Exhibit 10.1
Execution Version
DEEPWATER
PRODUCTION HANDLING
AND
OPERATING SERVICES AGREEMENT
FOR
GARDEN BANKS BLOCKS 738, 782, 785, 826 and 827
PRODUCTION HANDLING
AT THE GARDEN BANKS BLOCK 783 MAGNOLIA TLP
BY AND BETWEEN
CONOCOPHILLIPS COMPANY AND
DEVON ENERGY PRODUCTION COMPANY, L.P.
AND
CALLON PETROLEUM OPERATING COMPANY
EFFECTIVE April 18, 2007
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

 

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

 

Execution Version
TABLE OF CONTENTS

              ARTICLE I — CONTRACT APPLICATION
    2  
 
           
1.1
  Application in General     2  
1.2
  Application of Magnolia TLP Operating Agreement     2  
 
            ARTICLE II — DEFINITIONS AND EXHIBITS
    3  
 
           
2.1
  Preface     3  
2.2
  Definitions     3  
2.3
  Exhibits   10 ARTICLE III — INFRASTRUCTURE AND FACILITIES
    10  
 
           
3.1
  Satellite Production System   10
3.1.1
  Design and Installation of Satellite Production System     10  
3.1.2
  Costs of Satellite Production System     11  
3.1.3
  Scheduling Producer’s Work     12  
3.1.4
  Magnolia TLP Criteria     12  
3.1.5
  Riser and Umbilical Handover     13  
3.1.6
  Magnolia TLP Access & Boarding for Producer’s Work     13  
3.1.7
  Conduct of Producer’s Work     14  
3.2
  Receiving Facility   15
3.3
  Capacity Upgrades   16
3.4
  Magnolia Owners’ Tie-In Option   16
3.4.1
  Costs of Tie-in Option     17  
3.4.2
  Operation, Maintenance and Abandonment of Tie-in     17  
 
            ARTICLE IV — SERVICES
    18  
 
           
4.1
  General   18
4.1.1
  Production Handling Services     18  
4.1.2
  Satellite Production System Operations     19  
4.2
  Well Unloading   19
4.3
  Producer’s Responsibilities   19
4.4
  Right of Use of Deck Space   19
4.5
  Energy Sources   20
4.6
  Communication Equipment   20
4.7
  Emergency Response   20
 
            ARTICLE V — FEES & EXPENSES/ACCOUNTING PROCEDURES
    21  
 
           
5.1
  Operating and Maintenance   21
5.1.1
  Monthly Charges     21  
5.1.2
  Annual Review     22  
5.2
  Fuel/Vent/Flare Gas   22
5.3
  Infrastructure Access Fees   23
5.3.1
  IAF for Firm Capacity, Interruptible Capacity and FA Capacity     23  
5.3.2
  Minimum Monthly Fee     23  
5.4
  Future Governmental Regulations Costs   24
5.5
  Producer’s Sole Expenses   25
5.6
  Magnolia Owners’ Sole Expenses   25
5.7
  Deferred Production Compensation   25
5.7.1
  Compensation for Magnolia Owners for Initial Tie-In     25  

i

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

 

Execution Version

             
5.7.2
  Compensation for Producer     25  
5.7.3
  Compensation Methodology     26  
5.7.4
  Duration of Shutdown     27  
5.7.5
  Compensation for Magnolia Owners after Initial Tie-In     28  
5.8
  Royalties and Taxes   28
5.9
  Quality Bank Payments   28
 
            ARTICLE VI — CAPACITY
    28  
 
           
6.1
  Magnolia TLP Base Capacity   28
6.2
  Production Processing and Handling Capacity   29
6.2.1
  Firm Capacity     29  
6.2.2
  Interruptible Capacity     31  
6.2.3
  Flow Assurance Capacity     31  
6.3
  Production Prioritization   32
6.3.1
  Processing Facility Constraints     32  
6.3.2
  Gas Export Pipeline Constraints     33  
6.3.3
  Oil Export Pipeline Constraints     33  
6.4
  Production Compatibility   34
6.4.1
  Conforming Fluids     34  
6.4.2
  Non-Conforming Satellite Production     34  
6.4.3
  Market Value     35  
 
            ARTICLE VII – METERING AND ALLOCATION, PERMITS, AND QUALITY BANK
    36  
 
           
7.1
  General Application   36
7.2
  Permits   36
7.2.1
  Surface Commingling Permit     36  
7.2.2
  Other Permits     36  
7.2.3
  Permit Denials     37  
7.3
  Quality Bank   37
 
            ARTICLE VIII — GATHERING AND TRANSPORTATION
    37  
 
           
8.1
  Product Disposition   37
8.2
  Product Transportation   38
8.3
  Pipeline Penalties   38
8.4
  Gas Imbalances   39
 
            ARTICLE IX — SUSPENSION OF OPERATIONS AND FORCE MAJEURE
    39  
 
           
9.1
  Notice   39
9.2
  Suspension of Obligation   39
9.3
  Resolution   39
9.4
  Suspension of Operations   39
9.5
  Magnolia TLP Operator’s Right to ShutDown Operations on Magnolia TLP   40
 
            ARTICLE X — TERM, DEFAULT, TERMINATION, AND CONTINUATION OF SERVICES
    41  
 
           
10.1
  Term of Agreement   41
10.2
  Default   41
10.3
  Termination by Magnolia Owners   42
10.4
  Termination by Producer   43
10.5
  Responsibilities and Obligations at Termination   43
 
            ARTICLE XI — LIABILITIES AND INDEMNIFICATION
    45  

ii

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

 

Execution Version

             
11.1
  Liability and Indemnity   45
11.1.1
  Definition of Claims     45  
11.1.2
  Application of Indemnities     45  
11.1.3
  Producer’s Indemnity     46  
11.1.4
  Magnolia Owners’ Indemnity     48  
11.1.5
  Environmental Indemnity     49  
11.1.6
  Notices and Defense of Indemnified Claims     51  
11.1.7
  Non-Conforming Production     51  
11.1.8
  No Limitations     51  
11.1.9
  Allocation of Liability Among the Magnolia Owners     51  
11.2
  Indemnification With Respect to Warranty of Title   52
11.2.1
  Satellite Production     52  
11.2.2
  Non-Satellite Production     52  
11.3
  Waiver of Consequential Damages   52
11.4
  Individual Obligations   52
 
            ARTICLE XII — INSURANCE AND BONDS
    53  
 
           
12.1
  Insurance   53
12.2
  Bonds   54
 
            ARTICLE XIII — SUCCESSORS AND ASSIGNS
    54  
 
           
13.1
  Successors and Assigns   54
13.2
  Assignment   54
13.2.1
  Assignment by Producer     54  
13.2.2
  Assignment by Magnolia Owners     56  
 
            ARTICLE XIV – NOTICES
      56  
14.1
  Giving and Responding to Notices   56
14.2
  Content of Notice   58
 
            ARTICLE XV — ADMINISTRATIVE AND MISCELLANEOUS
    59  
 
           
15.1
  Billing Procedures   59
15.2
  Disclaimer of Warranties by Magnolia Owners   59
15.3
  Disclaimer of Warranties by Producer   60
15.4
  Representations and Warranties   61
15.5
  Warranty of Title   62
15.6
  Standard of Performance   62
15.7
  Producer’s Employees, Consultants, and Contractors   62
15.8
  Magnolia TLP Operator’s Employees, Consultants, and Contractors   63
15.9
  Further Assurances   63
15.10
  Non-Compliance Citations   63
15.11
  Dispute Resolution   63
15.12
  Waivers `   64
15.13
  Remedies   64
15.14
  No Third Party Beneficiaries   64
15.15
  Confidentiality Provisions   64
15.16
  Commitment of Oil and Gas Reserves   65
15.17
  Compliance With Laws and Regulations   66
15.17.1
  Applicable Law     66  
15.17.2
  Severance of Invalid Provisions     66  
15.17.3
  Fair and Equal Employment     67  
15.18
  Construction and Interpretation of this Agreement   67

iii

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

 

Execution Version

             
15.18.1
  Heading for Convenience     67  
15.18.2
  Gender     68  
15.18.3
  Number     68  
15.18.4
  Independent Representation     68  
15.19
  Integrated and Entire Agreement    68
15.20
  Amendment and Modification    68
15.21
  Survivability    69
15.22
  Existing Agreements    69
 
            ARTICLE XVI – EXECUTION
    69  
 
           
16.1
  Effect    69
16.2
  Counterparts    70
 
  EXHIBIT “A”     72  
 
  EXHIBIT “B”     73  
 
  EXHIBIT “C”     77  
 
  EXHIBIT “C-1”     83  
 
  EXHIBIT “D”     100  
 
  EXHIBIT “E”     102  
 
  EXHIBIT “F”     105  
 
  EXHIBIT “G”     114  
 
  EXHIBIT “G-1”     123  
 
  EXHIBIT “G-2”     124  
 
  EXHIBIT “H”     125  
 
  EXHIBIT “I”     127  
 
  EXHIBIT “J”     131  
 
  EXHIBIT “K”     134  
 
  EXHIBIT “L”     141  
 
  EXHIBIT “M”     142  
 
  EXHIBIT “N”     143  

iv

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

 

Execution Version
DEFINITIONS

          Term   Page No.        
Abandonment Notice
    46  
Abandonment Work
    46  
Affiliate
    3  
Agreement
    1  
Barrel
    4  
Bbl
    4  
BLPD
    4  
British Thermal Unit
    4  
Btu
    4  
Callon
    1  
Capacity Upgrade
    18  
Claims
    47  
Code
    29  
Confidential Information
    4  
COP
    1  
Day
    4  
Default
    43  
Delivery Point
    4  
Devon
    1  
DGPC
    28  
Dollar
    4  
DOPC
    27  
Downstream Gas Pipeline
    34  
Downstream Oil Pipeline
    35  
Effective Date
    1  
EI Index
    25  
Entry Point
    5  
Execution Date
    5  
FA Capacity
    5  
Firm Capacity
    31  
Flow Assurance Capacity
    5  
Force Majeure
    5  
Gas
    6  
Gas Constrained Parties
    35  
Gas Constrained Party
    35  
Gas Export Pipeline
    6  
Gas Unconstrained Parties
    35  
HPU
    12  
IAF
    25  
Infrastructure Access Fee
    25  
Interruptible Capacity
    33  
Laws
    6  
LEB
    7  
Magnolia Leases
    1  

v

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

 

Execution Version

          Term   Page No.        
Magnolia Owners
    1  
Magnolia TLP
    7  
Magnolia TLP Base Capacity
    7  
Magnolia TLP Capacity
    7  
Magnolia TLP Gas Production
    7  
Magnolia TLP Oil Production
    7  
Magnolia TLP Operating Agreement
    7  
Magnolia TLP Operator
    1  
Magnolia TLP Production
    7  
Magnolia TLP Shared Expenses
    23  
Magnolia TLP Ullage
    7  
MBO/d
    7  
MBtu
    7  
MBW/d
    8  
MCS
    12  
MMBtu
    8  
MMS
    8  
MMSCF
    8  
MMSCF/d
    8  
Mortgaged Property
    57  
MSCF
    8  
MSCF/d
    8  
Non-Conforming Production
    36  
Non-Performing Party
    43  
Non-Satellite Production
    8  
NORM
    49  
Notice Period
    44  
OEB
    8  
OFO’s
    40  
Oil
    8  
Oil Constrained Parties
    35  
Oil Constrained Party
    35  
Oil Export Pipeline
    8  
Oil Unconstrained Parties
    35  
Parties
    1  
Party
    1  
Permanent Cessation of Production
    9  
Person
    9  
Prevailing Gas Price
    9  
Prevailing Oil Price
    9  
Producer
    1  
Producer’s Work
    13  
Production Handling Services
    9  
Prorated Firm Capacity
    34  
PSOPEX
    23  
Receiving Facilities
    16  
Satellite First Production
    9  
Satellite Gas Production
    9  

vi

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

 

Execution Version

          Term   Page No.        
Satellite Leases
    1  
Satellite Oil Production
    9  
Satellite Operating Problem
    36  
Satellite Operations Procedures Guide
    10  
Satellite Operator
    1  
Satellite Production
    10  
Satellite Production System
    12  
Satellite Production System Operations
    10  
SCF
    10  
Services
    10  
Standard Cubic Foot
    10  
Third Parties
    10  
Third Party
    10  
Third Party Production
    11  
Third Party Production System
    11  
Transfer of Interest
    57  
UTB
    12  

vii

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

 

Execution Version
PREAMBLE
     This Production Handling and Operating Services Agreement (“Agreement”)
effective as of April 18, 2007, (“Effective Date”) is entered into by and
between ConocoPhillips Company (“COP”) and Devon Energy Production Company, L.P.
(“Devon”), hereinafter collectively referred to as the “Magnolia Owners”, in
their capacity as co-owners of the “Magnolia TLP” (as defined hereinbelow), and
Callon Petroleum Operating Company (“Callon”), hereinafter referred to as the
“Producer”, in its capacity as owner of the “Satellite Leases” (as defined
hereinbelow) and “Satellite Production System” (as defined hereinbelow). Each
signatory hereto is sometimes referred to singularly as a “Party” or
collectively as the “Parties”.
     WHEREAS, the Producer is the owner of the oil and gas leases bearing Serial
Numbers OCS-G 22336, OCS-G 20797, OCS-G 21403, OCS-G 20798 and OCS-G 20799,
covering Blocks 738, 782, 785, 826 and 827 respectively, in Garden Banks,
Offshore Louisiana, sometimes referred to as the “Satellite Leases”; and
     WHEREAS, the Producer is the owner of the Satellite Production System; and
     WHEREAS, the Satellite Leases and Satellite Production System are operated
by Callon, who, in that capacity, is hereinafter also referred to as the
“Satellite Operator”; and
     WHEREAS, the Magnolia Owners are the owners of various oil and gas leases,
including OCS-G 11573 and OCS-G 11574, covering Blocks 783 and 784 respectively,
in Garden Banks, Offshore Louisiana, sometimes referred to as the “Magnolia
Leases”; and
     WHEREAS, the Magnolia Owners are the owners of the Magnolia TLP, which is
located on Block 783 , Garden Banks, Offshore Louisiana; and
     WHEREAS, the Magnolia Leases and Magnolia TLP are operated by COP, who, in
that capacity, is hereinafter referred to as the “Magnolia TLP Operator”; and
     WHEREAS, the Producer desires to attach the Satellite Production System to
the Magnolia TLP, place control and monitoring equipment associated with the
Satellite Production System on the Magnolia TLP, and have the Magnolia TLP
Operator perform certain operations for the Satellite Production System from the
Magnolia TLP; and
     WHEREAS, the Producer desires to deliver “Satellite Production” (as defined
hereinbelow) to the Magnolia TLP at the “Entry Point” (as defined hereinbelow)
via the Satellite Production System; and

Page 1

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

 

Execution Version
     WHEREAS, the Producer desires to have the Magnolia TLP process, handle and
redeliver the Satellite Production into offtake pipelines owned and operated by
others; and
     WHEREAS, the Producer, as set forth hereinbelow, requests the Magnolia
Owners to: (A) grant the right to (i) attach the Satellite Production System to
the Magnolia TLP, and (ii) place control and monitoring equipment on the
Magnolia TLP and; (B) (i) perform the hereinafter described operation functions
for the Satellite Production System, and (ii) receive, process, handle and
redeliver Satellite Production; and
     WHEREAS, the Magnolia Owners and Magnolia TLP Operator are willing to
accommodate these desires and requests under the terms and conditions set forth
below.
     NOW, THEREFORE, in consideration of the premises, the mutual covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Parties agree as
follows:
ARTICLE I — CONTRACT APPLICATION

1.1   Application in General       This Agreement applies to the receipt,
processing, handling and redelivery of Satellite Production delivered to the
Entry Point via the Satellite Production System that is processed and handled on
the Magnolia TLP between the Entry Point and the “Delivery Point” (as defined
hereinbelow), and (ii) certain operations of the Satellite Production System
from the Magnolia TLP by the Magnolia Owners through the Magnolia TLP Operator
in accordance with the Satellite Operations Procedures Guide. Conversely, this
Agreement does not apply to the processing and handling of “Third Party
Production” (as defined hereinbelow) on the Magnolia TLP or to the operation of
a “Third Party Production System” (as defined hereinbelow) connected to the
Satellite Production System and/or the Magnolia TLP.       The permission to
enter on and use the Magnolia TLP as herein provided shall constitute a license
to the Producer, and shall not convey or create any interest, leasehold or
otherwise, in or title to the Magnolia TLP or the Magnolia Leases.

1.2   Application of Magnolia TLP Operating Agreement       The provisions of
the “Magnolia TLP Operating Agreement” (as defined hereinbelow) will govern the
rights, duties and obligations between the Magnolia Owners and the Magnolia TLP
Operator associated with the Magnolia TLP and the Magnolia Leases. It is not the
intention of the Parties for this Agreement to amend or otherwise modify the
provisions of the Magnolia TLP Operating Agreement.

Page 2

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

 

ARTICLE II — DEFINITIONS AND EXHIBITS
Execution Version

2.1   Preface       As used in this Agreement, the terms “Agreement”, “Effective
Date”, “Magnolia Leases”, “Magnolia TLP Operator”, “Magnolia Owners”, “Parties”,
“Party”, “Producer”, “Satellite Leases”, and “Satellite Operator” have the
meanings set forth hereinabove. Other capitalized terms used throughout this
Agreement and not listed in Article 2.2 (Definitions) have the meanings ascribed
to them elsewhere in this Agreement.   2.2   Definitions       The following
capitalized terms have the meanings ascribed to them.

  2.2.1   “Abandonment Notice” has the meaning ascribed to it in Article 10.5.3.
    2.2.2   “Abandonment Work” has the meaning ascribed to it in
Article 10.5.1(a).     2.2.3   “Affiliate” means any corporation, limited
liability company or partnership (including a limited partnership) or other
entity owned or controlled by a Party to this Agreement. The term “Affiliate of
a Party” includes any parent corporation, partnership or other entity that
directly or indirectly owns or controls fifty percent (50%) or more of the
outstanding stock (or other interests) having the right to vote for directors of
a Party to this Agreement, and also includes any other corporation, partnership
or other entity in which the parent corporation directly or indirectly owns or
controls fifty percent (50%) or more of the voting stock (or other interests) in
the other corporation.

  •   Ownership or control by a Party is deemed to exist if a Party to this
Agreement directly or indirectly owns or controls fifty percent (50%) or more of
the outstanding stock of the corporation having the right to vote for directors
of the corporation or fifty percent (50%) or more of the interests in the
partnership, general partner of a limited partnership, or other entity.     •  
The stock (or interests in a partnership or other entity) owned or controlled by
a Party includes all stock (or other interests) directly or indirectly owned or
controlled by any other corporation, partnership or other entity owned or
controlled by a Party to this Agreement.

  2.2.4   “Barrel” or “Bbl” means forty-two (42) United States standard gallons
at standard conditions of fourteen and seventy three hundredths pounds per
square inch absolute (14.73 psiA) at sixty degrees Fahrenheit (60°F).     2.2.5
  “BLPD” means one (1) Barrel of liquid per day determined by treating as each
one (1) Barrel of Oil or one (1) Barrel of water as a Barrel of liquid, or a
combination thereof.     2.2.6   “BOE” means one (1) equivalent Barrel
determined by treating as one (1) BOE each: one (1) Barrel of Oil or five and
eight tenths (5.8) MSCF of Gas.     2.2.7   “British Thermal Unit” or “Btu”
means the quantity of heat required to raise the temperature of one (1) pound in
weight of pure water one degree Fahrenheit (1°F) from fifty-eight and five-

Page 3

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

 

Execution Version

      tenths degrees (58.5°) Fahrenheit to fifty-nine and five-tenths degrees
(59.5°) Fahrenheit at a constant pressure of fourteen and seventy-three
hundredths pounds per square inch absolute (14.73 psiA) and determined on a
gross, dry basis.     2.2.8   “Claims” has the meaning ascribed to it in
Article 11.1.1 (Definition of Claims)     2.2.9   “Confidential Information”
means (i) the terms and conditions of this Agreement, (ii) the production
profiles provided pursuant to this Agreement, (iii) the metering and allocation
reports and data (including, without limitation, data associated with production
quality), (iv) the well test data, and (v) any other data and information
provided by any of the Parties pursuant to the terms of this Agreement.    
2.2.10   “Day” means a period of twenty-four (24) consecutive hours, beginning
at 12:00 a.m. central time.     2.2.11   “Default” has the meaning ascribed to
it in Article 10.2 (Default).     2.2.12   “Delivery Point” means:

  (a)   for Gas, the point shall be at the inlet of the Gas Export Pipeline
meter facility on the Magnolia TLP.     (b)   for Oil, the point shall be at the
beginning of the interconnecting pipeline deemed to be the upstream flange face
of the flexjoint on the fourteen inch (14”) oil pipeline which is owned on the
Effective Date by Shell Pipeline Company LP.

  2.2.13   “Dollar” and “$” means the lawful currency of the United States of
America.     2.2.14   “Entry Point” means (i) for each of the hydrocarbon
flowlines, the flange face on the “tie-in spool” at the lowest elevation
(deepest water depth) but at a higher elevation than the flexjoint or approved
equivalent and (ii) for the umbilicals, the top of the hang off flange on the
pull tube at the top of the northwest column.     2.2.15   “Execution Date”
means the date on which the last Party signatory to this Agreement executes this
Agreement.     2.2.16   “Firm Capacity” has the meaning ascribed to it in
Article 6.2.1 (Firm Capacity).     2.2.17   “Flow Assurance Capacity” or “FA
Capacity” means the minimal amount of production handling capacity through the
Magnolia TLP that is available for Satellite Production, on a
flowline-by-flowline basis, as a contingency measure for the minimum flow
necessary to prevent serious problems (including, but not limited to, waxing,
the formation of hydrates, and slugging) with the wells and flowlines and for
lease maintenance purposes in the event “Interruptible Capacity” (as defined
hereinbelow) and Firm Capacity are not available, unless it is not possible to
provide such Flow Assurance Capacity due to Magnolia TLP operating problems,
“downstream” facilities’ or equipment problems, or Force Majeure. For purposes
of this Article 2.2.17, “downstream” is after the Delivery

Page 4

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

 

Execution Version

      Point in the direction of flow. FA Capacity shall be
1********************* unless otherwise agreed by the Parties in writing.

  2.2.18   “Force Majeure” means the following events, but only if such events
are not reasonably within the control of the Party claiming suspension, and only
if such events materially affect a Party’s ability to perform its obligations
hereunder:

  (a)   flood, lightning, storm, hurricane, earthquake, adverse weather
conditions, high sea states, loop currents, or other acts of God;     (b)   a
fire, explosion, loss of well control, oil spill, or other environmental
catastrophe;     (c)   war, terrorist actions, actions of the public enemy,
blockade, insurrection, civil disturbance, labor dispute, strike, lockout, or
other industrial disturbance, compliance with any Laws, governmental action or
delay including the inability to secure permits or permit approvals as needed;  
  (d)   inability to secure or unavailability of materials or equipment; or    
(e)   any other causes, whether of the kind specifically enumerated above or
otherwise.

  2.2.19   “Gas” or “gas” means any mixture of gaseous hydrocarbons, consisting
of methane and heavier liquefiable hydrocarbons and inert and noncombustible
gases which are extracted from the subsurface of the earth, including any
condensate recovered from the Gas Export Pipeline and re-injected in a
downstream pipeline.     2.2.20   “Gas Export Pipeline” means the gas export
pipeline, owned on the Effective Date by Enbridge Offshore Facilities, LLC,
which extends from the Gas Delivery Point on the Magnolia TLP to the Garden
Banks Block 128 “A” Platform.     2.2.21   “Gas Constrained Party (and Parties)”
and “Oil Constrained Party (and Parties)” have the meanings ascribed to them in
Article 6.3.2 (Gas Export Pipeline Constraints) and Article 6.3.3 (Oil Export
Pipeline Constraints).     2.2.22   “Gas Unconstrained Parties” and “Oil
Unconstrained Parties” have the meanings ascribed to it in Articles 6.3.2 (Gas
Export Pipeline Constraints) and 6.3.3 (Oil Export Pipeline Constraints).

 

1   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 5

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

 

Execution Version

  2.2.23   “Infrastructure Access Fee” or “IAF” has the meaning ascribed to it
in Article 5.3 (Infrastructure Access Fees).     2.2.24   “Interruptible
Capacity” has the meaning ascribed to it in Article 6.2.2 (Interruptible
Capacity).     2.2.25   “Laws” means any laws, rules and regulations of the
United States of America or any duly constituted instrumentality thereof and all
other governmental bodies, agencies and other authorities having jurisdiction
over or affecting the provisions contained in or the transactions contemplated
by this Agreement or the Parties or their operations, whether such Laws now
exist or are hereafter amended, enacted, promulgated or issued.     2.2.26  
“LEB” means one (1) liquid equivalent Barrel determined by treating as one
(1) LEB each: one (1) Barrel of Oil, one (1) Barrel of water, or five and eight
tenths (5.8) MSCF of Gas.     2.2.27   “Magnolia TLP” means the tension leg
platform (including the mooring system, the production risers not included in
the Satellite Production System, and wells), together with all equipment and
facilities between the Entry Point and the Delivery Point (including the
Receiving Facilities to be installed), located on Block 783, Garden Banks,
Offshore Louisiana, but excluding the Satellite Production System components
owned by the Producer or Third Parties and located on the Magnolia TLP.    
2.2.28   “Magnolia TLP Base Capacity” has the meaning ascribed to it in Exhibit
“A” (Magnolia TLP Base Capacity) and Article 6.1(Magnolia TLP Base Capacity).  
  2.2.29   “Magnolia TLP Capacity” means the actual production handling capacity
at a given time for each of Oil, Gas, and water of the Magnolia TLP, as
reasonably determined by the Magnolia TLP Operator.     2.2.30   “Magnolia TLP
Gas Production” means Gas attributable to Magnolia TLP Production.     2.2.31  
“Magnolia TLP Oil Production” means Oil attributable to Magnolia TLP Production.
    2.2.32   “Magnolia TLP Operating Agreement” means that certain Operating
Agreement dated effective January 1, 2000, by and between the Magnolia Owners.  
  2.2.33   “Magnolia TLP Production” means Oil, Gas, water, and associated
substances produced from the Magnolia Leases and processed and handled on the
Magnolia TLP.

Page 6

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

 

Execution Version

  2.2.34   “Magnolia TLP Ullage” means (for each of Oil, Gas, and water) for a
calendar month the quantity of Magnolia TLP Capacity for each of Oil, Gas, and
water, as may be amended from time to time, which is in excess of the quantity
of Magnolia TLP Capacity required for handling Magnolia TLP Production,
Satellite Production (up to Firm Capacity) and other Third Party Production for
which the Magnolia Owners have granted firm production handling capacity on the
Magnolia TLP.     2.2.35   “MBO/d” means one thousand (1,000) Barrels of Oil per
Day.     2.2.36   “MBtu” means one thousand (1,000) Btu’s.     2.2.37   “MBW/d”
means one thousand (1,000) Barrels of water per Day.     2.2.38   “MMBtu” means
one million (1,000,000) Btu’s.     2.2.39   “MMS” means the United States
Department of the Interior, Minerals Management Service, or any successor
thereof.     2.2.40   “MMSCF” means one million (1,000,000) “Standard Cubic
Feet” (as defined hereinbelow).     2.2.41   “MMSCF/d” means one million
(1,000,000) Standard Cubic Feet per Day.     2.2.42   “Mortgaged Property” has
the meaning ascribed to it in Article 13.2.1(b).     2.2.43   “MSCF” means one
thousand (1,000) Standard Cubic Feet.     2.2.44   “MSCF/d” means one thousand
(1,000) Standard Cubic Feet per Day.     2.2.45   “Non-Conforming Production”
has the meaning ascribed to it in Article 6.4.2 (Non-Conforming Production).    
2.2.46   “Non-Performing Party” has the meaning ascribed to it in
Article 10.2.1.     2.2.47   “Non-Satellite Production” means Oil, Gas, water,
and all associated substances produced from sources other than the Satellite
Leases and processed and handled on the Magnolia TLP.     2.2.48   “Notice
Period” has the meaning ascribed to it in Article 10.2.1.     2.2.49   “Oil” or
“oil” means any mixture of hydrocarbons, regardless of gravity, originally and
naturally occurring as liquids and includes all condensate, distillate, and
other liquid hydrocarbons recovered by use of conventional separators on the
Magnolia TLP.

Page 7

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

 

Execution Version

  2.2.50   “Oil Export Pipeline” means the oil export pipeline, owned on the
Effective Date by Shell Pipeline Company LP, which extends from the Oil Delivery
Point on the Magnolia TLP to the Garden Banks Block 128 “A” Platform.     2.2.51
  “Permanent Cessation of Production” means the event which occurs when
production has not been restored from the last producing well on the Satellite
Leases in accordance with 30 CFR Part 250 of the federal regulations concerning
suspensions of production or other operations or such other regulations
promulgated by the relevant governing authority.     2.2.52   “Person” means any
individual or entity, including, without limitation, any corporation, limited
liability company, joint venture, joint stock company, general or limited
partnership, trust, agency, association, organization, governmental authority,
or other entity.     2.2.53   “Prevailing Gas Price” means first of the month
Inside FERC Gas Market Report publication for one hundred percent (100%) of ANR
Southern Louisiana (“ANR SLA”) price index, for the applicable production month,
reduced by the sum of (i) the Magnolia TLP to the Garden Banks Block 128 “A”
Platform transportation fee, and (ii) the Garden Banks Gas Pipeline FERC IT-1
Commodity Tariff, or such other published monthly index price as unanimously
agreed by the Parties.     2.2.54   “Prevailing Oil Price” means the average of
the high price and the low price on a day for Eugene Island as reported in the
Platts Oilgram, or such other published index price as unanimously agreed by the
Parties.     2.2.55   “Producer’s Work” has the meaning ascribed to it in
Article 3.1.3 (Scheduling Producer’s Work).     2.2.56   “Production Handling
Services” means those services as set forth in Exhibit “B” (Magnolia TLP
Services) attached to this Agreement.     2.2.57   “Prorated Firm Capacity” has
the meaning ascribed to it in Article 6.3.1(a).     2.2.58   “Receiving
Facilities” has the meaning ascribed to it in Article 3.2 (Receiving
Facilities).     2.2.59   “Satellite First Production” means the date of the
initial introduction of Satellite Production at the Entry Point.     2.2.60  
“Satellite Gas Production” means Gas attributable to Satellite Production.    
2.2.61   “Satellite Oil Production” means Oil attributable to Satellite
Production.     2.2.62   “Satellite Operating Problem” has the meaning ascribed
to it in Article 6.4.2 (Non-Conforming Satellite Production).

Page 8

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

 

Execution Version

  2.2.63   “Satellite Operations Procedures Guide” means those certain
operations procedures to be performed from the Magnolia TLP by the Magnolia TLP
Operator for the Satellite Production System as described in Exhibit “B”
(Magnolia TLP Services), to be developed jointly by the Magnolia TLP Operator
and the Satellite Operator, as may be amended from time to time by the Magnolia
TLP Operator and the Satellite Operator.     2.2.64   “Satellite Production”
means Oil, Gas, water, and associated substances produced from the Satellite
Leases limited to the stratigraphic equivalent of those depths from the surface
of the earth down to 150 feet below the 5800 millisecond sand, the base of which
is at a measured depth of 20,290’ on the Sperry Sun EWR/DGR (Electromagnetic
Wave Resistivity/Dual Gamma Ray) log for the Vastar OCS-G-20797 #2 ST 1 well,
and which is entirely owned by Producer and which is produced from Satellite
Leases and wells entirely owned by Producer.     2.2.65   “Satellite Production
System” has the meaning ascribed to it in Article 3.1.1 (Design and Installation
of Satellite Production System).     2.2.66   “Satellite Production System
Operations” means certain operations of the Satellite Production System from the
Magnolia TLP by the Magnolia Owners through the Magnolia TLP Operator in
accordance with the Satellite Operations Procedures Guide as set forth in
Exhibit “B” (Magnolia TLP Services) to this Agreement.     2.2.67   “Services”
means the Production Handling Services and the Satellite Production System
Operations, as defined in Articles 2.2.58 and 2.2.68, respectively.     2.2.68  
“Standard Cubic Foot” or “SCF” means that quantity of Gas that occupies one
(1) cubic foot of space when held at a base temperature of sixty degrees (60°)
Fahrenheit and a pressure of fourteen and seventy-three hundredths (14.73)
pounds per square inch absolute (psiA), or other standards as may be required by
the MMS.     2.2.69   “Third Party” or “Third Parties” means any Person other
than the Magnolia Owners, the Producer, and any Party hereto. A Third Party also
includes any proposed transferee of the Producer not meeting the requirements
for transfers under Article 13.2.1.     2.2.70   “Third Party Production” means
Oil, Gas, water, and all associated substances produced from sources other than
the Magnolia Leases or the Satellite Leases, and processed and handled on the
Magnolia TLP or owned by Third Parties.     2.2.71   “Third Party Production
System” means an offshore structure (i.e., where multiple wells or a single well
could be utilized), subsea wells or a template and the components thereof
(including flowlines and control systems) which are attached to the seafloor for
use in obtaining Third Party Production from a well(s) not drilled in the
Magnolia Leases or the Satellite Leases and being a system having similar
components to that of the Satellite Production System and owned

Page 9

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

 

Execution Version

      by any Person other than the Magnolia Owners, the Producer, and/or any
Party hereto.     2.2.72   “Transfer of Interest” has the meaning ascribed to it
in Article 13.2.1 (Assignment by Producer).

2.3   Exhibits

    All references in this Agreement to “Exhibits”, without further
qualification means the Exhibits listed below and attached to this Agreement.
Each Exhibit listed below is made a part of this Agreement, and is deemed
incorporated into the body of this Agreement by reference, as completely as if
the full text of each Exhibit were contained within the text of this Agreement.

      Exhibit “A”: Magnolia TLP Base Capacity         Exhibit “B”: Magnolia TLP
Services         Exhibit “C”: Accounting Procedures         Exhibit “C-1”:
Garden Banks 783 Unit Accounting Procedures         Exhibit “D”: Magnolia TLP
Facilities Schematic (two drawings)         Exhibit “E”: Operating & Maintenance
Expenses Matrix         Exhibit “F”: Metering and Allocation         Exhibit
“G”: Gas Balancing Procedures         Exhibit “G-1”: General Flow Diagram      
  Exhibit “G-2”: Cashout Reconciliation         Exhibit “H”: Satellite
Production Fluid Limits/Operating Parameters         Exhibit “I”: Project Team
Responsibility Matrix         Exhibit “J”: Insurance Provisions         Exhibit
“K”: Memorandum of Production Handling Agreement         Exhibit “L”:
Certification of Non-Segregated Facilities         Exhibit “M”: Well Unloading
Procedures         Exhibit “N”: Platform Boarding Agreement

    If the provisions of any of the Exhibits listed above conflict with any
provisions of the body of this Agreement, the body of this Agreement will
prevail. In the event of a conflict between Exhibit “C-1” (Garden Banks 783 Unit
Accounting Procedures) and Exhibit “E” (Operating & Maintenance Expenses
Matrix), the provisions of Exhibit “C-1” (Garden Banks 783 Unit Accounting
Procedures) will prevail.

ARTICLE III — INFRASTRUCTURE AND FACILITIES

3.1   Satellite Production System

  3.1.1   Design and Installation of Satellite Production System. The Producer
at its sole cost, risk and expense will own, design, procure, fabricate,
transport, and install as stipulated in (a) below, or cause to be installed by
the Magnolia TLP Operator as stipulated in (b) below, the following components
and any modifications thereto (the “Satellite Production System”):

Page 10

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

 

Execution Version

  (a)   All facilities and equipment upstream of the Entry Point including, but
not limited to, the wells, well jumpers, subsea wellheads, choke tie-in bases,
subsea manifolds, umbilicals and terminations, flowlines, two flowline risers,
and wellhead master and wing valves associated with producing and gathering
Satellite Production. For purposes of this Article III (Infrastructure and
Facilities), “upstream” is between the Entry Point and the Satellite Leases; and
    (b)   The Hydraulic Power Unit (“HPU”), the Umbilical Termination Box
(“UTB”), and the Master Control Station (“MCS”) and any facilities and equipment
necessary to connect same to the components identified in 3.1.1 (a) above with
the existing equipment and facilities on the Magnolia TLP. All of such
facilities and equipment listed in this Article 3.1.1 (b) will be installed on
the Magnolia TLP at the location(s) depicted on Exhibit “D” (Magnolia TLP
Facilities Schematic). Such facilities and equipment will be designed and
fabricated by the Satellite Operator, but will be installed and interconnected
with other facilities on the Magnolia TLP, as well as commissioned, by the
Magnolia TLP Operator.     (c)   The weight of the risers shall not exceed 275
kips each in live load, and the umbilical shall not exceed 100 kips operating
weight.

  3.1.2   Costs of Satellite Production System. The Magnolia TLP Operator shall
supply the Producer with a cost estimate describing in reasonable detail the
scope of work to be conducted with respect to the installation, hookup,
interconnection, startup, and commissioning of those Satellite Production System
components described in Article 3.1.1(b) above which are to be installed on the
Magnolia TLP and the costs associated therewith (including Magnolia TLP
Operator’s overhead provided for in Exhibit “C” (Accounting Procedures) and
shall obtain the prior written authorization of the Producer to conduct such
scope of work; provided, however, nothing herein shall alter or diminish the
liability and indemnity obligations of the Parties herein. If it appears the
actual cost associated with the scope of work will exceed the cost estimate by
more than ten percent (10%), the Magnolia TLP Operator will notify the Satellite
Operator. The Producer will reimburse the Magnolia TLP Operator for those costs
incurred in accordance with the terms of this Article 3.1.2 (Costs of Satellite
Production System). The Magnolia TLP Operator will deliver to the Satellite
Operator an invoice, on behalf of the Producer, for actual costs (including
Magnolia TLP Operator’s overhead) incurred by the Magnolia TLP Operator in or
for the installation, hookup, interconnection, startup, and/or commissioning of
those Satellite Production System components described in Article 3.1.1(b) above
which are installed on the Magnolia TLP. The Satellite Operator will submit
payment to Magnolia TLP Operator for such costs invoiced by Magnolia TLP
Operator. The determination and reimbursement by Satellite Operator of such
costs incurred by the Magnolia TLP Operator shall be in accordance with Exhibit
“C” (Accounting Procedures) to this Agreement.

Page 11

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

 

Execution Version

  3.1.3   Scheduling Producer’s Work         The timing of all operations
involving the tie-in and connection of the Satellite Production System to the
Magnolia TLP will be performed at the Magnolia TLP Operator’s sole discretion to
minimize interference with Magnolia TLP operations and for safety coordination.
The Magnolia TLP Operator and the Satellite Operator will use reasonable efforts
to tie-in the Satellite Production System and the Receiving Facilities in a
manner and on a schedule which minimizes Magnolia TLP downtime. The Satellite
Operator will give the Magnolia TLP Operator at least fifteen (15) Days prior
written notice of the anticipated mobilization for the tie-in and connection of
the Satellite Production System, and for any other installation, maintenance,
repair, replacement, removal or abandonment related to the Satellite Production
System or the Receiving Facilities requiring access to the Magnolia TLP by the
Satellite Operator or its contractors (“Producer’s Work”). The Satellite
Operator and the Magnolia TLP Operator shall mutually agree on the schedule for
the tie-in and connection of the Satellite Production System to the Magnolia TLP
and other of Producer’s Work. The Magnolia TLP Operator shall notify the
Satellite Operator in a timely manner of any required changes in the timing of
Producer’s Work which may impact the overall schedule of the tie-in and
connection of the Satellite Production System. Once construction and/or
installation of the Satellite Production System and/or the Receiving Facilities
is commenced, the Satellite Operator shall provide the Magnolia TLP Operator
with installation updates and its latest projected Magnolia TLP tie-in schedule
on a frequency of at least once every thirty (30) Days. The Magnolia TLP
Operator reserves the right to schedule Producer’s Work in accordance with its
Magnolia TLP activities so as to minimize the circumstances whereby Producer’s
Work would require Magnolia TLP Operator to shut-in or curtail any of the
Magnolia TLP Production. In order to accommodate Producer’s Work the Magnolia
TLP Operator shall not be required to shut in any wells on the Magnolia Leases
for more than forty-eight (48) consecutive hours without prior agreement of the
Magnolia Owners. If such well(s) is shut-in for a period of time exceeding
forty-eight (48) consecutive hours, the Magnolia TLP Operator may, at its
election, cause such well(s) to flow for at least eight (8) hours prior to any
subsequent shut-in under this provision. The Magnolia TLP Operator shall provide
advance notice of any planned Magnolia TLP shutdowns, along with reasonable
notice of any unplanned Magnolia TLP shutdowns, to the Satellite Operator.

  3.1.4   Magnolia TLP Criteria         The Magnolia TLP Operator will promptly
provide the Satellite Operator with all design specifications and criteria that
the Satellite Operator may reasonably require or request in connection with the
design, procurement, fabrication, transportation, installation, hook-up,
interconnection, startup and/or commissioning of the Satellite Production
System.

Page 12

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

 

Execution Version

  3.1.5   Riser and Umbilical Handover

      The Satellite Operator will conduct or cause to be conducted the
operations required to tie-in the Satellite Production System to the Magnolia
TLP. Subject to Article 5.7.1 (Initial Tie-In) and the issuance of Builder’s
Risk Insurance as provided for in Exhibit “J” (Insurance Provisions) and the
execution of Exhibit “N” (Platform Boarding Agreement) by Satellite Operator’s
contractors boarding the Magnolia TLP, the Satellite Operator will mobilize on
the Magnolia TLP and receive the riser and umbilical loads in a coordinated
handover. Exhibit “I” (Project Team Responsibility Matrix) provides the
responsibilities of the respective Parties in this handover, but shall not alter
or amend any cost or risk bearing provisions of this Agreement.

  3.1.6   Magnolia TLP Access & Boarding for Producer’s Work

  (a)   After the initial written notice of anticipated mobilization provided in
Article 3.1.3 (Scheduling Producer’s Work), the Satellite Operator will give the
Magnolia TLP Operator at least forty-eight (48) hours prior written notice of
actual commencement of Producer’s Work, and obtain prior permission for, any
intent to board the Magnolia TLP to conduct operations as contemplated herein
except as may be otherwise provided for below under Section 3.1.6(c). This
notice must include a detailed description of the operation(s) to be conducted,
a summary of anticipated work procedures, a summary of the tools and equipment
that are anticipated to be used when performing the operation(s), the
anticipated work schedule, as well as a brief description of the number of
Satellite Operator employees, or its contractors’ or subcontractors’ employees
or agents requesting boarding permission and the length of stay. Furthermore,
this notice must conform to the Magnolia TLP Operator’s standard requirements
for a “work permit”, as provided in Exhibit “N” (Platform Boarding Agreement),
amended from time to time (to include direct indemnities from Producer’s
contractors). Upon receipt of such prior notice, and if the Magnolia TLP
Operator determines, in its sole discretion, that there will be minimal conflict
or interference with its own operations, the Magnolia TLP Operator will provide
the Satellite Operator, at the Producer’s sole cost and expense, rights of
ingress and egress to certain space on the Magnolia TLP for activities in
connection with the rights and obligations granted to the Producer under this
Agreement. The Satellite Operator’s right of ingress and egress herein provided
includes the right for it and its contractors, agents and representatives, upon
prior notification to Magnolia TLP Operator as herein provided, to land
helicopters on the Magnolia TLP, to moor vessels to the Magnolia TLP mooring
facilities, and to inspect the Magnolia TLP and its facilities, and the
Satellite Production Facilities, all at the sole cost, risk, expense, and
liability of the Producer and subject always to the above scheduling
requirements. Such ingress and egress, and all activities conducted hereunder
will be subject to the strict observance of all of the Magnolia TLP Operator’s
safety policies and procedures applicable to the Magnolia TLP. Magnolia TLP
Operator shall have the right to have a representative present to witness such
Producer’s Work and activities. In addition,

Page 13

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

 

Execution Version

      neither the Satellite Operator, nor its contractor or subcontractor
employees or agents, have the right to observe any drilling, workover or other
operations conducted by the Magnolia TLP Operator or any Third Parties on the
Magnolia TLP.     (b)   The Magnolia Owners’ obligation to accommodate the
Producer, as set forth herein, does not include any license, easement or
right-of-way necessary for the installation of any subsea pipeline, which will
be the sole responsibility of the Producer.     (c)   All other rights of
ingress and egress by Satellite Operator and its representatives on the Magnolia
TLP including during times of an emergency shall be done substantially in
accordance with the terms and conditions set forth in Exhibit “N” (Platform
Boarding Agreement); provided, however, Satellite Operator and Producer and its
and their officers, directors and actual employees shall not be required to
execute Exhibit “N” (Platform Boarding Agreement) in order to board the Magnolia
TLP, but all of Satellite Operator’s and Producer’s agents, representatives,
contract employees, and contractors shall be required to execute Exhibit “N”
(Platform Boarding Agreement) substantially in its form (but subject to
negotiation of such terms and conditions as Magnolia TLP Operator may deem
appropriate) in order to board the Magnolia TLP. Whether or not Exhibit “N” is
executed by any Third Party, or the form of Exhibit “N” (Platform Boarding
Agreement) actually executed by any Third Party, the duties, liabilities,
indemnification obligations and benefits provided in Article XI (Liabilities and
Indemnification) shall not be affected, altered, increased or diminished, nor
shall the rights, duties and obligation as between the Magnolia Owners under the
Magnolia TLP Operating Agreement be affected, altered, increased or diminished.

3.1.7   Conduct of Producer’s Work

  (a)   If Magnolia TLP Operator should at any time in its reasonable opinion
determine that any Producer’s Work or other work and activities are not being
performed in accordance herewith, are being performed in an unduly dangerous or
unworkmanlike manner, or are not in accordance with Magnolia TLP Operator’s
safety practices, procedures, and requirements, Magnolia TLP Operator will so
inform the Producer and the Producer will cease such Producer’s Work, or other
work or activities and will resume the same only when an agreement between the
Satellite Operator and Magnolia TLP Operator is reached as to the manner and
method in which such work should be performed. Magnolia TLP Operator will not
arbitrarily, or without sufficient cause, delay the Producer’s Work under this
provision.     (b)   The Satellite Operator and Producer agrees at all times to
conduct its activities and operations hereunder in accordance with all Laws of
the Occupational Safety and Health Administration, U.S. Coast Guard, Corps

Page 14

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

 

Execution Version

      of Engineers, MMS, Federal Communications Commission, and Environmental
Protection Agency, as well as all other governmental agencies having
jurisdiction over such activities. The Producer shall bear the expense of all
necessary permits.

3.2   Receiving Facility

    The Magnolia TLP Operator, at the sole cost, risk and expense of the
Producer, is responsible for the design, procurement, fabrication,
transportation, installation, hook-up, interconnection, start-up and
commissioning of the facilities and equipment that are to be installed on the
Magnolia TLP for the purpose of receiving Satellite Production at the Magnolia
TLP and integrating said Satellite Production into the existing production
handling systems (“Receiving Facilities”). The weight of the Receiving
Facilities shall not exceed 250 kips operating weight and 350 kips weight during
construction. The Magnolia TLP Operator shall supply the Satellite Operator with
a cost estimate describing in reasonable detail the scope of work to be
conducted with respect to the design, procurement, fabrication, transportation,
installation, hook-up, interconnection, start-up and commissioning of the
Receiving Facilities and the costs associated therewith (including Magnolia TLP
Operator’s overhead provided for in Exhibit “C” (Accounting Procedures) and
shall obtain the prior written authorization of the Producer to conduct such
scope of work; provided, however, nothing herein shall alter or diminish the
liability and indemnity obligations of the Parties herein. If it appears the
actual cost associated with the scope of work will exceed the cost estimate by
more than ten percent (10%), the Magnolia TLP Operator will notify the Satellite
Operator. The Producer will reimburse the Magnolia TLP Operator for those costs
incurred in accordance with the terms of this Article 3.2 (Receiving Facility).
The Magnolia TLP Operator will deliver an invoice to the Satellite Operator, on
behalf of the Producer, for actual costs (including Magnolia TLP Operator’s
overhead) incurred by the Magnolia TLP Operator in or for the design,
procurement, fabrication, transportation, installation, hook-up,
interconnection, start-up and commissioning of the Receiving Facilities. The
Satellite Operator will submit payment to Magnolia TLP Operator for such costs
invoiced by Magnolia TLP Operator. The determination and reimbursement by
Satellite Operator of such costs incurred by the Magnolia TLP Operator shall be
in accordance with Exhibit “C” (Accounting Procedures) to this Agreement.

  3.2.1   The Receiving Facilities include, but are not limited to:

  (a)   inlet heat exchanger;     (b)   boarding valves;     (c)   flowline pig
launchers/receivers;     (d)   chemical storage and injection pump skid (subsea
chemical pumps);     (e)   hot oiling/pigging pump and associated equipment, if
added;     (f)   chemical injection pumps for the Receiving Facilities
(production chemical pumps), if needed; and     (g)   Oil, Gas and water
metering and fluid sampling equipment.

  3.2.2   The Producer’s reimbursement obligation for the design, fabrication,
and procurement of the Receiving Facilities will not apply for any equipment or

Page 15

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

 

Execution Version

      facilities that are designed, fabricated or procured by the Satellite
Operator or Producer and delivered to the Magnolia TLP Operator at a mutually
agreed location for installation, hookup, and/or commissioning on the Magnolia
TLP. Reimbursement of costs incurred by the Magnolia TLP Operator will be in
accordance with Exhibit “C” (Accounting Procedures) to this Agreement.     3.2.3
  No costs will be charged to the Magnolia TLP Operating Agreement joint account
or otherwise incurred by the Magnolia Owners in connection with the Satellite
Production System, other than those costs incurred by the Magnolia TLP Operator
in connection with the Receiving Facilities and as provided in Section 3.4.1
(Costs of Tie-in Option).     3.2.4   The Magnolia Owners will own the Receiving
Facilities (including any modifications thereto), whether such facilities are
procured and/or funded by the Magnolia TLP Operator, the Magnolia Owners, or the
Producer.     3.2.5   For reference purposes, an equipment layout and process
flow schematic depicting the Magnolia TLP facilities and the interface between
the Satellite Production System, the Receiving Facilities and the Magnolia TLP
facilities is included as Exhibit “D” (Magnolia TLP Facilities Schematic).    
3.2.6   Except as expressly provided herein, (i) Producer and Magnolia Owners
shall each be responsible for all capital expenditures with respect to their own
properties, and, as between them, there shall be no recovery of such capital
expenditures from the other; and (ii) there shall be no duty hereunder to
perform work or expend funds for the benefit of the other.

3.3   Capacity Upgrades

    Producer has the right to make a written proposal to the Magnolia Owners to
request additional Firm Capacity by wholly or partially funding one or more
expansions of Magnolia TLP Oil, Gas, and/or water production handling capacity
(“Capacity Upgrade”). The proposal by Producer shall include the scope of the
work to be performed and an estimate of the costs. The Magnolia Owners shall
review the proposal and reply within sixty (60) days of receipt. Notwithstanding
the foregoing, the Magnolia Owners are not obligated to perform or allow the
Capacity Upgrade.

3.4   Magnolia Owners’ Tie-In Option

    The Magnolia Owners may utilize the Satellite Production System for a single
tie-in to be located on Garden Banks Block 783 for production from subsea wells
drilled on the Magnolia Leases. The Producer grants the right to tie-in and will
provide services from the tie-in point to the Entry Point for such subsea wells.
Satellite Operator will provide notice to Magnolia Owners no sooner than
December 31, 2007, and then Magnolia Owners may elect within thirty (30) days of
such notice whether to pay for the costs of the tie-in as per Section 3.4.1 (if
tie-in occurs or not), provided that the right to tie in, is subject to: (i) the
introduction of such production into the Satellite Production System and any
modifications to the Satellite Production System necessary to accommodate such

Page 16

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

 

Execution Version

    production does not adversely affect the Producer’s Satellite Production;
and (ii) any changes in the Oil and Gas measurement and allocation procedures to
accommodate measurement and allocation of such production does not adversely
affect the measurement and allocation of Satellite Production and are consistent
with the principles and standards contained in Exhibit “F” (Metering and
Allocation). Upon Magnolia Owners’ election to pay said costs, Producer will
design, procure, fabricate, transport and install at a mutually agreeable
location to all Parties the required tie-in equipment at the expense of Magnolia
Owners, and thereafter will hook-up, interconnect, commission, start-up and
operate the same, all as provided in Sections 3.4.1 and 3.4.2.

  3.4.1   Costs of Tie-in Option. The Magnolia Owners shall be solely
responsible for, and bear the costs of the design, procurement, fabrication,
transportation, installation, hook-up, interconnection, commissioning and
start-up of such single tie-in as follows:

  (a)   One in-line sled to establish the tie-in point of the southernmost
flowline, located within Block 783, Garden Banks, Offshore Louisiana, for the
handling of subsea Magnolia TLP Production, which will be designed, procured,
fabricated, transported, installed, hooked-up, interconnected, commissioned and
started-up by the Producer; however, the Magnolia Owners will reimburse the
Satellite Operator for all such costs within thirty (30) days after receipt of
invoice from Satellite Operator; and     (b)   One tie-in point (in-line subsea
umbilical termination assembly) in the umbilical, located within Block 783,
Garden Banks, Offshore Louisiana, for the handling of subsea Magnolia TLP
Production, which will be designed, procured, fabricated, transported,
installed, hooked-up, interconnected, commissioned and started-up by the
Satellite Operator; however, the Magnolia Owners will reimburse the Satellite
Operator for all such costs within thirty (30) days after receipt of invoice
from Satellite Operator.     (c)   The foregoing installation costs will be
reasonably prorated on the basis of the costs of all the sleds and umbilicals
installed at the same time.     (d)   The determination and reimbursement by
Magnolia Owners of any reimbursable costs incurred by Satellite Operator and
Producer hereunder shall be in accordance with Exhibit “C” (Accounting
Procedures).     (e)   If the foregoing costs are invoiced 100% to the Magnolia
TLP Operator and paid 100% by Magnolia TLP Operator, the same may be charged to
the Magnolia TLP Operating Agreement joint account.

  3.4.2   Operation, Maintenance and Abandonment of Tie-in. The tie-in and
services from the tie-in point to the Entry Point for such subsea wells will be
made available by Producer and operated by Satellite Operator for the benefit of

Page 17

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

 

Execution Version

      Magnolia Owners for the following gathering fee: ************2. This
gathering fee shall apply from the first of the month in which commissioning of
the tie-in occurs until the end of the month that such portion of the Satellite
Production System ceases to be utilized by Magnolia Owners. This gathering fee
includes all operation, maintenance, upgrades, capital investment and
abandonment of such portion of the Satellite Production System, all of which
shall be paid by (and be at the sole cost, risk and expense of) Producer without
any reimbursement by Magnolia Owners, and no charges shall be made to Magnolia
Owners on account of their use of that portion of the Satellite Production
System other than the foregoing gathering fee.

ARTICLE IV — SERVICES

4.1   General

    Pursuant to the terms of this Agreement, the Magnolia Owners agree to
provide, via the Magnolia TLP Operator, certain Services with respect to the
Satellite Production System and the Satellite Production delivered to the
Magnolia TLP. The Magnolia Owners, the Magnolia TLP Operator, and anyone
employed by them, will not be deemed for any purpose to be the employees,
agents, servants, or representatives of the Producer or the Satellite Operator
in the performance of any Services or part thereof in any manner dealt with
hereunder. Except as otherwise provided herein, the Producer and the Satellite
Operator will not have direction or control of the Magnolia Owners or the
Magnolia TLP Operator, its or their employees and agents, or its or their
contractors, in the Magnolia Owners’ or the Magnolia TLP Operator’s performance
under this Agreement. It is not the intent or purpose of this Agreement to
change, nor should it be construed as changing, the rights and duties of the
Producer or the Satellite Operator to conduct operations associated with the
Satellite Leases or the Satellite Production System.

  4.1.1   Production Handling Services         The Magnolia Owners will provide
via the Magnolia TLP Operator the Production Handling Services for Satellite
Production in accordance with Exhibit “B” (Magnolia TLP Services). With respect
to the Production Handling Services, the Magnolia Owners will handle and be
responsible for production under this Agreement after such production passes
through the Entry Point and until production enters the Delivery Point(s). In
providing the Production Handling Services, the Magnolia TLP Operator shall
never be required under this Agreement to conduct an operation that it believes
would be unsafe or would endanger persons, property or the environment.

 

2   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 18

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

 

Execution Version

  4.1.2   Satellite Production System Operations         The Magnolia Owners
will provide via the Magnolia TLP Operator the operations described on Exhibit
“B” (Magnolia TLP Services) for the Satellite Production System in accordance
with the Satellite Operations Procedures Guide, which are the limit of the
Satellite Production System Operations provided hereunder. Such operations will
be performed only to the extent that such functions can be performed from or on
the Magnolia TLP by the Magnolia TLP Operator’s regular operating personnel with
the standard equipment and/or tools typically available on the Magnolia TLP in
accordance with the Magnolia TLP Operator’s day-to-day operating procedures and
guidelines. The Magnolia Owners and the Magnolia TLP Operator shall not be
liable to the Producer for losses sustained or liabilities incurred in
conducting the specified operations for the Satellite Production System, except
as may result from their gross negligence or willful misconduct. In operating
the Satellite Production System, the Magnolia TLP Operator shall never be
required under this Agreement to conduct an operation that it believes would be
unsafe or would endanger persons, property or the environment.

4.2   Well Unloading

    The Producer shall be entitled to the unloading of completion fluids (e.g.
chemicals, fracture fluids, acids, and/or water, etc.) from Satellite Lease
wells in accordance with Exhibit “M” (Well Unloading Procedures).

4.3   Producer’s Responsibilities

    The Producer will retain responsibility for all Satellite Production System
operations that are not included in the Services to be provided under this
Agreement or not performed from or on the Magnolia TLP including, but not
limited to, downhole well operations.

4.4   Right of Use of Deck Space

    The Magnolia Owners hereby grant the Producer a limited right to use only so
much of the surface and space for two Satellite Production System risers and one
instrument umbilical pull tube on the Magnolia TLP as is essential, in the
Magnolia TLP Operator’s sole discretion, for the placement, operation,
maintenance and removal of the Satellite Production System components. The
Satellite Production System components will be placed on the Magnolia TLP at a
location acceptable to the Magnolia TLP Operator. Two flexjoint baskets and an
umbilical pull tube (and the associated weight and buoyancy) are specifically
allocated to the Producer. The Magnolia Owners will provide deck space, and
associated weight and buoyancy (although there is no specific allocation of
space) for components of the Satellite Production System to be located on the
Magnolia TLP, the Receiving Facilities and other associated equipment. The size,
weight and location of such equipment will be approved by the Magnolia TLP
Operator. All use of the surface space shall be subject to platform weight and
buoyancy limitations to be provided by the Magnolia TLP Operator.

Page 19

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

 

Execution Version

4.5   Energy Sources

    The Magnolia Owners will provide energy sources (electricity and air) for
the Satellite Production System components located on the Magnolia TLP, as may
be available from time to time. Such electricity to be provided from the
Magnolia Owners’ existing electrical power source (i.e. generator) and such air
supply to be provided from the Magnolia Owners’ existing air supply source (i.e.
compressor).

4.6   Communication Equipment

    The Magnolia Owners will provide access to the existing communication
infrastructure (i.e. telephones) on the Magnolia TLP, subject to the Magnolia
TLP Operator’s guidelines, for use by the Satellite Operator associated with
conducting its operations on the Magnolia TLP contemplated herein. The Producer
will provide, at its sole cost and expense and subject to any mutually
acceptable agreement(s) that may be required, any necessary communication
upgrades and required extra bandwidth for data transmission, as well as other
forms of communication (e.g. microwave transmissions).

4.7 Emergency Response

  4.7.1   In the event of an imminent or actual emergency, including, but not
limited to, a hydrocarbon leak, explosion, fire, storm or any other situation
which threatens life, the environment, or property, the Magnolia TLP Operator,
with no admission or presumption of liability, may promptly take such action as
is deemed appropriate by the Magnolia TLP Operator under the circumstances to
remedy or alleviate such emergency. Such action includes, but is not limited to,
discontinuing the Services, shutting-in the Satellite Leases’ subsea wells and
the Satellite Production System, and initiating emergency response operations.
The Magnolia TLP Operator will promptly notify the Satellite Operator of such
emergency by telephone, followed by written notification of the emergency and
remedial actions taken.     4.7.2   Subject to Article XI (Liabilities and
Indemnification), all emergency response costs incurred by the Magnolia TLP
Operator which are attributable to the Satellite Production System will be
reimbursed to the Magnolia TLP Operator by the Producer.     4.7.3   The
Satellite Operator is responsible for making any reports required by
governmental agencies for emergencies attributable to the Satellite Production
System. The Magnolia TLP Operator is responsible for making any reports required
by governmental agencies for emergencies attributable to the Magnolia TLP. The
Parties will cooperate to the extent necessary in preparing such reports. All
Parties will use reasonable efforts to provide the other Parties with a copy of
any reports filed with governmental agencies in connection with emergency
response operations.

Page 20

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

 

Execution Version
ARTICLE V — FEES & EXPENSES/ACCOUNTING PROCEDURES

5.1   Operating and Maintenance Expenses.

      5.1.1    Monthly Charges.         The Producer is responsible for and will
reimburse the Magnolia Owners on a monthly basis for the Producer’s pro-rata
share of certain Magnolia TLP operating and maintenance expenses which are
identified as “Magnolia TLP Shared Expenses” in this Agreement on Exhibit “E”
(Operating & Maintenance Expenses Matrix).         The Producer’s pro-rata share
of expenses (“PSOPEX”) will be determined for each calendar month as follows: 3

***********************************************************
***********************************************************
************************************************************
***********************************************************
***********************************************************
***********************************************************
************************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
************************************************************
************************************************************
************************************************************
************************************************************
************************************************************
************************************************************
************************************************************

      For purposes of determining Sprod and STHprod, the quantity of Oil
produced means the sum of: (i) the quantity of Oil delivered to the Delivery
Point, and (ii) the quantity of fluids used for pigging and/or hot oiling. The
quantity of Gas produced means the quantity of Gas delivered to the Delivery
Point. The quantity of water and associated substances produced means the
quantity of water and associated substances attributed to Satellite Production
and Non- Satellite Production, respectively, pursuant to Exhibit “F” (Metering
and Allocation).

 

3   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 21

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

 

Execution Version

  5.1.1.1   If temporary mechanical or operational problems (with a duration not
to exceed six [6] months) associated with Satellite Production cause a
twenty-five percent (25%) or greater reduction in SPROD in a calendar month, as
compared to the arithmetic average of Sprod during the three (3) calendar months
immediately preceding the occurrence of such problems, then Sprod used for
purposes of determining the PSopex for such calendar month is equal to the
arithmetic average of Sprod during such three (3) calendar months. If Sprod is
adjusted in accordance with this Article 5.1.1.1, then STHprod shall be adjusted
to take into account the revised Sprod.     5.1.1.2   If temporary mechanical or
operational problems (with a duration not to exceed six [6] months) associated
with Non-Satellite Production cause a twenty-five percent (25%) or greater
reduction in the STHPROD in a calendar month, as compared to the arithmetic
average of the STHPROD during the three (3) calendar months immediately
preceding the occurrence of such problems, then the STHPROD used for purposes of
determining the PSOPEX for such calendar month is equal to the arithmetic
average of the STHPROD during such three (3) calendar months.

  5.1.2   Annual Review         The Producer or the Magnolia TLP Operator may
perform an annual review of the average value of HOPEX recorded for the prior
calendar year, the average value of SPROD and the average value of STHprod for
the prior calendar year, and the average value of PSopex for the prior calendar
year.

5.2   Fuel/Vent/Flare Gas

    Magnolia TLP fuel gas consumption will be allocated on a monthly basis to
the Magnolia Owners for Non-Satellite Production handling and to the Producer
for Satellite Production handling in accordance with this Article 5.2 (Fuel
Gas). The value of such gas is not to be included in the HOPEX in Article 5.1
(Operating and Maintenance Expenses).

  5.2.1   Fuel gas consumed by certain production handling equipment and
facilities located on the Magnolia TLP will be allocated to Satellite Leases in
accordance with Exhibit “F” (Metering and Allocation).     5.2.2  
Flare/vent/shrink gas will be handled and allocated in accordance with Exhibit
“F” (Metering and Allocation).     5.2.3   The Producer is obligated to and will
furnish its monthly-allocated share of fuel gas for Satellite Production
handling in kind. Each calendar month, the Magnolia TLP Operator will allocate
and deduct from the Producer’s share of Gas production its allocated share of
fuel/flare/vent/shrink gas.

Page 22

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

 

Execution Version

5.3   Infrastructure Access Fees

    In consideration for: (i) access to the Magnolia TLP, (ii) utilization of
Magnolia TLP facilities, including, but not limited to, risers, porches and
umbilical boarding facilities, (iii) utilization of deck and riser space for the
Satellite Production System components on the Magnolia TLP, (iv) utilization of
deck space for the Receiving Facilities, and (v) for the Services provided by
the Magnolia Owners, the Producer will pay the Magnolia Owners in accordance
with Exhibit “C” (Accounting Procedures), on a monthly basis an Infrastructure
Access Fee (“IAF” or “Infrastructure Access Fee”) for Satellite Production
handled during the applicable month as follows:

  5.3.1   IAF for Firm Capacity, Interruptible Capacity and FA Capacity

Infrastructure Access Fee (IAF) for Oil, Gas and Water4
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************

  5.3.2   Minimum Monthly Fee

  (a)   Effective as of the first day of the month following Satellite First
Production, if the collective sum of Infrastructure Access Fees for Firm

 

4   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 23

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

 

Execution Version

      Capacity for each product (Oil, Gas, and water) set forth in Article 5.3.1
(IAF for Firm Capacity Interruptible Capacity and FA Capacity), based upon
throughput, is less than 5******************************** in any calendar
month, the Producer will be charged a single fee of 5***
******************************** for the Services for such calendar month, in
lieu of the monthly Infrastructure Access Fees for Firm Capacity for each
product (Oil, Gas, and water) set forth in Article 5.3.1 (IAF for Firm Capacity
Interruptible Capacity and FA Capacity).     (b)   The Producer’s obligation to
pay the Magnolia Owners the minimum monthly fee set forth in Article 5.3.2(a)
will be suspended in the event the Magnolia TLP is incapable of processing and
handling any Satellite Production for a period greater than three
(3) consecutive days in a calendar month as a result of: (i) problems occurring
at the Magnolia TLP; (ii) conditions of the Magnolia TLP outlined in Articles
9.4 (Suspension of Operations) and 9.5 (Magnolia TLP Operator’s Right for Shut
Down Operations on Magnolia TLP) [other than Articles 9.5.1(d), 9.5.1(e)],
unless such problems are caused by Satellite Production and/or operations
related to the Satellite Production System; or (iii) Force Majeure.     (c)  
Payment of the minimum monthly fee set forth in Article 5.3.2(a) will not
mitigate, eliminate or be in lieu of any obligation to deliver Satellite
Production to the Magnolia TLP pursuant to this Agreement.

5.4   Future Governmental Regulations Costs

  5.4.1   The Parties agree that the IAF for produced water attributable to the
Satellite Leases as set forth in Article 5.3.1 may be increased to reflect
future increased costs associated with modifications due to changes in Laws
affecting discharge requirements of treated produced water into the Gulf of
Mexico, which are verifiable and attributable to Satellite Production. Such
modifications may include but are not limited to monitoring, testing, or
treating (includes adding chemicals) the produced water. The Magnolia TLP
Operator will provide justification and rationale for any cost increase for the
Producer’s review. The Parties will mutually agree upon an appropriate
methodology which would allow the Magnolia Owners to recover a proportionate
share of such costs from the Producer.     5.4.2   In addition to Article 5.4.1,
the Parties recognize that the Laws could change during the term of the
Agreement and such change could result in unforeseen

 

5   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 24

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

 

Execution Version

      costs to the Magnolia Owners in order to maintain compliance therewith.
Accordingly, the Parties do hereby agree that in the event the Magnolia Owners
incur additional costs due to changes in Laws which directly relate to the
provision of Firm Capacity or Services provided for the Satellite Leases, then
the Parties will mutually agree upon an appropriate methodology which would
allow the Magnolia Owners to recover a proportionate share of such costs from
the Producer.

5.5   Producer’s Sole Expenses

    The Producer is solely responsible for the cost of those operations
identified as Producer’s Sole Expenses in Exhibit “E” (Operating & Maintenance
Expenses Matrix) to this Agreement.

5.6   Magnolia Owners’ Sole Expenses

    The Magnolia Owners are responsible for (i) the cost of those operations
identified as Magnolia Owners’ Sole Expenses in Exhibit “E” (Operating &
Maintenance Expenses Matrix) to this Agreement, (ii) the Magnolia TLP Shared
Expenses included as Exhibit “E” (Operating & Maintenance Expenses Matrix) to
this Agreement which are not allocated to the Producer pursuant to Article 5.1
(Operations and Maintenance Expenses), and (iii) all sole expenses related to
Non-Satellite Production.

5.7   Deferred Production Compensation

  5.7.1   Compensation for Magnolia Owners for Initial Tie-In.

      The Producer will compensate the Magnolia Owners for any Magnolia TLP
Production which is deferred
6***************************************************** that is solely
attributable to the initial fabrication, construction, installation, hookup,
tie-in, and/or commissioning of the Satellite Production System and the
Receiving Facilities to handle Satellite Production. Such compensation will be
determined using the methodology described in Article 5.7.3 (Compensation
Methodology) and shall be the sole remedy for such downtime and deferred
production.

  5.7.2   Compensation for Producer

 

6   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 25

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

 

Execution Version

      The Producer will be compensated by the Magnolia Owners for any Satellite
Production which is deferred in 7**************************** due to Magnolia
TLP downtime that is solely attributable to the initial fabrication,
construction, installation, hookup, tie-in, and/or commissioning of the tie-in
as provided in Article 3.4 (Magnolia Owner’s Tie-in Option). Such compensation
will be determined using the methodology consistent with that described in
Article 5.7.3 (Compensation Methodology) and shall be the sole remedy for such
downtime and deferred production.

  5.7.3   Compensation Methodology

  (a)   Compensation paid by the Producer to the Magnolia Owners for deferred
Magnolia TLP Oil Production (“DOPC”) pursuant to Articles 5.7.1 (Compensation
for Magnolia Owners for Initial Tie-In) and 5.7.5 (Compensation for Magnolia
Owners after Initial Tie-In) is equal to:         DOPC = AOPR * SDD * (POP *
0.22)

             
 
  Where:        
 
  AOPR   =   the average daily volume of Magnolia TLP Oil Production delivered
to the Delivery Point during the first fourteen (14) Days of the twenty-one
(21) Days immediately preceding initiation of the Magnolia TLP Oil Production
shutdown (expressed in gross Barrels per Day, i.e., without any reduction for
royalty), adjusted for downtime;
 
           
 
  SDD   =   the duration of the Magnolia TLP Oil Production shutdown which is
solely attributable to Satellite Leases’ related activities (expressed in Days
to the nearest one- ninety-sixth (1/96) of a day), and
 
           
 
  POP   =   the average Prevailing Oil Price during the duration of the Magnolia
TLP Oil Production shutdown solely attributable to Satellite Leases’ related
activities (expressed in Dollars per Barrel).

  (b)   Compensation paid by the Producer to the Magnolia Owners for deferred
Magnolia TLP Gas Production (“DGPC”) pursuant to Articles 5.7.1 (Compensation
for Magnolia Owners for Initial Tie-In) and 5.7.5 (Compensation for Magnolia
Owners after Initial Tie-In) is equal to:

 

7   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 26

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

 

Execution Version

      DGPC = AGPR * HV * SDD * (PGP * 0.22)

             
 
  Where:        
 
  AGPR   =   the average daily volume of Magnolia TLP Gas Production delivered
to the Delivery Point during the first fourteen (14) Days of the twenty-one
(21) Days immediately preceding initiation of the Magnolia TLP Gas Production
shutdown (expressed in gross MSCF per Day, i.e., without any reduction for
royalty), adjusted for downtime;
 
           
 
  HV   =   the average daily Btu content of the Magnolia TLP Gas Production
during the first fourteen (14) Days of the twenty-one (21) Days immediately
preceding initiation of the Magnolia TLP Gas Production shutdown (expressed in
MMBtu per MSCF),
 
           
 
  SDD   =   the duration of the Magnolia TLP Gas Production shutdown which is
solely attributable to Satellite Leases’ related activities (expressed in Days,
to the nearest one- ninety-sixth (1/96) of a Day), and
 
           
 
  PGP   =   the average Prevailing Gas Price during the duration of the Magnolia
TLP Gas Production shutdown solely attributable to Satellite Leases’ related
activities (expressed in Dollars per MMBtu).

5.7.4   Duration of Shutdown

  (a)   At least thirty (30) Days prior to a scheduled shutdown of the Magnolia
TLP which is associated with non-Satellite Leases’ related activities, the
Magnolia TLP Operator will provide the Satellite Operator:

  (i)   a detailed work schedule which lists the work activities planned during
such shutdown, the estimated duration of each work activity, and the sequence
and relationship of each work activity to other work activities; and     (ii)  
an estimate of the duration of such shutdown which is solely attributable to
non-Satellite Leases’ related work activities.

  (b)   Within thirty (30) Days immediately following completion of a shutdown
of the Magnolia TLP which is associated with Non-Satellite Production and/or
non-Satellite Leases’ related work activities, the Magnolia TLP Operator will
provide the Satellite Operator with updated information furnished pursuant to
Article 5.7.4(a) reflecting actual execution of the work activities.

Page 27

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

 

Execution Version

  5.7.5   Compensation for Magnolia Owners after Initial Tie-In         The
Magnolia TLP Owners will be compensated by the Producer for any Magnolia TLP
Production which is deferred due to Magnolia TLP downtime that is solely
attributable to handling of Satellite Production at the Magnolia TLP subsequent
to the initial fabrication, construction, installation, hookup, tie-in, and/or
commissioning of facilities for the Satellite Production System. Such
compensation will be determined using the methodology described in Article 5.7.3
(Compensation Methodology) and shall be the sole remedy for such downtime and
deferred production.

5.8   Royalties and Taxes

  5.8.1   The Producer and each of the Magnolia Owners will be solely
responsible for payment of the royalties and taxes attributable to its share of
production.     5.8.2   This Agreement and the operations hereunder are not
intended to create, and will not be construed to create a joint venture,
association or partnership with respect to the Parties. If, for United States
federal income tax purposes, this Agreement is regarded as a partnership, each
Party elects to be excluded from the application of all or any part of the
provisions of Subchapter “K”, Chapter 1, Subtitle “A” of the United States
Internal Revenue Code of 1986, as amended (the “Code”), to the extent permitted
and authorized by Article 761(a) of the Code and the regulations promulgated
thereunder, or similar provisions of applicable state Laws.

5.9   Quality Bank Payments

    With respect to any monetary adjustments due the Magnolia Owners or the
Producer pursuant to Article 7.3 (Quality Bank) of this Agreement, each of the
Magnolia Owners or Producer, as applicable, will be responsible for any payments
invoiced by the Magnolia TLP Operator. Article 7.3 (Quality Bank) of this
Agreement will be interpreted to apply to the Producer or each of the Magnolia
Owners, individually with respect to invoices and payments pursuant to
Article 7.3 (Quality Bank).

ARTICLE VI — CAPACITY

6.1   Magnolia TLP Base Capacity

    The Magnolia TLP Base Capacity for Oil, Gas, and water handling is set forth
on Exhibit “A” (Magnolia TLP Base Capacity). The Parties stipulate this is only
an estimate, that the Magnolia TLP Base Capacity is not represented or warranted
by the Magnolia Owners, and that the stated handling capacities for these
substances has not been experienced or tested in the field. It is understood and
agreed that the Magnolia TLP Base Capacity will fluctuate based on the inlet
flow rates, conditions and compatibility,       and the operating pressure of
the export lines. Exhibit “A” (Magnolia TLP Base Capacity) reflects the current
estimate of the Magnolia TLP Base Capacity at the current pipeline operating
pressure and at the maximum pipeline operating pressure during all times of
normal and routine operations. Subject to Article 6.2 (Production Processing

Page 28

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

 

Execution Version

    and Handling Capacity), Article IX (Suspension of Operations and Force
Majeure) and Article 10.3 (Termination by Magnolia Owners), the Magnolia Owners
commit to operate and maintain the Magnolia TLP consistent with prevailing
industry operational and safety practices and standards for similar facilities
and all applicable Laws, and to use all reasonable efforts to restore the
Magnolia TLP to normal and routine operations in a timely manner when possible.
Except as expressly provided in the foregoing sentence, the Magnolia Owners
shall not be required to upgrade or maintain any facilities or equipment. The
Magnolia Owners will not be obligated to maintain the Magnolia Leases in force
and effect, or continue production at the Magnolia TLP for any reason.

6.2   Production Processing and Handling Capacity

    The Magnolia Owners will provide the Producer the following types of
capacity for production processing and handling on the Magnolia TLP for
Satellite Production in accordance with, and subject to, the terms and
conditions contained in this Article VI (Capacity). However, upon partial or
entire loss of or damage to the Magnolia TLP (or any component of the Magnolia
TLP) resulting from any incident, the Magnolia Owners will have no obligation to
repair or replace the Magnolia TLP or any component thereof for purposes of
resuming the processing and handling of Satellite Production (or the operation
of the Satellite Production System or the placement of Satellite Production
System components thereon). Notwithstanding the foregoing, nothing contained in
this Agreement limits or restricts the Magnolia Owners from entering into other
agreements for the utilization of the Magnolia TLP and/or its related equipment
and facilities.

  6.2.1   Firm Capacity

    For the purposes of this Agreement, “Firm Capacity” means that portion of
the Magnolia TLP Capacity representing:8

******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
 

8   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 29

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

 

Execution Version
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************

Page 30

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

 

Execution Version
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************
******************************************************************

  (f)   Any Party may request, but is not guaranteed, a change in the Firm
Capacity, as described above, with supporting data.

      The Magnolia Owners agree to process and handle Satellite Production at
volume rates not to exceed the Firm Capacity and the Producer will be entitled
to utilize Firm Capacity for Satellite Production; provided, however,
utilization of Firm Capacity for Satellite Production will only be subject to
priority, curtailment and/or proration in accordance with Articles 6.3
(Production Prioritization) and 6.4.2 (Non-Conforming Satellite Production) and
Magnolia TLP Operator’s rights and discretion as provided in Articles 4.1.1,
4.1.2, 6.4.2, 9.4 and 9.5. Firm Capacity, as provided above, will be determined
individually for each product (Oil, Gas, and water) on a daily throughput basis.

  (i)   The amount of Firm Capacity for any single product (i.e. Oil, Gas, or
water) will not be exceeded in order to allow the Producer to fully utilize the
Firm Capacity for another product.     (ii)   In the event the Producer does not
utilize its entire share of Firm Capacity during a calendar month, the Magnolia
Owners have the right to utilize, as they deem necessary and free of cost, any
unused Firm Capacity for such calendar month on an interruptible basis.

  6.2.2   Interruptible Capacity

      The Magnolia Owners agree to process and handle Satellite Production at
volume rates in excess of Firm Capacity to the extent that Magnolia TLP Ullage
exists (“Interruptible Capacity”); provided, however, utilization of Magnolia
TLP Ullage for Satellite Production handling will not result in any curtailment
of Magnolia TLP Production or Third Party Production being processed and handled
on the Magnolia TLP on a firm basis. Priority access to Magnolia TLP Ullage will
be given in the following order: (i) Satellite Production; and (ii) Third Party
Production.

  6.2.3   Flow Assurance Capacity

      The Magnolia Owners agree to process and handle Satellite Production at
volume rates not to exceed FA Capacity and, the Producer will be entitled to
utilize FA Capacity for Satellite Production, unless it is not possible to
provide such FA Capacity due to Magnolia TLP operating problems and/or operating
problems related to downstream facilities and equipment.

Page 31

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

 

Execution Version

  (a)   The amount of FA Capacity for a given product (Oil, Gas or water) will
be determined by the fluid type in a given flowline. If the flowline is defined
as an oil flowline (the flowline’s primary product is oil), the FA Capacity for
liquids (oil and water) will be that which is stated in Section 2.2.17 (Flow
Assurance Capacity) and the FA Capacity for gas will not be pre-determined, but
will be the amount of associated gas that the oil flowline is capable of flowing
at the stated FA Capacity for liquids. If the flowline is defined as a gas
flowline (the flowline’s primary product is gas), the FA Capacity for gas will
be that which is stated in section 2.2.17 (Flow Assurance Capacity) and the FA
Capacity for liquids (condensate and water) will not be pre-determined, but will
be the amount of associated liquids that the gas flowline is capable of
producing at the stated FA Capacity for gas.     (b)   In the event the FA
Capacity is insufficient to provide the Satellite Production with flow
assurance, the Magnolia Owners and the Producer will make a good faith effort to
unanimously agree on a revised FA Capacity. Approval by the Magnolia Owners of
such revised FA Capacity will not be unreasonably withheld.

6.3   Production Prioritization

  6.3.1   Processing Facility Constraints.         In the event of any
interruption or reduction in the Magnolia TLP Capacity, including but not
limited to: (i) a Force Majeure event, (ii) a planned or unplanned partial or
complete shutdown of the Magnolia TLP or any component of the Magnolia TLP for
maintenance, repair, replacement, construction or inspections, (iii) a
constraint in the Oil Export Pipeline or Gas Export Pipeline, (iv) a Magnolia
TLP equipment/facility upset or other such operating problem(s), or (v) the
partial and/or entire loss of the Magnolia TLP resulting from fire, hurricane,
explosion, or other Force Majeure events, the Magnolia TLP Operator (subject to
the rights of the Magnolia Owners under Article 6.2 (Production Processing and
Handling Capacity) hereinabove regarding no obligation to repair or replace the
Magnolia TLP or any component thereof upon partial or entire loss of the
Magnolia TLP or any component thereof resulting from any incident) will make
reasonable and prudent efforts to promptly restore normal operations while
maintaining safe and efficient production handling operations and in a manner
facilitating the resumption of normal operations. During such interruption or
temporary reduction in Magnolia TLP Capacity, the Magnolia Owners, through the
Magnolia TLP Operator will allocate the available Magnolia TLP Capacity to the
extent it is safe and practical to do so, in accordance with the following:

  (a)   Priority access to available production handling capacity will be given
in the following order: (i) FA Capacity and flow assurance for any future
Magnolia Leases subsea wells, (ii) Magnolia TLP Production; (iii) Satellite
Production which has been contractually granted firm

Page 32

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

 

Execution Version

      capacity; and (iv) Third Party Production which has been contractually
granted firm capacity. Such lesser allocation of Magnolia TLP Capacity being
defined as “Prorated Firm Capacity”.     (b)   If the Prorated Firm Capacity is
less than FA Capacity, the Magnolia TLP Operator will endeavor to provide FA
Capacity.

  6.3.2   Gas Export Pipeline Constraints         In the event that:
(i) Magnolia TLP Capacity cannot be fully utilized as a result of a
transportation capacity constraint (including, but not limited to, inadequate
pipeline capacity and/or pipeline operating conditions) in the Gas Export
Pipeline or other gas pipeline(s) downstream of the Delivery Point (“Downstream
Gas Pipeline”) and (ii) the gas transportation capacity available to all of the
Magnolia Owners, Producer, and Third Parties for their respective share of
Magnolia TLP Gas Production, Satellite Gas Production, and/or Third Party
Production is restricted by the Gas Export Pipeline or Downstream Gas
Pipeline(s) constraint, then the Magnolia TLP Capacity will be allocated to the
Parties as follows:

  (a)   Subject to Article 6.3.1 (Processing Facility Constraints), each Party
will be provided a sufficient amount of Magnolia TLP Capacity to accommodate
such Party’s Gas nomination up to the maximum volume of Gas production which
such Party is allowed to transport by the Gas Export Pipeline.     (b)   In the
event that transportation capacity in the Gas Export Pipeline is constrained for
one or more (but fewer than all) of the Parties (the “Gas Constrained Party” or
“Gas Constrained Parties”) and the Gas Constrained Party(ies) cannot provide for
the transportation of its full entitlement share of Magnolia TLP Gas Production
and/or Satellite Gas Production, each of the other Parties (the “Gas
Unconstrained Parties”) may exercise their respective rights under this
Agreement and the Magnolia TLP Operating Agreement, as appropriate to produce
volumes of Gas exceeding their entitlement share. With regard to Satellite Gas
Production, the rights provided in this Article will be subject to the Firm
Capacity and Interruptible Capacity provided for in this Agreement.

  6.3.3   Oil Export Pipeline Constraints         In the event that:
(i) Magnolia TLP Capacity cannot be fully utilized as a result of a
transportation capacity constraint (including, but not limited to, inadequate
pipeline capacity and/or pipeline operating conditions) in the Oil Export
Pipeline or other oil pipeline(s) downstream of the Delivery Point (“Downstream
Oil Pipeline”) and (ii) the oil transportation capacity available to all of the
Magnolia Owners, Producer, and Third Parties for their respective share of
Magnolia TLP Oil Production, Satellite Oil Production, and/or Third Party
Production is restricted by the Oil Export Pipeline or Downstream Oil
Pipeline(s) constraint, then the Magnolia TLP Capacity will be allocated to the
Parties as follows:

Page 33

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

 

Execution Version

  (a)   Subject to Article 6.3.1 (Processing Facility Constraints), each Party
will be provided a sufficient amount of Magnolia TLP Capacity to accommodate
such Party’s Oil nomination up to the maximum volume of Oil production which
such Party is allowed to transport by the Oil Export Pipeline.     (b)   In the
event that transportation capacity in the Oil Export Pipeline is constrained for
one or more (but fewer than all) of the Parties (the “Oil Constrained Party” or
“Oil Constrained Parties”) and the Oil Constrained Party(ies) cannot provide for
the transportation of its full entitlement share of Magnolia TLP Oil Production
and/or Satellite Oil Production, each of the other Parties (the “Oil
Unconstrained Parties”) may exercise their respective rights under this
Agreement and the Magnolia TLP Operating Agreement, as appropriate to produce
volumes of Oil exceeding their entitlement share. With regard to Satellite Oil
Production, the rights provided in this Article will be subject to the Firm
Capacity and Interruptible Capacity provided for in this Agreement.

6.4   Production Compatibility

    The Producer’s access to the types of capacity for production processing and
handling on the Magnolia TLP set forth in this Article VI (Capacity) assumes the
operating parameters/conditions of the Satellite Production System and the
Satellite Production arriving at the Entry Point conform to specifications and
characteristics stipulated in Exhibit “H” (Satellite Production Fluid
Limits/Operating Parameters) to this Agreement. Additionally, the terms and
conditions of this Agreement were established and agreed to by the Parties based
on the assumption that the operating parameters/conditions of the Satellite
Production System and the Satellite Production arriving at the Entry Point
conform to such specifications and characteristics.

  6.4.1   Conforming Fluids         If Satellite Production conforms to all of
the specifications contained in Exhibit “H” (Satellite Production Fluid
Limits/Operating Parameters) to this Agreement, then any incremental operating
costs which may result from handling Satellite Production on the Magnolia TLP,
which are not classified as Satellite Sole Expenses in Exhibit “E” (Operating &
Maintenance Expenses Matrix) to this Agreement or otherwise designated as costs
to be borne solely by the Producer, will be treated as Magnolia TLP Shared
Expenses in Exhibit “E” (Operating & Maintenance Expenses Matrix) to this
Agreement.     6.4.2   Non-Conforming Satellite Production         If Satellite
Production does not conform to one or more of the operating parameters and/or
specifications contained in Exhibit “H” (Satellite Production Fluid
Limits/Operating Parameters) (“Non-Conforming Production”) of this Agreement, as
evidenced by at least three (3) fluid samples taken over a period of seven (7)
consecutive Days, and such non-conformance (i) results in incremental

Page 34

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

 

Execution Version

      Magnolia TLP operating costs, (ii) causes a reduction in the Magnolia TLP
Capacity, or (iii) causes other operational problems on the Magnolia TLP
(hereinafter collectively or individually referred to as a “Satellite Operating
Problem”), the Magnolia TLP Operator may endeavor, but the Magnolia Owners are
not obligated, to accept and handle such Non- Conforming Production until the
Satellite Operating Problem has been rectified by the Producer in accordance
with the following:

  (a)   The Producer is solely responsible for all costs and expenses incurred
by the Magnolia TLP Operator and/or the Magnolia Owners:

  (i)   resulting from the Satellite Operating Problem (including, without
limitation, deferred production); and/or     (ii)   for measures taken to
rectify or mitigate the Satellite Operating Problem, and/or     (iii)   which
are associated with the Satellite Operating Problem until such problem has been
rectified.

  (b)   Promptly after identifying the Satellite Operating Problem, but prior to
initiating any measures to rectify such problem which would result in material
expenditures, the Magnolia TLP Operator will provide the Satellite Operator
(with information copy to the Magnolia Owners) with a written proposal for
measures to rectify the Satellite Operating Problem and an estimate of the
associated costs.     (c)   The Satellite Operator will have five (5) business
Days from its receipt of the Magnolia TLP Operator’s written proposal submitted
pursuant to Article 6.4.2(b) of this Agreement to approve such proposal in
writing (failure to respond shall be deemed a non-approval). Should the Parties
fail to determine a mutually acceptable technical alternative to mitigate the
incompatibility, the Magnolia TLP Operator has the right to discontinue the
Services set forth in Articles 4.1.1 (Production Handling Services) and 4.1.2
(Satellite Production System Operations) hereinabove.

  6.4.3   Market Value         Notwithstanding Article 7.3 (Quality Bank), in
the event Satellite Production is determined to be Non-Conforming Production and
such nonconformance results in a documented reduction in the actual market value
of the Non-Satellite Production, the Producer will compensate the Magnolia
Owners for such reduction in value, only to the extent caused by such
non-conformance and not addressed by the procedures referenced in Article 7.3
(Quality Bank). For purposes of this Article 6.4.3 (Market Value), the
non-conformance will be measured/determined prior to commingling the Satellite
Production with Non-Satellite Production.

Page 35

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

 

Execution Version

      In the event Non-Satellite Production is determined to be Non-Conforming
Production and such nonconformance results in a documented reduction in the
actual market value of the Satellite Gas Production and/or Satellite Oil
Production, the Magnolia Owners will compensate the Producer for such reduction
in value, only to the extent caused by such non-conformance and not addressed by
the procedures referenced in Article 7.3 (Quality Bank). For purposes of this
Article 6.4.3 (Market Value), the non-conformance will be measured/determined
prior to commingling the Satellite Production with Non-Satellite Production.

ARTICLE VII — METERING AND ALLOCATION, PERMITS, AND QUALITY BANK

7.1   General Application

    Satellite Production and Non-Satellite Production will be sampled, metered
and allocated in accordance with the provisions of Exhibit “F” (Metering and
Allocation). The Exhibit “F” (Metering and Allocation) provisions, in their
entirety, are (i) subject to and in accordance with the MMS approved surface
commingling application referred to in Article 7.2.1 (Surface Commingling
Permit) of this Agreement and any subsequent amendments and/or waivers thereto,
(ii) in accordance with MMS requirements set forth in 30 CFR Part 250 Subpart L
and any subsequent amendments and/or waivers thereof and (iii) conditioned upon
approval by the MMS of the surface commingling application discussed in
Article 7.2.1 (Surface Commingling Permit) of this Agreement and any subsequent
amendments and/or waivers thereto.

7.2   Permits

  7.2.1   Surface Commingling Permit         Satellite Production will not be
delivered to the Entry Point and flow across the Magnolia TLP without first
obtaining all required surface commingling permits. Magnolia TLP Operator shall
use reasonable endeavors to seek approval from the MMS for the surface
commingling of Satellite Production with Non-Satellite Production and shall,
upon request, furnish the Producer and the Magnolia Owners copies of the
application and approval. The Producer and Magnolia Owners will cooperate with
the Magnolia TLP Operator to the extent necessary to achieve MMS approval of the
application. The cost of obtaining such permit shall be at the sole expense of
Producer.     7.2.2   Other Permits

  (a)   The Producer is responsible for acquiring all necessary permits,
licenses authorizations and approvals required for the construction and
installation of the Satellite Production System and connection to the Magnolia
TLP (up to the Entry Point) at the sole cost and expense of the Producer.

Page 36

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

 

Execution Version

  (b)   The Magnolia TLP Operator is responsible for acquiring all necessary
permits, licenses, authorizations and approvals required for the construction
and installation of the Receiving Facilities on the Magnolia TLP at the sole
cost and expense of the Producer.     (c)   The Producer will obtain, or caused
to be obtained, all other required approvals, permits, consents, orders or other
documents, without limitation, from all appropriate jurisdictional authorities
to produce the Satellite Leases, transport Satellite Production to the Magnolia
TLP, and dispose/transport of Satellite Production from the Magnolia TLP. The
Satellite Operator and the Magnolia TLP Operator will cooperate with each other
to the extent necessary to obtain such permits, licenses, authorizations and
regulatory approvals.     (d)   The Magnolia TLP Operator will support the
Producer’s application(s) to the MMS for new pipeline construction to the
Magnolia TLP so long as it has met the Magnolia TLP Operator’s requirements for
pipeline crossings and/or risers.

  7.2.3   Permit Denials         The Parties hereby agree to use reasonable
endeavors to obtain all agreements and approvals required from all governmental
agencies and Third Parties with regard to the transportation and processing
contemplated by this Agreement. No representation or warranty is made by the
Magnolia TLP Operator or any Party that the necessary consents and approvals
will be obtained, and should MMS or any other necessary consent or approval be
denied, no Party shall have liability to any other Party on account thereof and
this Agreement shall be terminable in accordance with Article X (Term, Default,
Termination and Continuation of Services).

7.3   Quality Bank

    The Producer and the Magnolia Owners will utilize the procedures in
accordance with the Gravity and Sulfur Bank for the Shell Pipeline Company LP
F.E.R.C. Tariff No. S-103, effective November 1, 2004, as supplemented by
Supplement No. 1 to F.E.R.C No. S-103, effective July 1, 2006, as amended from
time to time, to handle oil quality difference between Magnolia TLP Production,
Satellite Production, and, if applicable, Third Party Production.

ARTICLE VIII — GATHERING AND TRANSPORTATION

8.1   Product Disposition

    Commencing at the Delivery Point, the Producer will (i) take in kind and
remain solely and separately responsible for the disposition, transportation,
and sale of Satellite Production and (ii) bear all costs and liabilities
associated with such disposition,

Page 37

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

 

Execution Version

    transportation, and sale. The Magnolia Owners will have no liability for any
costs of production transportation, production processing, and/or associated
costs downstream of the Delivery Point, which are attributable to the Satellite
Production and/or allocated to the Producer.

8.2   Product Transportation

    The Producer will enter into transportation arrangements or agreements with
the owners of the Oil Export Pipeline and/or the Gas Export Pipeline, as
appropriate, at its own sole cost and expense for its share of Satellite
Production.

  8.2.1   The Parties, independently, will be responsible for submitting, or
causing to be submitted, Gas and/or Oil nominations, as applicable, to the
transporter(s) of such product for their individual respective share of the
appropriate Satellite Production and/or Magnolia TLP Production, and for
advising the Magnolia TLP Operator of such nomination. The Parties,
independently, will also be responsible for cooperating with the Magnolia TLP
Operator and the transporters of the Gas and/or Oil to keep their nominations in
balance with their respective deliveries on the Gas and/or Oil transporters’
pipeline system. The Parties will, to the extent possible, work in good faith to
cause the nominations of their respective Gas and/or Oil production to closely
approximate their actual production.     8.2.2   To the extent required under
this Agreement, the Magnolia TLP Operator will furnish test and production
information to the Parties to adjust nominations; however, the Magnolia TLP
Operator will not be responsible for, and will not be liable for any damages
and/or penalties for any act done or omitted in the Magnolia TLP Operator’s
performance under this Agreement or for errors in judgment, except such as may
result from the Magnolia TLP Operator’s gross negligence or willful misconduct.
The Parties will release, indemnify, defend and hold the Magnolia TLP Operator
harmless from any transporter pipeline scheduling penalties or monthly balancing
provisions imposed in Gas or Oil transportation contracts, associated with, or
related to, such Party’s Gas or Oil production, by the Gas or Oil transporter,
as applicable, including, without limitation, penalties imposed pursuant to its
tariff, or which may be caused by Operational Flow Orders (“OFO’s”), or by
unscheduled Gas, or by unauthorized Gas, except such as may result from the
Magnolia TLP Operator’s gross negligence or willful misconduct.

8.3   Pipeline Penalties

  8.3.1   As between the Magnolia Owners and the Producer, any penalties
assessed by Gas or Oil transporters attributable to the Satellite Operator’s
and/or Producer’s actions or omissions will be the responsibility of the
Producer. As between the Magnolia Owners and the Producer, any penalties
assessed by the Gas or Oil transporters attributable to the Non-Satellite
Production, Magnolia TLP Operator’s (except as provided in Article 8.3.2) and/or
Magnolia Owners’ actions or omissions will be the responsibility of the Magnolia
Owners.

Page 38

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

 

Execution Version

  8.3.2   Any costs or penalties imposed by the Gas Export Pipeline or the Oil
Export Pipeline on the Magnolia TLP Operator as a result of OFO’s, unscheduled
Gas, unauthorized Gas, Gas pipeline imbalances, or Oil pipeline imbalances with
transporters, as described herein, will be borne by each Party, independently,
in the proportion that its nomination, failure to nominate, failure to properly
regulate production volumes, fault, negligence, or liability without fault,
caused such imbalance and/or penalties, except such as may result from the
Magnolia TLP Operator’s gross negligence or willful misconduct.

8.4   Gas Imbalances

    Producer and the Magnolia Owners will utilize procedures in accordance with
Exhibit “G” (Gas Balancing Procedures) to this Agreement to handle Gas
imbalances between the Magnolia Leases and the Satellite Leases.

ARTICLE IX — SUSPENSION OF OPERATIONS AND FORCE MAJEURE

9.1   Notice

    A Party which is unable, in whole or in part, to carry out its obligations
under this Agreement due to Force Majeure will promptly give written notice to
that effect to the other Party or Parties stating in reasonable detail the
circumstances underlying such Force Majeure.

9.2   Suspension of Obligation

    The obligation of the Party giving such notice as provided in Article 9.1,
so far as it is affected by such Force Majeure, will be suspended during the
continuance of any liability so caused, but for no longer period, and such cause
will be remedied with all reasonable diligence. No Party will be liable to the
other Party or Parties for failure to perform any of its obligations under this
Agreement, other than the obligation to pay monies due hereunder, to the extent
such performance is hindered, delayed or prevented by Force Majeure.

9.3   Resolution

    A Party claiming Force Majeure will: (i) diligently use all reasonable and
prudent efforts to remove the cause, condition, or event or circumstance of such
Force Majeure, (ii) promptly give written notice to the other Party of the
termination of such Force Majeure, (iii) resume performance of any suspended
obligation as soon as reasonably possible after termination of such Force
Majeure, and (iv) not be obligated to settle any labor dispute except on terms
acceptable to it in its sole discretion.

9.4   Suspension of Operations

  9.4.1   The Magnolia TLP Operator reserves and has the right to suspend the
Services set forth in this Agreement during the existence of conditions which
render the

Page 39

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

 

Execution Version

      Magnolia TLP, Third Party Production System, or any downstream facility
unsafe, or during the existence of a Force Majeure condition (but for the
Services, only to the extent that such Force Majeure prevents rendering such
Services and subject to the priorities provided in Article 6.3 (Production
Prioritization) affecting the Magnolia TLP, Third Party Production System, or
any downstream facility as further provided in Article 9.2 (Suspension of
Obligation) of this Agreement.     9.4.2   The Producer specifically understands
that operations and activities on facilities upstream or downstream of the
Magnolia TLP may impact operations on the Magnolia TLP. Further, at its sole
discretion, the Magnolia TLP Operator has the right to shut down the Magnolia
TLP and temporarily discontinue the Services contemplated by this Agreement for
any necessary repairs or changes to the Magnolia TLP, Third Party Production
System or any downstream facility. In such a case neither the Magnolia TLP
Operator nor the Magnolia Owners will have any liability to the Producer for
deferred production, lost production, or any other direct, indirect or
consequential damages, other than as provided in Article 5.7 (Deferred
Production Compensation).

9.5   Magnolia TLP Operator’s Right to Shut Down Operations on Magnolia TLP

  9.5.1   In addition to Section 9.4 (Suspension of Operations), the Magnolia
TLP Operator has the absolute discretion and authority to partially or totally
shutdown any and all operations and activities related to the Magnolia TLP, the
Satellite Leases, Third Party Production System or downstream facilities, and to
permanently or temporarily discontinue the Services related to the same
hereunder or under any other arrangements at any time or from time to time
(subject to the cure period for certain circumstances described below), if in
the Magnolia TLP Operator’s sole discretion, such shutdown is warranted due to
one or more of the following:

  (a)   To ensure the safety of persons, property or the environment; or     (b)
  To ensure the operational integrity of the Magnolia TLP, the Satellite
Production System, Third Party Production System and/or downstream facilities;
or     (c)   Construction or repairs on or to the Magnolia TLP, the Satellite
Production System, Third Party Production System and/or downstream facilities;
or     (d)   The existence of a Force Majeure condition (subject to Sections 9.1
(Notice), 9.2 (Suspension of Obligation) and 9.3 (Resolution); or     (e)   The
termination of this Agreement; or     (f)   Producer’s failure to provide proper
notice and/or obtain the review and/or consent to a proposed operation in
accordance with the requirements of this Agreement; or

Page 40

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

 

Execution Version

  (g)   Producer’s failure to conduct operations in accordance with this
Agreement; or     (h)   Any material breach by the Producer of this Agreement.

  9.5.2   The Magnolia TLP Operator will notify the Producer in writing in the
event of any of the occurrences listed above. In such cases, the Magnolia Owners
have no liability to the Producer or any Party or Third Party for deferred or
lost production or throughput, deferred or lost revenue, damage to, loss (or
loss of use—e.g. paraffin and/or hydrate damage) of flowlines, wells or
reservoirs, or any actual, direct, indirect or consequential damages arising
from such shutdowns. Whenever reasonably possible, the Magnolia TLP Operator
agrees to give the Producer reasonable advance notice of any scheduled shutdowns
of said facilities while this Agreement is in effect. In the event of the
occurrence of one or more of the events listed in subsections (f), (g) or (h),
prior to shutting down the Satellite Production System or discontinuance of
Services, the Magnolia TLP Operator shall give the Producer prior written notice
of the occurrence of such event. In the event the Producer do not cure same
within thirty (30) days after receipt of such written notice, the Magnolia TLP
Operator may act (and the Magnolia Owners shall be fully relieved of any
liability for the same) as described above. However, if the event specified in
such notice is of such a nature that it reasonably cannot be corrected within
the thirty (30) day period, and the Producer begins within said period
corrective action and thereafter diligently carries such corrective action to
completion, Magnolia TLP Operator shall defer acting so long as Producer is
carrying out such corrective action in good faith.

ARTICLE X — TERM, DEFAULT, TERMINATION, AND CONTINUATION OF SERVICES

10.1   Term of Agreement

    As of the Effective Date, this Agreement will continue until terminated
pursuant to the voluntary and involuntary provisions set forth in Articles 10.2
(Default), 10.3 (Termination by Magnolia Owners), and 10.4 (Termination by
Producer).

10.2   Default

    The occurrence of any of the following events constitutes default
(“Default”), giving the right to terminate this Agreement to Parties other than
the Non-Performing Party:

  10.2.1   The failure of a Party (the “Non-Performing Party”) to pay amounts
owed, provide a required defense, or materially to provide Services as required
by this Agreement when such failure has not been remedied by the Non-Performing
Party within (i) fifteen (15) days for any nonpayment or failure to provide a
required defense, and (ii) sixty (60) days for failure to materially provide the
required Services (the “Notice Period”) following receipt of written notice from
one or

Page 41

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

 

Execution Version

      more of the other Party(ies) describing the alleged non-performance or
non-compliance with particularity and demanding that such non-performance or
noncompliance be cured or remedied; provided, however, that there is no Default
if the failure cannot reasonably be cured within such Notice Period so long as:

  (a)   in the case of failure to make payments or provide a required defense,
the Non-Performing Party remedies or cures said failure within the Notice
Period; and     (b)   in the case of failure to materially provide the required
Services the Non-Performing Party commences reasonable efforts to remedy or cure
said failure and continues these efforts after the Notice Period and until the
failure has been cured or remedied, and such remedy or cure has been effected
within a reasonable period of time.

  10.2.2   The entry of a Party into voluntary or involuntary bankruptcy,
receivership or similar protective proceedings; or     10.2.3   The material
breach of any representation or warranty contained in Article 15.5 (Warranty of
Title).

    In the event of termination for Default, the Non-Performing Party remains
liable for all duties, obligations and liabilities accrued or incurred prior to
the termination date.

10.3   Termination by Magnolia Owners

  10.3.1   The Magnolia Owners, upon their unanimous agreement, have the right
to terminate this Agreement in the following circumstances:

  (a)   On not less than three (3) months written notice by the Magnolia TLP
Operator to the Satellite Operator, if the MMS issues a decision disapproving
the surface commingling permit application submitted by the Magnolia TLP
Operator pursuant to Article 7.2.1 (Surface Commingling Permit) or any other
necessary permits and the Parties agree in writing that: (i) such decision shall
not be appealed; and (ii) a revised application shall not be filed; or     (b)  
On not less than one (1) month written notice by the Magnolia TLP Operator to
the Satellite Operator, if no Satellite Production is delivered to the Entry
Point for any reason, including Force Majeure, for any period of twelve
(12) consecutive calendar months following the Execution Date of this Agreement
(unless an extension is mutually agreed by all Parties).

  10.3.2   This Agreement terminates on not less than six (6) months written
notice by the Magnolia TLP Operator to the Satellite Operator, if (i) the
Magnolia TLP is no longer economic to operate in the sole judgment of the
Magnolia Owners, and (ii) the Magnolia Owners permanently cease production
operations on the Magnolia TLP within the time period of such notice.

Page 42

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

 

Execution Version

  10.3.3   This Agreement terminates on not less than one (1) month written
notice by the Magnolia TLP Operator to the Satellite Operator, if destruction
of, major damage to, or total or constructive loss of the Magnolia TLP occurs
and the Magnolia Owners elect in their sole discretion to not repair or replace
the Magnolia TLP for use at the Magnolia Leases. In such event, the Magnolia
Owners have no obligation to replace or repair the Magnolia TLP. The Magnolia
Owners shall retain all causes of action and claims against any Third Party
arising out of such damage or destruction.

10.4   Termination by Producer

  10.4.1   The Producer has the right to terminate this Agreement in the
following circumstances:

  (a)   On not less than three (3) months written notice by the Satellite
Operator to the Magnolia TLP Operator, if the MMS issues a decision disapproving
the surface commingling permit application submitted by the Magnolia TLP
Operator pursuant to Article 7.2.1 (Surface Commingling Permit) or any other
necessary permits and the Parties agree in writing that: (i) such decision shall
not be appealed; and (ii) a revised application shall not be filed; or     (b)  
On not less than one (1) month written notice by the Satellite Operator to the
Magnolia TLP Operator, if no production handling capacity in excess of FA
Capacity is available for Satellite Production for any reason, including Force
Majeure, for any period of twenty-four (24) consecutive calendar months
following the Execution Date of this Agreement.

  10.4.2   This Agreement terminates on not less than three (3) months written
notice by the Satellite Operator to the Magnolia TLP Operator, if (i) delivery
of Satellite Production to the Magnolia TLP is not technically feasible or
economically justifiable in the sole judgment of the Producer, and (ii) the
Producer will permanently cease Satellite operations due to Permanent Cessation
of Production; provided, however, that the Satellite operations (excluding
abandonment operations) permanently cease within six (6) months of said notice.
    10.4.3   This Agreement terminates on not less than one (1) month written
notice by the Satellite Operator to the Magnolia TLP Operator, if Satellite
Production permanently ceases for any reason whatsoever.

10.5   Responsibilities and Obligations at Termination

    The Parties to this Agreement have the following responsibilities upon
termination of this Agreement and/or Permanent Cessation of Production from the
Satellite Leases:

  10.5.1   The Satellite Operator is responsible for: (i) disconnection of the
Satellite Production System from the Entry Point, (ii) removal of those
Satellite Production

Page 43

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

 

Execution Version

      System components located on the Magnolia TLP, and (iii) all costs, risk
and expense associated with such disconnection and removal. However, the
Magnolia Owners, at their sole discretion may either:

  (a)   Require Satellite Operator to remove and/or abandon the Satellite
Production System from the Magnolia TLP and remove and/or abandon all facilities
connecting the Satellite Production System to the Magnolia TLP including (i) the
Producer’s pipeline(s) and riser(s) up to the Entry Point insofar as such
facilities are located within five hundred (500) feet of the Magnolia TLP;
(ii) cleanup and paint the area on the Magnolia TLP which is occupied by
components of the Satellite Production System, and (iii) repair and replace any
damages to the Magnolia TLP resulting from the placement of the Satellite
Production System on the Magnolia TLP or the removal of the Satellite Production
System, if deemed necessary by the Magnolia Owners, at the Producer’s sole cost,
risk, expense and liability. (All such work listed in this paragraph 10.5.1(a)
shall be referred to as “Abandonment Work”). In the event this Agreement
terminates pursuant to the provisions of Sections 10.3.2 or 10.3.3, then
Producer shall not be required to perform the work described in 10.5.1(a)(i) or
10.5.1 (a)(ii) above.     (b)   Agree with Producer on other acceptable way(s)
to salvage and abandon the Satellite Production System.

  10.5.2   If the Magnolia Owners select Article 10.5.1 (a), Abandonment Work
will be completed by the Satellite Operator within twenty-four (24) months
subsequent to the termination of this Agreement. All Abandonment Work performed
by or on behalf of the Producer will be performed within the time frame required
by this Agreement and in compliance with all applicable Laws.     10.5.3   In
the event the Satellite Operator fails to perform any or all of Abandonment Work
obligations as specified in this Agreement within the applicable time periods,
the Magnolia TLP Operator may at its election perform such work and invoice the
Producer (or Satellite Operator, on behalf of the Producer) for all actual costs
and expenses associated with the Abandonment Work. However, prior to the
Magnolia TLP Operator performing such Abandonment Work, the Magnolia TLP
Operator is required to give the Satellite Operator written notice of its intent
to perform the work (“Abandonment Notice”). In the event the Satellite Operator
does not commence Abandonment Work within thirty (30) days after receipt of the
Abandonment Notice, the Magnolia TLP Operator has the right to perform
Abandonment Work related to the Satellite Production System without incurring
any liability or obligation to the Producer. Accordingly, in the event the
Magnolia TLP Operator conducts the Abandonment Work, the Magnolia TLP Operator
will directly charge and invoice the Producer (or Satellite Operator, on behalf
of the Producer) who is responsible for any costs associated with such
Abandonment Work.

Page 44

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

 

Execution Version
ARTICLE XI — LIABILITIES AND INDEMNIFICATION

11.1   Liability and Indemnity

  11.1.1   Definition of Claims. As used in this Agreement, the term “Claims”
means any and all losses, liabilities, damages, punitive damages, obligations,
expenses, fines, penalties, interest, costs, claims, causes of action and
judgments for: (i) breaches of contract; (ii) loss or damage to property, injury
to or death of persons, and other tortious injury; (iii) environmental damage or
pollution; and (iv) violations of applicable Laws or any other legal right or
duty actionable at law or equity. The term “Claims” also includes reasonable
attorneys’ fees, court costs, and other reasonable costs of litigation resulting
from the defense of any Claim or cause of action within the scope of the
indemnities in this Agreement.     11.1.2   Application of Indemnities

  (a)   Covered Claims and Parties. All indemnities set forth in this Agreement
extend to the officers, directors, employees, and Affiliates of the Party
indemnified.9
*************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
********************************************************************************************************
************************** However, the indemnities set forth in this Agreement
do not extend to any part of an indemnified Claim that (i) is the result of the
gross negligence or willful misconduct of the indemnified Party, or (ii) is the
result of the imposition of punitive damages on the indemnified Party to the
extent arising from the acts of the indemnified Party.     (b)   Other
Limitations. The indemnities of the indemnifying Party in this Agreement do not
cover or include any amounts that the indemnified Party may legally recoup from
other Parties or Third Parties under applicable joint operating agreements,
insurance or other agreements, or for which the indemnified Party is reimbursed
by any Third Party. The indemnities in this Agreement do not relieve the Parties
to this Agreement from any obligations to Third Parties.

 

9   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 45

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

 

Execution Version
The indemnities of the Parties in this Agreement do not relieve the indemnified
Party from, or extend to cover, any obligations of the indemnified Party under
the terms of any operating agreement or other cost-sharing arrangement which is
applicable to any Claim.

  11.1.3   Producer’s Indemnity. The Producer shall indemnify, release, defend
and hold the Magnolia Owners harmless from and against any and all Claims caused
by, resulting from, or incidental to:     (a)   Producer’s Activities. (i) All
activities, acts and omissions of the Producer and the Magnolia Owners with
respect to the installation, hookup, interconnection, startup, and/or
commissioning of the Receiving Facilities (but excluding all activities with
respect to the Receiving Facilities thereafter), (ii) all of the Producer’s
activities, acts and omissions with respect to the Satellite Production System
upstream of the Entry Point, including the activities, acts and omissions of its
contractors, suppliers, subcontractors, lessees, and (iii) the activities or
omissions of any Third Parties present on the Magnolia TLP or the Satellite
Production System under authority of the Producer as provided in Article 3.1.6
(Magnolia TLP Access & Boarding for Producer’s Work) and Exhibit “N” (Platform
Boarding Agreement), in the construction, transportation, installation,
operation, maintenance, repair, replacement, Abandonment Work, inspections of
the Magnolia TLP, ingress and egress to and from the Magnolia TLP, landing
helicopters and mooring vessels, utilization of the Magnolia TLP and other
necessary or required activities by the Producer under this Agreement; provided,
however, the foregoing shall not apply to (i) any Claims in excess of
$25 million (per occurrence) for damage to Magnolia Owners’ property arising out
of the initial construction of the Receiving Facilities as described in
Article 3.2 and the riser and umbilical handover as described in Article 3.1.5,
and (ii) any Claims for damage to Magnolia Owners’ property not arising out of
the initial construction of the Receiving Facilities as described in Article 3.2
and the riser and umbilical handover as described in Article 3.1.5.     (b)  
Producer’s Property. Loss or damage to, or destruction of, the property and
facilities of the Producer and its Affiliates, co-owners, co-venturers, and
partners, and its and their employees, officers, directors, agents,
representatives, and invitees, including the Satellite Production System,
Satellite Production and any other Producer’s property connected to the same,
for which the Producer also releases the indemnified Parties;     (c)  
Producer’s Contractor Property. Loss or damage to, or destruction of, the
property and facilities of (i) the Producer’s contractors, suppliers,
subcontractors, lessees, and any Third Parties present on the Magnolia TLP or
the Producer’s property under authority of the Producer as provided in
Article 3.1.6 (Magnolia TLP Access & Boarding for Producer’s Work) and Exhibit
“N” (Platform Boarding Agreement) (and their contractors), (ii) their parents,
affiliates, co-owners, co-venturers, and partners, and (iii) their employees,
officers, directors, agents, representatives, and invitees;

Page 46

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

 

Execution Version

  (d)   Producer’s Employees, Invitees, etc. Personal injury to, or death of,
the employees, officers, directors, agents, representatives, and invitees of the
Producer and its Affiliates, co-owners, co-venturers, and partners;     (e)  
Producer’s Contractor Employees. Personal injury to, or death of, employees,
officers, directors, agents, representatives, and invitees of (i) the Producer’s
contractors, suppliers, subcontractors, lessees, and any Third Parties present
on the Magnolia TLP or the Producer’s property under authority of the Producer
as provided in Article 3.1.6 (Magnolia TLP Access & Boarding for Producer’s
Work) and Exhibit “N” (Platform Boarding Agreement) (and their contractors), and
(ii) their affiliates, co-owners, co-venturers, and partners;     (f)  
Producer’s Abandonment Obligations. The Producer’s abandonment, removal,
disposal and restoration obligations, which the Producer shall conduct in a good
and workmanlike manner and in compliance with all applicable Laws, to include
but not necessarily be limited to:

  (1)   The Producer agrees to assume and pay, perform, fulfill and discharge
all future abandonment, removal, and site clearance costs and expenses in
connection with the abandonment and removal of the Satellite Production System
as may be necessary or proper or required by applicable Laws;     (2)   Any
necessary plugging, abandonment, or replugging of Producer’s wells;     (3)  
Capping and burying of all associated pipelines located on, comprising part of,
or included with the Satellite Production System;     (4)   Removal, disposal,
and abandonment of any wastes, equipment, or fixtures associated with the
Satellite Production System;     (5)   Removal, abandonment, and disposal of the
risers and umbilical, and all other structures located on or comprising part of
the Satellite Production System, or on the sea floor in the vicinity of the
Satellite Production System and associated therewith, as may be required by
applicable Laws; and     (6)   Clean-up or disposal of any Satellite Production
System contaminated by naturally occurring radioactive material (“NORM”) as may
be required by applicable Laws.

  (g)   The Producer’s gross negligence or willful misconduct, if any.10

 

10   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 47

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

 

Execution Version
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************

Page 48

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

 

Execution Version
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************

  11.1.5   Environmental Indemnity     (a)   Producer’s Environmental Indemnity.
The Producer shall indemnify, release, defend and hold the Magnolia Owners
harmless from and against all the clean-up responses, costs of remediation,
control, assessment or compliance, and any civil fines or penalties, for the
following occurrences, events and activities on or related to the Satellite
Production System and the operations conducted by the Producer while on the
Magnolia TLP (including the design, procurement, fabrication, transportation,
installation, hook-up, interconnection, start-up and commissioning of the
Receiving Facilities, but excluding all activities with respect to the Receiving
Facilities thereafter), regardless of whether arising from any sole or
concurrent acts or omissions of Magnolia Owners or the condition of the Magnolia
TLP:

  (1)   Environmental pollution or contamination including pollution or
contamination of the soil, sea, groundwater or air by hydrocarbons, brine, NORM,
or otherwise, emanating from the Satellite Production System upstream of the
Entry Point;     (2)   The Producer’s waste disposal onsite or offsite of any
hazardous substances, wastes, materials and products generated by or used in
connection with the ownership or operation of the Satellite Production System;
and     (3)   Any of the Producer’s failure to comply with applicable land use,
surface disturbance, licensing or notification requirements; provided, however,
the preceding Producer’s environmental indemnity obligations exclude and do not
include:

  (i)    Any civil or criminal fines or penalties that may be levied against the
Magnolia Owners or the Producer by any court or regulatory authority for any
violation of any Laws in connection with the ownership or

Page 49

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

 

Execution Version
operation of the Magnolia TLP by the Magnolia Owners, all of which shall remain
the responsibility of the Magnolia Owners; or
(ii) Transportation and disposal offsite from the Magnolia TLP by the Magnolia
Owners of any hazardous substances, wastes, NORM, materials and products
generated by or used in connection with the ownership or operation of the
Magnolia TLP by the Magnolia Owners, all of which shall remain the
responsibility of the Magnolia Owners.
(b)11
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************

 

11   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 50

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

 

Execution Version
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************

  11.1.6   Notices and Defense of Indemnified Claims

      Each Party shall immediately notify the other Party of any Claim of which
it becomes aware and for which it is entitled to indemnification from the other
Party under this Agreement. The indemnifying Party shall be obligated to defend
at the indemnifying Party’s sole expense any litigation or other administrative
or adversarial proceeding against the indemnified Party relating to any Claim
for which the indemnifying Party has agreed to indemnify and hold the
indemnified Party harmless under this Agreement. However, the indemnified Party
shall owe a duty of cooperation to the indemnifying Party and shall have the
right to participate with the indemnifying Party in the defense of any such
Claim at its own expense. Each Party shall owe a duty of cooperation to the
other with respect to any Claim covered by the terms of this Agreement. The
indemnifying Party may not settle any Claim for other than money damages without
the consent of the indemnified Party.

  11.1.7   Non-Conforming Production

      The Producer will defend, indemnify, release and hold the Magnolia Owners
harmless against all Claims arising from the operation, inspection, maintenance,
repair, replacement, and/or modification of the Magnolia TLP to the extent such
Claims are caused by Non-Conforming Production, except to the extent such Claims
are caused by the gross negligence or willful misconduct of any of the Magnolia
Owners.         To the extent such Claims are caused by the gross negligence or
willful misconduct of any of the Magnolia Owners, the Magnolia Owners will
defend, indemnify, release and hold the Producer harmless against all Claims
arising from the operation, inspection, maintenance, repair, replacement, and/or
modification of the Magnolia TLP to the extent such Claims are caused by
Non-Conforming Satellite Production.

  11.1.8   No Limitations

      The liability of the Parties hereunder is not limited by any amounts of
insurance carried by them.

  11.1.9   Allocation of Liability Among the Magnolia Owners

      Notwithstanding anything contained in this Article 11.1 (Liability and
Indemnity) to the contrary, as among the Magnolia Owners, including the Magnolia
TLP

Page 51

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

 

Execution Version

    Operator, the allocation of responsibility for the liabilities assumed by
the Magnolia Owners in Article 11.1 (Liability and Indemnity) are governed by
the Magnolia TLP Operating Agreement.

11.2   Indemnification With Respect to Warranty of Title

  11.2.1   Satellite Production         The Producer will defend, indemnify,
release and hold the Magnolia Owners harmless against all Claims brought by any
Person(s) challenging, or claiming an entitlement to, the ownership of Satellite
Production and any royalties or other interests burdening such ownership.    
11.2.2   Non-Satellite Production         The Magnolia Owners will defend,
indemnify, release and hold the Producer harmless against all Claims brought by
any Person(s) challenging, or claiming an entitlement to, the ownership of the
Non-Satellite Production and any royalties or other interests burdening such
ownership.

11.3   Waiver of Consequential Damages

    EACH PARTY: (I) AGREES THAT ONLY ACTUAL DAMAGES SHALL BE RECOVERABLE BY IT
AGAINST THE OTHER PARTIES UNDER THIS AGREEMENT; AND (II) HEREBY WAIVES AND
RELEASES THE OTHER PARTIES FROM ANY RIGHT TO RECOVER SPECIAL, INDIRECT,
INCIDENTAL, PUNITIVE, CONSEQUENTIAL, INCIDENTAL OR EXEMPLARY DAMAGES (WHETHER
SUCH DAMAGES ARE CLAIMED UNDER BREACH OF WARRANTY, BREACH OF CONTRACT, TORT OR
ANY OTHER THEORY OR CAUSE OF ACTION AT LAW OR IN EQUITY, INCLUDING LOST BUSINESS
PROFITS, DOWNTIME, CESSATION OR REDUCTION OF PRODUCTION, LOST THROUGHPUT, JOINT
USE OF THE MAGNOLIA TLP BY THE PARTIES AND ANY THIRD PARTIES, AND ANY BREACH OF
THIS AGREEMENT), INCLUDING, WITHOUT LIMITATION, LOSS OF PROFIT OR BUSINESS
INTERRUPTION, DAMAGE TO WELL(S) OR RESERVOIRS, OR LOSS OF WELL(S), FROM OR
AGAINST ANY OTHER PARTY, EXCEPT TO THE EXTENT SUCH PARTY SUFFERS SUCH DAMAGES TO
AN UNAFFILIATED THIRD-PARTY IN CONNECTION WITH A THIRD-PARTY CLAIM FOR WHICH AN
INDEMNITY IS EXPRESSLY PROVIDED HEREUNDER AND IN WHICH EVENT SUCH DAMAGES SHALL
BE RECOVERABLE. However, nothing in this section shall alter the Parties’ rights
to payments for deferred production as expressly provided in this Agreement.

11.4   Individual Obligations

    Notwithstanding any provisions herein, the rights and liabilities hereunder
are several and not joint or collective, and each Party will be responsible only
for its share of the costs and liabilities incurred as provided hereunder.
Except as provided in Article 5.8

Page 52

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

 

Execution Version

    (Royalties and Taxes), nothing contained herein will ever be construed as
creating a partnership, joint venture, association or other character of
business entity recognizable in law for any purpose. Each Party will hold all
the other Parties harmless from liens and encumbrances on the Magnolia Leases,
Magnolia TLP, Satellite Leases, Receiving Facilities, and Satellite Production
System as a result of its acts, but subject to Section 13.2.

ARTICLE XII — INSURANCE AND BONDS

12.1   Insurance

  12.1.1   At all times during the term of this Agreement, Producer shall
maintain the insurance described on Exhibit “J” (Insurance Provisions) attached
hereto and made a part hereof, and Producer shall maintain all insurance that
may be required under applicable Laws.     12.1.2   Each policy required under
Article 12.1.1 above, and each applicable insurance policy which Producer elects
to obtain in connection with its property or the operations and activities
contemplated by this Agreement, shall contain an endorsement waiving
underwriters’ rights of subrogation against Magnolia Owners and shall, with the
exception of Worker’s Compensation expressly include Magnolia Owners as
additional assureds, all as provided in Exhibit “J” (Insurance Provisions).
Magnolia Owners shall not have any liability for the payment of any premiums for
such insurance maintained by Producer hereunder.     12.1.3   Both the face
value of applicable coverages and any applicable umbrella liability insurance
coverage shall be counted towards meeting the required limits of coverages
provided for by this Article 12.1 and Exhibit “J” (Insurance Provisions).
Producer’s obligation to obtain such insurance coverage is separate and distinct
from the other obligations assumed by Producer hereunder or under applicable
Laws. The insurance policies set forth in Exhibit “J” (Insurance Provisions)
shall be endorsed to provide that the coverage afforded is primary irrespective
of the existence of other applicable insurance.     12.1.4   Contemporaneously
with execution hereof and from time to time upon request by Magnolia Owners,
Producer shall furnish Magnolia Owners with documentary evidence showing that
such insurance required by this Article 12.1 is in effect. Producer further
agrees that its insurance will not be canceled for any cause whatsoever or
materially changed without thirty (30) days prior to written notice to Magnolia
Owners, and further that any such lapse of insurance is a material breach of
this Agreement.     12.1.5   Without limiting Producer’s liability under this
Agreement, Producer shall require all of its contractors to carry all insurance
required by Laws and other types of insurance in amounts and limits normally
carried by prudent contractors for the type of work being performed. All
contractors so engaged by Producer may be required to provide proof of adequate
insurance to Magnolia Owners prior to

Page 53

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

 

Execution Version

      commencing any work on the Magnolia TLP and any agreement with such
contractors shall evidence this requirement.

12.2   Bonds       The Magnolia TLP Operator and the Satellite Operator will
obtain and maintain any and all bonds required to be carried by any applicable
Laws. The Magnolia TLP Operator and the Satellite Operator will require all
contractors to obtain and maintain all bonds required to be carried by any
applicable Laws.

ARTICLE XIII — SUCCESSORS AND ASSIGNS

13.1   Successors and Assigns       This Agreement is binding upon and inures to
the benefit of the Parties and their respective heirs, successors and assigns.
Each Party will incorporate in any assignment or transfer of its interest in the
Magnolia TLP, Satellite Leases or Satellite Production System a provision that
such assignment is subject to this Agreement.

13.2   Assignment

  13.2.1   Assignment by Producer. The Producer has the right at any time to
assign, transfer, farmout, exchange, sell or otherwise dispose its rights and
obligations in the Satellite Leases and this Agreement in whole or in part
(other than the granting of liens or security interests to secure other
obligations or indebtedness of the Producer) (“Transfer of Interest”) without
the prior written consent of the Magnolia Owners only under the following
circumstances:         (a)   There shall continue to be a single Satellite
Operator of the Satellite Leases and the Satellite Production System;

          (b)12
**************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************

 

12   CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR
CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE
INDICATED IN THIS AGREEMENT WITH “*****”.

Page 54

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

 

Execution Version
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************

Page 55

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

 

Execution Version
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************
********************************************************************************************

(c) The Transfer of Interest will be made subject to the rights, duties and
obligations of this Agreement, and any such assignee or transferee will be
obligated to ratify and join this Agreement. Failure to meet both of the
conditions to transfer provided in (a) and (b) above, or the failure of the
assignee or transferee to ratify and join this Agreement, shall render such
Transfer of Interest void. Written notice of the completion of any Transfer of
Interest must be given to the Magnolia TLP Operator within ninety (90) Days of
the completion of such transaction. Any Transfer of Interest will be effective
only upon at least ninety (90) Days written notice to the Magnolia TLP Operator.
Each individual Producer remains responsible for any costs incurred by it, under
the terms of this Agreement prior to the date of notice to the Magnolia TLP
Operator in writing of the Transfer of Interest and the assignee’s or
transferee’s acceptance of the terms of this Agreement.

  13.2.2   Assignment by Magnolia Owners. The assignment, transfer, farmout,
exchange, sale or other disposition of any ownership in the Magnolia TLP or the
Magnolia Leases will be made subject to the rights, duties and obligations of
this Agreement, and any such assignee or transferee is obligated to ratify and
join this Agreement. Written notice of the completion of any assignment or
transfer must be given to the Producer within ninety (90) Days of the completion
of such transaction. The Magnolia Owners (or each individual Magnolia TLP Owner)
remain responsible for the obligations incurred by the Magnolia Owners, or each
such individual Magnolia Owner, under the terms of this Agreement prior to the
date of notice to the Producer in writing of the assignment or transfer of this
Agreement and the assignee’s or transferee’s acceptance of the terms of this
Agreement.

ARTICLE XIV – NOTICES

14.1   Giving and Responding to Notices       Unless otherwise specifically
provided herein to the contrary, all notices, responses, demands, waivers,
consents and other communications required or permitted to be given under this
Agreement will be made in writing, and delivered to the designated
representative in person, by facsimile transmission (followed by a telephone
call confirming receipt), by U.S. mail, by overnight express or courier, in each
instance with proof of delivery. Notices and responses are deemed to have been
duly given and to have become effective (i) upon receipt if delivered in person;
(ii) upon receipt if given by facsimile so long as receipt is confirmed by
telephone, (iii) three (3) business Days after having been delivered to an air
courier for overnight delivery; or (iv) upon receipt after

Page 56

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

 

Execution Version

    having been deposited in the U.S. mail, in each instance all fees prepaid.
Any such notice shall be directed to the Party, or its permitted assignee at the
address set forth below in this Article 14.1 (Giving and Responding to Notices).
Failure to timely respond to any matter requiring consent is deemed a negative
response to such proposal. The following addresses will remain effective until
such time as a Party changes its address for notice by giving notice to the
other Parties in accordance with this Article 14.1 (Giving and Responding to
Notices).

      If to Satellite Operator, to:

      Operational Matters:         Callon Petroleum Operating Company
Attention: Terry M. Stock, Project and Operations Manager
1200 Enclave Pkwy.; Suite 225
Houston, TX 77077
Telephone: (281) 589-5207
Facsimile: (281) 589-5215         Billing/Invoices:         Callon Petroleum
Operating Company
Invoice Processing
P. O. Box 1287
Natchez, Mississippi 39121
(email: rhinton@callon.com)         Notices:         Callon Petroleum Operating
Company
Attention: Dee A. Newman, Land Manager
200 North Canal Street, Suite 200
Natchez, Mississippi 39120
Telephone: (601) 446-6260
Facsimile: (601) 446-1434
(email: dnewman@callon.com)

    If to the Magnolia TLP Operator, to:

      Operational Matters:

        ConocoPhillips Company
Attention: Gulf of Mexico Operations Manager
600 N. Dairy Ashford
Houston, Texas 77079
Telephone: (832) 486-2137
Facsimile: (832) 486-2744

Page 57

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

 

Execution Version

      Notices:         ConocoPhillips Company
Attention: Gulf of Mexico Land Manager
600 N. Dairy Ashford
Houston, Texas 77079
Telephone: (832) 486-2265
Facsimile: (832) 486-2691

    If to the Magnolia Owners, to:

      Notices:         ConocoPhillips Company
Attention: Gulf of Mexico Land Manager
600 N. Dairy Ashford
Houston, Texas 77079
Telephone: (832) 486-2265
Facsimile: (832) 486-2691
        Devon Energy Production Company, L.P.
Attention: Gulf of Mexico Land Manager
1200 Smith St.
Houston, TX 77002
Telephone: (713) 286-5858
Facsimile: (713) 286-5737

    If to Producer, to:

      Notices:         Callon Petroleum Operating Company
Attention: Terry M. Stock, Project and Operations Manager
1200 Enclave Pkwy.; Suite 225
Houston, TX 77077
Telephone: (281) 589-5207
Facsimile: (281) 589-5215

14.2   Content of Notice       Any notice which requires a response within a
time period will indicate the applicable response time. Any notice must contain
sufficient detail to allow the Parties to adequately evaluate the scope, timing,
costs, etc. of the matter/proposal.

Page 58

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

 

Execution Version
ARTICLE XV — ADMINISTRATIVE AND MISCELLANEOUS

15.1   Billing Procedures       Unless otherwise specifically provided herein,
the Magnolia TLP Operator will direct invoice, in accordance with Exhibit “C”
(Accounting Procedures), to the Satellite Operator on behalf of the Producer,
for all costs and expenses that are due from Producer under this Agreement.
Unless otherwise expressly provided in this Agreement, costs payable or
reimbursable by Producer shall be determined in accordance with Exhibit “C”
(Accounting Procedures).   15.2   Disclaimer of Warranties by Magnolia Owners  
    THE MAGNOLIA OWNERS DO NOT MAKE ANY EXPRESS OR IMPLIED WARRANTY OR
REPRESENTATION AS TO THE SUITABILITY, QUALITY, QUANTITY, OR FITNESS OF THE
MAGNOLIA TLP, EQUIPMENT, FACILITIES, OR THE EXISTING MAGNOLIA TLP SYSTEMS
REGARDING THE USE OF SAME FOR ANY PARTICULAR PURPOSE. The Producer acknowledges
that it has the right to inspect the Magnolia TLP, its facilities and systems at
any time and shall accept and use the same “AS IS,” “WHERE IS,” and “WITH ALL
FAULTS,” and in their present or future condition and state of repair as of the
date of this Agreement, and regardless of any wear and tear or damage that may
occur after the date of this Agreement. THE PRODUCER EXPRESSLY ASSUMES THE RISK
OF ANY DEFAULT IN OR FAILURE OF THE MAGNOLIA TLP, FACILITIES, EQUIPMENT, SYSTEMS
OR PROPERTY SUBJECT TO THIS AGREEMENT AND HEREBY FULLY RELEASES AND RELIEVES AND
AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS THE MAGNOLIA OWNERS WITH RESPECT
TO ANY LIABILITY TO THE PRODUCER, OR ANY CONTRACTORS OR ANY INVITEES OF THE
PRODUCER, AS A RESULT THEREOF.       To the extent required to be operative, the
disclaimers of representations and warranties contained in this Agreement are
conspicuous disclaimers for the purpose of any applicable Laws. MAGNOLIA OWNERS
EXPRESSLY DISCLAIM AND NEGATE AS TO THE MAGNOLIA TLP, FACILITIES, EQUIPMENT AND
SYSTEMS (A) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (B) ANY IMPLIED
OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, AND (C) ANY IMPLIED OR
EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS.       The
express representations and warranties of the Parties contained in this
Agreement are exclusive and are in lieu of all other representations and
warranties, express, implied or statutory. Except as expressly set forth in this
Agreement, the Parties hereto each disclaim all liability and responsibility for
any other representation, warranty, statements or communications (orally or in
writing) to any other Party (including, but not limited to, any information
contained in any opinion, information or advice that may have been provided to
any such Party by any employee, officer, director, agent, consultant, engineer
or engineering firm, trustee, representative, partner, member, beneficiary,
stockholder or contractor of such disclaiming Party or its Affiliates) wherever
and however made.

Page 59

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

 

Execution Version

    Without limiting the generality of the foregoing, Magnolia Owners make no
warranty or representation, express or implied, with respect to the accuracy,
completeness or materiality of the information, records and data now, heretofore
or hereafter made available to the Producer in connection with the Magnolia TLP,
facilities, equipment and systems or this Agreement, including, without
limitation, (i) any description of the Magnolia TLP, facilities, equipment and
systems, (ii) regulatory matters, (iii) the physical, operating, regulatory
compliance, safety or environmental condition of the Magnolia TLP, facilities,
equipment and systems at any time, (iv) potential for use of the Magnolia TLP,
facilities, equipment and systems, (iv) value of the Magnolia TLP, facilities,
equipment and systems, (v) any projections as to events that could or could not
occur, or that are likely to occur, and (vi) any other matters contained in or
omitted from any information or material furnished to Producer by Magnolia
Owners. Any and all such data, information and material furnished by Magnolia
Owners is provided as a convenience only and any reliance on or use of same is
at the Producer’s sole risk. The Magnolia Owners and their Affiliates, and their
officers, directors, employees, agents, consultants, trustees or
representatives, shall have no liability to the Producer or its Affiliates, and
its officers, directors, employees, agents, consultants, trustees or
representatives, resulting from any use, authorized or unauthorized, of the
information, records and data relating to the Magnolia TLP, facilities,
equipment and systems provided by or on behalf the Producer, and the Producer
hereby waives and releases the Magnolia Owners from same.   15.3   Disclaimer of
Warranties by Producer       THE PRODUCER DOES NOT MAKE ANY EXPRESS OR IMPLIED
WARRANTY OR REPRESENTATION AS TO THE SUITABILITY, QUALITY, QUANTITY, OR FITNESS
OF THE SATELLITE PRODUCTION SYSTEM, EQUIPMENT, FACILITIES, OR REGARDING THE USE
OF SAME FOR ANY PARTICULAR PURPOSE. The Magnolia Owners acknowledge that they
have the right to inspect the Satellite Production System, its facilities and
systems at any time and shall accept and use the same “AS IS,” “WHERE IS,” and
“WITH ALL FAULTS,” and in their present or future condition and state of repair
as of the date of this Agreement, and regardless of any wear and tear or damage
that may occur after the date of this Agreement. THE MAGNOLIA OWNERS EXPRESSLY
ASSUME THE RISK OF ANY DEFAULT IN OR FAILURE OF THE SATELLITE PRODUCTION SYSTEM,
FACILITIES, EQUIPMENT, SYSTEMS OR PROPERTY SUBJECT TO THIS AGREEMENT AND HEREBY
FULLY RELEASE AND RELIEVE AND AGREE TO INDEMNIFY, DEFEND AND HOLD HARMLESS THE
PRODUCER WITH RESPECT TO ANY LIABILITY TO THE MAGNOLIA OWNERS, OR ANY
CONTRACTORS OR ANY INVITEES OF THE MAGNOLIA OWNERS, AS A RESULT THEREOF.      
To the extent required to be operative, the disclaimers of representations and
warranties contained in this Agreement are conspicuous disclaimers for the
purpose of any applicable Laws. THE PRODUCER EXPRESSLY DISCLAIMS AND NEGATES AS
TO THE SATELLITE PRODUCTION SYSTEM, FACILITIES, EQUIPMENT AND SYSTEMS (A) ANY
IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (B) ANY IMPLIED OR EXPRESS
WARRANTY OF

Page 60

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

 

Execution Version

    FITNESS FOR A PARTICULAR PURPOSE, AND (C) ANY IMPLIED OR EXPRESS WARRANTY OF
CONFORMITY TO MODELS OR SAMPLES OF MATERIALS.       The express representations
and warranties of the Parties contained in this Agreement are exclusive and are
in lieu of all other representations and warranties, express, implied or
statutory. Except as expressly set forth in this Agreement, the Parties hereto
each disclaim all liability and responsibility for any other representation,
warranty, statements or communications (orally or in writing) to any other Party
(including, but not limited to, any information contained in any opinion,
information or advice that may have been provided to any such Party by any
employee, officer, director, agent, consultant, engineer or engineering firm,
trustee, representative, partner, member, beneficiary, stockholder or contractor
of such disclaiming Party or its Affiliates) wherever and however made.      
Without limiting the generality of the foregoing, the Producer makes no warranty
or representation, express or implied, with respect to the accuracy,
completeness or materiality of the information, records and data now, heretofore
or hereafter made available to the Magnolia Owners in connection with the
Satellite Production System, facilities, equipment and systems or this
Agreement, including, without limitation, (i) any description of the Satellite
Production System, facilities, equipment and systems, (ii) regulatory matters,
(iii) the physical, operating, regulatory compliance, safety or environmental
condition of the Satellite Production System, facilities, equipment and systems
at any time, (iv) potential for use of the Satellite Production System,
facilities, equipment and systems, (iv) value of the Satellite Production
System, facilities, equipment and systems, (v) any projections as to events that
could or could not occur, or that are likely to occur, and (vi) any other
matters contained in or omitted from any information or material furnished to
Magnolia Owners by Producer. Any and all such data, information and material
furnished by Producer is provided as a convenience only and any reliance on or
use of same is at the Magnolia Owners’ sole risk. The Producer and its
Affiliates, and its officers, directors, employees, agents, consultants,
trustees or representatives, shall have no liability to the Magnolia Owners or
their Affiliates, and their officers, directors, employees, agents, consultants,
trustees or representatives, resulting from any use, authorized or unauthorized,
of the information, records and data relating to the Satellite Production
System, facilities, equipment and systems provided by or on behalf the Magnolia
Owners, and the Magnolia Owners hereby waive and release the Producer from same.
  15.4   Representations and Warranties       Each Party represents and warrants
to the other Parties that on and as of the Effective Date hereof:

  15.4.1   it is duly formed and validly existing and in good standing under the
Laws of its state or jurisdiction of formation, with power and authority to
carry on the business in which it is engaged and to perform its respective
obligations under this Agreement;

Page 61

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

 

Execution Version

  15.4.2   the execution and delivery of this Agreement have been duly
authorized and approved by all requisite corporate, limited liability company,
partnership or similar action;     15.4.3   it has the entire requisite
corporate, limited liability company, partnership or similar power and authority
to enter into this Agreement and perform its obligations hereunder;     15.4.4  
the execution and delivery of this Agreement does not, and consummation of the
transactions contemplated herein will not, violate any of the provisions of
organizational documents, any agreement pursuant to which it or its property is
bound, to its knowledge, any applicable Laws; and     15.4.5   this Agreement is
valid, binding and enforceable against it in accordance with its terms, subject
to bankruptcy, moratorium, insolvency and other Laws generally affecting
creditors’ rights and general principles of equity (whether applied in a
proceeding in a court of law or equity).

15.5   Warranty of Title

  15.5.1   The Producer warrants title to its share of Satellite Production to
be handled by the Magnolia TLP Operator and indemnifies the Magnolia Owners
pursuant to Article 11.2.1 (Satellite Production) of this Agreement.     15.5.2
  Each Magnolia Owner severally warrants title to its share of the Magnolia TLP
Production to be handled on the Magnolia TLP and indemnifies the Producer
pursuant to Article 11.2.2 (Non-Satellite Production) of this Agreement.

15.6   Standard of Performance       The Magnolia TLP Operator and the Satellite
Operator will conduct all operations in a proper and workmanlike manner in
accordance with methods and practices customarily used in sound oil and gas
field practice and with that degree of diligence reasonable and ordinarily
exercised by an experienced prudent operator engaged in a similar activity under
the same or similar circumstances.   15.7   Producer’s Employees, Consultants,
and Contractors       The Producer will keep the Magnolia Leases, the Magnolia
TLP and all Non-Satellite Production free from all liens and encumbrances which
might arise by reason of the their operations and activities conducted under
this Agreement.

Page 62

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

 

Execution Version

15.8   Magnolia TLP Operator’s Employees, Consultants, and Contractors       The
Magnolia Owners will keep the Satellite Leases, the Satellite Production and the
Satellite Production System free from all liens and encumbrances which might
arise by reason of the their operations and activities conducted under this
Agreement, except as expressly provided in Article 13.2.1 (b).   15.9   Further
Assurances       Subject to the terms and conditions set forth in this
Agreement, each of the Parties agrees to use all reasonable efforts to take, or
to cause to be taken, all actions, and to do, or to cause to be done, all things
reasonably necessary, proper or advisable under applicable Laws to consummate
and make effective the transactions contemplated by this Agreement. In case, at
any time after the execution of this Agreement, any further action is deemed
necessary or desirable to carry out its purposes, the proper officers,
directors, or other appropriate representatives of the Parties will take or
cause to be taken all such reasonably necessary action.   15.10   Non-Compliance
Citations       The Producer will be responsible for any non-compliance
citations issues by governmental agencies with respect to the Satellite
Production System or the Satellite Leases, and such citations will be promptly
reported to the Magnolia TLP Operator. The Magnolia Owners will be responsible
for any non-compliance citations issued by governmental agencies with respect to
the Magnolia Leases or the Magnolia TLP and such citations will be promptly
reported to the Satellite Operator.   15.11   Dispute Resolution      
Compliance with this Article 15.11 (Dispute Resolution) shall constitute a
condition precedent to any Party seeking judicial enforcement of any provisions
of this Agreement. Any dispute concerning this Agreement shall be resolved under
the mediation procedures of this Article 15.11 (Dispute Resolution). The Parties
will first attempt in good faith to resolve all disputes by negotiations between
management level persons who have authority to settle the controversy. If either
Party believes further negotiations are futile, such Party may initiate the
mediation process by so notifying the other Party in writing. The other Parties
shall then attempt in good faith to resolve the dispute by mediation in Houston,
Texas, employing management level persons with authority to settle the dispute,
in accordance with the International Institute for Conflict Prevention and
Resolution Model Procedure for Mediation of Business Disputes, as such procedure
may be modified by agreement of the Parties. If the dispute has not been
resolved pursuant to mediation within sixty (60) days after initiating the
mediation process, the dispute may be addressed in any manner a Party deems
appropriate, but subject to Article 15.15.1 (Confidentiality Provisions). All
negotiations and mediations pursuant to this Article 15.11 (Dispute Resolution)
are confidential and shall be treated as compromise and settlement negotiations
for purposes of applicable rules of evidence. Notwithstanding the provisions of
this Article 15.11 (Dispute Resolution), any Party may seek from the courts any
interim, provisional or injunctive relief that may be necessary to protect the
rights or

Page 63

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

 

Execution Version

    property of any Party or maintain the status quo before, during or after the
pendency of any mediation or settlement discussions. The institution and
maintenance of any judicial action or proceeding for any such interim,
provisional or injunctive relief shall not constitute a waiver of the right or
obligation of any Party to submit the dispute to negotiation and mediation as
described above, including Claims or disputes arising from the exercise of such
interim, provisional or injunctive relief. The provisions of this Article 15.11
(Dispute Resolution) shall not limit the obligation of a Party to defend,
indemnify of hold harmless the other Parties against court proceedings or other
Claims as provided in Article XI (Liabilities and Indemnification). The cost of
the mediation shall be shared 50% by Magnolia Owners and 50% by Producer.  
15.12   Waivers       Neither action taken (including, without limitation, any
investigation by or on behalf of a Party) nor inaction pursuant to this
Agreement will be deemed to constitute a waiver of compliance with any
representation, warranty, covenant or agreement contained herein by the Party
not committing such action or inaction. A waiver by any Party of a particular
right, including, without limitation, breach of any provision of this Agreement,
will not operate or be construed as a subsequent waiver of that same right or a
waiver of any other right.   15.13   Remedies       The rights, obligations, and
remedies created by this Agreement are cumulative and in addition to any other
rights, obligations, or remedies otherwise available at Law or in equity.
Nothing herein will be considered an election of remedies.   15.14   No Third
Party Beneficiaries       Except to the extent a Third Party is expressly given
rights herein, any agreement herein contained, expressed or implied, will be
only for the benefit of the Parties and their respective legal representatives,
successors, and assigns, and such agreements or assumptions will not inure to
the benefit of any other Person whomsoever, it being the intention of the
Parties that no Person will be deemed a Third Party beneficiary to this
Agreement except to the extent a Third Party is expressly given rights herein.  
15.15   Confidentiality Provisions

  15.15.1   The Parties agree to keep in secrecy and confidence until the
termination of this Agreement the Confidential Information, save and except:

  (a)   to their respective Affiliates, subcontractors and consultants and their
respective employees, servants or agents actively engaged in the operations
hereunder to the extent that they need to know for purposes related to this
Agreement, or     (b)   if and to the extent it is required or requested to do
so by any Laws, provided that the disclosing Party will, if permitted to do so,
notify

Page 64

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

 

Execution Version

      the other Parties in writing as soon as possible upon becoming aware of
any such requirement, or     (c)   to any bona fide prospective assignee or
transferee of all or any portion of a Party’s interest in the Magnolia Leases or
Satellite Leases (whichever the case may be) provided that such prospective
assignee or transferee has executed a confidentiality agreement for a term of
not less than four (4) years requiring it to maintain the secrecy and
confidentiality of the Confidential Information.

  15.15.2   Notwithstanding the foregoing, the provision of confidentiality,
use, and disclosure above will not apply to information:

  (a)   which was in the public knowledge or literature at the time of
disclosure by any Party hereunder,     (b)   which was already in the possession
of any Party at the time of disclosure hereunder without obligation of
confidentiality,     (c)   which was or is subsequently developed by any Party
without use of the Confidential Information,     (d)   which subsequent to
disclosure hereunder and without fault of the disclosing Party becomes part of
the public knowledge, or     (e)   which is disclosed to any Party (without the
obligation of confidentiality) by a Third Party having the legal right to do so.

  15.15.3   Any Party who assigns or transfers its interest in this Agreement
remains bound by the confidentiality obligations of this Agreement as to any
Confidential Information obtained throughout the term of this Agreement.    
15.15.4   All Confidential Information made available to the Parties hereunder
will be done so on an “as is” basis without any warranties, either express or
implied, as to the accuracy, validity, or utility of such information. In no
event will any Party be liable for any damages of whatever nature arising out
of, or resulting from, making the Confidential Information available under this
Agreement.

15.16   Commitment of Oil and Gas Reserves       Subject to Article X (Term,
Default, Termination and Continuation of Services), for the life of the
Satellite Leases, the Producer commits to: (i) deliver all Satellite Production
to the Magnolia TLP for processing, handling, and delivery, except that the
Producer reserves unto itself, its successors and assigns, the right to use
quantities of Satellite Production sufficient to satisfy (a) development and
operations of the Satellite Leases including, but not limited to, additional
recovery operations and use of Gas for fuel,

Page 65

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

 

Execution Version

    flaring, pigging, drilling, deepening, reworking, or such other operations
and (b) any royalty interest in Satellite Production that the royalty owner may
elect to in-kind.   15.17   Compliance With Laws and Regulations       This
Agreement and all of the terms and conditions contained herein, and the
respective obligations of and the operations conducted by the Parties, are
expressly subject to and will remain subject to and comply with all valid and
applicable Laws. Each of the Parties hereto agree that they will at all times
maintain their respective facilities and leases and conduct their operations
thereon in accordance with all valid and applicable Laws.       No Party will
suffer a forfeiture or be liable in damages to the other Parties for any delays
or damages or any failure to act, due, occasioned or caused by reason of Laws
respecting the activities or operations covered hereby and delays due to the
above causes, or any of them, will not be deemed to be a breach of or failure to
perform under this Agreement.

  15.17.1   Applicable Law: THE PROVISIONS OF THIS AGREEMENT AND THE
RELATIONSHIP OF THE PARTIES WILL BE GOVERNED AND INTERPRETED ACCORDING TO THE
LAWS OF THE STATE OF LOUISIANA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS
OF ANOTHER JURISDICTION. Subject to Article 15.11 (Dispute Resolution) to the
extent permissible by Laws, Lafayette, Louisiana shall be the exclusive venue
for all proceedings brought by any party regarding any Claim under this
Agreement.     15.17.2   Severance of Invalid Provisions: The Parties intend
that every provision of this Agreement, the Exhibits attached hereto, and the
documents incorporated herein by reference be severable. If any term or other
provision of this Agreement is found to be invalid, illegal or incapable of
being enforced by any rule of Laws or public policy, all other conditions and
provisions of this Agreement will remain in full force and effect. The
illegality, invalidity or unenforceability of any provisions hereof will not
affect the legality, validity or enforceability of the remainder of this
Agreement. In the case of conflict between the provisions of this Agreement and
the provisions of any applicable Laws, the provisions of the Laws will govern
over the provisions of this Agreement. If, for any reason and for so long as,
any clause or provision of this Agreement is held by a court of competent
jurisdiction to be illegal, invalid, unenforceable or unconscionable under any
Laws (or interpretation thereof), the remainder of this Agreement will not be
affected by such illegality or invalidity. Any such invalid provision will be
deemed severed from this Agreement as if this Agreement had been executed with
the invalid provision eliminated. Any term or provisions of this Agreement that
is invalid or unenforceable in any jurisdiction will be ineffective only as to
such jurisdiction and then only to the extent of such invalidity or
unenforceability, without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any terms and provisions of this Agreement in any other

Page 66

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

 

Execution Version

      jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, each provision will be interpreted to be only so broad as is
enforceable. A bankruptcy or similar trustee must accept or, to the extent
permitted by Law, reject this Agreement in its entirety.     15.17.3   Fair and
Equal Employment: Each of the Parties is an Equal Opportunity Employer. To the
extent that this Agreement may be subject to Executive Order 11246, as amended,
the equal opportunity provisions (41 CFR 60-1) are incorporated herein by
reference. If the Non-Discrimination in the OCS provisions of 30 CFR 270 apply
to this Agreement and the operations conducted under it, the provisions of 30
CFR 270 are also incorporated by reference. To the extent required by applicable
Laws, this Agreement also includes and is subject to the affirmative action
clauses concerning disabled veterans and veterans of the Vietnam era (41 CFR
60-250) and the affirmative action clauses concerning employment of the
handicapped (41 CFR 60-741), which clauses are incorporated herein by reference.
In performing work under this Agreement, the Parties agree to comply with (and
the Magnolia TLP Operator and the Satellite Operator, as applicable, will
require each independent contractor to comply with) the governmental
requirements set forth in Exhibit “L” (Certification of Non-Segregated
Facilities) attached hereto, pertaining to non-segregated facilities. This
Agreement and the Parties are also subject to any other applicable Laws relating
to non-discrimination. The Magnolia Owners and the Producer do not condone in
any way the use of illegal drugs or controlled substances. The Magnolia TLP
Operator and the Satellite Operator, as applicable, will maintain in effect a
drug free workplace policy.

15.18   Construction and Interpretation of this Agreement       The construction
and interpretation of the terms of this Agreement will be governed by the
following conventions:

  15.18.1   Heading for Convenience: All references in this Agreement to
articles, sections, subsections and Exhibits hereof will refer to the
corresponding article, section, subsection or exhibit of this Agreement, unless
specific reference is made to such articles, sections, subsection or exhibit of
another document or instrument. All titles or headings to Articles, subarticles
or other divisions of this Agreement except Article II (Definitions and
Exhibits) or the Exhibits hereto are only for the convenience of the Parties and
will not be construed to have any effect or meaning with respect to the other
content of such Articles, subarticles or other divisions, such other content
being controlling as to the agreement between the Parties.         Except as
otherwise provided in this Agreement, each reference to an article of this
Agreement will include the entire referenced article including its sections and
subsections. Except as otherwise provided in

Page 67

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

 

Execution Version

      this Agreement, each reference to a section in this Agreement will include
all of the section including its subsections. Except as otherwise provided in
this Agreement, each reference to an exhibit in this Agreement will include all
of the exhibit, including sections and subsections.     15.18.2   Gender: All
personal pronouns used in this Agreement, whether used in the masculine,
feminine, or neuter gender, will include all other genders.     15.18.3  
Number: Whenever the context requires, reference herein made to the singular
will be understood to include the plural, and the plural will likewise be
understood to include the singular.     15.18.4   Independent Representation:
Each individual member of the Magnolia Owners and the Producer declare that they
have contributed to the drafting of this Agreement or have had it reviewed by
their counsel before signing it. Each agrees that it has been purposefully drawn
and correctly reflects their understanding of the transaction that it
contemplates. Accordingly, this Agreement, though drawn by one Party, will be
considered for all purposes as prepared through the joint efforts of the
Parties, and will not be construed unfairly and unreasonably and not more
strictly against one Party or another Party as a result of the preparation. Each
Party has had the benefit of independent representation with respect to the
subject matter of this Agreement.

15.19   Integrated and Entire Agreement       This Agreement, and the Exhibits
attached thereto, constitute the entire and final agreement between the Parties
pertaining to the subject matter hereof and as such supersedes all prior
agreements, understandings, negotiations, and discussion, whether oral or
written. There are no representations, warranties, promises, or other
agreements, oral or written, between the Parties in connection with the subject
matter hereof, other than those specifically set forth in this Agreement or in
documents delivered pursuant to this Agreement.       Upon execution of this
Agreement by all of the Parties, this Agreement will supersede and replace all
previous negotiations, understandings, promises, or discussions, whether written
or oral, relative to the subject matter of this Agreement. Each of the Parties
acknowledges that no other Party has made any promise, representation or
warranty that is not expressly stated in this Agreement. This Agreement is
entire as to all of the performances to be rendered under it and breach of any
provision will constitute a breach of the entire Agreement.   15.20   Amendment
and Modification       Except as otherwise provided in this Agreement, all
amendments, supplements, and modification to this Agreement will be in writing
and executed by all of the Parties. This

Page 68

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

 

Execution Version

    Agreement will not be modified or changed except by a written amendment
signed by all of the Parties.   15.21   Survivability       The provisions,
including any obligations associated therewith, relating to the payment of
invoices, audit, abandonment, indemnity, regulatory compliance, representation,
warranty, and confidentiality, will survive the cancellation or termination of
this Agreement without regard to any action taken pursuant to this Agreement,
including without limitation, the execution of any documents affecting an
interest in real property or any investigation made by the Party asserting the
breach thereof. Notwithstanding the foregoing, the indemnification provisions
contained in Article XI (Liabilities and Indemnification) will survive until the
later of (i) judicial declaration of the expiration of the applicable statute of
limitations or (ii) all Claims arising hereunder have been concluded.
Accordingly, cancellation or termination of this Agreement will not relieve any
Party from any costs, expenses, or liability accrued or incurred prior to the
cancellation or termination of this Agreement, and the provisions of this
Agreement will continue in force for such additional time as necessary until all
Claims have been settled or otherwise disposed of and a final accounting and
settlement has been made under this Agreement.   15.22   Existing Agreements    
  Unless specifically excepted or reserved, and to the extent that they are
binding on the Magnolia Owners, the Producer and the Magnolia Owners agree that
this Agreement will be made subject to (and Producer accept that this Agreement
is subject to) any and all valid and existing reservations, exceptions,
limitations, contracts, agreements, licenses, leases, grants and all other
agreements or instruments affecting the Magnolia TLP (i) which are of record
with the MMS or official county/parish records, (ii) of which Producer have
actual or constructive notice or knowledge, including, without limitation, any
matter included or referenced in materials made available to Producer by the
Magnolia Owners for its review prior to the execution of this Agreement,
(iii) which are listed in this Article 15.22 (Existing Agreements), or (iv) are
referred to in the contracts and agreements listed in this Article 15.22
(Existing Agreements).              None

ARTICLE XVI – EXECUTION

16.1   Effect       Upon its execution by all of the Parties, this Agreement
will become effective as of the Effective Date and will be binding upon and
inure to the benefit of the Parties and their respective legal representatives,
successors, and assigns. This Agreement does not benefit or create any rights in
any Person not a Party to this Agreement.  

Page 69

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

 

Execution Version

16.2   Counterparts       This Agreement may be executed by signing the original
or a counterpart thereof. If this Agreement is executed in multiple
counterparts, each counterpart will be deemed an original and all counterparts
when taken together will constitute but one and the same Agreement with the same
effect as if all of the Parties had signed the same instrument. This Agreement
may also be ratified by separate instrument referring to this Agreement and
adopting by reference all the provisions of this Agreement. A ratification will
have the same effect as an execution of the original Agreement.

IN WITNESS WHEREOF, this Agreement is executed by each Party through its duly
authorized agent or representative on the date shown below the respective
signature of each, but is effective as of the Effective Date.
THE MAGNOLIA OWNERS
CONOCOPHILLIPS COMPANY (Magnolia Owner and Magnolia TLP Operator)

         
By:
       
 
 
 
   
Name:
  David W. Twomey    
 
       
Title:
  Attorney-in-Fact    
 
       
Date:
                      , 2007    

DEVON ENERGY PRODUCTION COMPANY, L. P. (Magnolia Owner)

         
By:
       
 
 
 
   
Name:
  Mark K. Gress    
 
       
Title:
  Agent and Attorney-in-Fact    
 
       
Date:
                      , 2007    

Page 70

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

 

Execution Version
THE PRODUCER
CALLON PETROLEUM OPERATING COMPANY (Producer and Satellite Operator)

         
By:
       
 
 
 
   
Name:
  Fred L. Callon    
 
       
Title:
  President and CEO    
 
       
Date:
                      , 2007    

Page 71