Exhibit 10
  
PARTICIPATION AGREEMENT
 
BEREA SANDSTONE PROGRAM
 
BOYD, CARTER, GREENUP AND LAWRENCE COUNTIES, KENTUCKY
 
This Participation Agreement (“Agreement”) is entered into as of September 17,
2012 (the “Effective Date”), by and among NYTIS EXPLORATION COMPANY LLC, a
Delaware limited liability company (“Nytis”), CARBON NATURAL GAS COMPANY, a
 
Delaware corporation (“Carbon”) (for purposes of Article X only), and LIBERTY
ENERGY, LLC, a Massachusetts limited liability company (“Liberty”).
 
RECITALS
 
WHEREAS, Nytis has leased, or obtained leases of, certain oil and gas interests
in the Contract Area (as defined below) covering approximately 26,000 net
mineral acres (the “Berea Sandstone Program”);
 
WHEREAS,  Liberty desires to participate in the development of the Berea
Sandstone Program by paying a portion of the costs incurred by Nytis (subject to
the provisions of Section 3.2 below) associated with the drilling, completion
and equipping of oil and gas wells in the Berea Sandstone Geologic Interval
(collectively, the “Wells”) in exchange for forty percent (40%) of Nytis’
undivided working interest in the leases underlying the oil and gas interests
which constitute the Berea Sandstone Program (the “Liberty Working Interest”),
which leases are more particularly described on Exhibit A attached hereto and
incorporated herein (the “Leases”); and
 
WHEREAS, Liberty, as consideration for the right to participate in the
development of the Berea Sandstone Program and other rights set forth herein,
has agreed to carry a portion of Nytis’ costs in the Wells as set forth herein.
 
NOW, THEREFORE, for a good and valuable consideration, it is agreed between the
parties as follows:
 
ARTICLE I
DEFINITIONS
 
1.1      In addition to definitions set forth elsewhere herein, the following
definitions shall apply in this Agreement:
 
“AFE” means an authorization for expenditure representing an estimate of work to
be performed for a specific drilling, completion or other operation.
 
“Approved Spacing Unit” means the unit described in the as-built plat that is
used for division order purposes and submitted to the Kentucky Division of Oil
and Gas.
 
 
1

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

 
 
“Berea Sandstone Geologic Interval” means the geologic interval below the
Sunbury Shale and above the Devonian Shale as located in Brice Shepherd #1 from
1007 feet to 1162 feet.
 
“Contract Area” means the area extending one mile beyond the boundaries of the
Leases in Boyd, Carter, Greenup and Lawrence Counties, Kentucky, a general
outline of which is attached for illustrative purposes only on Exhibit B
attached hereto.
 
“Drilling and Completion Activities” means all activities and operations carried
out by or on behalf of the parties related to the Wells and under the terms and
conditions of this Agreement, including, but not limited to, drilling,
sidetracking, well control, acquisition, transportation and installation of
tubular goods, materials and equipment; surveying, constructing roads and
surface location.
 
“Drilling and Completion Costs” means all costs incurred in connection with
Drilling and Completion Activities, all of which will be determined, and billed
to the parties participating in such activities, pursuant to the Operating
Agreement.
 
“Horizontal Well” means a well permitted and spudded with the intent to drill
with at least 1500 feet of horizontal displacement from the surface
location.  If at any time the parties mutually agree to drill a well not
intended to have significant horizontal displacement under this Agreement, that
well shall be counted as 1/3 of a Horizontal Well for the purpose of this
Agreement.
 
“Operating Agreement” means the Operating Agreement in substantially the form of
that attached hereto as Exhibit C, together with the COPAS Accounting Procedure
annexed thereto, and together with all Exhibits thereto.
 
“Operator” means Nytis or its assigns.
 
“Proportionately Reduced” means the pro rata reduction of the amount to be paid
by Liberty and/or Nytis, as the case may be, with respect to any Well and/or
Lease in which Liberty and Nytis do not collectively own a 100% working
interest, based on the actual working interest owned by Liberty and Nytis,
collectively, in such Well and/or Lease.
 
1.2      The following Exhibits are attached to and made a part of this
Agreement:
 
Exhibit “A”     Description of Leases
Exhibit “B”     General Outline of Contract Area
Exhibit “C”     Operating Agreement
Exhibit “D”     Form of Well AFEs
Exhibit “E”      Form of Assignment
Exhibit “F”      Existing Wells
 
 
2

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

 
 
ARTICLE II
DRILLING COMMITMENT; SUBSEQUENT ACTIVITIES
 
2.1       Carry Wells.
 
(a)       Liberty shall commit to drill, complete and equip ten (10) Horizontal
Wells targeting the Berea Sandstone Geologic Interval (the “Drilling Commitment
Carry Wells”) as proposed and operated by Nytis on the lands in the Berea
Sandstone Program.  Nytis shall use its best efforts to spud the first Drilling
Commitment Carry Well on or before the date which is thirty (30) days following
the Closing, and shall drill such Drilling Commitment Carry Well in accordance
with an AFE  in the form attached hereto as Exhibit D.
 
(b)       Upon completion of the Drilling Commitment Carry Wells, Liberty may
elect, in accordance with the procedure provided below in this Section 2.1(b),
to participate in two (2) additional groups of Horizontal Wells, each group
consisting of five (5) Horizontal Wells, targeting the Berea Sandstone Geologic
Interval as proposed and operated by Nytis in the Berea Sandstone Program in
accordance with the terms of the Operating Agreement (the “Uncommitted Carry
Wells”, and together with the Drilling Commitment Carry Wells, the “Carry
Wells”).  Upon completion of the Drilling Commitment Carry Wells, Nytis shall
deliver to Liberty a proposal for the drilling, completion and equipping of the
first group of five (5) Uncommitted Carry Wells (the “Initial Uncommitted Carry
Wells”).  Liberty shall have ten (10) days to provide Nytis written notice of
its election to participate in the Initial Uncommitted Carry Wells.  In the
event that Liberty elects to participate in the Initial Uncommitted Carry Wells,
upon completion of the Initial Uncommitted Carry Wells, Nytis shall deliver to
Liberty a proposal for the drilling, completion and equipping of the second
group of five (5) Uncommitted Carry Wells (the “Remaining Uncommitted Carry
Wells”).  Liberty shall have ten (10) days to provide Nytis written notice of
its election to participate in the Remaining Uncommitted Carry Wells.  In the
event that Liberty fails to provide notice to Nytis of its election to
participate in the Initial Uncommitted Carry Wells or Remaining Uncommitted
Carry Wells within the respective ten (10) day periods, such failure shall be
deemed a consent by Liberty to such participation and constitute Liberty’s
election to participate in the Initial Committed Carry Wells or Remaining
Uncommitted Carry Wells, as applicable.
 
(c)       The parties shall bear the costs for the Carry Wells in accordance
with Section 3.1(b)(i).
 
2.2       Subsequent Activities.  Upon completion of the Carry Wells, the
parties may proceed to drill additional Horizontal Wells on the Berea Sandstone
Program in accordance with the terms of the Operating Agreement on a heads up
basis: Nytis 60% and Liberty 40%, each Proportionately Reduced.
 
2.3       Non-Consent Penalty.  In the event that Liberty elects not to
participate in either the Initial Uncommitted Carry Wells or the Remaining
Uncommitted Carry Wells as contemplated by Section 2.1(b), Liberty’s rights to
further participation in the Berea Sandstone Program shall terminate and Liberty
shall promptly re-assign to Nytis, without further consideration, the identical
leasehold and net revenue interest assigned to Liberty pursuant to Section 3.1
using the form of Assignment (as defined below); provided, however, that Liberty
shall retain its rights and interest in any Approved Spacing Unit surrounding
each Carry Well in which Liberty has previously participated.If Liberty
participates in all of the Carry Wells, Liberty shall have earned the Liberty
Working Interest and shall not be subject to any further re-assignment
obligations.
 
 
3

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

 
 
2.4       Drilling and Completion.  All Wells shall be Drilled and Completed in
accordance with the terms of the Operating Agreement.  Prior to spudding each
Well subject to this Agreement, Nytis shall deliver an authority for
expenditure, in the form as set forth on Exhibit D attached hereto (each a “Well
AFE”), setting forth drilling, completion and surface equipment costs for such
Well.  It is understood and agreed that the Well AFEs represent an estimate of
the costs of drilling and completing the Wells, but final billing will be based
on actual costs incurred.  Billings will be charged pursuant to the Operating
Agreement unless otherwise set forth herein.  In connection with any Well AFE,
Nytis agrees promptly to provide any additional information regarding the Well
which is reasonably requested by Liberty.  The location of each Well shall be
determined by the Operator in its sole discretion.  Unless otherwise consented
to in writing by Liberty, Nytis shall drill each Well as a Horizontal Well
running through the Berea Sandstone Geologic Interval.  Nytis shall complete,
equip and produce, or plug and abandon each of the Wells, with due diligence and
reasonable dispatch in accordance with applicable laws and the Operating
Agreement.
 
ARTICLE III
PURCHASE OF WORKING INTEREST; ASSIGNMENT
 
3.1       Purchase of Working Interest.
 
(a)       Upfront Payment.
 
(i)       Upon execution of this Agreement, Liberty will pay to Nytis an amount
equal to $350.00 per net mineral acre for forty percent (40%) of Nytis’
undivided working interest in the Berea Sandstone Program, which amount is
$3,655,552.60 (the “Initial Payment”).  The Initial Payment shall be made by
wire transfer of immediately available funds to an account designated by Nytis
no later than two Business Days prior to Closing.
 
(ii)       In exchange for the Initial Payment at the Closing, Nytis shall make
at Closing the assignments to Liberty set forth in Section 3.4 and grant Liberty
the right to participate for a forty percent (40%) working interest in the
drilling, development and production of oil and gas from the Leases in
accordance with the terms and conditions of this Agreement.
 
(b)       Subject to the limitation set forth in Section 3.2 below and in
accordance with the payment terms of the applicable Operating Agreement, unless
otherwise set forth herein, Liberty agrees to be responsible for and pay the
Drilling and Completion Costs of the Wells as follows:
 
 
4

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

 
 
(i)       With respect to the twenty (20) Carry Wells, Liberty shall bear eighty
percent (80%), Proportionately Reduced, of the Drilling and Completion Costs for
such Wells (the “Carry Costs”).
 
(ii)      In the event that Liberty elects to drill any Wells subsequent to the
completion of the Carry Wells, Liberty shall bear forty percent (40%),
Proportionately Reduced, of the Drilling and Completion Costs for such Wells.
 
3.2       Well Costs Cap.
 
(a)       Notwithstanding anything to the contrary in this Agreement, if the
Drilling and Completion Costs (or plugging and abandoning, if not completed):
 
(i)       associated with any particular Carry Well to be drilled pursuant to
Section 2.1 above exceed Six Hundred Fifty Thousand Dollars ($650,000.00) (the
“Single Well Cost Cap”), Liberty only shall be required to pay forty percent
(40%), Proportionately Reduced, of Drilling and Completion Costs in excess of
the Single Well Cost Cap for such Carry Well, and Nytis shall be required to pay
sixty percent (60%), Proportionately Reduced, of Drilling and Completion Costs
in excess of the Single Well Cost Cap for such Carry Well; or
 
(ii)      associated with all Carry Wells to be drilled pursuant to Section 2.1
above exceed Twelve Million Dollars ($12,000,000.00) in the aggregate (the
“Aggregate Well Cost Cap”), Liberty only shall be required to pay forty percent
(40%), Proportionately Reduced, of Drilling and Completion Costs in excess of
the Aggregate Well Cost Cap for the Carry Wells, and Nytis shall be required to
pay sixty percent (60%), Proportionately Reduced, of Drilling and Completion
Costs in excess of the Aggregate Well Cost Cap for the Carry Wells.
 
(b)       Nytis shall use its reasonable best efforts to obtain competitive,
market standard rates and costs with respect to the Drilling and Completion
Costs.
 
3.3       Spud Fee.  In addition to the amounts Liberty is required to pay
pursuant to Section 3.1, Liberty shall pay to Nytis a spud fee for each Well
drilled pursuant to this Agreement equal to $10,000.00, proportionately reduced
to Nytis’ initial working interest in such Well (the “Spud Fee”).  The Spud Fee
shall be paid by wire transfer of immediately available funds in accordance with
the invoicing provisions set forth in Section 4.2.
 
3.4       Assignment.  Simultaneously with Liberty’s payment of the Initial
Payment, Nytis shall deliver to Liberty a recordable assignment, in
substantially the form attached hereto as Exhibit E (the “Assignment”),
assigning Liberty forty percent (40%) of all of Nytis’ undivided right, title
and interest in and to the Leases.  Each and every Assignment contemplated
herein shall be made with a warranty of title, by, through and under Nytis, but
not otherwise, and such assignment(s) shall be subject to the terms contained in
this Agreement and the applicable operating agreements and/or pooling orders, if
any.  Liberty agrees that if it elects not to participate in either the Initial
Uncommitted Carry Wells or the Remaining Uncommitted Carry Wells as contemplated
by Section 2.1(b), Liberty shall promptly re-assign to Nytis, without further
consideration, the identical leasehold and net revenue interest assigned to
Liberty pursuant to Section 3.1 using the form of Assignment; provided, however,
that Liberty shall retain its rights and interest in any Approved Spacing Unit
surrounding a Carry Well in which Liberty has previously participated.
 
 
5

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

 
 
3.5       Overriding Royalty.  The parties acknowledge that all Assignments
shall include a reservation by Nytis of a two percent (2%) overriding royalty
interest on all Leases.
 
3.6       Existing Wells.  Nytis shall retain the wellbores and Approved Spacing
Units of all existing Wells spudded prior to the Effective Date in the Contract
Area, all of which are identified on Exhibit F attached hereto (the “Existing
Wells”), the production therefrom, and all equipment and facilities exclusively
associated therewith.  Nytis will assume all liabilities associated therewith
and indemnify Liberty therefrom.
 
3.7       Accelerated Payment of Carry Costs. Liberty shall have the option, and
Nytis hereby grants Liberty the option, to accelerate its payment of the Carry
Costs and secure its full Liberty Working Interest in the Berea Sandstone
Program (the “Acceleration Option”) if Nytis elects to sell the majority of its
working interests in the Berea Sandstone Program to a third party at any point
before Liberty has paid Carry Costs equal to the Aggregate Wells Costs Cap.  If
Liberty elects to exercise the Acceleration Option, then Liberty shall
immediately pay to Nytis an amount equal to the Aggregate Well Costs Cap minus
any Carry Costs actually paid by Liberty as of the date of Liberty’s exercise of
the Acceleration Option (the “Accelerated Amount”).  Upon Liberty’s payment of
the Accelerated Amount, Liberty (i) shall have satisfied its obligation to pay
the Carry Costs in its entirety, and shall have no further obligation to Nytis
or any third party that acquires an interest in the Berea Sandstone Program for
any Carry Costs, (ii) shall own the Liberty Working Interest in the Berea
Sandstone Program and neither Nytis nor any third party shall not be entitled to
any re-assignment of the same.
 
ARTICLE IV
OPERATOR
 
4.1       Operating Agreement.  Nytis shall be the Operator under the Operating
Agreement and in such capacity shall carry out or cause to be carried out all
Drilling and Completion Activities as well as all other operations covered by
the Operating Agreement; provided, however, that Nytis shall be permitted to
assign its obligations as Operator in accordance with the Operating
Agreement.  Additionally, it is understood that Nytis may engage a legitimate
third party contract operator, which is mutually acceptable to the parties
hereto, to consummate the actual Drilling and Completion Activities to be
conducted on each designated prospect.
 
4.2       Invoicing.  Notwithstanding the payment terms of any Operating
Agreement to the contrary, as to any Well proposed by Nytis under any Operating
Agreement, Nytis shall invoice Liberty twenty (20) days prior to the estimated
spud date for such Well for Liberty’s estimated share of Drilling and Completion
Costs on each such Well.  Such invoices will be due and payable by Liberty
within twenty (20) days of receipt of such invoice.
 
 
6

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

 
 
ARTICLE V
REPRESENTATIONS AND WARRANTIES
 
5.1       Mutual Representations and Warranties.  Each party, with respect to
itself only, hereby represents and warrants to the other party the following:
 
(a)       Each party is duly organized, validly existing and in good standing
under the applicable laws of the State of its formation, and is qualified to do
business and is in good standing in every other jurisdiction where the failure
to so qualify would have a material adverse effect on its ability to execute,
deliver and perform this Agreement and the other agreements contemplated herein.
 
(b)       Each party has all requisite power and authority to (i) own, lease or
operate its assets and properties and to carry on the business as now conducted,
and (ii) enter into and perform its obligations under this Agreement and to
carry out the transactions contemplated hereby.
 
(c)       Each party has taken (or caused to be taken) all acts and other
proceedings required to be taken by such party to authorize the execution,
delivery and performance by such party of this Agreement and the other
agreements contemplated herein.  This Agreement has been duly executed and
delivered by each party and constitutes the valid and binding obligation of each
party, enforceable against such party in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, moratorium,
reorganization or similar laws affecting the rights of creditors generally and
by principles of equity, whether considered in a proceeding at law or in
equity.  The execution, delivery and performance of this Agreement by each party
does not and will not (i) conflict with, or result in any violation of or
constitute a breach or default (with notice or lapse of time, or both) under (A)
any provision of the organizational documents of such party, or (B) any
applicable statute, law, rule, regulation, order,  agreement, instrument or
license applicable to such party, except as would not have a material adverse
effect, or (ii) except as provided on Schedule 5.1(c) attached hereto, require
the submission of any notice, report, consent or other filing with or from any
governmental authority or third persons.
 
(d)       There are no actions, suits or proceedings pending or, to such party’s
knowledge, threatened against a party which if decided unfavorably to such party
could have a material adverse effect on the ability of such party to execute,
deliver or perform this Agreement.
 
(e)       No party has incurred any obligation or liability, contingent or
otherwise, for any fee payable to a broker or finder with respect to the matters
provided for in this Agreement or the other agreements contemplated herein which
could be attributable to or charged to the other party.  Each party shall
indemnify, defend and hold harmless the other party from any claims, damages,
liabilities, costs and expenses, including reasonable attorneys’ fees in the
event the prior sentence should be or become untrue as to such party.
 
 
7

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

 
 
5.2       Nytis Representations and Warranties.  Nytis hereby represents and
warrants as follows:
 
(a)       There are no bankruptcy, reorganization or rearrangement proceedings
pending, being contemplated by or to its knowledge threatened against it.
 
(b)       None of the lands underlying the Leases which will be assigned to
Liberty will be subject to liens burdening Liberty’s interest therein, including
but not limited to any liens in favor of The Bank of Oklahoma (“BOK”), as
lender, pursuant to that certain Amended and Restated Credit Agreement, dated
May 31, 2010, by and between Nytis and BOK.  There are no calls on production or
contracts for sale of production encumbering the Leases which provide for the
delivery of hydrocarbons at a price below the prevailing market price.
 
(c)       All Leases are in full force and effect and are legal, valid and
binding obligations of the parties thereto, their respective successors and
assigns.  Operations with respect to the Wells are in material compliance with
applicable rules, regulations, statutes, and laws of any applicable governmental
authority.  To the best of Nytis’ knowledge and belief, after appropriate
inquiry, Nytis is not in breach or default under the terms of any of the Leases
which may result in material impairment or loss of title to any material part of
the Leases taken as a whole or the value thereof taken as a whole or which might
materially hinder or impede the operation of the Leases as a whole.
 
(d)       Nytis has delivered to Liberty all Phase I or Phase II environmental
site assessment reports in Nytis’ possession or control on the Leases or the
lands covered thereby. To the best of Nytis’ knowledge and belief, after
appropriate inquiry, Nytis has complied in all material respects with all
environmental laws with respect to the Leases.  To the best of Nytis’ knowledge
and belief, after appropriate inquiry, Nytis possesses all environmental permits
that are required for the operation of the Leases (except for such permits as
are expected to be obtained in the ordinary course of business), and is in
compliance with the provisions of all such environmental permits.  Nytis has not
received any written notice, report or other information regarding any
liabilities relating to its business or any of the Leases arising under
environmental laws, including any written notice of violation from any
governmental authority.  To the best of Nytis’ knowledge and belief, after
appropriate inquiry, Nytis has not treated, stored, disposed of, arranged for or
permitted the disposal of, transported, handled, or released any substance,
including any hazardous materials, or owned or operated any facility or
property, so as to give rise to liabilities for response costs, natural resource
damages or attorneys fees pursuant to federal or state environmental
laws.  Without limiting the foregoing, no facts, events or conditions relating
to the past or present facilities, properties or operations of Nytis with
respect to the Leases will prevent, hinder or limit continued compliance with
environmental laws, give rise to any investigatory, remedial or corrective
obligations on the part of Liberty pursuant to environmental laws, or give rise
to any other liabilities on the part of Liberty (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or to become due, and
regardless of whether asserted) pursuant to environmental laws, including any
relating to onsite or offsite releases or threatened releases of hazardous
materials, substances or wastes, personal injury, property damage or natural
resource damage.
 
 
8

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

 
 
(e)       The information set forth on Schedule 5.2(e) with respect to the
working interest and net revenue interest of Nytis in the Leases is true and
correct.
 
(f)        Schedule 5.2(f) sets forth a list of all policies of insurance owned
or held by or maintained by Nytis with respect to the Leases.  Such policies are
in full force and effect and, coupled with the insurance to be obtained under
any applicable Operating Agreement, will satisfy in all material respects all
requirements of applicable, laws and any agreements to which Nytis is a party.
 
(g)       Prior to the execution of this Agreement, Nytis will have obtained, or
cause to be obtained, any consents, approvals, certificates, licenses, permits,
and other authorizations of the necessary governmental authorities, which to the
best of Nytis’ knowledge and belief, after appropriate inquiry, are required for
Nytis to own, develop, operate, and maintain the Berea Sandstone Program.
 
(h)       Nytis has paid its pro-rata share of all ad valorem, property,
production, severance, excise, and similar taxes and assessments with respect to
the Leases that have become due and payable, and all tax returns required to be
filed by Nytis with respect to the same have been timely filed.  To the best of
Nytis’ knowledge and belief, after appropriate inquiry, with respect to the
Leases there are no tax deficiencies assessed against or audits in progress by
any governmental authority.  There are no tax liens on or with respect to the
Leases.
 
(i)        All rentals, royalties, shut-in royalties, overriding royalties and
other payments due pursuant to or with respect to the Leases have been properly
paid, excluding amounts properly held in suspense.
 
(j)        To the best of Nytis’ knowledge and belief, after appropriate
inquiry, there are no wells located on the Leases (other than the Existing
Wells) that (a) Nytis is obligated by law or contract to plug and abandon; (b)
Nytis would be obligated by law or contract to plug and abandon with the lapse
of time or notice or both because the well is not capable of producing oil, gas
or other hydrocarbons in commercial quantities or otherwise being used in normal
operations; (c) are subject to exceptions to a requirement to plug and abandon
issued by a regulatory authority having jurisdiction over the Leases; or (d)
have been plugged and abandoned but have not been plugged in accordance, in all
material respects, with all applicable requirements of each regulatory authority
having jurisdiction over the Leases.
 
(k)       The Leases are not subject to any preferential purchase rights
applicable to the transactions contemplated hereby.
 
(l)        There are no outstanding Well AFEs or other capital commitments which
are binding on the Leases.
 
 
9

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

 
 
5.3       Liberty Representations and Warranties.  Liberty hereby represents and
warrants as follows:
 
(a)       There is no bankruptcy, reorganization or arrangement proceedings
pending, being contemplated by or to its knowledge threatened against it.
 
(b)       The working interests being acquired by Liberty are being acquired for
investment purposes only, for Liberty’s own account, and not with a current view
to, for offer for sale or for sale in connection with, the distribution or
transfer thereof.  The working interests being acquired by Liberty are not being
purchased for subdivision or fractionalization thereof; and Liberty has no
contract, agreement or arrangement with any person or entity to sell or
otherwise transfer (with or without consideration) to any such person or entity
any of the working interests being acquired by Liberty, nor present plans or
intention to enter into any such contract, agreement or arrangement.
 
ARTICLE VI
CLOSING CONDITIONS; TERM AND TERMINATION
 
6.1       Closing Conditions.  It is the intent of the parties that a closing of
the transactions contemplated by this Agreement (the “Closing”) shall take place
contemporaneously with the execution of this Agreement at such location as is
mutually acceptable to the parties.  The parties’ obligations to close the
transactions contemplated hereby shall be subject to delivery of the following:
 
(a)       Liberty shall pay to Nytis the Initial Payment;
 
(b)       The parties shall execute the Operating Agreement;
 
(c)       Nytis shall deliver to Liberty:
 
(i)        the Assignments; and
 
(ii)       the acknowledgement of BOK of Nytis’ entry into this Agreement, and
that there are no liens held by BOK with respect to the Liberty Working Interest
in the Leases, in form and substance reasonably acceptable to Liberty.
 
6.2       Term.  The term of this Agreement (the “Term”) shall begin on the
Effective Date and shall continue so long as any Leases in which one of the
parties holds an interest continue in force, whether by production, extension,
renewal or otherwise; provided, however, that this Agreement may be earlier
terminated by the mutual consent of the parties hereto and shall be earlier
terminated upon Liberty’s failure to participate in any of the Carry Wells in
accordance with this Agreement; provided further, however, that any outstanding
assignment obligations of either party pursuant to this Agreement shall survive
any such termination.
 
6.3       Termination.  Upon termination of this Agreement, all rights and
obligations of the parties with respect to the Berea Sandstone Program will be
governed solely by the terms of the applicable Operating Agreements and any
other agreements entered into by the parties with respect to such properties,
and neither party shall have any further rights or obligations hereunder, except
as otherwise provided herein.
 
 
10

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

 
 
ARTICLE VII
AREA OF MUTUAL INTEREST
 
7.1       Subsequent Acquisitions.  If during the Term of this Agreement, either
Liberty or Nytis, or any of their respective affiliates, acquires any oil and
gas leasehold interest, whether by purchase, farm-in, contribution, forced
pooling or otherwise, covering lands lying within the Contract Area, the
acquiring party shall promptly notify the non-acquiring party of such
acquisition, describing the oil and gas leasehold interest acquired and
detailing the actual, third-party out-of-pocket costs incurred and the value of
any rights, leases, oil and gas interests or other property exchanged in
connection with the acquisition of the acquired interest.  Such acquired
interest shall be offered to the non-acquiring party on a heads up basis: sixty
percent (60%) to Nytis and forty percent (40%) to Liberty.
 
7.2       Election to Participate.  The non-acquiring party shall have a period
of twenty (20) days after receipt of such notice to notify the acquiring party
of the non-acquiring party’s election to participate or not in the ownership of
the acquired oil and gas leasehold interest, with the failure of the
non-acquiring party to notify the acquiring party within such twenty (20) day
period to constitute an election not to participate.
 
7.3       Payment and Assignment of Interest.  In the event the non-acquiring
party timely elects to participate in the acquired oil and gas leasehold
interest, and unless any such working interests have previously been conveyed to
such non-acquiring party, the acquired oil and gas leasehold interest shall
become subject to this Agreement and the acquiring party shall promptly assign
to the non-acquiring party its undivided percentage of the working interest
acquired by the acquiring party in such oil and gas leasehold interest, subject
only to the burdens in effect at the time the subject oil and gas leasehold
interest was acquired.  Such assignment shall be substantially in the same form
as Exhibit E attached hereto.  Upon receipt of such assignment, the
non-acquiring party will pay to the acquiring party, in immediately available
funds, the non-acquiring party’s share of the costs incurred in acquiring the
acquired oil and gas leasehold interest (limited to actual, third-party
out-of-pocket costs and the value of any rights, leases, oil and gas interests
or other property exchanged therefor), in accordance with such party’s undivided
percentage working interest.   For purposes of this Article VII, Liberty’s
undivided percentage working interest shall be forty percent (40%) and Nytis’
undivided percentage working interest shall be sixty percent (60%).
 
7.4       Non-Participation.  In the event a non-acquiring party fails to timely
elect to participate in acquired leasehold interest pursuant to Section 7.2,
then such oil and gas leasehold interest shall not become subject to this
Agreement, shall be held solely by the acquiring party and shall not in any
manner be subject to the terms of this Agreement.
 
 
11

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

 
 
ARTICLE VIII
CONFIDENTIAL DATA AND INFORMATION
 
8.1       Confidential Information.  Nytis has provided Liberty with certain
information, reports and data used in the evaluation of the Berea Sandstone
Program as contemplated by this Agreement. Subject to the terms of Section 8.2,
any party hereto may at any time utilize, and show and provide to third parties,
copies of such information.
 
8.2       Limitations.  Except to the extent that such data may legally become a
part of the public domain, all data and information acquired by the parties
pursuant to this Agreement or supplied by one party to the other pursuant to
this Agreement will be kept confidential and will be for the sole and exclusive
use and benefit of the parties hereto; provided, however, the parties may
disclose such data and information to their respective consultants and parties
providing, or proposing to provide, financial accommodations to the disclosing
party where each such recipient has (a) been advised of the confidential nature
of such data and information and the obligations of the disclosing party with
respect thereto hereunder, and (b) agreed to be bound by the terms of this
Article VIII, it being understood and agreed that the disclosing party shall
remain liable for any breach by any such recipient of the obligations of the
disclosing party under this Article VIII.  Notwithstanding anything to the
contrary herein, any party may disclose Confidential Information (i) to other
working interest owners in the Berea Sandstone Program, if any, (ii) to third
parties to the extent such information is required to be disclosed under
applicable law, rule, order or regulation of any governmental entity having
jurisdiction over such matters, (iii) to the extent requested by regulatory or
self-regulatory authority, (iv) in connection with the exercise of any remedies
hereunder or any suit, action or proceeding relating to this Agreement or the
enforcement of rights hereunder, or (v) to an equity owner, director, officer,
employee or agent of such party, including legal counsel, accountants and other
advisors where each such recipient has (y) been advised of the confidential
nature of such data and information and the obligations of the disclosing party
with respect thereto hereunder and (z) such recipient is subject to enforceable
obligations to keep such data and information confidential.
 
ARTICLE IX
INSURANCE
 
The Operator will at all times and in connection with all work performed
hereunder carry, for the account of the parties, the insurance specified on
Exhibit “D” to the Operating Agreement and shall otherwise comply with the
provisions of such Exhibit “D”.
 
ARTICLE X
INDEMNIFICATION
 
10.1     Application of Indemnities.  Indemnities shall apply as follows:
 
(a) All indemnities set forth in this Agreement extend to the affiliates,
partners, directors, employees, members, shareholders, subsidiaries, permitted
successors and permitted assigns of the indemnified party.  The indemnities set
forth in this Agreement do not extend to any part of an indemnified claim that
is the result of the gross negligence, willful misconduct or fraud of the
indemnified party.
 
 
12

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

 
 
(b) Neither Nytis nor Liberty shall be entitled to recover from the other party
(or Carbon, as applicable), respectively, and each party releases the other
party from and waives, any liabilities arising under this Agreement by reason of
the breach thereof, or in connection with or with respect to the transactions
contemplated in this agreement, any amount in excess of the actual compensatory
damages suffered by such party. Each of Nytis and Liberty waive, and release
each other (and Carbon, as applicable) from any right to recover punitive or
exemplary damages arising in connection with or with respect to any breach
hereof or as to the transactions contemplated in this agreement; provided,
however, any such damages recovered by a third party (other than a party’s
affiliates) for which a party owes the other party an indemnity under this
agreement shall not be waived.
 
(c) The indemnities of the indemnifying party in this Agreement do not cover or
include any amounts that the indemnified party may legally recoup from other
third party owners under applicable joint operating agreements or other
agreements, and for which the indemnified party is reimbursed by any third
party.  If it is judicially determined that any provision of this indemnity is
found to be in violation of state or federal law, such that the violation would
render the entire Agreement void and unenforceable, said provision shall be
amended automatically to comply with said law. In the event that such provision
cannot be amended to comply with said law, the provision shall be disregarded,
and the validity and enforceability of the remaining provisions shall not be
affected.
 
10.2     Liberty Indemnity.  Liberty shall indemnify, defend and hold Nytis and
Carbon harmless from and against any and all claims and liabilities caused by,
resulting from or incidental to (a) any inaccuracy of any representation or
warranty of Liberty set forth in this agreement or (b) any breach of, or failure
to perform or satisfy, any of the covenants and obligations of Liberty
hereunder.
 
10.3     Nytis Indemnity.  Nytis and Carbon shall indemnify, defend and hold
Liberty harmless from and against any and all claims and liabilities caused by,
resulting from or incidental to (a) any inaccuracy of any representation or
warranty of Nytis set forth in this agreement, (b) any breach of, or failure to
perform or satisfy, any of the covenants and obligations of Nytis hereunder
which are to be performed after the execution of this agreement, (c) the
Existing Wells, and (d) any matter arising or resulting from the ownership and
operation of the Leases prior to the Effective Date.  The liability of Nytis and
Carbon pursuant to this Article X shall be joint and several.
 
10.4     Demand.  Each indemnified party hereunder agrees that promptly upon its
discovery of facts giving rise to a claim for indemnity under the provisions of
this Agreement, including receipt by it of notice of any demand, assertion,
claim, action or proceeding, judicial or otherwise, by any third party (such
third party actions being collectively referred to herein as the “Indemnity
Claim”), with respect to any matter as to which it claims to be entitled to
indemnity under the provisions of this Agreement, it will give prompt notice
thereof in writing to the indemnifying party or parties, together with a
statement of such information respecting any of the foregoing as it shall
have.  Such notice shall include a formal demand for indemnification under this
Agreement.  The indemnifying party or parties shall not be obligated to
indemnify the indemnified party with respect to any Indemnity Claim if the
indemnified party knowingly failed to notify the indemnifying party or parties
thereof in accordance with the provisions of this Agreement in sufficient time
to permit the indemnifying party or parties or its/their counsel to defend
against such matter and to make a timely response thereto including, without
limitation, any responsive motion or answer to a complaint, petition, notice or
other legal, equitable or administrative process relating to the Indemnity
Claim, only insofar as such knowing failure to notify the indemnifying party has
actually resulted in prejudice or damage to the indemnifying party or parties.
 
10.5 Reimbursement
 
.  The indemnifying party or parties shall pay to the indemnified party in
immediately available funds any amounts to which the indemnified party may
become entitled by reason of the provisions of this Agreement, such payment to
be made within five (5) days after any such amounts are finally determined
either by mutual agreement of the parties hereto or pursuant to the final
unappealable judgment of a court of competent jurisdiction.  In calculating any
amount to be paid by an indemnifying party or parties by reason of the
provisions of this Agreement, the amount shall be reduced by all tax benefits
and other reimbursements credited to or received by the other party related to
the damages.
 
10.6     Survival.  The representations and warranties of the parties set forth
in Section 5.1 shall survive the execution of this Agreement indefinitely.  All
other representations and warranties of Nytis and Liberty made on the date of
execution of this Agreement shall survive the execution of this Agreement for a
period of two (2) years.  All other covenants and agreements contained in this
Agreement shall survive the execution of this Agreement until this Agreement is
terminated in accordance with Section 6.2; provided, however, that the
indemnification provisions of this Article X shall survive the execution of this
Agreement indefinitely.
 
10.7     Exclusive Remedy.  The terms and provisions of this Article X shall be
the sole and exclusive remedy of each of the parties indemnified hereunder with
respect to the representations, warranties, covenants and agreements of the
parties set forth in this Agreement and the other documents executed and
delivered hereunder.
 
10.8     Assumption of Liability.  Each party that is required to assume any
obligation or liability of the other party pursuant to this Agreement or that is
required to defend, indemnify or hold the other party harmless hereunder shall,
notwithstanding any other provision hereof to the contrary, be entitled to the
use and benefit of all defenses (legal and equitable) and counterclaims of such
other party in defense of third party claims arising out of any such assumption
or indemnification.
 
 
13

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

 
 
ARTICLE XI
RELATIONSHIP OF PARTIES
 
It is not the purpose or intention hereof to create any mining partnership,
joint venture, general partnership or other partnership relation and none shall
be inferred.  The parties understand and agree that their relationship hereunder
is not one of partnership, association, trust, joint venture, mining partnership
or entity of any kind.
 
ARTICLE XII
FORCE MAJEURE
 
If any party is rendered unable, wholly or in part, by force majeure to carry
out its obligations under this Agreement, other than an obligation to make
payments of money, such party shall give to the other party prompt written
notice of the force majeure with reasonably full particulars concerning it;
thereupon, the obligations of the party giving the notice, so far as they are
affected by the force majeure, shall be suspended during, but no longer than,
the continuance of the force majeure. The affected party shall use all
reasonable diligence to remove the force majeure situation as quickly as
practicable.  The requirement that any force majeure shall be remedied with all
reasonable dispatch shall not require the settlement of strikes, lockouts or
other labor difficulties by the party involved, contrary to its wishes; how any
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.  The term “force majeure”, as here employed, shall mean an
act of God, strike, lockout or other industrial disturbance, act of the public
enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion,
governmental action, governmental delay, restraint or inaction, and any other
cause, whether of the kind specifically enumerated above or otherwise, which is
not reasonably within the control of the party claiming suspension.
 
ARTICLE XIII
MARKETING
 
Production of oil and gas for Liberty from the Wells and any other wells drilled
and completed by the parties on the Berea Sandstone Program shall be gathered,
processed, treated, transported and marketed by Nytis, after reasonable
consultation with Liberty, with no “mark-up” costs and/or internal fees from
Nytis or its affiliates to Liberty; provided, however, that Nytis may charge
Liberty the typical overhead fees relating to such activities included within
the standard COPAS Accounting Procedure annexed to the Operating Agreement.
 
ARTICLE XIV
NOTICES
 
All notices and communication required or permitted under this Agreement shall
be in writing, delivered to or sent by U.S. Mail or any other recognized
overnight delivery service, postage or similar charges prepaid, or by facsimile,
addressed as follows:
 
Nytis Exploration Company LLC
c/o Carbon Natural Gas Company
1700 Broadway, Suite 1170
Denver, CO  80290
Attn: Patrick R. McDonald
Telephone No. (720) 407-7032
Facsimile No.   (720) 407-7031
 
 
14

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

 
 
Liberty Energy, LLC
175 Berkeley St., Mail Stop 18K
Boston, MA   02116
Attn: Scott Carson
Telephone No. (617) 654-4595
Facsimile No.    (617) 574-6920
 
ARTICLE XV
CONFLICTS
 
In the event of any conflict between the provisions of this Agreement and the
Operating Agreement, including the Exhibits attached thereto, the terms of this
Agreement shall control.
 
ARTICLE XVI
SUCCESSORS AND ASSIGNS
 
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective permitted successors and assigns.  Neither party
shall assign any of its rights and obligations under this Agreement, without the
express written consent of the other party, such consent to not be unreasonably
withheld, delayed or conditioned; provided, however, that no consent shall be
required for an assignment in connection with (i) the sale of all or
substantially all of such party’s assets or (ii) the merger or consolidation of
such party in which such party is not the survivor, so long as (A) such assignee
agrees to be bound by the provisions of this Agreement, and (B) such party shall
promptly notify the other party prior to the making of such a permitted
assignment.  No consent shall be required by a party for any mortgage of the
other party’s interest herein.
 
ARTICLE XVII
GOVERNING LAW
 
This Agreement shall be construed under and in accordance with the laws of the
State of Colorado, excluding any conflicts-of-law rule or principle that might
apply the law of another jurisdiction.  The parties agree that venue for any
dispute hereunder shall be in a Federal or state court in Denver County,
Colorado.
 
ARTICLE XVIII
NO THIRD PARTY BENEFICIARY
 
Nothing in this Agreement, express or implied, is intended to confer on any
person other than the parties hereto any rights, remedies, obligations or
liabilities in and to the Wells, or the interest in lands included therein or
pertaining thereto acquired hereunder, or otherwise, under or by reason of this
Agreement.
 
ARTICLE XIX
PUBLIC ANNOUNCEMENTS
 
Subject to applicable legal requirements, at all times during the term hereof,
each party shall promptly advise and cooperate with the others before issuing,
or permitting any of its affiliates, directors, officers, employees, managers,
members or agents to issue any press release or other public announcement with
respect to this Agreement or the transactions contemplated hereby.
 
 
15

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

 
 
ARTICLE XX
FURTHER ASSURANCES
 
Each party agrees to deliver or cause to be delivered to the other parties at
such times as shall be requested any additional instrument that the other may
reasonably request for the purpose of carrying out this Agreement.
 
ARTICLE XXI
COUNTERPART EXECUTION
 
This Agreement may be executed in one or more counterparts, no one of which need
be executed by all parties but all of which shall constitute but one and the
same instrument.
 
ARTICLE XXII
ENTIRE AGREEMENT
 
This Agreement constitutes the entire understanding between the parties with
respect to the subject matter hereof, and supersedes all other agreements,
written or oral, between the parties with respect to such subject matter.
 
ARTICLE XXIII
CAPTIONS/HEADINGS
 
Any captions to or headings of the articles, sections, subsections, paragraphs
or subparagraphs of this Agreement are solely for the convenience of the
parties, are not a part of this Agreement and shall not be used for the
interpretation or determination of validity of this Agreement or any provision
hereof.

[Signatures Begin on the Following Page]
 
 
16

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

 
 
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first set forth above.
 

  NYTIS EXPLORATION COMPANY LLC               By:    Nytis Exploration (USA)
Inc., its Manager                           By: /s/ Patrick R. McDonald        
Patrick R. McDonald, President              
LIBERTY ENERGY, LLC
              By: /s/ Scott E. Carson       Scott E. Carson, Vice President  

 
Acknowledged and agreed for purposes of Article X only:

CARBON NATURAL GAS COMPANY

      By:  /s/ Patrick R. McDonald     Patrick R. McDonald,     President and
Chief Executive Officer  

 
 
17

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

 
        
List of Exhibits and Schedules

Exhibit A *
 Description of Leases
Exhibit B *
 General Outline of Contract Area
Exhibit C *
 Form of Operating Agreement
Exhibit D *
 Form of Well AFEs
Exhibit E *
 Form of Assignment
Exhibit F *
 Existing Wells
Schedule 5.1 (c) *
 Required Filings
Schedule 5.2 (e) *
 Working Interests; Net Revenue Interests
Schedule 5.2 (f) *
 Insurance

 
*
A copy of any omitted schedule will be furnished supplementally to the
Commission upon request.

 
 
18

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