Exhibit 10.3

EXECUTION VERSION

PRODUCTION AND MARKETING AGREEMENT

between

GMX RESOURCES INC.

and

EDF TRADING NORTH AMERICA, LLC

December 8, 2011

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

TABLE OF CONTENTS

 

     Page  

ARTICLE I DEFINITIONS AND REFERENCES

     1   

Section 1.1 Defined Terms

     1   

Section 1.2 Rules of Construction; Monthly and Daily Equivalents; Publications

     6   

ARTICLE II NO ADVERSE CHANGES TO SUBJECT INTERESTS

     7   

Section 2.1 Abandonment and Shut-In

     7   

Section 2.2 Non-Consent Operations

     9   

Section 2.3 Production Imbalances

     9   

Section 2.4 Option to Adjust Scheduled Quantities

     10   

Section 2.5 Defense of Agreement and Production Payment

     12   

Section 2.6 Further Assurances

     12   

ARTICLE III PRODUCTION OF SUBJECT INTERESTS

     13   

Section 3.1 General Operating Requirements

     13   

Section 3.2 Rates of Production

     14   

Section 3.3 Quality and Pressure Requirements

     15   

Section 3.4 Imbalance Charges

     15   

Section 3.5 Environmental Compliance

     15   

Section 3.6 Maintaining and Restoring Productivity

     16   

Section 3.7 Insurance; Damage or Loss.

     16   

Section 3.8 Continued Ability to Operate

     17   

ARTICLE IV SALE OF PRODUCTION PAYMENT HYDROCARBONS TO WORKING INTEREST OWNER

     17   

Section 4.1 Agreement to Sell and Purchase Production Payment Hydrocarbons

     17   

Section 4.2 Monthly Payments for Hydrocarbons

     17   

Section 4.3 Acceptance of Production Payment Hydrocarbons

     17   

Section 4.4 Title; Liability

     18   

Section 4.5 Working Interest Owner’s Failure to Accept Delivery

     18   

Section 4.6 Suspension or Termination by Royalty Owner

     19   

Section 4.7 Additional Hydrocarbons.

     19   

ARTICLE V OTHER AGREEMENTS

     20   

Section 5.1 Performance of Production Payment Documents

     20   

Section 5.2 Interest on Late Payments; No Usury

     20   

Section 5.3 Indemnity

     21   

Section 5.4 Payment of Expenses

     23   

Section 5.5 Information and Reporting.

     23   

Section 5.6 Alternative Marketing of Production Payment Hydrocarbons

     27   

Section 5.7 Preservation of Subject Well Drainage

     28   

ARTICLE VI LIENS TO SECURE PERFORMANCE; OTHER REMEDIES

     28   

Section 6.1 Mortgage

     28   

Section 6.2 Production Proceeds

     29   

 

i

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

Section 6.3 Replacement of Operator

     29   

ARTICLE VII MISCELLANEOUS

     29   

Section 7.1 Notices

     29   

Section 7.2 Successors and Assigns

     29   

Section 7.3 Acknowledgments and Admissions

     30   

Section 7.4 Entire Agreement; Amendments; Waiver

     30   

Section 7.5 Counterpart Execution

     30   

Section 7.6 Applicable Law

     31   

Section 7.7 Severability

     31   

Section 7.8 Termination; Limited Survival

     31   

Section 7.9 Waiver of Jury Trial and Punitive Damages

     31   

Section 7.10 Consent to Jurisdiction

     31   

Schedules:

  

Schedule 2.4 Target Tail Ratios

  

Schedule 3.7 Insurance

  

 

ii

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

PRODUCTION AND MARKETING AGREEMENT

This Production and Marketing Agreement (this “Agreement”), dated as of
December 8, 2011 is made by and between GMX Resources Inc., an Oklahoma
corporation (“Working Interest Owner” and a “Party”), and EDF Trading North
America, LLC, a Texas limited liability company (“Royalty Owner” and a “Party”).

WHEREAS, by means of a certain Conveyance of Term Overriding Royalty Interest
dated as of the date hereof from Working Interest Owner to Royalty Owner (the
“Conveyance”), Working Interest Owner has sold and conveyed to Royalty Owner the
“Production Payment” (as such term is defined in the Conveyance) in the Subject
Interests described therein; and

WHEREAS, the Parties are entering into this Agreement to set out certain
agreements with respect to the operation and production of the Subject Interests
and the marketing of the Production Payment Hydrocarbons;

NOW, THEREFORE, as a material inducement to cause Royalty Owner to purchase the
Production Payment and in consideration of the mutual benefits and obligations
of the Parties hereunder, Royalty Owner and Working Interest Owner have agreed,
and hereby agree, as follows:

ARTICLE I

DEFINITIONS AND REFERENCES

Section 1.1 Defined Terms. Reference is made to the Conveyance for the meaning
of all capitalized terms defined therein, all of which will when used herein
(unless otherwise expressly defined herein) have the meanings given them in the
Conveyance. As used herein, the terms “Agreement” and “Conveyance” have the
meanings given them above. For purposes of this Agreement, unless the context
otherwise requires, the following terms have the following meanings:

“Additional Hydrocarbons” has the meaning given to such term in Section 4.8.

“Adjusted Prices” has the meaning given to such term in Section 2.1(c).

“Adjustment Rate” has the meaning given such term in Section 2.4.

“Agreed Rate” means the rate of ten percent (10%) per annum, calculated on the
basis of actual days elapsed and a year of 360 days.

“Anticipated Termination Time” means 9:00 a.m., Central Time, on October 31,
2019 or such earlier date as of which, after giving effect to any adjustment of
Scheduled Quantities pursuant to Section 2.4, the Termination Time is
anticipated to occur.

“Commercial Well” has the meaning given to such term in Section 2.1(c).

 

1

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

“Company Engineers” means Degolyer and MacNaughton and any other nationally
recognized independent reserve engineering firm that Working Interest Owner and
Royalty Owner from time to time agree to designate as the Company Engineers for
the purposes hereof.

“Downstream Contracts” means all contracts or arrangements to which Working
Interest Owner (or any Person acting on behalf of Working Interest Owner) is a
party that provide for or relate to the gathering, transportation, treatment,
processing, marketing or sale of Subject Hydrocarbons.

“Economically Feasible” has the meaning given to such term in Section 2.1(d).

“Environmental Laws” means all applicable Laws regulating or otherwise
pertaining to (a) the use, generation, migration, storage, removal, treatment,
remedy, discharge, release, transportation, disposal or cleanup of pollutants,
contamination, hazardous wastes, hazardous substances, hazardous materials,
toxic substances or toxic pollutants, (b) environmental matters involving the
soil, surface waters, groundwater, land, stream sediments, surface or subsurface
strata, ambient air and any other environmental medium on or off any Subject
Interest, or (c) the environment or health and safety-related matters; including
the following as from time to time amended and all others whether similar or
dissimilar and whether now existing or hereinafter enacted: the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, the Resource
Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act
of 1980, the Solid Waste Disposal Act amendments of 1980, and the Hazardous and
Solid Waste Amendments of 1984, the Hazardous Materials Transportation Act, as
amended, the Toxic Substance Control Act, as amended, the Clean Air Act, as
amended, the Clean Water Act, as amended, and all regulations promulgated
pursuant thereto.

“Event of Force Majeure” means any of the following:

(a) physical events such as acts of God, landslides, lightning, earthquakes,
fires, hurricanes, storms or storm warnings that result in evacuation of the
affected area, floods, washouts, explosions, breakage or accident or necessity
of repairs to wells, equipment or lines of pipe;

(b) weather related events affecting an entire geographic region, such as low
temperatures which cause freezing or failure of wells, equipment or lines of
pipe;

(c) interruption of firm transportation and/or storage by transporters of
Hydrocarbons; and

(d) orders of any court or governmental authority having jurisdiction (which in
each case cannot be satisfied by actions taken with respect to wells other than
Subject Wells, which actions do not violate other contractual duties of Working
Interest Owner), strikes, lockouts or other industrial disturbances, riots,
sabotage, insurrections, wars and similar acts of other Persons;

provided that (i) in order to be entitled to assert an Event of Force Majeure,
(1) the affected Party must be making all reasonable efforts to mitigate the
adverse impacts of any such event or

 

2

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

occurrence, to resolve the event or occurrence once it has occurred, and to
resume performance (provided that such Party will not be obligated to settle any
strike or lockout) and (2) the asserted Event of Force Majeure must not be
reasonably within the control of and must not be caused by the fault or
negligence of the affected Party and must be the type of event which, by the
exercise of reasonable diligence, the affected Party is unable to prevent;
(ii) no Party will be entitled to assert an Event of Force Majeure on account of
economic hardship or to the extent such Party’s performance is affected by the
curtailment of interruptible or secondary firm transportation unless primary,
in-path, firm transportation is also curtailed; and (iii) no Party claiming an
Event of Force Majeure will be excused from any responsibility to make cash
payments that are due or become due during the period in which an Event of Force
Majeure persists.

“Hazardous Substances” means any substances regulated under any Environmental
Law, whether as pollutants, contaminants, or chemicals, or as industrial, toxic
or hazardous substances or wastes, or otherwise, including any asbestos or
asbestos-containing materials, any naturally occurring radioactive materials,
and any hydrocarbons or other substances that are released into the environment.

“Imbalance Charges” means any fees, penalties, costs or charges (in cash or in
kind, and whether or not denominated as price adjustments or as prices for spot
sales in place of prices for nominated production) that are incurred, payable or
suffered by Royalty Owner to any Person in connection with any imbalance between
the amount of Production Payment Hydrocarbons delivered at the Delivery Points
and the amounts of nominated sales thereof or transportation, gathering or
processing capacity scheduled or available therefor, or that are otherwise
assessed against Royalty Owner by a transporter or purchaser for failure to meet
such Person’s balance, delivery or nomination requirements. Interest and
penalties owing with respect to Imbalance Charges will also constitute Imbalance
Charges.

“Losses” has the meaning given to such term in Section 5.3(b).

“Mortgage” means the Deed of Trust, Mortgage, Assignment, Security Agreement and
Financing Statement of even date herewith executed in connection herewith by
Working Interest Owner with respect to the Retained Interests and certain
related assets.

“NYMEX Strip Prices” has the meaning given to such term in Section 2.1(c).

“Overtake” has the meaning given to such term in Section 2.3(a).

“Parties” means Working Interest Owner and Royalty Owner.

“PDP Reserves” means proved developed producing reserves of Hydrocarbons, as
determined in accordance with the definitions and standards promulgated by the
Society of Petroleum Engineers. The PDP Reserves will be measured in MMBtus of
Gas, and for purposes of such calculation Oil will be converted to Gas at a
ratio of six MMBtus of Gas to one Barrel of Oil.

“Performance Default” means any of the following: (a) any failure by Working
Interest Owner to pay any money owing or belonging to Royalty Owner that
continues unremedied for more than three Business Days after Working Interest
Owner becomes aware of such failure;

 

3

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

(b) any breach by Working Interest Owner of any covenant or agreement made by
Working Interest Owner herein or in any other Production Payment Document (other
than as described in the preceding clause (a)) that continues unremedied for 30
days following the earlier to occur of (i) written notice thereof being
delivered to Working Interest Owner by Royalty Owner or (ii) Working Interest
Owner first becoming aware of such breach; (c) any of the representations or
warranties made by Working Interest Owner herein or in any other Production
Payment Document is false or incorrect in any material respect on any date made
or as of which made; (d) the commencement of a voluntary case by Working
Interest Owner under the United States Bankruptcy Code, or Working Interest
Owner’s application for or consent to any order for relief in any involuntary
case filed under such code; (e) the commencement of any involuntary case against
Working Interest Owner under such code that is not dismissed within 30 days
after filing; and (f) the appointment or taking possession of a receiver,
liquidator, custodian, trustee, keeper or similar official of any of the Subject
Interests which either (i) is not made ineffective or discharged within 30 days
thereafter or (ii) is requested, consented to or acquiesced to by Working
Interest Owner.

“Post-Adjustment Net Present Value” has the meaning given such term in
Section 2.4.

“Pre-Adjustment Net Present Value” has the meaning given such term in
Section 2.4.

“Production Payment Documents” means this Agreement, the Conveyance, the
Purchase and Sale Agreement, the Mortgage, and each other agreement, instrument,
certificate or other document at any time made or given by Working Interest
Owner with or to Royalty Owner in connection with this Agreement, the
Conveyance, the Purchase and Sale Agreement or the Mortgage, including all
supplements and amendments to and restatements of any of the foregoing.

“Purchase and Sale Agreement” means the Purchase and Sale Agreement of even date
herewith between Working Interest Owner and Royalty Owner, under which Working
Interest Owner has agreed to sell and Royalty Owner has agreed to purchase the
Production Payment.

“Related Adjusted Commodity Swaps” has the meaning given such term in
Section 2.4.

“Related Commodity Swaps” has the meaning given such term in Section 2.4.

“Remaining Reserves” means, as of the date of any determination, the PDP
Reserves projected to be attributable to the Subject Interests (i.e., both the
Production Payment Hydrocarbons and the Retained Interest Hydrocarbons) after
such date for the remaining expected productive life thereof. For the purpose of
calculating Remaining Reserves, the sales prices of the Hydrocarbons to be
produced from each Subject Interest will be assumed to be the Adjusted Prices as
calculated on the date of determination. Calculations of Remaining Reserves will
otherwise be based on the then most recent Reserve Report, after disregarding
any reserves shown in such Reserve Report that have actually been produced on or
before the date of determination of such Remaining Reserves.

 

4

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

“Repair Operations” means reworking, redrilling, reconditioning, fracing,
refracing, plugging back, deepening, or other operations to repair, restore, or
enhance the productivity of one or more Subject Wells or to repair, restore,
replace or enhance equipment and facilities used to produce and handle Subject
Hydrocarbons.

“Reserve Report” means (a) any annual or semiannual reserve engineering report
prepared by Company Engineers or Working Interest Owner’s in-house reserve
engineers with respect to the Subject Interests as required under
Section 5.5(c), and (b) any reserve engineering report prepared by Reviewing
Engineers with respect to the Subject Interests as described in Section 2.4(a).
Each Reserve Report will be in form and detail acceptable to Royalty Owner and
will set forth the following:

(i) an estimation of the Oil and Gas reserves, classified by appropriate
categories, as of such date attributable to the various Subject Interests,

(ii) a projection of the future production of, and net revenue from, such
reserves,

(iii) a calculation of the present worth of such net revenue discounted at the
rate of ten percent per annum, and

(iv) a schedule or description of the principal assumptions, estimates and
projections made or used in the preparation of such report, including estimated
future product prices, capital expenditures, operating expenses and taxes.

Each such report will be prepared in accordance with customary and generally
accepted standards and practices for independent professional petroleum
engineers and will be based on the NYMEX Strip Prices on the effective date of
such report.

“Retained Interest Hydrocarbons” means the Subject Hydrocarbons other than the
Production Payment Hydrocarbons.

“Reviewing Engineers” means an independent petroleum engineering firm of
recognized national standing that is selected by Working Interest Owner and
Royalty Owner to make determinations as described in Section 2.4. If either
Party notifies the other that it requests a determination by the Reviewing
Engineers and the Parties are unable to agree upon such a firm within 15 days
thereafter, each Party will in good faith prepare a list of four independent
petroleum engineering firms. Each list will set forth that Party’s priority
order with the highest priority firm listed first. Each Party will submit its
list to the other within five days after the end of the 15 day period provided
above. The lists will be compared and the first firm appearing in Royalty
Owner’s list that also appears in Working Interest Owner’s list will be the
Reviewing Engineers used to make such determination. If either Party fails to
provide a list of that Party’s recommended firms, such Party’s list will not be
considered and the first firm named on the other Party’s list will be the firm
used to make the determination. If no firm is selected pursuant to the foregoing
procedures, then the Reviewing Engineers will be selected by Royalty Owner.

“Royalty Owner” refers to EDF Trading North America, LLC, a Texas limited
liability company, as well as to its successors and assigns hereunder.

“Royalty Owner Indemnitees” has the meaning given to such term in
Section 5.3(a).

 

5

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

“Royalty Owner Spot Market PP Hydrocarbons” has the meaning given to such term
in Section 5.6(b).

“Shortfall Value” has the meaning given to such term in Section 4.8.

“Subject Contracts” means all Upstream Contracts and Downstream Contracts.

“Tail Ratio” means, as of the date of any determination, the quotient of (a) the
Tail Reserves, divided by (b) the Remaining Reserves.

“Tail Reserves” means, as of the date of any determination, the portion of the
Remaining Reserves that is projected to be attributable to the Subject Interests
after the Anticipated Termination Time (or, if any Adjustment Quantity is
expected to exist at such time, after the first date thereafter on which no
Adjustment Quantity is expected to exist).

“Target Tail Ratio” means, on any date or for any Month, the percentage set
forth on Schedule 2.4 opposite the time period in which such date or Month
occurs.

“Trustee” means the Person or Persons who from time to time serve (or have
served) as the trustee under the Mortgage.

“Undertake” has the meaning given to such term in Section 2.3(a).

“Upstream Contracts” means all joint operating agreements, unit operating
agreements, facilities leases or use agreements, water agreements (whether
relating to water injection, supply, transportation or disposal), or other
agreements or arrangements to which Working Interest Owner (or any Person acting
on behalf of Working Interest Owner) is a party that provide for or relate to
the operation of the Subject Interests or the production of Hydrocarbons
therefrom.

“Working Interest Owner” refers to GMX Resources Inc., an Oklahoma corporation,
as well as to its successors and assigns hereunder.

“Working Interest Owner Spot Market PP Hydrocarbons” has the meaning given to
such term in Section 5.6(b).

Section 1.2 Rules of Construction; Monthly and Daily Equivalents; Publications.

(a) Construction. All references in this Agreement to articles, sections,
subsections and other subdivisions refer to corresponding articles, sections,
subsections and other subdivisions of this Agreement unless expressly provided
otherwise. Titles appearing at the beginning of any of such subdivisions are for
convenience only and will not constitute part of such subdivisions and will be
disregarded in construing the language contained in such subdivisions. The words
“this Agreement”, “this instrument”, “herein”, “hereof”, “hereby”, “hereunder”
and words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. Unless the context otherwise
requires: “including” (and its grammatical variations) means “including without
limitation”; “or” is not exclusive; words in the singular form will be construed
to include the plural and vice versa; words in any gender include all other
genders; references herein to the Conveyance, the Purchase

 

6

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

and Sale Agreement, or any other instrument or agreement refer to such
instrument or agreement as it may be from time to time supplemented, amended or
restated; and references herein to any Person include such Person’s successors
and assigns. All references in this Agreement to exhibits and schedules refer to
the exhibits and schedules to this Agreement unless expressly provided
otherwise, and all such exhibits and schedules are hereby incorporated herein by
reference and made a part hereof for all purposes. This Agreement has been
drafted with the joint participation of Working Interest Owner and Royalty Owner
and is to be construed neither against nor in favor of either Party but rather
in accordance with the fair meaning hereof.

(b) Monthly Equivalents. To the extent that this Agreement refers to information
or data measured or based upon Daily production or deliveries of Hydrocarbons
and such information or data is instead provided or available only with respect
to Monthly production or deliveries of Hydrocarbons, such Monthly Hydrocarbons
will be deemed produced or delivered in equal quantities on each Day during such
Month. To the extent that this Agreement refers to Daily price information for
production or deliveries of Hydrocarbons and such information or data is instead
provided or available only on a Monthly basis, such Monthly price information
will be deemed to apply on each Day during such Month.

(c) Publications. To the extent that this Agreement (or any other Production
Payment Document other than the Conveyance) incorporates prices, rates,
adjustments to prices or rates, or other information from a specific source or
publication and that source or publication temporarily fails or permanently
ceases to publish such information, or ceases publication altogether, or changes
the heading or format under which such information is published, or changes the
source of information which it publishes under such heading or format, and in
any such case the relevant Production Payment Document does not specify how to
deal with such event, then Royalty Owner will designate a reasonable alternative
source for the same or equivalent information and the Parties will thereafter
use such designated alternative source.

ARTICLE II

NO ADVERSE CHANGES TO SUBJECT INTERESTS

Section 2.1 Abandonment and Shut-In.

(a) Abandonment. Working Interest Owner will not, without first obtaining the
consent of Royalty Owner, abandon (or propose or consent to the abandonment of)
any Subject Well or surrender, abandon or release (or propose or consent to the
surrender, abandonment or release of) any Subject Interest; provided, however,
that Working Interest Owner may, without the consent of Royalty Owner, abandon
any Subject Well (and the acreage held only by such well) if such Subject Well
is not a Commercial Well and it would not be Economically Feasible to restore
the productivity of such Subject Well by Repair Operations. Notwithstanding the
foregoing, Working Interest Owner may not under any circumstances, without first
obtaining the consent of Royalty Owner, abandon any Subject Well or Subject
Interest to an Affiliate of Working Interest Owner.

(b) Shut-in of Subject Wells. Working Interest Owner will not, without first
obtaining the consent of Royalty Owner, voluntarily shut-in a Subject Well (or
propose or consent to such a shut-in), provided that (i) a shut-in of a Subject
Well will not be deemed to be

 

7

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

voluntarily made if it is caused by or results from an Event of Force Majeure,
or from well servicing or maintenance in the ordinary course of business, or if
Working Interest Owner is waiting for a pipeline connection or other
transportation services for Gas produced from a Subject Well for which
transportation or a pipeline connection is not otherwise available, and (ii) a
Subject Well that has not achieved the status of, or has ceased to be a
Commercial Well and can be abandoned under subsection (a) above may be shut-in
pending such abandonment.

(c) Definitions of “Commercial Well,” “Economically Feasible,” “Adjusted Prices”
and “NYMEX Strip Prices”. For all purposes of this Agreement:

(i) A well will be deemed to be a “Commercial Well” unless and until a condition
arises, which reasonably appears to be permanent, such that such well is no
longer capable of producing in paying quantities (without regard to the burden
of the Production Payment) and a reasonably prudent operator (acting without
regard to the burden of the Production Payment) would not undertake Repair
Operations to restore the productivity of such well.

(ii) An operation on a well will be deemed to be “Economically Feasible”
whenever (A) the net present value (before deduction of federal income taxes),
discounted at ten percent per annum, of the Subject Hydrocarbons which it
reasonably appears will be produced from such well after such operation —
assuming such Hydrocarbons will be sold at the Adjusted Prices for each Subject
Interest and net of (1) Taxes (other than federal and state franchise and income
taxes), (2) expenses of operating and maintaining such well (assuming such
operating costs and expenses will be on the same basis as the last twelve Months
(or the portion of such twelve Month period for which such information is
available) and excluding overhead costs and similar charges, and (3) royalties,
overriding royalties and similar burdens reflected in the Net Revenue Interests
set out on the Property Exhibit, but without regard to the burden of the
Production Payment — exceeds (B) the costs and expenses of Working Interest
Owner directly related to such operation (net of any insurance proceeds related
to such operation).

(iii) The “Adjusted Prices” as calculated for a Subject Interest on any Day are,
with respect to Oil, the NYMEX Strip Price for Oil calculated as of such Day,
minus $1.50 per Barrel, and, with respect to Gas (A) the NYMEX Strip Price for
Gas calculated as of such Day.

(iv) The “NYMEX Strip Prices” calculated as of any Day are the arithmetic
average of the settlement prices (per Barrel of Oil or MMBtu of Gas) on such Day
of the applicable futures contract traded on the New York Mercantile Exchange
for the first thirty-six Months after such Day. The NYMEX Strip Price for Oil
will be the average of such prices for the West Texas Intermediate Crude Oil
Futures Contract for Cushing, Oklahoma Delivery that is traded on such exchange,
and the NYMEX Strip Price for Gas will be the average of such prices for the
Natural Gas Futures Contract for Henry Hub Delivery that is traded on such
exchange.

 

8

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

Section 2.2 Non-Consent Operations. Working Interest Owner will not, without the
prior consent of Royalty Owner, elect to be a non-participating party with
respect to any plugging back, reworking, sidetracking, drilling, completion or
other operation on any Subject Interest or Subject Lands if the consequence of
such election is that any part of Working Interest Owner’s interest in such
Subject Interest on Subject Lands is temporarily (e.g., during a recoupment
period) or permanently forfeited to the parties participating in such operations
or electing not to abandon such well, unless such operation would not be
Economically Feasible. Upon any such election by Working Interest Owner that is
consented to by Royalty Owner (or for which, pursuant to the preceding sentence,
no consent is required), such election will also be binding on the Production
Payment as to the interest so temporarily or permanently forfeited but will not
cause any modification in the Scheduled Quantities or in any component of the
Daily Adjustment Amount.

Section 2.3 Production Imbalances.

(a) Definitions. As used herein, “Undertake” means that an owner of production
from a Subject Well takes a lesser share of Hydrocarbons produced from such
Subject Well than the share of Hydrocarbons which such owner is entitled to take
by virtue of its ownership interest, determined without regard to any rights
under any production balancing agreement or similar arrangement or any rights
under common law with respect to production balancing, and “Overtake” means that
an owner of production from a Subject Well takes a greater share of Hydrocarbons
produced from such Subject Well than the share of Hydrocarbons which such owner
is entitled to take by virtue of its ownership interest, again determined
without regard to any rights under any production balancing agreement or similar
arrangement or any rights under common law with respect to production balancing.
Adjustments due to Non-Consent Provisions, however, will not be considered
Undertakes or Overtakes.

(b) No Undertakes Without Consent. Subject to Section 3.2, without Royalty
Owner’s prior consent Working Interest Owner will not Undertake from a Subject
Well (either for itself or on behalf of Royalty Owner), except as a result of an
Event of Force Majeure or a joint interest owner in one or more Subject Wells
electing to Overtake in order to balance previous Overtakes from such Subject
Wells by Working Interest Owner or any of its predecessors in title to such
Subject Wells, but only to the extent that such previous Overtakes either
occurred after the Effective Time or occurred prior to the Effective Time and
are disclosed in Schedule 1 attached to the Purchase and Sale Agreement,
provided that Working Interest Owner may Undertake from any Subject Well on any
Day so long as Royalty Owner’s actual share of production on such Day from all
Subject Wells is the entire Scheduled Quantity and Adjustment Quantity for such
Day. If any Undertake by Working Interest Owner occurs in violation of this
section, the Production Payment will be determined (to the maximum extent
allowed under applicable Law and any applicable Permitted Encumbrances) without
regard thereto.

(c) Limitation on Overtakes. Subject to Section 3.2, without Royalty Owner’s
prior consent Working Interest Owner will not Overtake from a Subject Well on
any Day (either for itself or on behalf of Royalty Owner), except either (i) in
order to produce and take up to 111% of the Scheduled Quantities and Adjustment
Quantities for such Day from the Subject Wells, or (ii) if one or more other
owners of production from such Subject Well elects to Undertake, in order to
produce and take the same amount of Hydrocarbons that Working Interest Owner and

 

9

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

Royalty Owner would have received had such joint interest owner not elected to
Undertake. If, pursuant to applicable contracts and Law, Working Interest Owner
does Overtake, then the additional Hydrocarbons so taken by Working Interest
Owner will be included among the Subject Hydrocarbons and will be subject to the
Production Payment.

(d) No Balancing From Other Properties. Working Interest Owner will not allow
any Subject Interest to be subject to any production balancing arrangement or
agreement under which one or more third Persons may Overtake a portion of the
production attributable to such Subject Interest as a result of Undertakes or
Overtakes (or other actions or inactions) with respect to properties other than
such Subject Interest. For the purposes of this subsection (d), a production
unit in which all parties have uniform interests will be considered to be a
single Subject Interest.

Section 2.4 Option to Adjust Scheduled Quantities.

(a) Option. If for any reason at any time, or from time to time, both of the
following conditions exist:

(i) the Tail Ratio (determined as of such time using the most recent Reserve
Report) is less than the Target Tail Ratio, and

(ii) since the date six months prior to the effective date of such Reserve
Report, the actual production of Gas from the Subject Wells during any period of
three consecutive Months has exceeded 120% of the projected production of Gas
attributable to the Subject Wells listed on the Property Exhibit of the
Conveyance,

then in addition to any other rights or remedies available to Royalty Owner,
Royalty Owner will have the option to cause the remaining Scheduled Quantities
to be adjusted as provided in subsection (b) of this Section. Royalty Owner may
at any time, at its option and at its own expense, retain Reviewing Engineers to
prepare a new Reserve Report to be used to recalculate the Tail Ratio, and
Working Interest Owner will cooperate in all respects with such Reviewing
Engineers to enable them to promptly prepare such Reserve Report.

(b) Procedure to Adjust Scheduled Quantities. Upon Royalty Owner’s election to
exercise the option set forth in subsection (a) of this section, Royalty Owner
will in good faith adjust the remaining Scheduled Quantities by preparing a
revised Schedule 1 to the Conveyance that results, at the time of Royalty
Owner’s exercise of the option, in an anticipated Tail Ratio as of the end of
each Month remaining prior to the Anticipated Termination Time that is greater
than, but as near as reasonably possible to, the Target Tail Ratio for such
Month (it being understood that in order to achieve the Target Tail Ratio for
each such Month the Tail Ratio may be larger than the Target Tail Ratio for some
Months); provided, however, that:

(i) Royalty Owner will not increase Scheduled Quantities in any Month to more
than ninety percent (90%) of the Subject Hydrocarbons projected in the most
recent Reserve Report to be produced and saved in such Month,

(ii) any adjustment to the Scheduled Quantities under this Section will result
in a Post-Adjustment Net Present Value equal to the Pre-Adjustment Net Present
Value, and

 

10

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

(iii) no adjustments to the Scheduled Quantities will extend the projected
Termination Time, unless otherwise agreed to by Working Interest Owners and
Royalty Owner.

Royalty Owner will present the revised Schedule 1 to Working Interest Owner for
verification that the revised Schedule complies with the requirements of the
foregoing sentence. If Working Interest Owner agrees with the revised Schedule
1, Royalty Owner will prepare an amendment to the Conveyance incorporating the
revised Schedule 1 into the Conveyance, Working Interest Owner and Royalty Owner
will execute and acknowledge such amendment, and Royalty Owner will, at Working
Interest Owner’s expense, cause such amendment to be filed in all appropriate
county, state and federal records. As used in this Agreement:

“Adjustment Rate” means a monthly discount rate equal to (x) eleven and one-half
percent (11.5%), divided by (y) 12.

“Related Commodity Swaps” means, at any time in question, the commodity and
basis swaps of Royalty Owner with respect to a Scheduled Quantity which were in
effect on or about the Closing Date and remain in effect at such time.

“Pre-Adjustment Net Present Value” means the net present value of the Scheduled
Quantities prior to adjustment under this Section, which will be deemed to be
equal to the net present value (before deduction of federal income taxes) of
each Month’s Scheduled Quantities as of the date of determination, assuming that
such Scheduled Quantities will be sold at the NYMEX Strip Price whose Index
Price component is the weighted average net fixed price to be paid for that
Month under Royalty Owner’s Related Commodity Swaps (and any Related Adjusted
Commodity Swaps previously entered into as a result of any prior adjustment
pursuant to this Section 2.4) and discounting the assumed sales proceeds at the
Adjustment Rate.

“Post-Adjustment Net Present Value” means the net present value of the Scheduled
Quantities after adjustment under this Section, which will be equal to the net
present value (before deduction of federal income taxes) of each Month’s
adjusted Scheduled Quantities as of the date of determination, assuming that the
unchanged Scheduled Quantities will be sold at the prices provided for in the
preceding definition and that any increased Scheduled Quantities for any Month
will be sold at the NYMEX Strip Price whose Index Price component is the net
fixed price to be paid under Royalty Owner’s commodity and basis swaps to be
entered into with respect to such increased Scheduled Quantity (the “Related
Adjusted Commodity Swaps”), discounting the assumed sales proceeds at the
Adjustment Rate, and subtracting the costs (or adding the benefits) to Royalty
Owner of unwinding the Related Commodity Swaps (and any Related Adjusted
Commodity Swaps previously entered into as a result of any prior adjustment
pursuant to this Section 2.4) due to reductions in Scheduled Quantities and of
implementing the Related Adjusted Commodity Swaps for increases in Scheduled
Quantities, and similarly adjusting for the economic benefits and economic
detriments of changing the interest rate swaps of Royalty Owner.

 

11

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

(c) Determination by Reviewing Engineers. If, within 30 days after Working
Interest Owner’s receipt of Royalty Owner’s proposed revised Schedule 1, Working
Interest Owner and Royalty Owner do not agree upon Royalty Owner’s revised
Schedule 1 and execute and acknowledge an amendment to the Conveyance pursuant
to subsection (b) above, the Parties will select Reviewing Engineers to
determine the revisions to be made to Schedule 1 to achieve the result set out
in the first sentence of subsection (b) above. The fees and expenses of the
Reviewing Engineers will be borne equally by Royalty Owner and Working Interest
Owner. The determination of the Reviewing Engineers will be binding upon Working
Interest Owner and Royalty Owner and, upon the determination by the Reviewing
Engineers of the contents of the revised Schedule 1, Royalty Owner will prepare
an amendment to the Conveyance incorporating the revised Schedule 1 into the
Conveyance, Working Interest Owner will execute and acknowledge such amendment,
and Royalty Owner will, at Working Interest Owner’s expense, cause such
amendment to be filed in all appropriate public records. If Working Interest
Owner refuses to execute and acknowledge such amendment, Royalty Owner may do so
on behalf and in the name of Working Interest Owner, and Working Interest Owner
hereby appoints Royalty Owner as its agent and attorney-in-fact for the purposes
of making such execution and acknowledgement, which power is coupled with an
interest and is irrevocable.

Section 2.5 Defense of Agreement and Production Payment. If any Person
(including Working Interest Owner or its Affiliates but excluding Royalty Owner
and its Affiliates) ever challenges or attacks (a) the validity or priority of
the Production Payment Documents or of any rights, titles or interests of
Royalty Owner that are created or evidenced thereby or (b) the title of Working
Interest Owner to any Subject Interest or of Royalty Owner to any part of the
Production Payment, then upon learning thereof Working Interest Owner will give
prompt written notice thereof to Royalty Owner and at Working Interest Owner’s
own cost and expense will diligently endeavor to defeat such challenge or attack
and to cure any defect that may be developed or claimed, and Working Interest
Owner will take all reasonable steps for the defense of any legal proceedings
with respect thereto, including the employment of counsel to represent Working
Interest Owner, the prosecution or defense of litigation, and the release or
discharge of all adverse claims. Royalty Owner is hereby authorized and
empowered to take such additional steps as in its judgment and discretion may be
necessary or proper for the defense of any such legal proceedings or the
protection of the validity or priority of the Production Payment Documents and
the rights, titles, and interests created or evidenced thereby, including the
employment of independent counsel to represent Royalty Owner, the prosecution or
defense of litigation, the compromise or discharge of any adverse claims made
with respect to the Production Payment, the purchase of any tax title and the
removal of prior liens or security interests, and all reasonable and related
expenditures so made of every kind and character will be paid to Royalty Owner
by Working Interest Owner on demand.

Section 2.6 Further Assurances. Working Interest Owner will, on request of
Royalty Owner, (a) promptly correct any defect, error or omission which may be
discovered in the contents, execution or acknowledgment of any Production
Payment Document, (b) execute, acknowledge, deliver and record or file such
further instruments and do such further acts as may be necessary, desirable or
proper, in the reasonable judgment of Royalty Owner, to carry out more
effectively the purposes of the Production Payment Documents and to more fully
identify and make subject to the Production Payment Documents any property
intended to be covered thereby, including any renewals, additions,
substitutions, replacements, or appurtenances to the

 

12

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

Subject Interests; and (c) execute, acknowledge, deliver, and file or record any
document or instrument reasonably requested by Royalty Owner to protect its
rights, title and interests under the Production Payment Documents against the
rights or interests of third Persons. Working Interest Owner will provide to
Royalty Owner any assurances of title to the Subject Interests which Royalty
Owner may from time to time reasonably request concerning the Production
Payment, including the recording and filing of the Conveyance (it being
understood that no title deficiencies learned of by Royalty Owner will in any
way be deemed to qualify any of Working Interest Owner’s warranties of title or
indemnities with respect to title in any Production Payment Document).

ARTICLE III

PRODUCTION OF SUBJECT INTERESTS

Section 3.1 General Operating Requirements. At all times from the date hereof
until the termination of the Production Payment, and whether or not Working
Interest Owner is the operator of the relevant Subject Interests, Working
Interest Owner, at Working Interest Owner’s cost and expense, will:

(a) Cause the Subject Interests to be maintained in full force and effect, free
of any right of cancellation, forfeiture or termination, and to be developed,
protected against drainage, and continuously operated for the production of
Hydrocarbons in a good and workmanlike manner as would a prudent operator (and
without regard to the burden of the Production Payment), all in accordance with
generally accepted industry practices, applicable operating agreements, the
Leases, and all applicable Laws, and will otherwise comply in all material
respects with all applicable Laws, the Leases, and all other contracts or
agreements forming a part of or related to the Subject Interests.

(b) Pay, or cause to be paid, as and when due and payable, all rentals,
royalties, Taxes and other amounts payable in respect of the Subject Interests
or the production therefrom, and all costs, expenses, capital expenditures and
liabilities incurred in or arising from the operation, maintenance or
development of the Subject Interests, or the producing, treating, gathering,
storing, marketing or transporting of Hydrocarbons therefrom at or prior to the
Delivery Points (except, in each case, to the extent contested in good faith by
appropriate proceedings that effectively delay any remedy for non-payment
thereof).

(c) Cause all Subject Wells that are Commercial Wells, and all machinery,
equipment and facilities of any kind now or hereafter necessary or useful in the
operation of such Subject Wells (as well as all separation, metering and related
facilities that are located at or prior to each Delivery Point and all related
wells for the supply, injection or disposal of water, to the extent owned or
operated by Working Interest Owner or its Affiliates) to be maintained and kept
in good and effective operating condition as would a prudent operator (and
without regard to the burden of the Production Payment), and all repairs,
renewals, replacements, additions and improvements thereof or thereto, useful or
needful to such end, to be promptly made.

(d) Give or cause to be given to Royalty Owner written notice of every adverse
claim or demand made by any Person affecting the Subject Interests, the
Hydrocarbons produced therefrom, the Production Payment or the Production
Payment Hydrocarbons in any manner

 

13

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

whatsoever, and of any suit or other legal proceeding instituted with respect
thereto, and at Working Interest Owner’s expense cause all necessary and proper
steps to be taken with reasonable diligence to protect and defend the Subject
Interests, the Subject Hydrocarbons produced therefrom, the Production Payment
and the Production Payment Hydrocarbons against any such adverse claim or
demand, including the employment of counsel for the prosecution or defense of
litigation and the contest, release or discharge of such adverse claim or
demand.

(e) Cause the Subject Interests to be kept free and clear of liens, charges and
encumbrances of every character, other than the Permitted Encumbrances.

(f) Except to the extent contested in good faith by appropriate proceedings that
effectively delay any remedy for non-payment thereof, pay all Taxes when due and
before they become delinquent (and provide Royalty Owner with proof of such
payment upon request), and reimburse Royalty Owner for any Taxes paid by Royalty
Owner relating to the Production Payment or the Production Payment Hydrocarbons.

(g) Maintain or cause to be maintained in full force and effect in accordance
with prudent operator standards, all permits, licenses, easements, servitudes,
contracts and other rights reasonably necessary or useful in connection with the
development, operation or management of the Subject Interests and the
production, treating, gathering, storing, marketing or transportation of the
Subject Hydrocarbons or of water produced or used in connection therewith.

(h) Not resign as operator (or otherwise voluntarily relinquish such position)
of any of the Subject Interests that are or hereafter become operated by Working
Interest Owner until and unless the successor operator is a subsidiary of
Working Interest Owner or has been approved in writing by Royalty Owner.

(i) Not conduct any work or operation in any wellbore of a Subject Well, which
work or operation is related to any horizon, zone, formation or interval not
included in the Subject Interests, without the prior written consent of Royalty
Owner.

(j) Measure all Subject Hydrocarbons, and determine the MMBtu content thereof,
in accordance with the terms of the Conveyance, including the requirements of
Section 1.7 thereof.

Whenever Working Interest Owner is not the operator of a Subject Interest, it
will use its reasonable best efforts and diligently enforce its rights under any
operating agreement for such Subject Interest in order to cause such Subject
Interest to be operated and dealt with as contemplated in this Agreement.

Section 3.2 Rates of Production.

(a) Rates of Production. Working Interest Owner will prudently operate and
produce the Subject Interests and Subject Wells operated by Working Interest
Owner, and Working Interest Owner will use all commercially reasonable efforts
to cause the Subject Interests and Subject Wells not operated by Working
Interest Owner to be prudently operated and produced by whomever is the operator
thereof, in each case in accordance with prudent industry practices and the
following additional requirements:

 

14

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

(i) the amount of Hydrocarbons produced from any Subject Well shall not exceed
in any Month the lower of (1) the maximum amount that the Subject Well is
capable of producing at its maximum efficient rate of flow or (2) the respective
allowable rate of flow under applicable orders and Laws, if any; and

(ii) the amount of Hydrocarbons produced from the Subject Wells shall be
sufficient to prevent a material net migration of Hydrocarbons from the
reservoirs to which proved reserves are attributed underlying the Subject
Interests.

(b) Production Goals. Subject to the provisions of the preceding subsection
(a) and Sections 2.1, 2.2, 2.3, 3.6, 3.7(b) and 3.8, Working Interest Owner will
use all commercially reasonable efforts to ensure that the rate of production
from the Subject Wells, taken as a whole, is sufficient to allow the delivery to
Royalty Owner of the Scheduled Quantity and the Adjustment Quantity for such
Day.

Section 3.3 Quality and Pressure Requirements. All Production Payment
Hydrocarbons delivered to Royalty Owner, or to Royalty Owner’s credit, will
satisfy the quality and pressure requirements and specifications as set forth
in:

(a) all applicable agreements with or requirements of Delivery Point Recipients
(including tariffs filed with regulatory agencies) for acceptance and
transportation of such Production Payment Hydrocarbons,

(b) all applicable agreements with or requirements of operators of processing
plants or treatment facilities for acceptance of such Production Payment
Hydrocarbons, and

(c) all applicable agreements with or requirements of first purchasers for
acceptance and purchase of such Production Payment Hydrocarbons,

in each case without penalty or deduction for nonconformity. All costs and
expenses to satisfy such quality and pressure requirements will be borne and
paid by Working Interest Owner.

Section 3.4 Imbalance Charges. Working Interest Owner will make all commercially
reasonable efforts to prevent any Imbalance Charges from becoming payable by
Royalty Owner, will pay in place of Royalty Owner all such Imbalance Charges not
prevented, and will in all circumstances indemnify and hold Royalty Owner
harmless from and against all Imbalance Charges.

Section 3.5 Environmental Compliance. Working Interest Owner will not (a) cause
or permit the Subject Lands or the condition thereof or operations thereon to be
in violation of any Environmental Laws in any material respect, (b) cause or
permit the disposal or other release of any Hazardous Substance on or to the
Subject Lands in violation of any Environmental Law in any material respect,
(c) fail to timely remove or remediate any Hazardous Substance which has been or
now or hereafter is released on the Subject Lands in amounts which would violate
any Environmental Laws in any material respect, or (d) take or omit to take any
action that will subject Working Interest Owner or the Subject Lands to any
material remedial obligation (or Royalty Owner to any remedial obligation) under
any Environmental Laws pertaining to the

 

15

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

Subject Lands, assuming in each case disclosure to the applicable governmental
authorities of all relevant facts, conditions and circumstances, if any. Working
Interest Owner will promptly notify Royalty Owner in writing of any existing,
pending or, to the best knowledge of Working Interest Owner, threatened
investigation or inquiry of a material nature affecting any Subject Lands by any
private party or governmental authority in connection with any Environmental
Laws. Working Interest Owner will take all steps reasonably necessary to
determine that no Hazardous Substances are disposed of or otherwise released or
being released on or to the Subject Lands in violation of any Environmental
Laws.

Section 3.6 Maintaining and Restoring Productivity. If any Subject Well at any
time ceases to be a Commercial Well for any reason and it would be Economically
Feasible to restore or enhance the productivity of such Subject Well by Repair
Operations, then Working Interest Owner will carry out such Repair Operations.

Section 3.7 Insurance; Damage or Loss.

(a) Insurance. Working Interest Owner will maintain or cause to be maintained,
at Working Interest Owner’s sole cost and expense and with financially sound and
reputable insurers reasonably satisfactory to Royalty Owner, insurance against
such liabilities, casualties, risks and contingencies, and in such types as is
customary in the case of independent oil and gas companies engaged in operations
of similar properties, including insurance of the types and coverages described
in Schedule 3.7 and with limits of coverage no less than those set out in
Schedule 3.7. Such insurance will name Royalty Owner as an additional insured
and as a loss payee as provided in Schedule 3.7, and Working Interest Owner will
otherwise take all actions described in Schedule 3.7. Any loss proceeds from
such property insurance, whether collected by Working Interest Owner or Royalty
Owner, will be applied to the costs of repairing or replacing the property loss
or damage unless otherwise agreed by Working Interest Owner and Royalty Owner.
Working Interest Owner will furnish certificates of such insurance to Royalty
Owner and will obtain endorsements to such policies providing that the insurer
will notify Royalty Owner not less than 30 days prior to the expiration or
termination of such policy of insurance.

(b) Repair. In the event of any damage to or loss of any platform, pipeline,
well, equipment or facility on the Subject Lands or otherwise owned by any of
Working Interest Owner or Endeavor Pipeline and used in connection with the
operation of any Subject Interest or the production of Subject Hydrocarbons, or
the balancing, treating, gathering, transporting, tender, processing or other
handling of Subject Hydrocarbons, or the marketing, sale or transfer of Subject
Hydrocarbons, Working Interest Owner or Endeavor Pipeline will (at no cost to
Royalty Owner and without regard to whether insurance proceeds are available to
Working Interest Owner) will promptly carry out or cause to be carried out
Repair Operations as necessary or appropriate to repair, restore or replace such
damaged or lost property (or carry out other Repair Operations reasonably
expected to replace the future production lost by such damage or loss), unless
such Repair Operations would not be Economically Feasible after taking into
account insurance proceeds and recoveries (including any insurance proceeds and
recoveries that would have been available but for Working Interest Owner’s
failure to maintain the insurance required hereunder).

 

16

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

Section 3.8 Continued Ability to Operate. Working Interest Owner will at all
times be a limited liability company, corporation or limited partnership that is
validly existing and in good standing under the Laws of its state of formation
and duly qualified to do business and in good standing in each jurisdiction
where any Subject Lands are located. Working Interest Owner (and any Person
operating the Subject Interest on its behalf) will at all times obtain and
possess (or cause to be obtained and possessed) all consents, bonds, permits,
licenses, right-of-ways, easements, authorizations and waivers reasonably
necessary under any applicable Law or any Lease or material contract, indenture,
instrument or agreement binding on or affecting Working Interest Owner or the
Subject Interests in order to permit the performance by Working Interest Owner
of the Production Payment Documents.

ARTICLE IV

SALE OF PRODUCTION PAYMENT HYDROCARBONS

TO WORKING INTEREST OWNER

Section 4.1 Agreement to Sell and Purchase Production Payment Hydrocarbons.
Royalty Owner hereby agrees to sell to Working Interest Owner, and Working
Interest Owner hereby agrees to buy from Royalty Owner, upon the terms of this
Agreement, all of the Production Payment Hydrocarbons as and when produced. For
so long as Royalty Owner remains so obligated to sell the Production Payment
Hydrocarbons to Working Interest Owner, any sale, conveyance or mortgage of the
Production Payment or the Production Payment Hydrocarbons by Royalty Owner will
be made expressly subject to this Article IV.

Section 4.2 Monthly Payments for Hydrocarbons The price to be paid by Working
Interest Owner for the Production Payment Hydrocarbons is the Field Price each
Month for each MMBtu or Barrel of Production Payment Hydrocarbons tendered or
delivered during such Month. On or before the Monthly Settlement Date for each
Month, Working Interest Owner will pay to Royalty Owner, by wire transfer of
immediately available funds, a sum equal to the product of the quantity of
Production Payment Hydrocarbons tendered or delivered to Working Interest Owner
during such Month (measured in MMBtus or Barrels) times the applicable Field
Price for such Month. In the event an adverse claim of any kind is asserted with
respect to any Hydrocarbons sold or delivered to Working Interest Owner under
this Agreement or any money due hereunder, Working Interest Owner will continue
to make payments as required hereunder until such claim is resolved by a final
judgment of a court of competent jurisdiction,but shall be subrogated to all
rights of Royalty Owner. At least five (5) days prior to each such Monthly
Settlement Date, Working Interest Owner will furnish or cause to be furnished to
Royalty Owner statements in form acceptable to Royalty Owner (reasonably
supported, if requested, by statements from Delivery Point Recipients or first
purchasers) showing the quantities of Production Payment Hydrocarbons actually
tendered or delivered hereunder at each Delivery Point during such Month and
Working Interest Owner’s calculation of the payments due to Royalty Owner.

Section 4.3 Acceptance of Production Payment Hydrocarbons. Working Interest
Owner will accept and purchase all Production Payment Hydrocarbons, regardless
of: (a) the quality or condition of such Production Payment Hydrocarbons,
(b) the pressure at which such Production Payment Hydrocarbons are delivered,
(c) whether such Production Payment Hydrocarbons are made up of Production
Payment Gas or Production Payment Oil or both, (d)

 

17

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

whether the amount of Production Payment Hydrocarbons so delivered is less than,
equals or exceeds the Scheduled Quantity (if any) for any Month, and (e) the
Delivery Points at which such Production Payment Hydrocarbons are delivered.
Royalty Owner will not be responsible for any Imbalance Charges resulting from
any Production Payment Hydrocarbons not being delivered in compliance with the
requirements of the Conveyance or any Downstream Contract. Working Interest
Owner will use its best reasonable efforts to avoid Imbalance Charges, and
Working Interest Owner will pay all Imbalance Charges assessed against Working
Interest Owner or Royalty Owner. For so long as this Agreement is in effect,
Working Interest Owner will perform on Royalty Owner’s behalf (and Royalty Owner
is hereby released from any obligation to perform) any and all duties owed by
Royalty Owner to Working Interest Owner under the Conveyance with respect to
possessing, transporting, treating, processing, marketing and otherwise dealing
with the Production Payment Hydrocarbons. Further, Working Interest Owner shall
cause the Production Payment Hydrocarbons purchased from Royalty Owner pursuant
to this Agreement to be delivered to EPL for sale to Royalty Interest owner
pursuant to the terms of the Endeavor NAESB Contract.

Section 4.4 Title; Liability. Royalty Owner hereby disclaims, and Working
Interest Owner hereby releases Royalty Owner from, any warranty of title to any
Production Payment Hydrocarbons sold by Royalty Owner to Working Interest Owner
(whether statutory, regulatory, at common law, by agreement, or otherwise);
provided that Royalty Owner does warrant that it will convey to Working Interest
Owner the same title to such Production Payment Hydrocarbons that Royalty Owner
receives from Working Interest Owner under the Conveyance, free and clear of all
liens, burdens and other encumbrances of any kind or nature arising by, through
or under Royalty Owner, but not otherwise. ROYALTY OWNER FURTHER DISCLAIMS, AND
WORKING INTEREST OWNER HEREBY RELEASES ROYALTY OWNER FROM, ANY OTHER WARRANTIES
OF ANY KIND WITH RESPECT TO ANY PRODUCTION PAYMENT HYDROCARBONS SOLD HEREUNDER,
IT BEING AGREED THAT ALL PRODUCTION PAYMENT HYDROCARBONS SOLD HEREUNDER BY
ROYALTY OWNER WILL BE SOLD “AS IS,” WITH ALL FAULTS AND IN THE CONDITION THAT
SUCH PRODUCTION PAYMENT HYDROCARBONS ARE TENDERED BY OR ON BEHALF OF ROYALTY
OWNER. Title to the Production Payment Hydrocarbons sold hereunder by Royalty
Owner to Working Interest Owner will pass to Working Interest Owner at the
Delivery Points, and Working Interest Owner will be solely responsible for the
handling, management and care of the Production Payment Hydrocarbons at and
after the Delivery Points and solely responsible for any damage, injury or loss
that may occur in connection with the Production Payment Hydrocarbons.

Section 4.5 Working Interest Owner’s Failure to Accept Delivery. If, during any
Month, Working Interest Owner fails to accept tender of delivery at the Delivery
Points of all or any part of the Production Payment Hydrocarbons, Working
Interest Owner will be in breach of this Agreement. Upon any such breach,
Royalty Owner will have the right to sell to one or more third party purchasers
any Production Payment Hydrocarbons not accepted by Working Interest Owner, and,
as to any Production Payment Hydrocarbons so sold by Royalty Owner to any third
party purchaser, Royalty Owner will be entitled to reimbursement from Working
Interest Owner for the positive remainder, if any, of (a) the price set forth
under this Agreement, minus (b) the amount actually received from such sale
(after deduction of all relevant costs), and Working Interest Owner will pay
such amount to Royalty Owner upon demand therefor.

 

18

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

Section 4.6 Suspension or Termination by Royalty Owner. Upon (i) any failure by
Working Interest Owner to pay amounts owing under Section 4.2 above, if such
failure is not cured within five Business Days after it occurs, or (ii) any
other Performance Default, Royalty Owner will have (in addition to the rights
described in the preceding Section 4.5 and all other rights and remedies
available to Royalty Owner) the rights, exercisable upon written notice to
Working Interest Owner, to:

(a) suspend Royalty Owner’s obligations under this Agreement to sell any or all
Production Payment Hydrocarbons not then previously delivered hereunder, for the
remainder of the then current Month or for any one or more Months thereafter, or

(b) terminate Royalty Owner’s obligations under this Agreement to sell any or
all Production Payment Hydrocarbons not then previously delivered (which right
of termination may be exercised regardless of whether or not such right of
suspension has first been exercised).

If Royalty Owner so suspends or terminates such sale obligations with respect to
any Production Payment Hydrocarbons not then previously delivered hereunder,
then Royalty Owner will have the right to sell such Production Payment
Hydrocarbons to one or more third party purchasers, and, as to any Production
Payment Hydrocarbons so sold by Royalty Owner to any third party purchaser,
Royalty Owner will be entitled to receive from Working Interest Owner the
positive remainder, if any, of (i) the price set forth under this Agreement,
minus (ii) the amount actually received from such sale (after deduction of all
relevant costs), and Working Interest Owner will pay such amount to Royalty
Owner upon demand therefor. Royalty Owner will also have the right to liquidate
and determine, in good faith and in a commercially reasonable manner, Royalty
Owner’s future damages reasonably to be expected from the loss of future sales
of Production Payment Hydrocarbons to Working Interest Owner at the NYMEX Strip
Prices from time to time in effect and the replacement of such sales to Working
Interest Owner at such NYMEX Strip Prices with sales to other purchasers at
prices then available or reasonably expected to be available. In so doing,
Royalty Owner may consider, among other valuations, any or all of the settlement
prices of NYMEX futures contracts, quotations from leading dealers in energy
swap contracts or physical gas trading markets, similar sales or purchases and
any bona fide third-party offers, all adjusted for the length of the term and
differences in transportation and processing costs. Royalty Owner will not be
required to enter into any replacement transaction(s) in order to liquidate and
determine such future damages. Royalty Owner’s rights and remedies under this
Section 4.6 and the preceding Section 4.5 will be in addition to any other
rights and remedies that Royalty Owner may have with respect to any or all
breaches by Working Interest Owner of this Agreement or any other Production
Payment Document, and Royalty Owner’s exercise of rights or remedies under any
section of this Agreement will not limit any other rights or remedies of Royalty
Owner and this Agreement will remain in effect in all other respects.

Section 4.7 Additional Hydrocarbons. If production of Production Payment
Hydrocarbons during any Month is insufficient to provide Royalty Owner under the
Conveyance with the full Scheduled Quantity for such Month, the value of such
shortfall will be determined

 

19

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

by multiplying such shortfall (measured in MMBtus) by the Field Price for Gas
for such Month (the “Shortfall Value”) and Working Interest Owner will have the
option, but not the obligation, to substitute other Hydrocarbons produced from
the Subject Interests (“Additional Hydrocarbons”) during such Month with a value
up to or equal to such Shortfall Value and to receive in exchange the future
Adjustment Quantities, as and when produced, that will constitute Production
Payment Hydrocarbons as a result of the insufficient production for which such
Adjustment Quantities are substituted. All Additional Hydrocarbons must be
produced by Working Interest Owner from the Subject Interests and will be valued
at the applicable Field Price. To exercise such option, Working Interest Owner
must deliver such Additional Hydrocarbons to Royalty Owner at one or more
Delivery Points in accordance with all applicable requirements of the Production
Payment Documents. If Working Interest Owner exercises such option, Working
Interest Owner will assume the risk that sufficient Hydrocarbons will be
produced from the Subject Interests in the future to produce the Adjustment
Quantity to which Working Interest Owner is entitled hereunder and Royalty Owner
will have no liability or obligation to Working Interest Owner in the event
there is insufficient production to produce any such Adjustment Quantity. For
the purposes of this Section 4.7, it is understood that the Production Payment
Hydrocarbons produced each Month will (a) first, be considered Production
Payment Hydrocarbons attributable to the Scheduled Quantity for such Month,
(b) second, be considered Adjustment Quantities that have not been exchanged to
Working Interest Owner for Additional Hydrocarbons, and (c) last, be considered
Adjustment Quantities that have been exchanged to Working Interest Owner under
this section, so that Royalty Owner will receive its full share of Production
Payment Hydrocarbons each Month before Working Interest Owner is entitled to
receive any part of the Production Payment Hydrocarbons in exchange for
Additional Hydrocarbons.

ARTICLE V

OTHER AGREEMENTS

Section 5.1 Performance of Production Payment Documents. Working Interest Owner
will, at its sole cost and expense, perform all of its covenants and other
obligations under this Agreement and the other Production Payment Documents, as
and when provided therein and herein.

Section 5.2 Interest on Late Payments; No Usury. Should Working Interest Owner
fail to pay Royalty Owner any amount of money due under any Production Payment
Document at the time when such amount is due, Working Interest Owner will also
pay interest on such amount at the Agreed Rate from the date such amount is due
until it is paid. Working Interest Owner and Royalty Owner stipulate and agree,
however, that they intend to contract in strict compliance with applicable usury
Law from time to time in effect. In furtherance thereof they further stipulate
and agree that neither this Section 5.2 nor any of the other terms and
provisions contained in any Production Payment Document will ever be construed
to create a contract to pay, for the use, forbearance or detention of money,
interest in excess of the maximum amount of interest permitted to be charged by
applicable Law from time to time in effect. No party to any Production Payment
Document will ever be liable for unearned interest or will ever be required to
pay interest in excess of the maximum amount that may be lawfully charged under
applicable Law from time to time in effect, and the provisions of this section
will control over all

 

20

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

other provisions of the Production Payment Documents which may be in conflict or
apparent conflict herewith. In determining whether or not the interest paid or
payable, under any specific circumstance, exceeds the maximum amount permitted
under applicable Law, the parties to the Production Payment Documents will to
the greatest extent permitted under applicable Law prorate, allocate, and spread
the total amount of interest throughout the entire contemplated term of the
interest bearing obligations in accordance with the amounts thereof outstanding
from time to time and the maximum legal rate of interest from time to time in
effect under applicable Law in order to lawfully charge the maximum amount of
interest permitted under applicable Law.

Section 5.3 Indemnity.

(a) As used herein, “Royalty Owner Indemnitees” means (i) Royalty Owner,
(ii) each of Royalty Owner’s successors and assigns (including its mortgagees
and lenders), (iii) all of the Affiliates of each Person referred to in either
of the preceding clauses (i) and (ii), and (iv) all of the partners, members,
shareholders, officers, directors, agents, representatives, beneficiaries,
trustees (including Trustee), attorneys and employees of each Person described
in any of the preceding clauses (i), (ii) and (iii).

(b) Working Interest Owner agrees to indemnify and hold each Royalty Owner
Indemnitee harmless from and against all claims, demands, damages, liabilities,
liens, losses, fines, penalties, charges, administrative and judicial
proceedings, orders, judgments, remedial action requirements, investigations,
and enforcement actions of any kind, together with all interest thereon and all
costs and expenses related thereto (including all fees and disbursements of
counsel and other advisors) and all other obligations whatsoever (collectively,
“Losses”) arising, in whole or in part, directly or indirectly, from or in
connection with any of the following:

(i) the exploring, drilling, developing, operating, maintaining, reworking,
redrilling or recompleting of the Subject Interests, Subject Lands, or Subject
Wells, or other operations thereon, or the production of Subject Hydrocarbons,
or the balancing, treating, gathering, transporting, tender, processing or other
handling of Subject Hydrocarbons, or the marketing, sale or transfer of Subject
Hydrocarbons;

(ii) the presence of any Hazardous Substances in, around, under or about any of
the Subject Lands, any other properties or assets of Working Interest Owner, or
any other properties or natural resources in the vicinity thereof or affected
thereby (in this subsection, all of the foregoing are referred to as the
“Relevant Property”); the presence, use, generation, transportation, treatment,
storage, remediation, disposal, release, or discharge at any time of any
Hazardous Substance on, under or from the Relevant Property; any failure at any
time by any Person (whether Working Interest Owner, Royalty Owner, any of their
Affiliates, or any other Persons) to comply with any Environmental Laws or with
any other duties in respect of damage to or remediation of the environment that
are in any way related to the Relevant Property; or the exposure of any Person
or property at any time to any Hazardous Substance on, under or from the
Relevant Property or in connection with any operations conducted on or in
respect of the Relevant Property by any Person;

 

21

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

(iii) any injury or alleged injury to Persons or properties occurring or
allegedly occurring in connection with any of the matters described in the
preceding subsections (i) or (ii);

(iv) any breach of Working Interest Owner’s warranties in Section 1.9 of the
Conveyance (including any Losses suffered by any Royalty Owner Indemnitee as a
result of any claim that such Royalty Owner Indemnitee lacks good title to the
Production Payment Hydrocarbons or otherwise must deliver or pay over to any
Person any part of the Production Payment Hydrocarbons or any proceeds thereof
at any time previously received or thereafter to be received by such Royalty
Owner Indemnitee);

(v) the breach or alleged breach of any Subject Contract by Working Interest
Owner or any other Person (including Royalty Owner);

(vi) any violation or alleged violation of the rights of any Person as a result
of Working Interest Owner’s conveyance of the Production Payment to Royalty
Owner or Working Interest Owner’s execution, delivery or performance of any
Production Payment Document; or

(vii) any breach by Working Interest Owner of any of its representations,
warranties, covenants or agreements in any of the Production Payment Documents,
or any matters relating to the enforcement or defense of the Production Payment
Documents by Royalty Owner.

(c) THE FOREGOING INDEMNITY WILL APPLY WHETHER OR NOT ANY LOSSES ARISE OUT OF
THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF ANY
ROYALTY OWNER INDEMNITEE OR IN CONNECTION WITH ANY LIABILITY IMPOSED UPON ANY
ROYALTY OWNER INDEMNITEE AS A RESULT OF ANY THEORY OF STRICT LIABILITY OR ANY
OTHER DOCTRINE OF LAW (IN EACH CASE WHETHER ALLEGED, ARISING OR IMPOSED IN A
LEGAL PROCEEDING BROUGHT BY OR AGAINST WORKING INTEREST OWNER, ANY AFFILIATE OF
WORKING INTEREST OWNER, ANY ROYALTY OWNER INDEMNITEE, OR ANY OTHER PERSON),
provided that the foregoing indemnity will not apply to any Losses incurred by
any Royalty Owner Indemnitee to the extent proximately caused by the gross
negligence or willful misconduct of such Royalty Owner Indemnitee as determined
in a final judgment by a court of competent jurisdiction. The foregoing
indemnity will not be qualified or limited by any other provisions of any
Production Payment Documents and will survive the termination of the Production
Payment and of this Agreement and the other Production Payment Documents.
Without limitation of the foregoing provisions, the foregoing indemnity will
apply in the event of any dispute, adversary proceeding, litigation or other
action among or between Working Interest Owner and any of the Royalty Owner
Indemnitees.

 

22

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

Section 5.4 Payment of Expenses. Working Interest Owner will promptly (and in
any event, within thirty (30) days after any invoice or other statement or
notice) pay: (a) all transfer, stamp, mortgage, documentary or other similar
taxes, assessments or charges levied by any governmental or revenue authority in
respect of any of the Production Payment Documents or any other document or
transaction referred to herein or therein, (b) all reasonable out-of-pocket
costs and expenses incurred by or on behalf of Royalty Owner (including
attorneys’ fees, consultants’ fees, engineering fees, travel costs and
miscellaneous expenses) in connection with (i) the amendment, filing, recording,
refiling or re-recording of any Production Payment Document (or any waiver in
connection therewith) or any other document or instrument or further assurances
obtained, provided, filed or recorded or refiled or re-recorded in connection
with the terms of any Production Payment Document, the analysis of the
Production Payment, the administration of the Production Payment Documents, or
the monitoring of the Production Payment or Working Interest Owner’s compliance
with the Production Payment Documents, and (c) all reasonable out-of-pocket
costs and expenses incurred by or on behalf of Royalty Owner (including
attorneys’ fees, consultants’ fees, engineering fees, travel costs and
miscellaneous expenses whether or not related to disputes, adversary proceedings
or litigation between or involving Working Interest Owner and Royalty Owner) in
connection with the defense or enforcement of any of the Production Payment
Documents, any attempt to cure any breach thereunder, or the defense of Royalty
Owner’s exercise of its rights thereunder; provided that, in the case of claims
or causes of action by Royalty Owner against Working Interest Owner, Working
Interest Owner will only be obligated to reimburse such costs and expenses to
the extent that such claim or cause of action is resolved in favor of Royalty
Owner by a final order of a court of competent jurisdiction.

Section 5.5 Information and Reporting.

(a) Monthly Statements. Until the termination of the Production Payment and the
completion of all payments for Production Payment Hydrocarbons, Working Interest
Owner, at its own expense, will furnish to Royalty Owner (i) as and when
provided in Section 4.2, the monthly statements described therein and
(ii) within 55 Days after the end of each Month, a lease operating statement in
form acceptable to Royalty Owner, showing (1) gross volumes of Hydrocarbons
produced and sold from the Subject Lands during such Month and the portions
thereof that constituted Subject Hydrocarbons, (2) the average sales prices paid
to Working Interest Owner for the Retained Interest Hydrocarbons, and (3) the
severance Taxes, lease operating expenses, capital expenditures and any other
expenses for such Month. Each such lease operating statement will be in a form
and level of detail reasonable acceptable to Royalty Owner and certified by an
authorized officer of Working Interest Owner to be materially true and correct.

(b) Quarterly Reports. Until the termination of the Production Payment and the
completion of all payments for Production Payment Hydrocarbons, Working Interest
Owner, at its own expense, will furnish to Royalty Owner the following reports
and information within 60 days after the end of each March, June, September, and
December:

(i) A certificate executed by an authorized officer of Working Interest Owner
certifying that, to the best of his knowledge after reasonable investigation,
all Taxes, royalties, rentals and other amounts with respect to the Subject
Interests (other than amounts disputed in good faith by appropriate proceedings
and royalties held in suspense due to title disputes or title questions) have
been paid in full and in accordance with the

 

23

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

terms of the Leases, any other applicable agreements and all applicable Laws,
and that Working Interest Owner is in compliance in all material respects with
the terms of the Production Payment Documents, the Leases, and the Subject
Contracts, or if not, specifying in reasonable detail any exceptions thereto.

(ii) Reports concerning any material change in methods of treatment or operation
of all or any Subject Wells which are productive of Hydrocarbons, any new
drilling or development, any method of secondary or tertiary recovery by
repressuring or otherwise, or any other action with respect to the Subject
Interests, the decision as to which may materially increase or reduce the
quantity of Hydrocarbons ultimately recoverable from the Subject Interests, or
the rate of production therefrom, or which may shorten or prolong the period of
time required for termination of the Production Payment.

(iii) A report setting out the current status of all production imbalances by
Subject Well or Subject Interest.

(iv) Unaudited consolidated financial statements of Working Interest Owner as of
the end of and for the fiscal quarter then ending (provided that no quarterly
financial statements need be provided for the fourth fiscal quarter of any
fiscal year), including a balance sheet and statements of income and cashflows,
prepared in accordance with generally accepted accounting principles (other than
the omission of footnotes), consistently applied, accompanied by a certificate
of Working Interest Owner’s chief financial officer stating that such financial
statements were so prepared and fairly present the matters addressed therein,
subject to normal year end adjustments.

(c) Annual and Semiannual Reports. Until the termination of the Production
Payment and the completion of all payments for Production Payment Hydrocarbons,
Working Interest Owner, at Working Interest Owner’s own expense, will furnish to
Royalty Owner the following reports and information:

(i) Semi-annually, on or before March 15 and September 15 of each year, a
Reserve Report prepared as of the preceding December 31 and June 30,
respectively. Each report dated as of December 31 will be prepared or audited by
the Company Engineers, and each report dated as of June 30 will, at Royalty
Owner’s election, be prepared by Working Interest Owner’s in-house reserve
engineers or by the Company Engineers. Each report will incorporate all current
information and data available to Working Interest Owner pertinent to the
estimation of Oil and Gas reserves attributable to the Subject Interests and the
Production Payment. Working Interest Owner will also furnish to Royalty Owner
Working Interest Owner’s internally prepared summary of such report, if any, and
a copy of any other reserve report from time to time prepared for Working
Interest Owner by any independent petroleum engineering firm covering the
Subject Interests or any part thereof.

(ii) Annually, within 90 days after the end of each fiscal year, audited
financial statements of Working Interest Owner as of the end of and for such
year, including a balance sheet and statements of income, owner’s equity and
cash flows, prepared in accordance with generally accepted accounting
principles, accompanied by a

 

24

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

report of Working Interest Owner’s independent certified public accountants
stating that their examination was made in accordance with generally accepted
auditing standards and that in their opinion such financial statements fairly
present Working Interest Owner’s financial position, results of operations,
owner’s equity and cash flows in accordance with generally accepted accounting
principles consistently applied.

(iii) At least 20 days prior to the expiration date of any policy, evidence
satisfactory to Royalty Owner confirming timely renewal of the insurance
policies required hereunder.

(d) Notices. Until the termination of the Production Payment and the completion
of all payments for Production Payment Hydrocarbons, Working Interest Owner, at
Working Interest Owner’s own expense, will furnish to Royalty Owner the
following as and when indicated below:

(i) As soon as possible and in any event within 5 days after Working Interest
Owner becomes aware thereof, written notice of (A) any breach of any Production
Payment Document or any material breach (by any party thereto) of any Subject
Contract, (B) any action, event or occurrence that could reasonably be expected
to have a material adverse effect on the Production Payment, or (C) any material
change in the rate of production of Subject Hydrocarbons from the Subject Wells.

(ii) Promptly after obtaining actual knowledge thereof, written notice of any
material adverse claim or demand made by any Person affecting the Subject
Interests or the Hydrocarbons produced therefrom in any manner whatsoever, or of
any proceedings instituted or threatened with respect thereto, or of any other
matter required to be reported under Section 3.1(d) or Section 3.5.

(iii) Promptly after the filing thereof, copies of any notices and filings made
by Working Interest Owner with the Securities and Exchange Commission, but only
to the extent not available on EDGAR.

(iv) At least 30 days prior to the occurrence thereof, notice of any change in
Working Interest Owner’s name, identity or organizational structure, or any
change to its jurisdiction of organization, including in such notice a
ratification of Royalty Owner’s authority to file any related financing
statement amendments contemplated in the Uniform Commercial Code.

In connection with any change in Working Interest Owner’s name, identity or
organizational structure, or any change to its jurisdiction of organization,
Royalty Owner is hereby authorized (whether or not Working Interest Owner’s
gives the ratification described in the preceding subsection (iv)) to file any
related financing statement amendments contemplated in the Uniform Commercial
Code.

 

25

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

(e) Other Information Upon Request. Until the termination of the Production
Payment and the completion of all payments for Production Payment Hydrocarbons,
Working Interest Owner, at Working Interest Owner’s own expense, will, upon
request, furnish to Royalty Owner and its consultants and representatives the
following information and access as and when requested from time to time:

(i) Access to the Company Engineers or other engineers who prepared the most
recent annual and semiannual Reserve Reports delivered hereunder, and to their
engineering databases and other relevant data, for the purpose of discussing and
reviewing their data, analysis, and conclusions.

(ii) Except to the extent prohibited by confidentiality agreements in place on
the date hereof (or agreements hereafter entered into with respect to seismic
data), copies of surface maps showing property lines and well locations, well
logs, core analysis data, flow and pressure tests, production analysis, casing
programs and other similar information related to the Subject Interests, the
Subject Wells or the production therefrom.

(iii) A schedule of the Upstream Contracts pursuant to which operations relating
to the Subject Interests are carried out, all reasonably requested information
pertaining thereto, and copies of each such Upstream Contract (or amendment
thereto).

(iv) A schedule of the Downstream Contracts under which the Subject Hydrocarbons
were transported, treated, processed, resold or otherwise dealt with during the
most recent Month(s), setting out the amount of Subject Hydrocarbons dealt with
under each such Downstream Contract and the prices paid or received thereunder
by Working Interest Owner, the Leases covered thereby, and the remaining term
thereof, and a copy of each such Downstream Contract (or amendment thereto).

(v) Access to remote field monitoring data specifically related to the wells
subject to the Production Payment, such as SCADA data that is available
electronically.

(vi) Such other information relating to the Subject Interests or the matters
addressed in the Production Payment Documents as Royalty Owner may from time to
time request.

(f) Audit and Inspection Rights. Royalty Owner will have the right from time to
time to audit the books and records of Working Interest Owner with respect to
the Subject Interests and the Subject Hydrocarbons, including all information
with respect to the matters to be reported on by Working Interest Owner as
provided herein. Such audits will be conducted by Royalty Owner so as to result
in a minimum disruption in the ongoing business and affairs of Working Interest
Owner and will be conducted during normal business hours at Working Interest
Owner’s offices or at the offices where Working Interest Owner maintains the
records relating to the items set forth above. This right to audit will survive
the termination of the Production Payment for two years. If, as a result of any
such audit, it is determined that any amount is due Royalty Owner under the
Production Payment Documents, whether as a result of the failure of Working
Interest Owner to properly deliver all Production Payment Hydrocarbons, or the
proceeds thereof, to Royalty Owner in accordance with the terms of the
Production Payment Documents, or otherwise, Working Interest Owner will pay such
amount to Royalty Owner together with interest at the Agreed Rate from the date
that such amount should have been

 

26

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

delivered or paid in accordance with the terms of the Production Payment
Documents to the date of payment. Working Interest Owner will also permit the
duly authorized representatives of Royalty Owner, at any reasonable time, to
make such inspections of the Subject Interests and the property, equipment and
facilities used in the operation thereof (or any records of Working Interest
Owner related thereto) as such representatives may deem proper.

Section 5.6 Alternative Marketing of Production Payment Hydrocarbons.

(a) General Provision. As provided in the Conveyance, the Production Payment
Hydrocarbons will be delivered to Royalty Owner in kind or to the credit of
Royalty Owner, free of Delivery Point Charges and other costs and expenses, at
the applicable Delivery Points. Except as provided otherwise in Article IV
hereof, Royalty Owner will take and market the Production Payment Hydrocarbons
upon delivery by Working Interest Owner at the applicable Delivery Points.

(b) Spot Market PP Hydrocarbons. If the sales agreement between Royalty Owner
and Working Interest Owner set out in Article IV hereof is ever suspended or
terminated, Royalty Owner will have the right to take and market all or any
portion of the Production Payment Hydrocarbons and also the right to require
Working Interest Owner to process and/or market, as Royalty Owner’s agent, all
or any portion of the Production Payment Hydrocarbons on the same terms and
conditions as Working Interest Owner’s Retained Interest Hydrocarbons are
processed and/or marketed. Any such Production Payment Hydrocarbons so marketed
by Royalty Owner are called “Royalty Owner Spot Market PP Hydrocarbons” and any
such Production Payment Hydrocarbons that Royalty Owner so requires Working
Interest Owner to process or market as Royalty Owner’s agent are herein called
“Working Interest Owner Spot Market PP Hydrocarbons”.

(c) Assistance with Marketing. Working Interest Owner will, without charge,
render all assistance that may be useful or necessary to Royalty Owner in
marketing the Royalty Owner Spot Market PP Hydrocarbons, including giving
Royalty Owner access to and the use of all treating, gathering, processing,
storage, transportation and other facilities available to Working Interest Owner
or Working Interest Owner’s Affiliates, whether by ownership, contract or
otherwise, which access and use will, to the maximum extent allowed by Law or
other agreements existing on the date hereof, (i) be made available to the
Subject Hydrocarbons prior to any other Hydrocarbons owned or controlled by
Working Interest Owner, (ii) be allocated between the Production Payment
Hydrocarbons and the Retained Interest Hydrocarbons in proportion to the
relative amounts thereof, and (iii) be without charge by Working Interest Owner
or its Affiliates for any such treating, gathering or other facilities in the
area of production and with the same charges per unit of Oil or Gas as are paid
by Working Interest Owner to third parties for any other facilities. Working
Interest Owner will process and market all Working Interest Owner Spot Market PP
Hydrocarbons on the same terms as its own Retained Interest Hydrocarbons.
Working Interest Owner will use its reasonable best efforts to cause all
proceeds of Working Interest Owner Spot Market PP Hydrocarbons and Retained
Interest Hydrocarbons to be paid directly to Royalty Owner by the purchasers
thereof, and upon receipt thereof, Royalty Owner will retain the proceeds from
the Production Payment Hydrocarbons and promptly remit the remainder to Working
Interest Owner. Until such designation is effective (and if Working Interest
Owner otherwise receives any such proceeds), Working Interest Owner will receive
such

 

27

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

proceeds in trust on behalf of Royalty Owner and pay such proceeds to Royalty
Owner by wire transfer on or before the first business day after receipt
thereof, without any setoff, defense or counterclaim, all of which are hereby
waived by Working Interest Owner.

(d) Nominations. Whenever any Royalty Owner Spot Market PP Hydrocarbons are
being sold, Working Interest Owner will, not less than five Business Days prior
to the first day of each Month in which such sales will occur, notify Royalty
Owner of the daily quantities of such Production Payment Hydrocarbons that
Working Interest Owner expects to be produced and delivered for Royalty Owner’s
account at each Delivery Point during such Month. Working Interest Owner will
use its reasonable commercial efforts to cause the Production Payment Gas
constituting Royalty Owner Spot Market PP Hydrocarbons to be delivered at
uniform daily rates throughout each Month at each Delivery Point in the
quantities set out in such notice, but nothing in such notice will modify or
limit Royalty Owner’s right to receive Production Payment Hydrocarbons as
provided in the Conveyance. Working Interest Owner will immediately notify
Royalty Owner of any change (in excess of tolerances permitted by the relevant
Delivery Point Recipient) in the rate of delivery at the Delivery Points of any
Gas constituting Royalty Owner Spot Market PP Hydrocarbons. Variations in rates
of deliveries from those scheduled which do not exceed the tolerances permitted
by the Delivery Point Recipient without penalty will not require any such
notice. Working Interest Owner and Royalty Owner will cooperate to ensure that
nominations for Gas constituting Royalty Owner Spot Market PP Hydrocarbons are
timely made to transporters and other appropriate Persons and that such
nominations reflect the actual expected deliveries and receipts. Working
Interest Owner and Royalty Owner will use reasonable efforts to give each other
24 hours’ prior notice of any adjustments to be made in quantities delivered or
received.

Section 5.7 Preservation of Subject Well Drainage. From the Effective Date of
this Agreement through the termination of the Production Payment and the
completion of all payments to Royalty Owner that are required under any of the
Production Payment Documents, Working Interest Owner will not take any action in
drilling or completing any well that is not a Subject Well (or other operations
in connection therewith) that has, or would reasonably be expected to have, a
negative impact on the performance characteristics of any Subject Well.

ARTICLE VI

LIENS TO SECURE PERFORMANCE; OTHER REMEDIES

Section 6.1 Mortgage. The Conveyance is the grant of a property interest in the
Subject Interests and the Subject Hydrocarbons, pursuant to which Royalty Owner
will own and possess the Production Payment Hydrocarbons if, as and when
produced. Royalty Owner will look solely to the Production Payment Hydrocarbons
for satisfaction and discharge of the Production Payment, and Working Interest
Owner will not be personally liable for such satisfaction and discharge (and the
indemnity provided in Section 5.3 will not be construed to make Working Interest
Owner personally liable for such satisfaction and discharge). Working Interest
Owner has, however, made various covenants, agreements, representations,
warranties and indemnities in the various Production Payment Documents for which
it is personally liable. In order to secure the performance by Working Interest
Owner of all of Working Interest Owner’s obligations and liabilities under this
Agreement or any other Production Payment Document, Working Interest Owner is
concurrently herewith executing and delivering the Mortgage.

 

28

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

Section 6.2 Production Proceeds. Notwithstanding that, by the terms of the
Mortgage, Working Interest Owner is granting to Royalty Owner the right to
collect directly all of the “Production Proceeds” (as defined therein), so long
as no Performance Default has occurred Working Interest Owner may continue to
receive from the purchasers of production all such Production Proceeds, subject,
however, to the Liens created under the Mortgage, which Liens are hereby
affirmed and ratified, and Royalty Owner will not exercise its rights and powers
under Sections 3.1 and 3.2 of the Mortgage. Upon the occurrence of a Performance
Default, Royalty Owner may exercise all rights and remedies granted under the
Mortgage, including the right to obtain possession of all Production Proceeds
then held by Working Interest Owner and the right to receive directly from the
purchasers of production all other Production Proceeds. In no case shall any
failure, whether intentioned or inadvertent, by Royalty Owner to collect
directly any Production Proceeds constitute in any way a waiver, remission or
release of any of its rights under the Production Payment Documents, nor shall
any release of any Production Proceeds by Royalty Owner to Working Interest
Owner constitute a waiver, remission, or release of any other Production
Proceeds or of the rights of Royalty Owner to collect all other Production
Proceeds thereafter.

Section 6.3 Replacement of Operator. In addition to its other remedies under the
Production Payment Documents, upon the continuance of a Performance Default for
thirty consecutive days without being cured, Royalty Owner may require Working
Interest Owner to do either or both of the following: (i) employ a contract
operator designated by Royalty Owner for any or all of the Subject Interests, or
(ii) resign as operator of any or all of the Subject Interests, whereupon
Working Interest Owner will so resign and will appoint, vote for, and otherwise
support a substitute operator acceptable to Royalty Owner.

ARTICLE VII

MISCELLANEOUS

Section 7.1 Notices. All notices, requests, demands, instructions and other
communications required or permitted to be given hereunder or under the
Conveyance will be in writing and will be given as provided in the Purchase and
Sale Agreement.

Section 7.2 Successors and Assigns. The covenants, provisions and conditions
contained in this Agreement will be binding upon and (subject to the
restrictions concerning the Subject Interests that are contained in Section 1.8
of the Conveyance) inure to the benefit of Working Interest Owner and Royalty
Owner and their respective successors and permitted assigns. Working Interest
Owner will not transfer, assign or pledge its rights or obligations hereunder or
under the other Production Payment Documents except as allowed under Section 1.8
of the Conveyance. Royalty Owner and its successors and assigns may, and nothing
contained in the Production Payment Documents will in any way limit or restrict
the right of Royalty Owner, or Royalty Owner’s successors and assigns, to, sell,
convey, assign, mortgage or otherwise transfer the Production Payment or its
rights and obligations under the Production Payment Documents in whole or in
part. If Royalty Owner, or any of Royalty Owner’s successors and assigns, at any
time executes a mortgage, pledge or deed of trust covering all or

 

29

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

any part of the Production Payment as security for any obligation, then the
mortgagee, the pledgee or the trustee therein named or the holder of the
obligation secured thereby will be entitled, when and to the extent such
mortgage, pledge or deed of trust so provides or Royalty Owner otherwise agrees,
to exercise all of the rights, remedies, powers and privileges conferred upon
Royalty Owner under the Production Payment Documents and to give or withhold all
consents required or permitted to be obtained from Royalty Owner pursuant to the
Production Payment Documents. All references herein to either Working Interest
Owner or Royalty Owner will include their respective successors and permitted
assigns.

Section 7.3 Acknowledgments and Admissions. Working Interest Owner hereby
represents, warrants, agrees, acknowledges and admits that Royalty Owner is not
a fiduciary or an advisor for Working Interest Owner with respect to any
Production Payment Document or the transactions contemplated thereby and that no
partnership or joint venture exists with respect to the Production Payment
Documents between Working Interest Owner and Royalty Owner.

Section 7.4 Entire Agreement; Amendments; Waiver. This Agreement and the other
Production Payment Documents constitute the entire agreement between the
Parties. This Agreement may not be amended or modified, and no rights hereunder
may be waived, except by a written document signed by the Party to be charged
with such amendment, modification or waiver. Provisions of this Agreement that
refer to any consent, approval, amendment or waiver by either Party require such
consent, approval, amendment or waiver to be in writing. No waiver of any of the
provisions of this Agreement will be deemed to be or will constitute a waiver of
any other provisions hereof (whether or not similar), nor will such waiver
constitute a continuing waiver unless otherwise expressly provided.

THIS WRITTEN AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

Section 7.5 Counterpart Execution. This Agreement may be executed by Working
Interest Owner and Royalty Owner in any number of counterparts, each of which
will be deemed an original instrument and all of which will constitute but one
and the same Agreement.

 

30

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

Section 7.6 Applicable Law. This Agreement will be governed by and construed in
accordance with the Laws of the State of Texas.

Section 7.7 Severability. If any term or provision of this Agreement or any
other Production Payment Document is ever determined to be illegal or
unenforceable to any extent, such term or provision will otherwise remain
effective and be enforced, and all other terms and provisions of the hereof or
thereof will nevertheless remain effective and will be enforced, to the fullest
extent permitted by applicable Law.

Section 7.8 Termination; Limited Survival. Upon both (i) the termination of the
Production Payment as provided in the Conveyance and (ii) the full and complete
payment and performance of all obligations and duties of Working Interest Owner
under this Agreement and the other Production Payment Documents, Working
Interest Owner will be entitled to request and receive the release by Royalty
Owner of the liens and security interests under the Mortgage, and at such time
Royalty Owner will, at the request and expense of Working Interest Owner,
execute and deliver an appropriate release to Working Interest Owner.
Notwithstanding the foregoing or anything to the contrary herein or in any other
Production Payment Document, the following will survive any termination of the
Production Payment, this Agreement, or any other Production Payment Document:
(a) all waivers or admissions made by Working Interest Owner herein or therein,
(b) all obligations that any Person may have to indemnify or compensate Royalty
Owner or any Royalty Owner Indemnitee hereunder or thereunder, and (c) all other
provisions hereof or thereof that are expressly stated to survive the
termination of the Production Payment or of this Agreement, the Conveyance, or
any other Production Payment Document.

Section 7.9 WAIVER OF JURY TRIAL AND PUNITIVE DAMAGES. WORKING INTEREST OWNER
AND ROYALTY OWNER HEREBY RATIFY AND REMAKE THEIR WAIVERS OF AND AGREEMENTS
CONCERNING JURY TRIAL AND PUNITIVE AND OTHER DAMAGES MADE IN SECTION 7.9 OF THE
PURCHASE AND SALE AGREEMENT.

Section 7.10 CONSENT TO JURISDICTION. WORKING INTEREST OWNER AND ROYALTY OWNER
HEREBY RATIFY AND REMAKE THEIR CONSENTS TO AND AGREEMENTS CONCERNING
JURISDICTION, FORUM AND VENUE MADE IN SECTION 7.10 OF THE PURCHASE AND SALE
AGREEMENT.

[remainder of page intentionally left blank]

 

31

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

IN WITNESS WHEREOF, Working Interest Owner and Royalty Owner have executed this
Agreement as of the date set forth above.

 

WORKING INTEREST OWNER:

GMX RESOURCES INC.

By:   /s/ Harry C. Stahel, Jr.  

Name: Harry C. Stahel, Jr.

Title:   Executive Vice President — Finance

 

ROYALTY OWNER:

EDF TRADING NORTH AMERICA, LLC By:   /s/ Eric Dennison  

Name: Eric Dennison

Title:   Senior Vice President

Signature Page to Production and Marketing Agreement

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

SCHEDULE 2.4

TO PRODUCTION AND MARKETING AGREEMENT

TARGET TAIL RATIOS

 

Month

   Target Tail
Ratio     Tail Reserves/
Remaining
Reserves     Tail
Reserves      Remaining
Reserves  

Closing Date through December 31, 2011

     40 %      43 %      15,579         36,448   

January 1, 2012 through June 30, 2012

     40 %      44 %      15,579         35,795   

July 1, 2012 through December 31, 2012

     45 %        15,579      

January 1, 2013 through June 30, 2013

     50 %      52 %      15,579         30,233   

July 1, 2013 through December 31, 2013

     50 %        15,579      

January 1, 2014 through June 30, 2014

     50 %      59 %      15,579         26,621   

July 1, 2014 through December 31, 2014

     55 %        15,579      

January 1, 2015 through June 30, 2015

     60 %      65 %      15,579         23,899   

July 1, 2015 through December 31, 2015

     65 %        15,579      

January 1, 2016 through June 30, 2016

     70 %      72 %      15,579         21,703   

July 1, 2016 through December 31, 2016

     70 %        15,579      

January 1, 2017 through June 30, 2017

     70 %      78 %      15,579         19,853   

July 1, 2017 through December 31, 2017

     75 %        15,579      

January 1, 2018 through June 30, 2018

     80 %      85 %      15,579         18,256   

July 1, 2018 through December 31, 2018

     85 %        15,579      

January 1, 2019 through June 30, 2019

     90 %      92 %      15,579         16,844   

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

SCHEDULE 3.7

TO

PRODUCTION AND MARKETING AGREEMENT

INSURANCE

Required Coverage

Working Interest Owner will at all times while operations are conducted on the
Subject Interests procure and maintain with responsible insurance companies for
the benefit and protection of the Parties the following insurance and such other
insurance as Working Interest Owner deems appropriate:

(a) Worker’s Compensation Insurance and Employer’s Liability Insurance in
compliance with all applicable Laws.

(b) Comprehensive General Liability Insurance (including pollution) with a
combined single limit of not less than $1,000,000 per occurrence and $2,000,000
in the aggregate. This policy will be endorsed to provide coverage for
explosion, collapse and underground damage hazards to property of others;
contractual liability; and products and completed operations;

(c) Comprehensive Liability Insurance covering all owned, hired or non-owned
vehicles with a combined single limit of not less than $1,000,000 per
occurrence;

(d) Excess Umbrella Liability Insurance with a combined single limit of not less
than $10,000,000 per occurrence;

(e) Well Control Operator’s Excess Expense Liability Insurance (including cost
of well control, relief wells, redrilling) in an amount not less than
$15,000,000 per occurrence; and

(f) Property Insurance (subject to deductibles that are customary in the case of
independent oil and gas companies engaged in operations of similar properties)
on a replacement cost basis fully covering the property subject to this
Production and Marketing Agreement including the value of all facilities and
well surface equipment.

Additional Requirements

1. All insurance policies will be endorsed to be primary and noncontributory
with any other valid and collectible insurance.

2. Working Interest Owner will provide to Royalty Owner from time to time as
requested a Certificate of Insurance, in form satisfactory to Royalty Owner, as
evidencing that satisfactory coverages of the type and limits set forth
hereinabove are in effect. Policies providing such coverages will contain
provisions that no cancellation or material changes in the policies will become
effective except on 30 days’ advance written notice thereof to Royalty Owner.
Irrespective of the requirements as to insurance to be carried as provided for
herein, the insolvency, bankruptcy or failure of any insurance company carrying
insurance of Working

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

Interest Owner, the failure of any insurance company to pay claims accruing, or
the inadequacy of the limits of the insurance, will not affect, negate or waive
any of the provisions of any Production Payment Document applicable to the
property, including, without exception, the indemnity obligations of Working
Interest Owner. Working Interest Owner will furnish to Royalty Owner copies of
all renewal applications or applications for replacement insurance promptly
following submission of the same.

3. Working Interest Owner will promptly notify Royalty Owner of any one or more
claims made under any insurance policy where Working Interest Owner is a named
or additional insured (whether such claim is made by Working Interest Owner or
any other person insured thereunder) where such claim(s) are for an aggregate
amount in excess of 50% of any aggregate policy limit.

4. Working Interest Owner will require any policies of liability insurance,
except workers compensation coverage, that are in any way related to the Subject
Interests, and that are obtained or maintained by Working Interest Owner, to
include Royalty Owner, its parent and affiliated companies and mortgagees, and
their directors, officers, employees and agents, as Additional Insureds, without
any limitations based on the fault or negligence, in whole or in part, of such
Additional Insureds. Working Interest Owner will require any property and
casualty policies that are in any way related to the Subject Interests, and that
are obtained or maintained by Working Interest Owner, to name Royalty Owner as
the loss payee to the extent of Royalty Owner’s or Working Interest Owner’s
interests. If any insurance policy is issued with the name of the insured being
other than the name of Working Interest Owner, then Working Interest Owner will
be added as a named insured and Royalty Owner and its parent and affiliated
companies and mortgagees, and their directors, officers, employees and agents
will be named as Additional Insureds and loss payee as required in the preceding
sentences of this paragraph.

5. Working Interest Owner will require all policies of insurance that are in any
way related to this Production and Marketing Agreement and that are obtained or
maintained by Working Interest Owner to include clauses providing that each
underwriter will waive its rights of recovery, under subrogation or otherwise,
against Royalty Owner, its parent and affiliated companies and mortgagees, and
their directors, officers, employees and agents.