from each sale shall be computed and allocated to the capital
accounts of the Joint Venturers as provided in Section 7.1;     (3)   with
respect to all Joint Venture property that has not been sold, the fair market
value of that property shall be determined and the capital accounts of the Joint
Venturers shall be adjusted to reflect the manner in which the unrealized
income, gain, loss, and deduction inherent in property that has not been
reflected in the capital accounts previously would be allocated among the Joint
Venturers under Section 7.1 if there were a taxable disposition of that property
for the fair market value of that property on the date of distribution; and    
(4)   Joint Venture property shall be distributed among the Joint Venturers in
the amounts specified in Section 8.1.

All distributions in kind to the Joint Venturers shall be valued for purposes of
determining each Joint Venturer’s interest therein at its fair market value at
the time of such distribution, and such distributions shall be made subject to
the liability of each distributee for costs, expenses, and liabilities
theretofore incurred or for which the Joint Venture has committed prior to the
date of termination, and those costs, expenses, and liabilities shall be
allocated to the distributee pursuant to this Section 13.8. It is intended that
the foregoing distributions to each Joint Venturer will be equal to each Joint
Venturer’s respective positive capital account balance as determined after
giving effect to the foregoing adjustments and to all adjustments attributable
to allocations of items of income, gain, loss and deduction realized by the
Joint Venture during the taxable year in question and all adjustments
attributable to contributions and distributions of money and property effected
prior to such distribution. To the extent that any such Joint Venturer’s
positive capital account balance does not correspond to such distribution, the
allocations provided for in Section 7.1 shall be adjusted, to the least extent
necessary, to produce a capital account balance for the Joint Venturer which
corresponds to the amount of such distribution. Any distribution to the Joint
Venturers in liquidation of the Joint Venture shall be made by the later of the
end of the taxable year in which the liquidation occurs or 90 days after the
date of such liquidation. For purposes of the preceding sentence, the

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term “liquidation” shall have the same meaning as set forth in Treasury
Regulation §1.704-1(b)(2)(ii). The distribution of cash and/or property to a
Joint Venturer in accordance with the provisions of this Section 13.8
constitutes a complete return to the Joint Venturer of its Capital Contribution
and a complete distribution to the Joint Venturers of its Joint Venture
Percentage Interest and all the Joint Venture’s property and constitutes a
compromise to which all Joint Venturers have consented. To the extent that a
Joint Venturer returns funds to the Joint Venture, it has no claim against any
other Joint Venturer for those funds.
     (b) Notwithstanding anything to the contrary contained in this Agreement,
and notwithstanding any custom or rule of law to the contrary, no Joint Venturer
shall be obligated to restore a deficit balance in its capital account at any
time.
     (c) All assignments under this Section 13.8 shall be by special warranty.
Such assignments shall be made subject to the liability of each assignee for
costs, expenses and liabilities theretofore incurred or for which a commitment
has been made by the Joint Venture prior to the date of termination, and such
costs, expenses and liabilities shall be allocated to such assignee pursuant to
this Agreement.
     13.9 Effect of Termination or Withdrawal. No termination of the Joint
Venture shall relieve a Joint Venturer from any obligation accruing or accrued
to the date of such termination or deprive a Joint Venturer not in default
hereunder of any remedy otherwise available to it. Withdrawal by a Joint
Venturer pursuant to Section 13.3(b) shall terminate such Withdrawing Joint
Venturer’s status as a Joint Venturer, forfeit its voting rights in Joint
Venture affairs and terminate its representation on the Management Committee. In
addition, a Joint Venturer’s withdrawal shall not affect any obligations or
liabilities incurred by such Joint Venturer prior to withdrawal, nor shall such
withdrawal affect any other Joint Venturer’s right to seek damages that it may
have incurred as a result of such withdrawal.
ARTICLE 14
SALVAGE
     14.1 Abandonment. It is agreed that, upon abandonment of the System or any
portion thereof, the cost of the salvage of the line so abandoned shall be borne
by the Joint Venturers in accordance with their respective Joint Venture
Percentage Interests. Credits derived from salvaged material shall be
distributed to the Joint Venturers in accordance with their respective Joint
Venture Percentage Interests. If the cost of salvage is more than the credits
possible of being received therefrom, salvage operations shall be limited to
those required by the governmental regulations then in effect and applicable to
the System.

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ARTICLE 15
CONFIDENTIALITY
     15.1 Confidentiality. Except as may be required or advisable under
applicable law or valid subpoena or other lawful process or other regulatory
requirements, each Joint Venturer agrees that it will (consistent with its
reasonable practices and procedures adopted in good faith for handling
confidential information) keep confidential all Joint Venture information
relating to the Joint Venture’s properties and assets, and the Joint Venture’s
financial information, and will not disclose any such information to any Person
whatsoever (other than such Joint Venturer’s officers, directors, employees,
beneficial owners, attorneys, accountants, advisors or potential transferees
(provided each of such Persons is informed of the confidential nature of such
information) or to another Joint Venturer and its representatives); provided,
however, that the foregoing covenant of each Joint Venturer shall not apply to
any information that (a) was or becomes generally available to the public other
than as a result of disclosure by such Joint Venturer, (b) becomes available to
such Joint Venturer from a source other than the Joint Venture, provided that
such source is not (to the knowledge of such Joint Venturer) bound by a
confidentiality agreement with the Joint Venture, (c) such Joint Venturer can
establish was within its possession prior to it being furnished to such Joint
Venturer by or on behalf of the Joint Venture, provided that the source of such
information was not (to the knowledge of such Joint Venturer) bound by a
confidentiality agreement with the Joint Venture in respect thereof, or (d) is
necessary to be made in connection with any financing or investment activity
permitted by this Agreement.
ARTICLE 16
MISCELLANEOUS
     16.1 Notice. Any notice, request or other communication required by this
Agreement shall be in writing and shall be deemed to have been given on the
third day following the day of mailing, if the same shall be mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to:
     (a) each Joint Venturer at the address designated from time to time by such
Joint Venturer by written notice to the Joint Venture, and
     (b) the Joint Venture at its principal office specified in Section 3.2 or
such other address as may be designated from time to time by written notice to
each of the Joint Venturers.
     Until changed by notice pursuant hereto, the address of each party for
purposes of this Agreement is as follows:

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Parallel Petroleum Corporation
1004 N. Big Spring, Suite 400
Midland, Texas 79701
Attn: John S. Rutherford
Feagan Gathering Company
130 Spring Park Drive, Suite 105
Midland, Texas 79705
Attn: Joe Feagan
Capstone Oil & Gas Company, L.P.
P.O. Box 10187
Midland, Texas 79702
Attn: Dale Douglas
     16.2 Further Assurance. Each of the Joint Venturers agrees to execute and
deliver all such other and additional instruments and documents and to do such
other acts and things as may be reasonably necessary to effectuate this
Agreement and the Joint Venture created thereby and to carry on the business of
the Joint Venture in accordance with this Agreement.
     16.3 Amendment This Agreement may be amended, supplemented or restated only
with the written consent of all the Joint Venturers.
     16.4 Waiver. No waiver by any Joint Venturer or any default by any other
Joint Venturer in the performance of any provision, condition or requirement
herein shall be deemed to be a waiver of, or in any manner release the other
Joint Venturers from performance of any other provision, condition or
requirement herein; nor deemed to be a waiver of, or in any manner a release of
the other Joint Venturers from future performance of the same provision,
condition or requirement. Any delay or omission of any Joint Venturer to
exercise any right hereunder shall not impair the exercise of any such right, or
any like right, accruing to it thereafter. No waiver of a right created by this
Agreement by one Joint Venturer shall constitute a waiver of such right by the
other Joint Venturers except as may otherwise be hereto.
     16.5 Exhibits. The exhibits, annexes and schedules attached to this
Agreement are incorporated herein and shall be considered a part of this
Agreement for the purposes stated herein, except that in the event of any
conflict between any of the provisions of such exhibits, annexes and schedules
and the provisions of this Agreement, the provisions of this Agreement shall
prevail; provided, however, the fact that any term, condition or covenant
contained in such exhibits, annexes and schedules is not contained herein shall
not be, or be deemed to be, a conflict. All capitalized terms used in such
exhibits, annexes

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and schedules, but not defined therein, shall have the same meanings as given to
such terms in this Agreement.
     16.6 Applicable Laws. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Texas.
     16.7 Counterparts This Agreement may be executed in any number of separate
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
     16.8 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
     16.9 Entirety. As to matters covered by this Agreement, this Agreement
constitutes the entire agreement of the parties hereto and is the complete and
final expression of such agreement.
     16.10 Severability. If one or more of the provisions contained herein
shall, for any reason, be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement.
     16.11 Binding Effect; Joinder of Additional Parties. Subject to the
restrictions on dispositions and transfers set forth herein, this Agreement
shall be binding upon and shall inure to the benefit of the Joint Venturers
parties hereto, as well as their respective heirs, legal representatives,
successors and assigns.
     16.12 Third Party Beneficiaries. Except as otherwise provided in
Article 11, it is the intent of the Joint Venturers parties hereto that no
third-party beneficiary rights be created or deemed to exist in favor of any
Person not a party to this Agreement, unless otherwise expressly agreed to in
writing by the Joint Venturers.
ARTICLE 17
ARBITRATION
     17.1 General. The Joint Venturers acknowledge and agree that any claim or
controversy arising out of or relating to this Agreement, or the breach of this
Agreement, or any other dispute arising out of or relating to the relationships
among the Joint Venturers, shall be settled by final and binding arbitration in
the City of Midland, Texas in accordance with the Expedited Procedures and
Commercial Arbitration Rules of the American Arbitration Association in effect
on the date the claim or controversy arises.
     17.2 Procedures. Any arbitration called for by this Article 17 shall be
conducted in accordance with the following procedures:

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     (a) The Joint Venture or any Joint Venturer (the “Requesting Party”) may
demand arbitration at any time by giving written notice of such demand (the
“Demand Notice”) to all other Joint Venturers and (if the Requesting Party is
not the Joint Venture) to the Joint Venture, which Demand Notice shall describe
in reasonable detail the nature of the claim, dispute or controversy.
     (b) Within 15 days after the giving of a Demand Notice, the Requesting
Party, on the one hand, and each of the other Joint Venturers and/or the Joint
Venture against whom the claim has been made or with respect to which a dispute
has arisen (collectively, the “Responding Party”), on the other hand, shall
together select and designate in writing to the other party one reputable,
disinterested individual (a “Qualified Individual”), willing to act as an
arbitrator of the claim, dispute or controversy in question. Each of the
Requesting Party and the Responding Party shall use their best efforts to select
an arbitrator licensed to practice law in the State of Texas and having no
affiliation with any of the parties as their respective Qualified Individual.
Within 15 days after the foregoing selections have been made, the arbitrators so
selected shall jointly select an arbitrator licensed to practice law in the
State of Texas having no affiliation with any of the parties as the third
Qualified Individual willing to act as an arbitrator of the claim, dispute or
controversy in question. If the two arbitrators initially selected are unable to
agree on a third arbitrator within the second 15-day period referred to above,
then, on the application of either party, the American Arbitration Association
shall promptly select and appoint an arbitrator licensed to practice law in the
State of Texas having no affiliation with any of the parties as the Qualified
Individual to act as the third arbitrator. The three arbitrators selected
pursuant to this subsection (b) shall constitute the arbitration panel for the
arbitration in question.
     (c) The presentations of the parties hereto in the arbitration proceeding
shall be commenced and completed within 60 days after the selection of the
arbitration panel pursuant to subsection (b) above, and the arbitration panel
shall render its decision in writing within 30 days after the completion of such
presentations. Any decision concurred in by any two of the arbitrators shall
constitute the decision of the arbitration panel, and unanimity shall not be
required.
     (d) The arbitration panel shall have the discretion to include in its
decision a direction that all or part of the attorneys’ fees and costs of any
party or parties and/or the costs of such arbitration be paid by any other party
or parties. On the application of a party before or after the initial decision
of the arbitration panel, and proof of its attorneys’ fees and costs, the
arbitration panel shall order the other party to make any payments directed
pursuant to the preceding sentence.
     (e) Any decision rendered by the arbitration panel shall be final and
binding on the parties hereto, and judgment thereon may be entered by any state
or federal court of competent jurisdiction.

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     (f) Arbitration shall be the exclusive method available for resolution of
claims, disputes and controversies described in Section 17.1, and the Joint
Venture and its Joint Venturers stipulate that the provisions hereof shall be a
complete defense to any suit, action, proceeding in any court or before any
administrative or arbitration tribunal with respect to any such claim,
controversy or dispute. The provisions of this Article 17 shall survive the
dissolution of the Joint Venture.
     (g) Nothing contained herein shall be deemed to give the arbitrators any
authority, power or right to alter, change, amend, modify, add to or subtract
from any of the provisions of this Agreement.
     17.3 Specific Enforcement. The Joint Venturers acknowledge and agree that
the arbitration provisions in Sections 17.1 and 17.2 may be specifically
enforced by any Joint Venturer, and submission to arbitration proceedings
compelled, by any court of competent jurisdiction. The Joint Venturers further
acknowledge and agree that the decision of the arbitrators may be specifically
enforced by any Joint Venturer in any court of competent jurisdiction.
[Remainder of page left blank intentionally]

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     IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its respective duly authorized officer as of the date first
written above, to be effective from and after April 1, 2006.

            FEAGAN GATHERING COMPANY
      By:   /s/ Mike Feagan         Mike Feagan, President               
PARALLEL PETROLEUM CORPORATION
      By:   /s/ John S. Rutherford         John S. Rutherford, Vice President
of        Land and Administration        CAPSTONE OIL & GAS COMPANY, L.P.

By:  Capstone Investments, Inc., its
          general partner
      By:   /s/ Dale Douglas         Dale Douglas, President           

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Exhibit “A”
to
Joint Venture Agreement
CONSTRUCTION AND OPERATING AGREEMENT
     This Construction and Operating Agreement, dated as of January 16, 2007, to
be effective from and after April 1, 2006, is between Hagerman Gas Gathering
System, a joint venture organized under the laws of Texas (the “Joint Venture”),
and Feagan Gathering Company, a Texas corporation (the “Operator”).
WITNESSETH:
     Whereas, the Joint Venture has been formed by Parallel Petroleum
Corporation, a Delaware corporation, Capstone Oil & Gas Company, L.P., a Texas
limited partnership, and Feagan Gathering Company, a Texas corporation
(collectively, the “Joint Venturers,” and individually, a “Joint Venturer”)
pursuant to that certain Joint Venture Agreement, dated as of January 16, 2007,
among the Joint Venturers; and
     Whereas, Operator is engaged in the business of designing and constructing
facilities of the nature as that desired by the Joint Venture, and Operator
represents that it has at this time an adequate, competent and fully-trained
organization together with access to necessary tools, machinery and equipment
with which it desires to perform such work for the Joint Venture; and
     Whereas, Feagan Gathering Company has been designated as Operator of a
pipeline and appurtenant facilities owned or to be owned by the Joint Venture
and located in Chaves County, New Mexico; and
     Whereas, Operator and the Joint Venture desire to enter into this Agreement
for the work to be done under the terms and conditions as hereinafter provided.
     NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements herein contained to be done, paid and performed, Operator and the
Joint Venture agree as follows:

 

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ARTICLE 1
Definitions
          1.1 Defined Terms.
          (a) Capitalized terms used herein which are defined in the Joint
Venture Agreement and not otherwise defined herein shall have the meanings
specified in the Joint Venture Agreement.
          (b) The words “hereof”, “herein” and “hereunder” and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement.
          (c) In addition to the terms defined in the preamble and the recitals
of this Agreement, and in the Joint Venture Agreement, the following terms shall
have the following meanings:
          “Agreement” means this Construction and Operating Agreement, as the
same may be amended from time to time.
          “Joint Venture Agreement” means that certain Joint Venture Agreement,
dated as of January 16, 2007, by and among Parallel Petroleum Corporation,
Capstone Oil & Gas Company, L.P. and Feagan Gathering Company, as the same may
be amended from time to time.
ARTICLE 2
Operator
          2.1 Designation of Operator. In accordance with Section 10.2 and
Section 10.7 of the Joint Venture Agreement, Feagan has been designated as
Operator of the System.
          2.2 Duties of Operator. In addition to the duties of the Operator as
set forth in the Joint Venture Agreement, Operator shall recommend the design,
construction, operation, maintenance, replacement, removal and improvement of
the System and shall do and perform, for and on behalf of the Joint Venture, any
and all acts and things necessary, requisite or proper in connection therewith
or in carrying out Operator’s duties and obligations pursuant to the directions
of the Management Committee.
          2.3 Reports. Operator shall report to the Management Committee on all
matters pertaining to the planning, design, construction and operation of the
System. During the construction of the System, Operator shall report to the
Management Committee not less frequently than one time each week. After the
construction of the

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System, and throughout the operation of the System, Operator shall report to the
Management Committee not less frequently than one time each month.
          2.4 Limitations. The rights, duties, obligations and responsibilities
of Operator under this Agreement shall be subject in all respects to the
provisions of the Joint Venture Agreement as they relate to Operator.
ARTICLE 3
Conduct of Operations
          3.1 Standard of Care. Operator shall perform its services and carry
out its responsibilities under this Agreement (i) in accordance with the
standards set forth in the Joint Venture Agreement, (ii) in accordance with all
applicable laws, rules, orders and regulations of governmental authorities and
(iii) with due diligence and in accordance with engineering practices
customarily accepted for work similar to that contemplated by this Agreement. In
performing its duties and obligations under this Agreement, Operator shall act
fairly and impartially, and shall not favor any one Joint Venturer and shall act
as an independent contractor and not an employee or agent of the Joint Venture
or the Joint Venturers.
          3.2 Turnover of Property. If Operator receives any monies or other
property properly owing or belonging to the Joint Venture or any Joint Venturer,
such monies or other property shall be delivered forthwith by Operator to the
Joint Venture or Joint Venturer, as the case may be, in the form received,
except for the addition of any endorsement or assignment necessary to effect a
transfer of all rights therein to the Joint Venture or Joint Venturer. The Joint
Venture and each Joint Venturer is irrevocably authorized to supply any required
endorsement or assignment which may have been omitted. Until so delivered, any
such monies or other property shall be held by Operator in trust for the Joint
Venture or Joint Venturer, as the case may be, and shall not be commingled with
other funds or property of Operator.
          3.3 Scope of Operator’s Responsibility. Operator agrees to furnish or
cause to be furnished, subject to the conditions and provisions contained herein
and in the Joint Venture Agreement, all process and engineering services,
drawings, materials, superintendence, labor, equipment, tools and machinery
required for the design, construction and installation of the System and agrees
to design, construct and install the System in accordance with the Management
Committee’s specifications and proposals. The completed System shall be free and
clear of all liens and encumbrances for labor and materials used thereon. Upon
request by the Joint Venture from time to time, Operator shall submit to the
Joint Venture evidence reasonably satisfactory to the Joint Venture of payment
of all debts, taxes, liens, claims, charges and obligations arising out of the
purchase of equipment, material, supplies or labor for use in the work
hereunder.

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ARTICLE 4
Work Inspection
          4.1 Right to Inspect. The Joint Venturers shall be entitled to have
their respective inspectors or designees present at any times during the
progress of the work to be performed by Operator, subcontractors, vendors or
fabricators hereunder, and these parties shall furnish access to any of such
work to such inspectors or designees at all times. If any work to be performed
by these parties hereunder is found by such inspectors or designees to be
unsatisfactory and not in accordance with the governing plans and specifications
or drawings previously approved by the Management Committee, then Operator
shall, upon written notice from the Management Committee, promptly revise such
work in such manner as to conform with said specifications or drawings. It is
further agreed that if such revisions are not promptly made, the Management
Committee may, upon written notice to Operator require Operator to suspend all
work until such revisions have been made.
ARTICLE 5
Personnel
          5.1 Supervision and Compensation of Personnel. Subject to the terms
and provisions of the Joint Venture Agreement, Operator shall employ and have
supervision over the personnel (including outside consultants and professional,
service or other organizations) required by Operator to perform its duties and
responsibilities under this Agreement in an efficient and economically prudent
manner. Subject to the provisions of Section 3 of the Accounting Procedures
attached hereto as Exhibit A, the Joint Venture shall pay all reasonable
expenses of such personnel, including compensation, salaries, wages, expenses,
social security taxes, worker’s compensation insurance, retirement and insurance
benefits and other such expenses.
ARTICLE 6
Method of Payment
          6.1 Direct Payment by Joint Venture and Reimbursement of Operator’s
Costs. During the progress of the work to be performed hereunder by Operator,
all equipment, materials and machinery which are to be incorporated into and
become a component part of the System shall be purchased either directly by the
Joint Venture or by the Operator for and on behalf of the Joint Venture. In
addition, all labor, tools and supplies necessary to diligently and properly
perform the work and complete the construction required hereunder shall be
furnished or cause to be furnished by Operator for the benefit of the Joint
Venture, and such labor, tools and supplies shall be purchased and paid for
either directly by the Joint Venture or by the Operator for and on behalf of

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the Joint Venture. If the Joint Venture has not directly paid for any equipment,
materials, machinery, labor, tools and supplies in connection with the work
herein provided, then upon the furnishing by Operator of proof satisfactory to
the Joint Venture that any bills and expenses for any such labor, tools,
material, equipment, machinery and supplies have been paid and fully discharged
by Operator, the Joint Venture shall promptly pay and reimburse Operator an
amount equal to the total of such payments as may have been made by Operator.
Without limiting the foregoing, Operator shall also be reimbursed by the Joint
Venture for all other reasonable and proper costs, expenses and expenditures
incurred by Operator within the scope of its responsibilities under this
Agreement, including the reimbursable costs described in Exhibit A hereto, in
each case in accordance with the billing and payment procedures set forth in the
Accounting Procedures attached hereto as Exhibit A. Operator shall keep a full
and complete account of all costs, expenses and expenditures incurred by it in
connection with (i) the design, construction, operation, maintenance and other
improvement of the System, including any Joint Venture Expansion, and (ii) all
other reimbursable costs.
          6.2 Expenditure Approvals. All construction, operating, maintenance
and other expenditures, and the approvals therefor, shall be subject to the
terms and provisions of the Joint Venture Agreement.
          6.3 Audit. The Joint Venture shall at all times, upon five (5) day’s
prior notice in writing to Operator, have the right during normal business hours
to audit, at its own expense, the books and records of Operator as they relate
to the Joint Venture and the System and all books and records supporting costs
incurred by Operator pursuant to this Agreement.
ARTICLE 7
Indemnity, Administration of Claims and Insurance
          7.1 Indemnity.
               (a) The Joint Venture hereby agrees to indemnify and hold
harmless Operator, when acting in its capacity as Operator, and its officers,
agents and employees, from and against any loss, claim, damage and liability,
joint or several, and any action in respect thereof, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, its duties
as Operator, including, without limitation, the design, construction, operation,
upkeep, repair, replacement, removal and improvement of the System and any Joint
Venture Expansion, and including any loss, claim, damage or liability, joint or
several, and any action in respect thereof, arising out of the negligent conduct
(but not recklessness, gross negligence or willful misconduct) of Operator, its
officers, agents or employees. The Joint Venture agrees to promptly reimburse
Operator, its officers, agents and employees, for any legal and other expenses
reasonably incurred by Operator

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investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action. Indemnification pursuant to this Section 7.1(a)
shall be available only to the extent that policies of insurance carried
pursuant to Section 7.3 hereof cover such loss, claim, damage, liability or
action.
               (b) Operator agrees that it will indemnify and hold the Joint
Venture and the Joint Venturers harmless from any and all claims, liens,
liabilities or losses arising out of or from Operator’s or any subcontractor’s
or materialman’s failure to fully pay all liens, charges, claims, encumbrances
and obligations arising by operation of law or otherwise out of Operator’s or
any subcontractor’s or materialman’s performance of the work hereunder or the
furnishing of any labor, material, equipment, supplies or other items for use in
the construction of the System.
          7.2 Administration. Responsibility for the administration of any
claims and litigation arising out of the design, construction, operation,
maintenance, upkeep, repair, replacement, removal and improvement of the System
and any Joint Venture Expansion, or any other matter, shall be as provided for
in Section 11.3 of the Joint Venture Agreement. Upon written request from any
Joint Venturer, Operator will provide true and complete copies of all documents
relating to any claims or litigation and the defense thereof.
          7.3 Insurance. Operator shall carry and maintain in force for the
benefit of the Joint Venture and the Joint Venturers insurance of the types and
in the amounts required by the Joint Venture Agreement. Upon request by the
Joint Venture from time to time, Operator shall furnish certificates to the
Joint Venture evidencing that such insurance is in force and that thirty
(30) days advance written notice will be given to the Joint Venture prior to any
change, non-renewal or cancellation thereof.
ARTICLE 8
Taxes
          8.1 Taxes. Except as provided in Section 9.5(b) and Section 10.12 of
the Joint Venture Agreement, the Joint Venture, acting pursuant to the
directions of the Management Committee, shall file all tax returns and shall
handle all audits related thereto and render and pay with funds provided by the
Joint Venture (prior to delinquency) all taxes (except income, excess profits
and surcharges thereon, presently and hereinafter enacted) attributable to or
arising from the operation, repair and maintenance of the System or the
transportation of Gas through the System.

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ARTICLE 9
Term, Termination by Default and Preservation of Rights
          9.1 Term. This Agreement shall continue in force and effect until
(i) terminated pursuant to Section 9.2, Section 9.3 or Section 9.4 hereof,
(ii) the Joint Venture is dissolved and terminated pursuant to the terms of the
Joint Venture Agreement or (iii) the tenth anniversary of this Agreement.
whichever shall first occur.
          9.2 Removal of Operator. If Operator defaults in the performance of
its duties or obligations under this Agreement, the Joint Venture Agreement or
any policies, procedures or rules adopted by the Management Committee in
connection with the work to be performed hereunder, the Joint Venture or any
Joint Venturer shall have the right to give Operator a notice of default (the
“Notice of Default”), which shall set forth the nature of the duty or obligation
which Operator has not observed or performed. Upon receipt of any such Notice of
Default, Operator shall have the right and be given the opportunity to review
and discuss with the Joint Venturers any such Notice of Default. If within the
forty (40) day period following receipt of the Notice of Default, the Operator
in good faith commences to perform such duty or obligation and cure such default
and thereafter prosecutes to completion with diligence and continuity the curing
thereof and cures such default within a reasonable time, it shall be deemed that
the Notice of Default was not given and the Operator shall not be removed from
the office of Operator and shall lose no rights hereunder. If, within such forty
(40) day period, the Operator does not commence in good faith the curing of such
default or does not thereafter prosecute to completion with diligence and
continuity the curing thereof, any Joint Venturer shall have the right to remove
the Operator from the office of Operator and terminate this Agreement by giving
the Operator and all other Joint Venturers written notice thereof. In the event
of its removal, Operator shall have no further responsibility or authority
pursuant to this Agreement, except that related to the transfer of
responsibility to any successor Operator. Subject to Section 6.1 of this
Agreement, Operator shall be reimbursed by the Joint Venture for all expenses it
may have reasonably incurred in fulfilling its responsibilities under this
Agreement prior to its removal.
          9.3 Withdrawal of Operator. If the Operator is a Joint Venturer, and
if the Operator withdraws from the Joint Venture pursuant to any of the
provisions set forth in Section 12.2 or Section 12.3 of the Joint Venture
Agreement, any Joint Venturer shall then have the right and option to terminate
this Agreement upon written notice to the Operator. In the event of its
withdrawal, Operator shall have no further responsibility or authority pursuant
to this Agreement, except that related to the transfer of responsibility to any
successor Operator. Subject to Section 6.1 of this Agreement, Operator shall be
reimbursed by the Joint Venture for all expenses it may have reasonably incurred
in fulfilling its responsibilities under this Agreement prior to its withdrawal.

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          9.4 Resignation of Operator. At any time after July 31, 2007, Operator
may resign as Operator at any time upon sixty (60) days prior written notice to
the Joint Venture. In the event of its resignation, Operator shall have no
further responsibility or authority pursuant to this Agreement, except that
related to the transfer of responsibility to any successor Operator. Subject to
Section 6.1 of this Agreement, Operator shall be reimbursed by the Joint Venture
for all expenses it may have reasonably incurred in fulfilling its
responsibilities under this Agreement prior to its resignation.
          9.5 Preservation of Rights. The termination of this Agreement as a
result of the removal, withdrawal or resignation of the Operator (whether in its
capacity as a Joint Venturer, Operator only, or both) pursuant to the terms and
provisions of the Joint Venture Agreement or this Agreement shall be without
prejudice to any other right or remedy the Joint Venture or any Joint Venturer
may have as a result of Operator’s removal or withdrawal under the Joint Venture
Agreement or this Agreement, or Operator’s resignation under this Agreement.
ARTICLE 10
Laws and Regulations
          10.1 Compliance with Laws. This Agreement and the rights and
obligations of the Joint Venture and Operator hereunder shall be subject to all
applicable laws, rules, orders and regulations of governmental authorities
having jurisdiction, and in the event of conflict, said laws, rules, orders and
regulations of governmental authorities having jurisdiction shall control.
Operator agrees that it will operate the System as an “intrastate pipeline”, as
such term is defined in Section 2(16) of the Natural Gas Policy Act of 1978; and
that Operator will not, through any act or omission, cause or contribute to
causing the Joint Venture or any Joint Venturer, or any facilities thereof, to
become subject in whole or in part of the jurisdiction of the Federal Energy
Regulatory Commission or any successor thereto under the Natural Gas Act of
1938, as heretofore or hereafter amended.
          Operator agrees to comply with all applicable laws, rules,
regulations, ordinances and requirements of federal, state and local
governmental or regulatory bodies having jurisdiction over any aspect of the
work performed hereunder. Operator shall indemnify and hold the Joint Venture
and the Joint Venturers, and their respective officers, directors, agents and
employees, and their respective subsidiary and affiliated companies, and their
respective directors, officers, agents and employees, harmless from and against
all fines, penalties, expenses or claims resulting from Operator’s failure to
abide by any and all applicable laws, rules, regulations, ordinances or
requirements of governmental or regulatory bodies having jurisdiction.

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ARTICLE 11
Patents
          11.1 Limitation on License and Royalty Fees. No patented article,
method or device which involves or requires the payment of any license fee or
royalty in addition to the purchase price shall be used in connection with the
work under this Agreement without prior approval of the Management Committee.
ARTICLE 12
Safety
          12.1 Standards. Operator shall comply with the Joint Venture’s safety
standards and shall be subject to periodic safety inspections conducted by the
Joint Venture. Operator shall also report to the Joint Venture any injury
requiring hospitalization or any fatality as soon as practical after the
incident. The Joint Venture reserves the right to suspend all work (with or
without terminating this Agreement) without penalty if Operator fails to comply
with these safety requirements.
ARTICLE 13
Subcontracts
          13.1 Required Approvals. None of the work to be done by the Operator
shall be subcontracted without the prior approval of the Management Committee
and no approval by the Management Committee to subcontract any portion of such
work shall relieve Operator of its primary obligation to the Joint Venture to
properly perform such work in accordance with this Agreement.
ARTICLE 14
Force Majeure
          14.1 Force Majeure. If either Operator or the Joint Venture is
rendered unable, wholly or in part, by force majeure to carry out its
obligations under this Agreement, it is agreed that on such party’s giving
notice and reasonable full particulars of such force majeure in writing to the
other party as soon as possible after the occurrence of the cause relied on, the
obligations of the party giving such notice, so far as to the extent that they
are affected by such force majeure, shall be suspended during the continuance of
any inability so caused but for no longer period, and such cause shall so far as
possible be remedied with all reasonable dispatch.

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     The term “force majeure” as used herein shall mean acts of God, strikes,
lockouts or other industrial disturbances, acts of terrorism and the public
enemy, wars, blockages, insurrections, riots, epidemics, landslides, lightning,
earthquakes, fires not resulting from Operator’s negligence, storms, floods,
washouts, laws, rules and regulations, arrests and restraints of government,
either federal or state, civil or military, civil disturbances, inability of
either party to obtain necessary materials, and any other cause, whether of the
kind herein enumerated or otherwise, which is not reasonably within the control
of the party claiming suspension. Rain, snow, ice or other adverse weather
conditions shall not be considered force majeure. It is understood and agreed
that the settlement of strikes or lockouts shall be entirely within the
discretion of the party having the difficulty, and that the above requirement
that any force majeure shall be remedied with all reasonable dispatch shall not
require the settlement of strikes or lockouts by acceding to the demands of an
opposing party when such course is inadvisable in the discretion of the party
having the difficulty.
ARTICLE 15
Miscellaneous
          15.1 Applicable Laws. This Agreement shall be deemed to be a contract
made under, and shall be construed in accordance with, and governed by, the laws
of the state of Texas; provided, however, that the rights provided in any other
agreement entered into in connection herewith with reference to properties
covered thereby that are situated in other states may be governed by the laws of
such other states.
          15.2 Further Assurances. The Joint Venture and the Operator each
hereby agree to execute and deliver such further documents and to do such other
acts and things as either other party hereto may reasonably request in order to
more fully effect the purposes of this Agreement.
          15.3 Waiver. The parties hereto may (a) mutually agree in writing to
extend the time for the performance of any of the obligations or other acts of
the other parties hereto, and (b) waive performance of any of the covenants or
agreements, or satisfaction of any of the conditions, contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in a written instrument signed on behalf of such party.
Except as provided in this Agreement, no action taken pursuant to this
Agreement, including any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any covenants or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereof shall not operate or be construed as
a waiver of any prior or subsequent breach of the same or any other provisions
hereof.

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          15.4 Assignment. Operator shall not assign this Agreement or its
rights and obligations hereunder without the prior written approval of the
Management Committee.
          15.5 Notices. All notices and other communications given or made
pursuant to this Agreement shall be in writing and shall be deemed to have been
given or made (i) the third business day after the date of mailing, if delivered
by registered or certified mail (postage prepaid, return receipt requested),
(ii) upon delivery or refusal of delivery, if sent by hand delivery, (iii) upon
delivery or refusal of delivery, if sent by prepaid courier (with record of
receipt or refusal), or (iv) upon confirmed transmission, if sent by telecopier
(with a copy simultaneously sent by certified mail, postage prepaid, return
receipt requested), to the parties at the following addresses:
If to Parallel Petroleum Corporation:
Parallel Petroleum Corporation
1004 N. Big Spring, Suite 400
Midland, Texas 79701
Attention: John S. Rutherford
Telecopy: 432-684-3905
If to Capstone Oil & Gas Company, L.P.:
Capstone Oil & Gas Company, L.P.
P.O. Box 10187
Midland, Texas 79702
Attention: Dale Douglas
Telecopy: 432-682-4498
If to Feagan Gathering Company:
Feagan Gathering Company
130 Spring Park Drive, Suite 105
Midland, Texas 79705
Attention: Joe Feagan
Telecopy: (432) 683-5442
          15.6 Amendment. This Agreement may be amended, supplemented or
restated only by a written instrument signed by the Joint Venture and the
Operator.
          15.7 Conflict. If there is a conflict between any of the terms,
conditions, representations, warranties or covenants contained in this Agreement
and the terms, conditions, representations, warranties or covenants in the Joint
Venture Agreement, the provisions of the Joint Venture Agreement shall govern
and control; provided, however,

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the fact that any term, condition, representation, warranty or covenant
contained herein is not contained in the Joint Venture Agreement shall not be or
be deemed to be, a conflict.
          15.8 Headings. The headings of Articles and Sections contained in this
Agreement are provided for reference and convenience only and shall not affect
the meaning or interpretation of this Agreement.
          15.9 Counterparts. This Agreement may be executed in any number of
counterparts (including by facsimile transmission), each of which shall be an
original, but all of which together shall constitute but one and the same
instrument. Neither the Joint Venture nor the Operator shall be bound hereby
until a counterpart of this Agreement has been executed by both of them.
          15.10 Limitation of Liability. The claims of Operator under this
Agreement, if any, shall be limited to the assets of the Joint Venture, and
Operator hereby waives any and all rights it may have to proceed against the
Joint Venture or the Joint Venturers individually.
          15.11 Entire Agreement; No Third Party Beneficiaries. This Agreement,
the Joint Venture Agreement and the documents and instruments to be delivered by
the parties in connection with this Agreement and the Joint Venture Agreement
(a) constitute the entire agreements and supersede all other prior agreements
and understandings, both written and oral, among the parties with respect to the
subject matter hereof and the Joint Venture Agreement; and (b) except as
otherwise specifically provided herein, are solely for the benefit of the
parties hereto and their respective permitted successors, legal representatives
and assigns and does not confer on any other person any rights or remedies
hereunder.
          15.12 Fair Construction. This Agreement shall be deemed to be the
joint work product of the Joint Venture and Operator without regard to the
identity of the draftsperson, and any rule or construction that a document shall
be interpreted or construed against the drafting party shall not be applicable.
          15.13 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.

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     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above, to be effective from and after April 1, 2006.

          THE JOINT VENTURE  
HAGERMAN GAS GATHERING SYSTEM

By Each of Its Joint Venturers Named Below

PARALLEL PETROLEUM CORPORATION
      By:   /s/ John S. Rutherford         John S. Rutherford, Vice President
of        Land and Administration        CAPSTONE OIL & GAS COMPANY, L.P.

By:  Capstone Investments, Inc., its
          general partner
      By:   /s/ Dale Douglas         Dale Douglas, President               
FEAGAN GATHERING COMPANY
      By:   /s/ Mike Feagan         Mike Feagan, President           
THE OPERATOR
 
FEAGAN GATHERING COMPANY
      By:   /s/ Joe Feagan         Joe Feagan, Vice President           

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Exhibit A
to
Construction and Operating Agreement
Accounting Procedures
     Section 1. Billing and Payment Procedures. On or before the fifteenth
(15th) day of each month, the Operator shall deliver to the Joint Venture a
detailed invoice or request for reimbursement for all costs incurred by or on
behalf of the Joint Venture during the previous month and the Joint Venture
shall pay such invoice or request for reimbursement within ten (10) days of its
receipt thereof. If (i) the Joint Venture is unable to timely pay the full
amount of any such invoice or request for reimbursement due to a lack of
sufficient funds maintained by the Joint Venture, and (ii) the Operator, for and
on behalf of the Joint Venture, pays all or any part of such invoice or request
for reimbursement that remains unpaid by the Joint Venture (the “Deficiency
Amount”), then the Joint Venture shall be liable to the Operator for the
Deficiency Amount, plus interest thereon at the rate of ten percent (10.00%) per
annum, commencing on the date such amount is paid by Operator and continuing
until the Joint Venture has paid the Deficiency Amount to Operator.
     Section 2. Adjustments. Payment of invoices or requests for reimbursement
hereunder shall not prejudice the right of the Joint Venture or any Joint
Venturer to protest the correctness thereof; provided, however, all bills and
statements rendered during any calendar year shall be presumed to be true and
correct after twenty-four (24) months following the end of any such calendar
year, unless prior to the end of such period the Joint Venture or any Joint
Venturer takes exception thereto and makes a written claim for adjustment by
written notice to the Operator and the Joint Venture.
     Section 3. Reimbursable Costs. Operator shall be entitled to be reimbursed
for the following costs and expenses:
          (a) Operator’s Direct General and Administrative Costs. Salaries and
wages of employees of Operator during the construction, operation, maintenance
and improvement of the System, including customary benefits paid to such
employees, payroll taxes and insurance, which are directly allocable to time
spent on Joint Venture affairs. Allocable time shall be limited to field
activities carried out directly on or at the physical System.
          (b) Monthly Management Fee in Lieu of Operator’s Indirect General and
Administrative Costs. In lieu of all of Operator’s indirect general and
administrative

 

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costs, which are those general and administrative costs that are not directly
allocable to time spent on Joint Venture affairs, including, but not limited to,
executive, clerical, secretarial, personnel, office service, purchasing, gas
accounting, gas procurement and sales, engineering and operations personnel, the
Joint Venture shall pay to the Operator a management fee in an amount equal to
Nine Thousand Five Hundred and No/100 Dollars ($9,500.00) per month. On May 1,
2007, or as soon thereafter as practicable, the Management Committee and the
Operator shall meet for the purpose of reviewing and reconsidering the amount of
the monthly management fee payable to the Operator under this Section 3(b). The
Management Committee and the Operator shall, acting in good faith and in
cooperation with each other, use their best efforts to agree upon (i) whether
the monthly management fee should be maintained at the rate of $9,500.00 per
month or (ii) whether the monthly management fee should be adjusted upward or
downward in order to more accurately reflect the then existing circumstances
surrounding the Operator’s services to the Joint Venture.
          (c) Third Party Expenses of Employees. Direct, out of pocket third
party expenses incurred by employees whose time is allocable to the Joint
Venture under Section 3(a) above, detailed in properly approved expense reports
as to meals, lodging, transportation and other related miscellaneous expenses.
          (d) Materials and Supplies. Net cost to Operator, including
transportation costs, of new materials and supplies. Used materials or materials
employed as substitutes shall be charged at an amount commensurate with their
depreciated value (in the case of used items) or the value of the item replaced.
          (e) Fabrication and Inspection Costs. Costs incurred in fabricating
materials placed in service on the System and inspection services performed by
independent contractors.
          (f) Construction Contractors. Costs incurred for construction
contractors. Operator shall employ competitive bidding, unless otherwise
directed by the Management Committee. Operator shall obtain the prior approval
of the Management Committee before committing to pay amounts to a contractor
over and above contract prices, provided that extra work not contemplated in the
construction contract shall be paid for as set forth in such contract or a
written amendment thereto. Bids shall be obtained whenever practical on all
construction projects.
          (g) Routine Expenses. All other expenses incurred by Operator for and
on behalf of the Joint Venture pursuant to the duties and responsibilities of
Operator described herein, including permits, licenses, right-of-way damages,
inspection, maintenance, support contractors, routine legal, equipment rentals
and field costs.

 

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Exhibit “B”
to
Joint Venture Agreement
All of the following leasehold acreage located in Chaves County, New Mexico in
the lands described below owned by Parallel or Capstone as of the date of this
Agreement, and all leasehold acreage located in Chaves County, New Mexico in the
lands described below hereafter acquired by Parallel or Capstone, whether by
renewal, extension or new lease taken, but only insofar as such renewal,
extension or new lease is made or taken on or before March 1, 2009 (in each
case, whether jointly or individually owned of record or beneficially by
Parallel or Capstone).
Township 12 South, Range 28 East, NMPM: All Sections
Township 12 South, Range 29 East, NMPM: All Sections
Township 13 South, Range 27 East, NMPM: Sections 19 through and including
Section 36
Township 13 South, Range 28 East, NMPM: All Sections
Township 13 South, Range 29 East, NMPM: Sections 1 through and including
Section 18
Township 14 South, Range 28 East, NMPM: Sections 1 through and including
Section 18
Township 14 South, Range 27 East, NMPM: Sections 1 through and including
Section 3,
Sections 10 through and including Section 15, Sections 22 through and including
Section 27, and
Sections 34 through and including Section 36
Township 14 South, Range 25 East, NMPM: All Sections
Township 14 South, Range 26 East, NMPM: All Sections
Township 14 South, Range 27 East, NMPM: Sections 4 through and including
Section 9, Sections
16 through and including Section 21 and Sections 28 through and including
Section 33
Township 15 South, Range 24 East, NMPM: Sections 1 through and including
Section 3,
Sections 10 through and including Section 15, Sections 22 through and including
Section 27, and
Sections 34 through and including Section 36
Township 15 South, Range 25 East, NMPM: Sections 1 through and including
Section 31, and
Section 36
Township 15 South, Range 26 East, NMPM: All Sections
Township 15 South, Range 27 East, NMPM: Sections 6 and 7
Gas is committed for all depths.

 

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Exhibit “C”
to
Joint Venture Agreement
GAS GATHERING AGREEMENT
Among
PARALLEL PETROLEUM CORPORATION
and
CAPSTONE OIL AND GAS COMPANY, L.P.
as Producer
and
HAGERMAN GAS GATHERING SYSTEM
as Gatherer

 

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TABLE OF CONTENTS

              ARTICLE       PAGE
 
           
I
  Definitions     2  
 
           
II
  Scope of Agreement     4  
 
           
III
  Quantity     5  
 
           
IV
  Agreement Implementation     7  
 
           
V
  Points of Delivery and Redelivery     9  
 
           
VI
  Pressure     10  
 
           
VII
  Gathering, Compression and Transportation Fees     12  
 
           
VIII
  Quality — Treating and Dehydration Fee     13  
 
           
IX
  Measurement     15  
 
           
X
  Term     19  
 
           
XI
  Taxes     19  
 
           
XII
  Pipeline Operation     20  
 
           
XIII
  Billing and Payments     20  
 
           
XIV
  Right-of-Way     22  
 
           
XV
  Warranty of Title     22  
 
           
XVI
  Regulation     23  
 
           
XVII
  Force Majeure     24  
 
           
XVIII
  Notices and Payments     25  
 
           
XIX
  Relationship of the Parties     26  
 
           
XX
  Insurance During Transportation     27  
 
           
XXI
  Governmental Authority     27  
 
           
XXII
  Priority and Termination of Joint Venture     28  
 
           
XXIII
  General     28  
 
           
 
  Exhibit “A”        

 

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GAS GATHERING AGREEMENT
     This Gas Gathering Agreement (hereinafter referred to as the “Agreement”),
dated as of January 16, 2007, to be effective from and after April 1, 2006, is
made by and among Parallel Petroleum Corporation, a Delaware corporation, and
Capstone Oil and Gas Company, L.P. (collectively referred to as “Producer”), and
Hagerman Gas Gathering System, a joint venture organized under the laws of Texas
(“Gatherer”). Producer and Gatherer are collectively referred to as the
“parties” and individually as a “party”.
WITNESSETH:
     WHEREAS, Gatherer is engaged or intends to engage in the business of
gathering, compressing, treating, dehydrating, processing for liquefiable
hydrocarbon recovery and transporting natural gas in Chaves County, New Mexico;
and
     WHEREAS, Producer desires, on behalf of itself and the other owners of the
jointly owned wells located on the lands within the Contract Area (as defined in
Paragraph 3.1 hereof), to have certain wells connected to Gatherer’s pipeline
system for the purpose of, among other things, transporting Producer’s natural
gas; and
     WHEREAS, Gatherer has constructed, or will cause to be constructed, the
necessary pipelines extending from Producer’s wells to points on Gatherer’s
pipeline; and
     WHEREAS, such points may require further construction on Gatherer’s
facilities, the cost of which will be borne by Gatherer.

 

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     NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, Gatherer and Producer agree as follows:
ARTICLE I
DEFINITIONS
     1.1 In addition to the terms defined elsewhere in this Agreement, the
following terms shall have the respective meanings set forth below:
     “Btu” means British thermal unit, which is the quantity of heat required to
raise the temperature of one pound of water one (1) degree Fahrenheit at or near
39.2 degrees Fahrenheit.
     “casinghead gas” means gas produced with oil from a well that is classified
as an oil well under applicable laws or by ruling, order, or designation of the
Oil Conservation Division of the Energy and Minerals Department of the State of
New Mexico (the “OCD”).
     “cubic foot of gas” means the quantity of gas contained in one (1) cubic
foot of space at a pressure of fourteen and seventy-three hundredths (14.73)
psia and at a temperature of sixty degrees (60º) Fahrenheit.
     “day” means a period of twenty-four (24) consecutive hours commencing at
9:00 a.m. on one calendar day and ending at 9:00 a.m. on the following calendar
day.
     “gas” means natural gas produced from gas wells and casinghead gas produced
in association with oil and residue gas resulting from processing for
liquefiable hydrocarbon recovery both gas well gas and casinghead gas.

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     “gas well gas” means all natural gas that is not casinghead gas.
     “Heating Value” means the gross number of Btus produced by combustion, at a
constant pressure, of the amount of dry gas which would occupy a volume of one
(1) cubic foot at a temperature of sixty degrees Fahrenheit and a pressure of
14.73 psia, with air of the same temperature and pressure of the gas, when the
products of combustion are cooled to the initial temperature of the gas and air
and the water formed by combustion is condensed to the liquid state, adjusted
from ideal to real conditions, and further adjusted to reflect the water vapor
content at delivery conditions.
     “liquefiable hydrocarbons” means ethane, propane, isobutane, normal butane
and natural gasoline separated or recovered at Gatherer’s plant facilities.
     “Mcf” means one thousand (1,000) cubic feet of gas.
     “month” means a period beginning at 9:00 a.m. on the first day of a
calendar month and ending at 9:00 a.m. on the first day of the succeeding
calendar month.
     “psia” means pounds per square inch absolute.
     “psig” means pounds per square inch gauge.
     “well” means any well classified as a gas well or as an oil well by the OCD
or any other governmental authority having jurisdiction.
     “year” means the period beginning at 9:00 a.m. on the first day of a
calendar year and ending at 9:00 a.m. on the first day of the succeeding
calendar year; provided that the first year of this Agreement shall commence on
the effective date hereof and end on the next succeeding December 31st and the
last year of this Agreement shall end at the “termination” hereof.

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ARTICLE II
SCOPE OF AGREEMENT
     2.1 Pursuant to the terms hereof, Gatherer agrees to (i) operate and
maintain its natural gas pipeline system and any additions thereto
(collectively, the “System”) which shall extend from the Delivery Point(s) at or
near Producer’s wells to the pipeline owned by Transwestern Pipeline Company
(“Transwestern”) or other pipeline company designated by Producer at the
Point(s) of Redelivery (as defined in Paragraph 5.2), and (ii) receive, gather,
dehydrate, treat for CO2, process for recovery of liquefiable hydrocarbons,
compress, transport and redeliver any and all gas committed to this Agreement as
provided for herein. To expedite connecting Gatherer’s facilities to
Transwestern, Producer agrees to pay to Gatherer in advance the estimated cost
of connecting Gatherer’s facilities to Transwestern (including rights-of-way,
surveying and similar customary charges) prior to the time any wells drilled by
the Producer on or before the date of this Agreement and located in the Contract
Area (as defined in Paragraph 3.1) are connected to the System and initial
deliveries made. Gatherer will thereafter invoice Producer for the actual cost
of such construction (which amounts will be offset by Producer’s prior estimated
payments). Producer shall not be obligated to pay for any construction costs
associated with the connection of any additional wells to the System which are
drilled in the Contract Area (as defined in Paragraph 3.1) after the date of
this Agreement.

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ARTICLE III
QUANTITY
     3.1 Producer hereby dedicates and commits for the term of this Agreement
all its interest in the gas produced and sold from Producer’s wells located on
the lands described in Exhibit A attached hereto (the “Contract Area”), subject,
however, to the limitations set forth herein and in the preamble of Exhibit A.
This Agreement shall not imply or require any leasehold preservation, drilling
or development obligations on the part of Producer. Subject to the terms and
conditions hereof, Gatherer hereby covenants and agrees that commencing on the
date of first deliveries hereunder and continuing until termination of this
Agreement, Gatherer will receive all gas tendered by Producer at the Delivery
Point(s) under this Agreement. Producer agrees to notify Gatherer in writing
when initial deliveries of gas are expected to commence and the expected
deliverability rates from each well.
     3.2 If Gatherer fails to connect any well within sixty (60) days from the
date Gatherer receives written notification as provided for in Article 3.1, then
Producer shall have the right, but not the obligation, to withdraw any such well
from the terms of this Agreement and, upon Gatherer’s receipt of written notice
from Producer withdrawing any such well, such well shall automatically, and
without any further action on the part of Producer or Gatherer, be released from
the terms of this Agreement without further obligation or liability of Producer
of any kind with respect to such well.
     3.3 Producer expressly reserves for itself, its successors and assigns, the
following prior rights with respect to the gas subject hereto:

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          (a) The right to deliver to lessors under any of the leases subject
hereto gas required in kind to meet the requirements of lessee’s obligations
under such leases to furnish gas to such lessors.
          (b) The right to use gas reasonably required to develop and operate
Producer’s properties in the Contract Area, including, but not limited to, use
of gas for drilling, reworking, operating, treating, gas lift and compression
fuel.
          (c) Subject to the other provisions of this Agreement, the control,
management and operation of the properties subject to this Agreement shall be
and remain the exclusive right of Producer. Producer may, in its sole
uncontrolled discretion and as it deems advisable, drill new wells, repair or
rework old wells, renew or extend in whole or in part any lease or unit, and
abandon any well or surrender, terminate or release all or any part of any lease
not deemed by Producer capable under normal production methods of producing gas
in commercial quantities.
          (d) The right from time to time to alter any gas unit by increasing or
decreasing the surface acreage contained therein or to pool or combine any lease
or unit or any part thereof with other properties or to include in any unit any
interest in lands covered by such unit not theretofore included in such unit;
and in the event of any pooling, unitization or change in any unit, this
Agreement shall apply only to the interest of Producer in the unit or units and
the gas attributable thereto but only insofar as such interest is attributable
to the lands and leases committed hereunder.

6

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     3.4 Gatherer shall have the right to process, or cause to be processed by
others, all gas hereunder for the recovery of liquefiable hydrocarbons prior to
the delivery of such gas to Gatherer at the Delivery Point(s) hereunder;
provided, however, that the Gatherer shall be obligated to accept the residue
gas resulting therefrom in accordance with the terms and provisions hereof.
ARTICLE IV
AGREEMENT IMPLEMENTATION
     4.1 All facilities provided by Gatherer shall be of sufficient design,
capacity and capability for receiving, gathering, compressing, dehydrating,
treating for CO2, processing for the recovery of liquefiable hydrocarbons,
transporting and redelivering the gas subject hereto and shall be provided by
Gatherer in accordance with the following:
     (a) volumes of gas transported hereunder shall be redelivered at uniform
hourly and daily rates of flow subject to the needs of Producer or its designee
at the Point(s) of Redelivery;
     (b) subject to all other provisions of this Agreement, Gatherer shall each
day redeliver to Producer or Producer’s designee such daily quantities of gas as
are available and tendered by Producer during such day (less fuel, shrinkage and
losses) with all deliveries and redeliveries hereunder to be balanced monthly on
an MMBtu basis. For each Point of Delivery, Gatherer will allocate to Producer
its proportionate share of gas in MMBtus at the Points of Redelivery by
multiplying the total MMBtus at the Point of Redelivery (obtained by multiplying
the Heating Value by the Mcf at the Redelivery Point) times a ratio, the
numerator of which is the MMBtus at that Point of Delivery

7

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(obtained by multiplying the Heating Value by the Mcf at the Delivery Point) and
the denominator of which is the MMBtus from all Points of Delivery delivering
gas into Gatherer’s System; and
     (c) Unless Producer elects to take in kind its share of liquefied
hydrocarbons saved and sold (at Producer’s sole cost and expense), Gatherer will
allocate to Producer its proportionate share of liquefied hydrocarbons saved and
sold at Gatherer’s plant facilities. Allocations will be made on the same basis
as in Article 4.1(b).
ARTICLE V
POINTS OF DELIVERY AND REDELIVERY
     5.1 The point of delivery for measurement, allocation and transfer of
possession of gas received by Gatherer hereunder shall be at the inlet flange of
Gatherer’s meter station located immediately downstream of Producer’s separation
facilities (the “Point(s) of Delivery” or “Delivery Point(s)”).
     5.2 The point of redelivery for measurement, allocation and transfer of
possession of gas from Gatherer to Producer shall be at the inlet flange of the
existing meter located at a point of interconnection of Gatherer’s System and
Transwestern Pipeline Company’s meter site located in Section 23, T-14S, R-27E,
Chaves County, New Mexico (the “Point(s) of Redelivery” or “Redelivery
Point(s)”). One or more additional Points of Redelivery may be designated from
time to time by mutual consent of the parties.
     5.3 As between Producer and Gatherer, Producer shall be in control and
possession of the gas delivered hereunder until the same shall have been
delivered to

8

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Gatherer at the Point of Delivery, and Producer shall also be liable and
responsible for any damages or injuries resulting from the delivery of the gas
until Producer shall have delivered the same to Gatherer at the Point of
Delivery, except for damages and injuries which result solely and proximately
from Gatherer’s negligence. From and after the Point of Delivery, Gatherer shall
be in control and possession of the gas and Gatherer shall be liable and
responsible for any leaks, blowouts, damages or injuries caused thereby until
the same shall have been redelivered to Producer or Producer’s designee at the
Point of Redelivery; provided, however, title to all liquefiable hydrocarbons
and gas transported hereunder shall at all times remain in and with Producer.
     5.4 If in Gatherer’s reasonable good faith judgment it becomes commercially
unprofitable for Gatherer to maintain and operate a connection at any Point of
Delivery, then Gatherer may elect to terminate this Agreement as it applies to
any such Point of Delivery by giving Producer one hundred eighty (180) days
prior written notice of such election.
ARTICLE VI
PRESSURE
     6.1 The pressure at which Producer shall deliver, or cause to be delivered,
gas at each Point of Delivery shall be sufficient to enter Gatherer’s pipeline
at each such Point of Delivery from time to time; provided, however, Gatherer’s
pressure at the Point(s) of Delivery shall not exceed 400 psig.
     6.2 If any of Producer’s wells become incapable of delivering gas into
Gatherer’s pipeline, neither party shall have an obligation to compress, but
each party

9

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shall have the option to do so. If Gatherer elects not to compress within a
reasonable time after the need for compression appears, Producer may, by written
notice to Gatherer, request that Gatherer either provide compression or release
the affected gas sources as to the then-producing formations from commitment
under this Agreement. If Producer requests that Gatherer provide compression,
Gatherer shall promptly arrange for providing compression and upon installation
of the necessary compression equipment the price to be paid by Gatherer for
Producer’s gas shall be increased by a mutually agreeable compression fee that
will allow Gatherer to recover its related fuel costs and reasonably compensate
Gatherer for such additional costs and services.
     6.3 Producer will furnish and cause to be installed at Producer’s expense,
in accordance with customary industry standards, over-pressure protection
devices which will control the pressure of gas being delivered to a pressure not
in excess of 500 psig. Gatherer shall not be responsible for any gas lost as a
result of the failure of the operation of any such pressure devices.
     6.4 If Gatherer’s pressure exceeds 400 psig at the Point of Delivery,
Producer may give Gatherer written notice of Gatherer’s breach of this Agreement
and Gatherer shall have ninety (90) days after receipt of any such notice to
take, at Gatherer’s expense, such actions as may be necessary to cure any such
breach of this Agreement. If Gatherer does not cure such breach within the time
provided for in this Paragraph 6.4, upon Gatherer’s receipt of written notice
from Producer withdrawing such Point of Delivery and the associated gas, such
Point of Delivery and associated gas shall automatically, and without any
further action on the part of Producer or Gatherer, be released from the terms

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of this Agreement without further obligation or liability of Producer of any
kind with respect to such Point of Delivery and associated gas.
ARTICLE VII
GATHERING, COMPRESSION AND TRANSPORTATION FEES
     7.1 Producer will use its best efforts to deliver a daily volume of 2,000
Mcf to Gatherer at the Point(s) of Delivery for a period of twelve months
beginning from the date of first delivery of gas under this Agreement. Producer
agrees to pay Gatherer a fee per Mcf measured at the Delivery Point(s) as
follows:
     (a) Gathering Fee — Producer will pay a gathering fee of $.25 per Mcf for
metering at the Point of Delivery, gathering and delivering gas to a central
field point;
     (b) Compression Fee — Producer will pay a compression fee of $.15 per Mcf
for compressing gas to a pressure sufficient to enable delivery of gas into
Transwestern at the Redelivery Point at approximately 1050 psig, and Producer
shall bear its proportionate share of compression fuel; and
     (c) Transportation Fee — Producer will pay a transportation fee in the
amount of $.20 per Mcf for the delivery of gas from a central field point
through a sixteen inch pipeline to the Points of Redelivery.

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ARTICLE VIII
QUALITY — TREATING AND DEHYDRATION FEE
     8.1 Producer’s gas shall comply at all times with the following
specifications: the gas
     (a) shall be commercially free from objectionable odors, objectionable
liquid and solid matters, dust, gums, and gum forming constituents, or any other
substance which interferes with the intended purpose of merchantability of the
gas, or causes interference with the proper and safe operation of the lines,
meters, regulators or other appliances through which it may flow;
     (b) shall contain no hydrocarbons in liquid form at the temperature and
pressure at which the gas is delivered into the System;
     (c) shall contain not more than 0.2% by volume of oxygen;
     (d) shall contain not more than 2.0% by volume of carbon dioxide;
     (e) shall contain not more than a combined total of 3.0% by volume of
carbon dioxide plus nitrogen;
     (f) shall contain not more than one quarter (1/4) grain of hydrogen
sulfide;
     (g) shall contain not more than 0.3 grains of mercaptan sulfur per one
hundred (100) cubic feet of gas;
     (h) shall contain not more than 0.75 grains of total sulfur per one hundred
(100) cubic feet of gas;

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     (i) shall not contain any toxic or hazardous substance in concentrations
which, in the normal use of the gas, may be hazardous to health, injurious to
pipeline facilities or limit merchantability or be contrary to applicable
government standards;
     (j) shall have a minimum total Heating Value of not less than nine hundred
seventy (970) Btu per cubic foot; and
     (k) shall have a temperature of not less than forty (40) degrees
Fahrenheit, and not more than one hundred twenty (120) degrees Fahrenheit.
     8.2 If any of the gas delivered by Producer fails in any material respect
to meet the quality specifications set forth in Paragraph 8.1, Gatherer may at
its option either (i) accept delivery of the gas or (ii) discontinue or curtail
taking gas at any Point of Delivery. If Gatherer elects to accept delivery of
“off specification” gas and incurs any incremental costs relating to its
acceptance and delivery of “off specification” gas into the System, Gatherer
shall be entitled to charge Producer an additional fee of $.21 per Mcf.
ARTICLE IX
MEASUREMENT
     9.1 Measurement facilities at the Point(s) of Delivery shall be installed,
owned, maintained and operated by Gatherer or its agent. Producer may, at its
option and expense, install check measuring and testing equipment for checking
the accuracy of the equipment at any Point of Delivery; provided, however, any
check measuring and testing equipment installed by Producer shall not interfere
with the operation and use of Gatherer’s facilities at the Point of Delivery.

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     9.2 Gatherer will use its best efforts to cause Transwestern to install,
maintain and operate at Transwestern’s expense, at the Points of Redelivery,
measuring equipment of a type acceptable to both Gatherer and Producer and of
ample size and proper type for the accurate measurement of the gas delivered
hereunder, and shall cause said measuring equipment to be read at regular
periods which are consistent with accurate measurement. If Transwestern fails or
refuses to install, maintain and operate such measuring equipment, then Gatherer
shall do so at its sole expense. The location and installation of such measuring
equipment shall be such as to prevent, so far as is reasonably possible,
pulsations of compressors from interfering with accurate measurement. If at any
time or from time to time Gatherer commingles gas from a Point of Delivery with
gas from a source other than a Point of Delivery under this Agreement, then
Gatherer shall measure such other gas prior to its entering Gatherer’s System.
     9.3 The unit of volume for measurement of gas delivered hereunder shall be
one (1) cubic foot of gas. All measurement of gas hereunder shall be determined
by calculation in terms of such unit. All fundamental constants, observations,
records and procedures utilized in determining or verifying the volume and
quality of gas delivered hereunder shall be in accordance with the standards
prescribed in aga3 ANSI/API 2530, as now in effect and as hereafter amended or
supplemented from time to time.
     9.4 Gatherer, or its designee shall operate the measuring stations located
at each Point of Delivery. The reading of electronic flow meters and the
calculation of volumes therefrom shall be the responsibility of the Gatherer.
The calibration and

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adjustment of such meters shall be made or arranged for by the parties hereto in
compliance with the terms and provisions hereof.
     9.5 The specific gravity of gas committed to this Agreement shall be
determined with accuracy to the nearest one thousandth (0.001) by taking samples
of the gas at the Point of Delivery at such times as may be designated by any
party hereto, but no less often than two (2) times per year. The specific
gravity of the gas shall be determined by gas chromatography. The specific
gravity determined by any test shall apply from the first day of the month
following the date the test was taken until the first day of the month following
the next test.
     9.6 Each party shall be given reasonable and sufficient prior notice and
shall have the right to be present at the time of installing, reading, cleaning,
changing, repairing, inspecting, testing, calibrating or adjusting measuring and
testing equipment used by the other party in connection with the delivery of gas
hereunder. The records from measuring equipment shall remain the property of the
owner of such equipment, but upon request, each party will submit to the other
its records and charts, together with calculations therefrom, which shall be
returned to the owner within fifteen (15) days after receipt thereof. Test data
and other similar records pertaining to the delivery and transportation of gas
hereunder shall be retained by the party owning such records for a period of not
less than two (2) years.
     9.7 At least once every three (3) months, the Gatherer shall calibrate and
adjust meters at the Delivery Points or cause the same to be calibrated and
adjusted. The Gatherer shall give Producer sufficient notice in advance of such
tests so that Producer

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may be present to observe the calibration and adjustments, if any, which are
made. For purposes of measurement and meter calibrations hereunder, the
atmospheric pressure shall be assumed to be fourteen and sixty-five hundredths
(14.65) psia, irrespective of variations in natural atmospheric pressure from
time to time. Gatherer shall, upon written request of Producer, conduct tests of
Gatherer’s measuring equipment; provided, however, in no event shall Gatherer be
required to test its measuring equipment more frequently than once each month.
All tests of measuring equipment shall be made at Gatherer’s expense, except
that Producer shall bear the expense of tests made at its request if the
inaccuracy is found to be less than two percent (2.00%).
     9.8 If at any time the metering equipment at the Point of Redelivery is
found to be inaccurate by a margin of two percent (2.00%) or more, registration
thereof and any payment based upon such registration shall be corrected at the
rate of such inaccuracy for any period of inaccuracy which is definitely known
or agreed upon, or if not known or agreed upon, then for a period extending back
one-half (1/2) of the time elapsed since the last day of calibration. Following
any test, any metering equipment found to be inaccurate to any degree shall be
adjusted immediately to measure accurately. If, for any reason, any meter at a
Point of Delivery is out of service or out of repair so that the quantity of gas
delivered through such meter cannot be ascertained or computed from the readings
thereof, the quantity of gas delivered during the period the meter is out of
service or out of repair shall be estimated and agreed upon by the parties upon
the basis of the best available data using one of the following methods which
the parties deem to be the most feasible:

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     (a) by using the registration of any check metering equipment if installed
and registering properly;
     (b) by correcting the error if the percentage of error is ascertainable by
calibration, test or mathematical calculation; or
     (c) by estimating the quantity or quality of deliveries by deliveries made
during preceding periods under similar conditions when the meter was registering
accurately.
ARTICLE X
TERM
     10.1 Subject to the other terms and provisions hereof, this Agreement shall
be effective from the date hereof and shall thereafter continue and remain in
full force and effect for an initial term of ten (10) years and shall continue
year-to-year thereafter until either party gives written notice of termination
of this Agreement to the other party not less than 60 days prior to any
anniversary date of this Agreement.
ARTICLE XI
TAXES
     11.1 Commencing on the effective date hereof, each of the parties hereto
shall be solely responsible for and agrees to hold the other party harmless from
the payment of any and all taxes or charges of every kind applicable to the gas
hereunder or to the transportation hereof pursuant to statutes or orders of
governmental authorities having jurisdiction. Neither party shall be responsible
or liable for any taxes or other statutory

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charges levied or assessed against the facilities of the other party used for
the purpose of carrying out the provisions of this Agreement.
ARTICLE XII
PIPELINE OPERATION
     12.1 Throughout the term of this Agreement, Gatherer shall have and retain
full and continuing responsibility for the care, maintenance and condition of
Gatherer’s System and Producer does not assume, nor shall it have any
responsibility, obligation or liability for, the care, maintenance and condition
of the System. Gatherer shall at all times operate the System, or cause the
System to be operated, in a reasonable and prudent manner consistent with
customary industry standards and practices pertaining to the gathering and
transportation of gas. Gatherer agrees to indemnify and hold harmless Producer
from and against any and all loss, costs, claims, damages and expense resulting
from Gatherer’s failure to operate the System in accordance with the standards
set forth in this Paragraph 12.1.
ARTICLE XIII
BILLINGS AND PAYMENTS
     13.1 Gatherer shall deliver to Producer, no later than fifteen (15) days
after the end of each month, a statement and billing of the total quantities of
gas received and redelivered hereunder during the preceding month.
     13.2 Producer shall pay to Gatherer on or before the expiration of twenty
(20) days after Producer’s receipt of the statement and billing provided for in
Paragraph 13.1

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above, all charges, costs and fees billed by Gatherer to Producer in accordance
with the provisions of this Agreement.
     13.3 Each party shall have the right to examine at any reasonable time all
books, records and measurement data of the other party to the extent necessary
to verify the accuracy of any statement or computation made under or pursuant to
the provisions of this Agreement.
     13.4 If Producer fails to pay all or any part of any billing for services
rendered by Gatherer hereunder or any other charges payable hereunder, interest
on the undisputed unpaid amount shall accrue at a rate per annum which is two
percent (2.00%) above the prime rate of interest of Wells Fargo Bank Texas, N.A.
as announced or published by such bank from time to time (adjusted from time to
time to reflect any changes in such rate determined hereunder).
     13.5 If presentation of a bill by Gatherer is delayed to a date after the
fifteenth (15th) day of a production month, then the time for payment of such
bill shall be extended for a period of time equivalent to the period of delay.
     13.6 If an error is discovered in the amount billed in any statement
rendered by Gatherer to Producer, such error shall be adjusted without interest
or penalty as soon as reasonably possible, but in any event no later than three
(3) months after written notice of such error (the “Notice of Error”) has been
given by one party to the other. The computation of fees, and the computation
and allocation of MMBtus received at the Delivery Point and redelivered at the
Redelivery Point shall be deemed to be correct unless the written Notice of
Error is given within two (2) years after the month in which the gas was
produced.

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ARTICLE XIV
RIGHT-OF-WAY
     14.1 Insofar as each party is contractually and legally able to do so, each
party hereby grants (the “granting party”) to the other party the right to
install, operate and maintain equipment utilized hereunder on the property of
the granting party and the right of free access to such equipment for purposes
relating to this Agreement; but only to the extent such access does not
interfere with the granting party’s rights of ownership, operation, use or
enjoyment of the property, whether under the terms of this Agreement or
otherwise.
ARTICLE XV
WARRANTY OF TITLE
     15.1 Producer warrants title (by, through and under Producer, but not
otherwise) to its gas delivered by it hereunder, and warrants that it has the
right to deliver the same free from liens and adverse claims of every kind. Each
party will indemnify and hold the other party harmless from and against any and
all loss, costs, claims, demands, damages and expense of every character with
respect to gas delivered by it on account of royalties, taxes, payments or other
charges applicable before or upon delivery of the gas.
     15.2 Producer agrees to indemnify and hold Gatherer harmless from and
against any and all loss, costs, claims, demands, damages and expense on account
of any damage to property or injury to persons arising or resulting from (i) any
breach by Producer of its covenants and agreements contained herein or arising
or resulting from (ii) Producer’s operations hereunder, unless caused by
Gatherer’s negligence or willful misconduct.

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     15.3 Gatherer agrees to indemnify and hold Producer harmless from and
against any and all loss, costs, claims, demands, damages and expense on account
of any damage to property or injury to persons arising or resulting from (i) any
breach by Gatherer of its covenants and agreements contained herein or arising
or resulting from (ii) Gatherer’s operations hereunder, unless caused by
Producer’s negligence or willful misconduct.
ARTICLE XVI
REGULATION
     16.1 This Agreement shall be interpreted, governed and construed in
accordance with the laws of the State of Texas.
     16.2 Both parties represent that all of the gas hereunder will be produced
and transported in the State of New Mexico, except as to any transportation of
gas authorized to be made pursuant to enabling legislation or regulations of the
U.S. Federal Energy Regulatory Commission (“FERC”) which do not subject gas to
any increased jurisdiction of FERC and each party recognizes that the other
party has entered into this Agreement based upon such representation, and
further recognizes that such other party would have been unwilling to enter into
this Agreement in the absence of such representation. If either party
voluntarily undertakes any course of action that is not required by any
governmental agency or law and which results in any portion of the gas delivered
hereunder being sold, transported, used, consumed or commingled in such a manner
as to increasingly subject such gas to the jurisdiction of FERC or any successor
agency, then this Agreement shall be deemed to have terminated by its own terms
on the day prior to the date of such occurrence.

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ARTICLE XVII
FORCE MAJEURE
     17.1 If either party is rendered unable, wholly or in part, by events of
“force majeure” to carry out its obligations under this Agreement, other than
the obligation to make monetary payments, that party shall give to all other
parties prompt written notice of the force majeure event with reasonably full
particulars. After such notice has been given, the obligations of the party
giving such notice, so far as they are affected by the event of force majeure,
shall be suspended during, but no longer than, the continuance of the force
majeure event, and the affected party shall use all reasonable diligence to
remedy the force majeure event with all reasonable diligence. The term “force
majeure” as used herein shall mean all acts of God, strikes, lockouts or other
industrial disturbances, acts of terrorism and the public enemy, wars,
blockages, insurrections, public riots, lightning, earthquakes, fires not
resulting from a party’s negligence, storms, floods, washouts, explosions,
inability of either party to obtain necessary materials, supplies,
rights-of-ways, permits or labor, and any other cause, whether of the kind
specifically enumerated above or otherwise, which is not reasonably within the
control of and could not reasonably have been avoided by the party claiming
suspension in the exercise of ordinary diligence. It is understood and agreed
that the settlement of strikes or lockouts shall be entirely within the
discretion of the party involved, and that the above requirement that any force
majeure event shall be remedied with all reasonable diligence shall not require
the settlement of strikes or lockouts by the party involved.

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ARTICLE XVIII
NOTICES AND PAYMENTS
     18.1 All notices and other communications given or made pursuant to this
Agreement shall be in writing and shall be deemed to have been given or made
(i) the third business day after the date of mailing, if delivered by registered
or certified mail (postage prepaid, return receipt requested), (ii) upon
delivery or refusal of delivery, if sent by hand delivery, (iii) upon delivery
or refusal of delivery, if sent by prepaid courier (with record of receipt or
refusal), or (iv) upon confirmed transmission, if sent by telecopier (with a
copy simultaneously sent by certified mail, postage prepaid, return receipt
requested), to the parties at the following addresses:
If to the Producer:
Parallel Petroleum Corporation
1004 N. Big Spring, Suite 400
Midland, Texas 79701
Attention: John S. Rutherford
Telecopy: (432) 684-3905
Capstone Oil & Gas Company, L.P.
P.O. Box 10187
Midland, Texas 79702
Attention: Dale Douglas
Telecopy: (432) 683-4498
If to the Gatherer:
Hagerman Gas Gathering System
P.O. Box 50307
Midland, Texas 79710-0307
Attention: Joe Feagan
Telecopy: (432) 683-5442

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or at such address as either party may from time to time designate as the
address for such purpose by notice similarly given.
ARTICLE XIX
RELATIONSHIP OF THE PARTIES
     19.1 The parties agree that Producer will tender gas which is owned by
Producer for transportation by Gatherer and that gas owned by Producer shall be
subject only to the fees and expenses set forth herein. Title to all gas owned
by Producer shall remain vested in Producer when delivered to Gatherer for
transportation and redelivery hereunder.
     19.2 The relationship of the parties hereto is solely that of Producer and
Gatherer setting forth in writing their agreement with respect to the gathering,
transportation and delivery of Producer’s gas as set forth herein, and nothing
herein shall be construed or deemed to create or constitute any joint venture,
partnership or agency between the parties or to authorize either party to bind
the other in any manner to any third party whatsoever. The duties, obligations
and liabilities of the parties hereto are separate and not joint or collective,
and nothing contained herein shall be construed as an obligation of guaranty or
indemnification for any indebtedness incurred by the other party in connection
with such other party’s performance of its obligations under this Agreement.
ARTICLE XX
INSURANCE DURING TRANSPORTATION
     20.1 As among the parties hereto, it is agreed that Gatherer will obtain
insurance against damages or injuries incurred by Producer from and after the
Point(s) of Delivery

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and prior to redelivery of such gas at the Redelivery Point(s). In any event,
Producer shall not be responsible for such gas after delivery to Gatherer at the
Delivery Point(s) or liable for any damages or injuries incurred during the
subsequent gathering, dehydration, treating for CO2, processing for recovery of
liquefiable hydrocarbons, compression, transportation and redelivery thereof.
ARTICLE XXI
GOVERNMENTAL AUTHORITY
     21.1 This Agreement and the rights and obligations of the parties hereunder
shall be subject to all applicable federal, state and municipal laws, rules,
regulations and orders of governmental authorities having jurisdiction. If any
provision of this Agreement is abrogated or modified by lawful governmental
action, this Agreement shall continue in full force and effect as modified by
said governmental action, provided that either party may thereafter, upon ninety
(90) days prior written notice to the other party, elect to terminate this
Agreement.
ARTICLE XXII
PRIORITY AND TERMINATION OF JOINT VENTURE
     22.1 All gas produced by Parallel Petroleum Corporation and Capstone Oil &
Gas Company, L.P., and their respective successors and assigns, and dedicated by
them to this Agreement shall have first priority to the availability and
capacity of the System, and such gas shall remain subject to and continue to be
bound by this Agreement notwithstanding the earlier termination and winding up
of the Hagerman Gas Gathering System Joint Venture created by that certain
Hagerman Gas Gathering System Joint

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Venture Agreement, dated as of January 16, 2007, by and among Feagan Gathering
Company, Parallel Petroleum Corporation and Capstone Oil & Gas Company, L.P.
ARTICLE XXIII
GENERAL
     23.1 The terms, covenants and conditions hereof shall be binding and inure
to the benefit of the parties hereto and their respective successors and
assigns.
     23.2 Assignment of this Agreement or any duty hereunder may be made by
either party hereto without the prior written consent of the other; provided,
however, that no assignment shall have the effect of relieving the assigning
party of any liabilities hereunder, past, present or future, unless agreed to in
writing by the non-assigning party.
     23.3 The waiver by either party hereto of any breach by the other party of
any provision of this Agreement shall not constitute a continuing waiver of such
breach or a waiver of any other breach of any other provision of this Agreement.
     23.4 This Agreement may be executed in any number of counterparts
(including by facsimile transmission), each of which shall be an original, but
all of which together shall constitute but one and the same instrument. Neither
party shall be bound hereby until a counterpart of this Agreement has been
executed by the other party.
     23.5 Whenever the word “herein” is used in this Agreement, the intended
reference is to the entire document, including, without limitation, the
paragraph in which such word appears.

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     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above, to be effective from and after April 1, 2006.

            HAGERMAN GAS GATHERING SYSTEM
      By:   Feagan Gathering Company, Operator
      By:   /s/ Joe Feagan         Joe Feagan, Vice President             
PARALLEL PETROLEUM CORPORATION
      By:   /s/ John S. Rutherford         John S. Rutherford, Vice President   
    of Land and Administration        CAPSTONE OIL AND GAS COMPANY, L.P.
      By:   Capstone Investments, Inc., its general partner
      By:   /s/ Dale Douglas         Dale Douglas, President           

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EXHIBIT “A”
to
Gas Gathering Agreement
All of the following leasehold acreage located in Chaves County, New Mexico in
the lands described below owned by Parallel or Capstone as of the date of this
Agreement, and all leasehold acreage located in Chaves County, New Mexico in the
lands described below hereafter acquired by Parallel or Capstone, whether by
renewal, extension or new lease taken, but only insofar as such renewal,
extension or new lease is made or taken on or before March 1, 2009 (in each
case, whether jointly or individually owned of record or beneficially by
Parallel or Capstone).
Township 12 South, Range 28 East, NMPM: All Sections
Township 12 South, Range 29 East, NMPM: All Sections
Township 13 South, Range 27 East, NMPM: Sections 19 through and including
Section 36
Township 13 South, Range 28 East, NMPM: All Sections
Township 13 South, Range 29 East, NMPM: Sections 1 through and including
Section 18
Township 14 South, Range 28 East, NMPM: Sections 1 through and including
Section 18
Township 14 South, Range 27 East, NMPM: Sections 1 through and including
Section 3,
      Sections 10 through and including Section 15, Sections 22 through and
including Section 27, and
      Sections 34 through and including Section 36
Township 14 South,   Range 25 East, NMPM: All Sections
Township 14 South, Range 26 East, NMPM: All Sections
Township 14 South, Range 27 East, NMPM: Sections 4 through and including
Section 9,
      Sections 16 through and including Section 21 and Sections 28 through and
including Section 33
Township 15 South, Range 24 East, NMPM: Sections 1 through and including
Section 3,
     Sections 10 through and including Section 15, Sections 22 through and
including Section 27, and
     Sections 34 through and including Section 36
Township 15 South, Range 25 East, NMPM: Sections 1 through and including
Section 31, and
     Section 36
Township 15 South, Range 26 East, NMPM: All Sections
Township 15 South, Range 27 East, NMPM: Sections 6 and 7
Gas is committed to all depths.

 

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Exhibit “D”
to
Joint Venture Agreement
Insurance Requirements
(Minimum Requirements)

1.   At all times during the conduct of operations hereunder, Operator shall
maintain in force, in accordance with the terms of the Hagerman Gas Gathering
System Joint Venture       Agreement (the “Agreement”), the following minimum
limits of insurance at the expense of and for the benefit of the Joint Venture:

  (a)   Workers’ Compensation Insurance in accordance with the laws of the
state(s) in which operations are covered under the Agreement; and     (b)  
Employer’s Liability Insurance with a minimum limit of $1,000,000.

2.   In addition to the above, the Operator shall provide and maintain in force
the following minimum limits of insurance, at the expense of and for the benefit
of the Joint Venture, covering operations on lands subject to the Agreement:

  (a)   Commercial General Liability Insurance with a combined single limit of
$1,000,000 per occurrence; and     (b)   Automobile Liability Insurance covering
owned, non-owned and hired automobiles with a combined single limit of
$1,000,000 per accident.

3.   Any party may at its own expense acquire such other insurance as it deems
proper to protect itself against any claims, losses, damages or destruction
arising out of operations under the Agreement.

4.   Operator shall require all contractors and subcontractors working on or
performing services under the Agreement to comply with applicable Workers’
Compensation and Employer’s Liability laws, both state and federal, and to carry
Commercial General Liability and such other insurance as Operator deems
necessary.

5.   Operator may include Workers’ Compensation and Employer’s Liability
Insurance risks under its qualified self-insurance program, provided Operator
complies with all applicable laws. In such event, Operator shall charge the
Joint Venture with an amount

 

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    that shall not exceed the amount of the premium that would be charged at the
manual rate effective for insurance coverage as if Operator were a purchaser of
such coverage from an insurance company or companies.

6.   In connection with all losses, Operator shall (i) furnish copies of
accident reports on a prompt basis; (ii) give written notification of the
service of all summons and legal processes; (iii) provide information as to the
status of any claim or suit of any payment made in connection therewith; and
(iv) furnish any other available information required for the purpose of fixing
or adjusting premiums or to support any claims.

7.   Operator and each Joint Venturer agree to mutually waive subrogation in
favor of each other on all insurance carried by each party and/or obtain such
waiver from the insurance carrier if so required by the insurance contract. If
such waiver is not obtained, the party failing to do so shall indemnify the
other party for any claim by an insurance carrier arising out of subrogation.

2