Exhibit 10.3

 

LIMITED LIABILITY COMPANY AGREEMENT

 

CONTANGO OFFSHORE EXPLORATION LLC

 

THIS Limited Liability Company Agreement dated effective the 1st day of
November, 2002 (this “AGREEMENT”), among Juneau Exploration, L.P., a Texas
limited partnership (“JEX”), with offices at 26902 Nichols Sawmill Road,
Magnolia, TX 77355-3586, and COE Offshore, LLC, a Delaware limited liability
company (“COE O/S”), with offices at 3700 Buffalo Speedway, Suite 960, Houston,
TX 77098.

 

WITNESSETH:

 

WHEREAS, JEX and COE O/S caused Contango Offshore Exploration LLC (the
“COMPANY”) to be formed under the Delaware Limited Liability Company Act (the
“ACT,” which term will include any future amendments thereto), a copy of the
certificate of formation being attached hereto as EXHIBIT A; and

 

WHEREAS, JEX and COE O/S wish to provide for, among other things, membership in
and management of the COMPANY, all on the terms hereinafter set forth.

 

NOW, THEREFORE, JEX and COE O/S hereby agree as follows:

 

1. Limited Liability Company Agreement. This AGREEMENT is a limited liability
company agreement under and as provided in the ACT.

 

2. Members. Concurrently with the execution of this AGREEMENT, JEX and COE O/S
will become and be the MEMBERS of the COMPANY. JEX and COE O/S and any other
individual, corporation or other entity that becomes a member of the COMPANY in
accordance with the terms of this AGREEMENT are collectively called “MEMBERS,”
and any one of them is called a “MEMBER.” The neuter pronoun will refer to a
MEMBER regardless of the MEMBER’s gender.

 

3. Duration of the Company. The COMPANY will have perpetual existence.

 

4. Business of the Company. The business of the COMPANY will be the acquisition,
reprocessing, interpretation and evaluation of speculative and proprietary
geophysical and geological data (“DATA”) and the identification, recovery and
exploitation of hydrocarbon deposits.

 

5. Contributions by the Members.

 

  A. COE O/S. COE O/S agrees to contribute Seven Million Four Hundred Thousand
Dollars ($7,400,000.00) to the COMPANY for working capital in the manner
hereinafter provided, which dollar amount may be revised at any time and from
time to time upon approval by all of the MEMBERS. JEX, on behalf of the COMPANY,
shall have the right to demand and receive from COE O/S working capital for the
COMPANY as and when needed, at any time and from time to time. Upon receipt of a
cash call from JEX on behalf of the COMPANY (“CASH CALL”), COE O/S shall wire
transfer the requested funds to the COMPANY within the time period specified in
the CASH CALL and shall provide evidence of the same to JEX. In the event COE
O/S fails to pay any CASH CALL when due, JEX, on behalf of the COMPANY, will
give COE O/S written notice of such nonpayment (“FINAL NOTICE”), and COE O/S
will have forty-eight (48) hours (excluding weekends and federal holidays) from
receipt of such FINAL NOTICE (the “DEADLINE”) within which to make payment in
full to the COMPANY of the CASH CALL.

 

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Due to the vagaries involved in any given CASH CALL, JEX will set forth in the
FINAL NOTICE the ramifications of nonpayment by COE O/S on or before the
DEADLINE, citing the specific wells, prospects, blocks, leases and/or DATA
involved or affected thereby (“COVERED ASSETS”). Failure by COE O/S to timely
remit payment in full of a CASH CALL on or before the DEADLINE after receiving
FINAL NOTICE will be deemed a material breach by COE O/S of its obligations
under this AGREEMENT, and thereafter COE O/S shall be considered in default with
respect to the COVERED ASSETS. In addition to any other available remedies
available to JEX, the penalty under this AGREEMENT for such default shall be
forfeiture by COE O/S (and reassignment to JEX, if applicable) of its interests
in or rights to the COVERED ASSETS (“FORFEITED OWNERSHIP”). Thereafter, the
COVERED ASSETS shall be excluded from this AGREEMENT, and the FORFEITED
OWNERSHIP shall automatically inure to the benefit of JEX.

 

  B. JEX. JEX will provide its know-how and expertise in oil and gas exploration
and development to the COMPANY. In addition, JEX will from time to time make
available to the COMPANY certain DATA license and use agreements (“LICENSES”),
subject to the terms and conditions of the applicable LICENSES and this Section
5.B. Concurrent with the MEMBERS’ execution of this AGREEMENT, JEX will
contribute the following LICENSES to the COMPANY as hereinafter provided, and
COE O/S hereby agrees to assume and bear full responsibility for payment of all
amounts due under or in connection with the DATA or LICENSES, including, but in
no way limited to, the amounts set forth below:

 

  (i) Volume License Agreement dated September 9, 2002, as amended October 18,
2002, between JEX and Seismic Exchange, Inc., in the amount of Eight Hundred
Seventy-Five Thousand and No/100 Dollars ($875,000.00)1;

 

  (ii) Master Geophysical Data-Use License dated May 10, 2001 and Supplemental
Agreement No. VMS01 effective October 7, 2002, between JEX and Veritas Marine
Surveys, in the amount of Three Hundred Twenty-Six Thousand and No/100 Dollars
($326,000.00)2;

 

  (iii) Seismic Data Review and Possession Agreement (Contract No. 02-10-001
AJF) dated October 3, 2002, between JEX and Seitel Data Ltd., in the amount of
One Million Two Hundred Fifty Thousand and No/100 Dollars ($1,250,000.00)3; and

 

  (iv) Master License Agreement dated November 7, 2002 together with
Supplementary Agreement for License of Geophysical Data - Supplement Number 1 of
even date, between JEX and TGS-NOPEC Geophysical Company (“TGS”), in the amounts
of:

 

  (a) One Million Five Hundred Thousand Dollars ($1,500,000.00)4 due on or
before November 30, 2002;

 

  (b) Sixty-Two Thousand Five Hundred Dollars ($62,500.00) due on or before
December 1, 2002 and monthly thereafter [on or before the first of each month]
for twenty-three (23) consecutive months; and

 

  (c) Fifty Thousand Dollars ($50,000.00) per block for each OCS block leased or
earned using the TGS dataset, and One Hundred Thousand and No/100 ($100,000.00)
per block for each OCS block covered by the TGS dataset that is drilled to total
depth, said performance bonuses, if any, due and payable until the earlier of:
November 7, 2007 or such time as TGS participates in the net profits from Viosca
Knoll Block 75, Viosca Knoll Block 211 or Ship Shoal Block 155.

 

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1 Paid in full by Contango Oil & Gas Company on 9/26/02.

2 Paid in full by Contango Oil & Gas Company on 10/04/02.

3 Paid in full by Contango Oil & Gas Company on 10/29/02.

4 Paid in full by Contango Oil & Gas Company on 11/26/02.

 

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It is understood and agreed that payment of such sums by COE O/S represents only
a cash contribution to the COMPANY, not the purchase of an interest in the
LICENSES or a right to use or receive delivery of the DATA. JEX will be the only
MEMBER of the COMPANY entitled to use said DATA, and neither the COMPANY nor COE
O/S nor any other MEMBER of the COMPANY shall have any ownership interest in or
rights to use or receive delivery of said DATA including any resulting or
related interpretations, derivatives or reprocessings. The COMPANY’s and the
other MEMBERS’ access to the DATA will be limited to the same rights afforded
non-licensees under the LICENSES.

 

  C. The COMPANY will not pay interest on capital contributions.

 

  D. Each MEMBER confirms to the COMPANY and to the other MEMBERS that it and/or
its principal equity owners are experienced in the oil and gas industry and that
it is fully aware of the risks involved in the venture set forth in this
AGREEMENT.

 

6. Management of the Company.

 

  A. JEX will manage the business, affairs and day-to-day operations of the
COMPANY and, except as hereinafter provided, will make all decisions with
respect to the foregoing and the strategic direction of the COMPANY.

 

  B. As part of its management responsibilities, JEX will, for and on behalf of
the COMPANY, acquire, analyze, process and/or reprocess, interpret and use the
DATA to identify hydrocarbon prospects in which the COMPANY should acquire an
interest; and, except as hereinafter provided, JEX will make all decisions with
respect to the acquisition of DATA and leases, the development of prospects and
the exploitation of production from the prospects.

 

  C. Before the COMPANY acquires an interest in any prospect (other than
prospects to be bid upon at regularly scheduled federal and/or state lease
sales), JEX will advise the other MEMBERS of the prospect and its potential
risks; the terms and other details of the interest to be acquired, including
whether that interest will be acquired alone or in conjunction with one or more
other parties; the manner in which the COMPANY will develop the prospect; the
estimated cost to the COMPANY to acquire the interest and develop the prospect;
and any other information about the venture that the other MEMBERS may request.
Prior to bidding upon prospects at federal and/or state lease sales, JEX will
advise the other MEMBERS in general terms of the number of prospects the COMPANY
expects to bid on and the approximate dollars the COMPANY anticipates exposing
at any such lease sale. Immediately following the lease sale, JEX will provide
the other MEMBERS with full particulars regarding the COMPANY’s participation at
such sale.

 

Notwithstanding the foregoing paragraph, if, under Section 6D(ii) below, JEX may
cause the COMPANY to acquire an interest in a prospect without the approval of
the other MEMBERS, and if JEX determines that the COMPANY may lose a worthwhile
opportunity if JEX must report about the prospect to the other MEMBERS before
the acquisition is made, then JEX may cause the COMPANY to acquire the interest
before making the report; and if JEX does so, then JEX will promptly thereafter
advise the other MEMBERS of the information required under the foregoing
paragraph.

 

  D. JEX may, without the approval of the other MEMBERS, cause the COMPANY to do
any of the following and to enter into agreements to accomplish the same:

 

  (i) license or acquire DATA, provided the cost to the COMPANY does not exceed
One Hundred Thousand Dollars ($100,000.00);

 

  (ii) acquire an interest in a prospect, either alone or in conjunction with
one or more other parties, and make all arrangements with respect to that
interest and prospect, provided JEX’s estimated cost for the COMPANY to acquire
the interest and develop the prospect does not exceed Five Hundred Thousand
Dollars ($500,000.00);

 

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  (iii) borrow up to and including One Million Dollars ($1,000,000.00) in
connection with any prospect in which the COMPANY has acquired an interest and
grant a security interest in the COMPANY’s interest in that prospect to secure
the COMPANY’s obligations in respect of that borrowing;

 

  (iv) sell, lease or otherwise dispose of any asset of the COMPANY which has a
reasonable value not exceeding Five Hundred Thousand Dollars ($500,000.00);

 

  (v) settle any claim for an amount not exceeding One Hundred Thousand Dollars
($100,000.00); and

 

  (vi) apart from the direct costs and expenses to acquire, interpret, evaluate
and reprocess the DATA and acquire interests in and develop prospects, budget
and incur expenses for the operation of the COMPANY not in excess of One Million
Dollars ($1,000,000.00) per fiscal year of the COMPANY. Beginning with fiscal
year 2004, JEX will prepare the budget for each fiscal year, with expenses
itemized, and furnish the other MEMBERS a copy thereof. The budget may include:
fees for professionals to provide expertise [which none of the MEMBERS can
provide] necessary to effectively conduct the business of the COMPANY, and all
costs, risks and expenses, direct, indirect and/or allocated, that are related
to, associated with or in support of reprocessing the DATA by JEX in-house
(“REPROCESSING G&A”). In the event JEX receives third party reimbursement for
all or any portion of the REPROCESSING G&A, COE O/S shall receive credit for
such reimbursed amounts.

 

In making its estimate of the cost to the COMPANY to acquire an interest and
develop a prospect, JEX may take into account investments by participants to the
extent that JEX reasonably and in good faith determines that it can obtain
participation by others in the prospect.

 

The amounts set forth in items (i) through (vi) above may be amended according
to the determination of two (2) or more MEMBERS owning at least fifty-one
percent (51%) of the profits of the COMPANY.

 

  E. Approval by two (2) or more MEMBERS owning at least fifty-one percent (51%)
of the profits of the COMPANY will be required for any matter described in
Section 6.D above for which JEX does not have sole authority; for the COMPANY to
borrow money or enter into any agreement other than for the express purposes in
the express situations described in Section 6.D above; for the COMPANY to lend
money or issue a guarantee; except as provided in Section 6D(vi) above, for the
COMPANY to engage the services of anyone; and for the COMPANY to arrange the
defense or prosecution of any claim.

 

  F. Approval by all of the MEMBERS will be required for the COMPANY to merge,
consolidate or otherwise combine with another entity, make an assignment for the
benefit of creditors or seek relief under any bankruptcy, insolvency or similar
law and engage in any business other than that set forth in Section 4 above.

 

  G. At the request of any MEMBER, the MEMBERS will meet to discuss the business
of the COMPANY.

 

  H. The MEMBERS will record, in writings signed by them, their approvals,
agreements, determinations and other actions under or in respect of this
AGREEMENT.

 

7. Compensation; Expenses.

 

  A. The COMPANY will grant to certain JEX employees (as designated by JEX), by
an instrument substantially in the form of EXHIBIT 7.A hereto, an overriding
royalty of three and one-third percent (3 1/3%) of one hundred percent (100%)
[proportionately reducible as provided in EXHIBIT 7.A] burdening any oil, gas
and/or mineral interest that the COMPANY acquires.

 

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  B. Except as expressly provided in this AGREEMENT, the MEMBERS will not be
entitled to compensation or reimbursement for their services to the COMPANY or
for the services of their employees to the COMPANY. Further, the MEMBERS will
cause their employees not to seek compensation from the COMPANY, and each MEMBER
will indemnify the COMPANY against and hold it harmless from any claims for
compensation by any of its employees and any expenses (including, without
limitation, legal fees) that the COMPANY incurs in connection with any such
claim.

 

  C. The MEMBERS will pay their own expenses (including, without limitation,
legal fees) in connection with the preparation and negotiation of this
AGREEMENT, but the COMPANY will reimburse JEX for the filing fees and service
company fees to establish the COMPANY and to qualify the COMPANY to do business
in Texas, Louisiana and any other venues or governing bodies deemed necessary by
JEX.

 

8. Profits and Losses; Taxation.

 

  A. JEX and COE O/S will have a one-third (1/3) and two-thirds (2/3) interest,
respectively, in the profits of the COMPANY. However, notwithstanding the
foregoing or anything contained in this AGREEMENT to the contrary, the MEMBERS
agree that in the event COE O/S fails or refuses to pay in full the One Million
Five Hundred Thousand and No/100 Dollars set forth under Section 5B(iv)(b) of
this AGREEMENT, the MEMBERS’ interests in the profits of the COMPANY will become
JEX one-half (1/2) and COE O/S one-half (1/2).

 

The losses of the COMPANY for any fiscal year will be shared by the MEMBERS in
proportion to their capital accounts on the day before the last day of that
fiscal year. The capital accounts of the MEMBERS will be determined in
accordance with the requirements of the Internal Revenue Code and the rules and
regulations thereunder from time to time in effect (collectively called the
“CODE”).

 

  B. The profits and losses of the COMPANY and items of income, gain, loss,
deduction, expense, credit and similar items will be determined by the COMPANY’s
accountants in accordance with generally accepted accounting principles.

 

  C. The COMPANY will be treated as a partnership for federal income tax
purposes and, wherever possible, for state and local income tax purposes.

 

The COMPANY will make the following elections for its first and subsequent tax
years:

 

  (i) to deduct currently, in accordance with the CODE and the relevant
provisions of state law, all intangible drilling and development costs with
respect to drilling productive and non-productive wells and the preparation of
wells for the production of hydrocarbons;

 

  (ii) to recover the basis of recovery property using the maximum recovery rate
permitted by the CODE; and

 

  (iii) to deduct expenses of organizing the COMPANY ratably over a sixty (60)
month period in accordance with Section 709 of the CODE.

 

The COMPANY will make all other elections required, or permitted to be made, by
it under the CODE or applicable state law in accordance with the written
agreement of all of the MEMBERS.

 

The COMPANY will elect COE O/S the “tax matters MEMBER” under and pursuant to
the CODE. COE O/S will have authority to apply the provisions of this AGREEMENT
relating to the maintenance of capital accounts and the allocation of profits
and losses and of each item of income, gain, loss and deduction of the COMPANY
so as to comply with Treasury Regulation Sections 1.704-1(b) and 1.704-2 from
time to time in effect. In the event COE O/S determines it is prudent to modify
any allocations of profits or losses or items of income, gain, loss or

 

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deduction, or debits or credits, or the manner in which they are computed, in
order to comply with said Treasury Regulations, then COE O/S may make such
modification provided that such modification will not have a material effect on
the allocation of profits or losses or on cash or other property in kind that
would otherwise be allocable or distributable to any MEMBER pursuant to this
AGREEMENT had no such modification been made. COE O/S will promptly notify the
other MEMBERS of any modification that it makes under this paragraph and of the
nature, extent and effect of the modification.

 

  D. If a MEMBER transfers all or a part of its interest in the COMPANY [see
Section 13], the COMPANY may, but will not be required to, elect to adjust the
basis of the COMPANY’s property in accordance with the provisions of the CODE
from time to time in effect. The COMPANY will make this election only in
accordance with the written agreement of all of the MEMBERS.

 

  E. The COMPANY and its MEMBERS will use their best efforts to cause the firm
that audits the COMPANY’s financial statements to sign the COMPANY’s federal
income tax return as preparer thereof. The MEMBERS will also use their best
efforts to cause the COMPANY to furnish the MEMBERS, within ninety (90) days
after the close of the COMPANY’s fiscal year, all information reasonably
necessary for the MEMBERS to prepare their federal income tax returns.

 

9. Distributions.

 

  A. Distributions by the COMPANY will be made to the MEMBERS in the same
percentages as their interests in the profits of the COMPANY.

 

  B. During each of its fiscal years, the COMPANY will set aside and maintain,
in a separate interest bearing account, forty percent (40%) of the revenues it
receives, as it receives them (the funds so set aside and the interest thereon
are called the “TAX RESERVE”). If the MEMBERS have taxable income from the
COMPANY for a fiscal year, the COMPANY will distribute to the MEMBERS, from and
to the extent of the TAX RESERVE for that year, an amount equal to forty percent
(40%) of the aggregate taxable income of the MEMBERS from the COMPANY for that
fiscal year. To the extent the TAX RESERVE for any fiscal year is not
distributed to the MEMBERS, it will be used for the general purposes of the
COMPANY.

 

  C. Except as provided above, the COMPANY will make distributions to the
MEMBERS only in accordance with the determination of all of the MEMBERS;
provided, however, any MEMBER may request a meeting by written notice to the
other MEMBERS to discuss a recommendation for a distribution.

 

  D. The COMPANY will not make distributions to the MEMBERS before year 2004.

 

10. Bank Accounts.

 

  A. The COMPANY will maintain bank accounts at such banks with such signatories
having such authority as two (2) or more MEMBERS owning at least fifty-one
percent (51%) of the profits of the COMPANY determine.

 

  B. Initially the COMPANY will maintain its accounts at Whitney Bank and/or
Guaranty Bank, Houston, Texas, with the following signatories: John B. Juneau,
Mark A. Stephens, Linda G. Ferszt, Tracy Mevs, Kenneth R. Peak, William H.
Gibbons and Lesia Bautina. Each of the foregoing will have single signature
authority up to Ten Thousand Dollars ($10,000.00); anything in excess of such
amount will require two (2) such signatories.

 

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11. Books and Records; Financial Statements.

 

  A. Unless two (2) or more MEMBERS owning at least fifty-one percent (51%) of
the profits of the COMPANY decide otherwise:

 

  (i) Commencing on the date of this AGREEMENT and ending on June 30, 2003, JEX
will, without charge, keep the books and records of the COMPANY and will prepare
and furnish to the other MEMBERS quarterly and annual balance sheets and profit
and loss and cash flow statements and such other reports as the MEMBERS deem
appropriate.

 

  (ii) Effective as of July 1, 2003, COE O/S may assume such duties from JEX and
perform the same, without charge, on behalf of the COMPANY; provided, however,
until such time as any given oil and gas lease acquired under this AGREEMENT
qualifies as producible, JEX will handle all payments in connection with such
lease, including, but not limited to, payment of lease sale bids, bonuses, delay
rentals and shut-in rentals.

 

  B. The COMPANY will maintain its books and records on an accrual basis.

 

  C. The COMPANY’s fiscal year will end on June 30th, and its first fiscal year
will end June 30, 2003.

 

  D. Unless changed by approval of all of the MEMBERS, the COMPANY will
initially engage the services of the accounting firm of Grant Thornton to audit
the COMPANY’s annual balance sheet and profit and loss statement.

 

  E. Any MEMBER may examine the books and records of the COMPANY during normal
business hours.

 

12. Restrictions on the Activities of the Members.

 

  A. While the COMPANY is in existence and for a period of one (1) year
thereafter, JEX and John B. Juneau will not – and John B. Juneau will cause any
entity which he and/or his wife and/or any of his children, either directly or
indirectly, control not to – without the approval of the other MEMBERS, (i)
acquire any interest in any area covered by any seismic data utilized hereunder
or (ii) exploit, participate in the recovery or exploitation of, derive any
benefit from or assist anyone else to recover or exploit or derive any benefit
from any area covered by any DATA utilized hereunder.

 

  B. While the COMPANY is in existence and for a period of one (1) year
thereafter, COE O/S and Contango Oil & Gas Company, a Delaware corporation
(“CONTANGO”) will not – and CONTANGO will cause any entity which it, either
directly or indirectly, controls not to – without the approval of the other
MEMBERS, (i) acquire any interest in any area covered by any seismic data
utilized hereunder or (ii) exploit, participate in the recovery or exploitation
of, derive any benefit from or assist anyone else to recover or exploit or
derive any benefit from any area covered by any DATA utilized hereunder.

 

  C. Control means the ability to control or determine the management of an
entity, whether by voting power or other means.

 

13. Resignation; Expulsion; Assignment.

 

  A. A MEMBER may not resign from the COMPANY prior to its dissolution and
winding up.

 

  B. A MEMBER may not be expelled from the COMPANY.

 

  C. Prior to the dissolution and winding up of the COMPANY, a MEMBER may not
assign, transfer, encumber or otherwise dispose of all or a portion of its
interest in the COMPANY (including its interest in profits and losses) except
for (i) transfers on the dissolution or death of a MEMBER,

 

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but in either of these cases the transfer may only be to the shareholders,
members or heirs, as the case may be, of the MEMBER and (ii) transfers approved
by all of the MEMBERS other than the MEMBER which is transferring its interest.
Any assignment, transfer, encumbrance or other disposition of a MEMBER’s
interest in the COMPANY in violation of the provisions of this AGREEMENT will be
null and void.

 

  D. A transferee (other than the COMPANY) of all or a portion of a MEMBER’s
interest in the COMPANY pursuant to the provisions of this AGREEMENT is called a
“Transferee.” A Transferee that is not a MEMBER of the COMPANY at the time of
the transfer will, without further act, become and be a MEMBER of the COMPANY. A
Transferee will be subject to the terms and provisions of this AGREEMENT, will
be entitled to the rights and benefits of the transferor (“Transferor”) to the
extent of the interest transferred and will be subject to the obligations of the
Transferor to the extent of the interest transferred; but a Transferee that is
not a signatory to this AGREEMENT at the time of the transfer will not be
entitled to receive any distributions unless and until that Transferee executes
this AGREEMENT by signing an instrument in the form of EXHIBIT 13.D-1 hereto. In
addition, if a MEMBER transfers all or a portion of its interest in the COMPANY,
all of the MEMBERS will enter into an amendment of this AGREEMENT, substantially
in the form of EXHIBIT 13.D-2 hereto, reflecting the changes in the ownership of
the profits and losses of the COMPANY resulting from the transfer and any other
matters to which the MEMBERS and a Transferee agree.

 

A Transferor and Transferee will agree between themselves as to the allocation
between them of the profits and losses and items of income, gain, loss,
deduction, expense, credit and similar items for the fiscal year in which the
transfer occurs, and they will jointly advise the COMPANY in writing of their
allocation.

 

  E. The COMPANY may not transfer or assign any of its rights under this
AGREEMENT, and any such transfer will be null and void.

 

14. Events of Bankruptcy. None of the events listed in Section 18-304 of the ACT
(EVENTS OF BANKRUPTCY) will result in a MEMBER ceasing to be a MEMBER of the
COMPANY.

 

15. Dissolution.

 

  A. The COMPANY will be dissolved and its affairs will be wound up upon the
occurrence of any of the following: approval by all of the MEMBERS; or the
election of any MEMBER (other than JEX), made by written notice to the COMPANY
and the other MEMBERS, at any time after the dissolution of or cessation of
business by JEX, or after the death of John B. Juneau, or John B. Juneau’s
ceasing to control JEX, including any incapacity that renders John B. Juneau
incapable of controlling JEX; or the election of any MEMBER (other than COE
O/S), made by written notice to the COMPANY and the other MEMBERS, at any time
after CONTANGO’s ceasing to control COE O/S; or the election of any MEMBER
(other than the MEMBER in breach or default), made by written notice to the
COMPANY and the other MEMBERS, within a period of one hundred twenty (120) days
after: a MEMBER materially breaches this AGREEMENT or materially defaults in any
of its obligations under this AGREEMENT and the MEMBER making the election
becomes aware of the breach or default. The right to elect to dissolve the
COMPANY because of a breach or default is in addition to any other rights and
remedies each MEMBER has by reason of that breach or default.

 

Control means the ability to control or determine the management of an entity,
whether by voting power or other means.

 

Except as provided above, the dissolution or death of a MEMBER or the occurrence
of any other event which terminates the membership of a MEMBER in the COMPANY
will not result in the dissolution and winding up of the COMPANY.

 

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  B. On the dissolution and winding up of the COMPANY, after the obligations of
the COMPANY have been paid or provided for, the COMPANY will distribute its
remaining assets to the MEMBERS in the same percentages as their interests in
the profits of the COMPANY.

 

16. Indemnity.

 

  A. The COMPANY will indemnify each of the MEMBERS, their officers and
employees from and against any claim, demand, liability, fine or expense
(including, without limitation, reasonable legal fees and disbursements, court
costs and the cost of appellate proceedings) arising out of any act or inaction
by a MEMBER done in good faith and reasonably believed by such MEMBER to be in
the best interests of the COMPANY and provided, in the case of any fine, that
such MEMBER had no reasonable cause to believe its conduct was unlawful.

 

  B. The COMPANY will, to the extent approved by all of the MEMBERS (other than
the one seeking indemnity), pay the expenses of a MEMBER seeking indemnity in
advance of the final disposition of the matter upon receipt of an undertaking
from that MEMBER satisfactory to those MEMBERS to repay the amount advanced if
it is ultimately determined that the MEMBER seeking indemnity is not entitled to
indemnification. The MEMBERS required to approve the payment of these expenses
will grant such approval if they determine that the MEMBER seeking indemnity
will, in fact, be entitled to indemnity under Section 16.A and to the extent
that they determine that the payment of those expenses will not jeopardize the
COMPANY.

 

  C. Each MEMBER will indemnify each other MEMBER, its officers and employees
from and against any liability and any loss, damage or expense (including,
without limitation, reasonable legal fees and disbursements, court costs and the
cost of appellate proceedings) arising out of any claim by a third party against
the indemnitee because of any act or inaction by the indemnitee which does not
constitute negligence, gross negligence willful misconduct, malfeasance, a
breach of duty or other wrongdoing – but only to the extent that the COMPANY
does not perform its obligation to the indemnitee under Section 16.A, and then
only for a portion of the COMPANY’s unperformed obligation equal to the product
of such unperformed obligation and the indemnitor’s percentage interest in the
profits of the COMPANY at the time of the occurrence giving rise to the
indemnification.

 

  D. No MEMBER will incur liability to any other MEMBER, and no MEMBER will have
a claim against any other MEMBER, because of an error or mistake in judgment
made in good faith and in what the MEMBER believed to be in the best interests
of the COMPANY.

 

  E. No MEMBER will have any liability to the COMPANY or any other MEMBER with
respect to any deficit in its capital account.

 

17. Amendment; Admission of New Members.

 

  A. This AGREEMENT may be amended only by an instrument in writing signed by
all of the MEMBERS.

 

  B. The certificate of formation of the COMPANY may be amended only by an
instrument in writing signed by all of the MEMBERS.

 

  C. Except as provided in Section 13, a person may not become a MEMBER in the
COMPANY unless that person’s admission is approved by all of the MEMBERS as
evidenced by an amendment to this AGREEMENT signed by all of the MEMBERS and by
that person.

 

18. Waiver. The COMPANY and each MEMBER of the COMPANY may not waive any of its
rights or any obligation of another or any provision of this AGREEMENT except by
an instrument in writing signed by the party issuing the waiver.

 

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19. Severability. If any provision of this AGREEMENT or the application of any
such provision to any individual, corporation or other entity or to any
circumstance is held invalid, the remainder of this AGREEMENT, and the
application of such provision, other than to the extent it is held invalid, will
not be invalidated or affected thereby.

 

20. Governing Law; Submission to Jurisdiction. This AGREEMENT and the rights and
obligations of the MEMBERS of the COMPANY will be governed by and construed in
accordance with the laws of the State of Texas. For purposes of any proceeding
involving this AGREEMENT or any of the rights or obligations of any of the
MEMBERS, each MEMBER hereby submits to the non-exclusive jurisdiction of the
courts of the State of Texas and agrees not to raise and waives any objection to
or defense based upon the venue of any such court or based upon forum non
conveniens. Each MEMBER and the COMPANY agree not to bring any action or other
proceeding with respect to this AGREEMENT or the COMPANY or with respect to any
of the rights or obligations of any of the MEMBERS of the COMPANY in any other
court unless such courts of the State of Texas determine that they do not have
jurisdiction in the matter.

 

21. Entire Agreement. This AGREEMENT contains the entire agreement of the
parties with respect to the subject matter hereof, and it supercedes all prior
understandings and agreements, whether written or oral, and all prior dealings
of the parties with respect to the subject matter hereof.

 

22. Execution by the Company. By executing this AGREEMENT, the COMPANY agrees to
abide by and to be bound by all of the terms of this AGREEMENT.

 

23. Section Headings. Section headings are for reference purposes only and will
not in any way affect the meaning or interpretation of any provision of this
AGREEMENT.

 

IN WITNESS WHEREOF, the MEMBERS have executed this AGREEMENT as of the day and
year first written above.

 

JUNEAU EXPLORATION, L.P. By: Juneau GP, LLC, Its General Partner   By:  

 

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

    John B. Juneau     Sole Manager COE OFFSHORE, LLC By:  

 

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    Kenneth R. Peak     Chairman and CEO

 

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ACKNOWLEDGED AND AGREED:

 

CONTANGO OFFSHORE EXPLORATION LLC By: Juneau Exploration, L.P. By: Juneau GP,
LLC, its General Partner By:  

 

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

    John B. Juneau     Sole Manager

 

To induce COE Offshore, LLC to enter into this AGREEMENT, and in consideration
thereof, the undersigned, John B. Juneau, agrees to the provisions of Section 12
of this AGREEMENT and agrees to abide by and perform those provisions that apply
to him.

 

John B. Juneau confirms to the COMPANY and COE Offshore, LLC that he controls
Juneau Exploration, L.P. John B. Juneau will notify the COMPANY and its MEMBERS
if he ceases to control Juneau Exploration, L.P.

 

 

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

JOHN B. JUNEAU

 

To induce Juneau Exploration, L.P. to enter into this AGREEMENT, and in
consideration thereof, the undersigned, Contango Oil & Gas Company agrees to the
provisions of Section 12 of this AGREEMENT and agrees to abide by and perform
those provisions that apply to it.

 

Contango Oil & Gas Company confirms to the COMPANY and Juneau Exploration, L.P.
that it controls COE Offshore, LLC. Contango Oil & Gas Company will notify the
COMPANY and its MEMBERS if it ceases to control COE Offshore, LLC.

 

CONTANGO OIL & GAS COMPANY By:  

 

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    Kenneth R. Peak     Chairman and CEO

 

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