Exhibit
10.34


 


UNITS OF LIMITED
PARTNERSHIP INTEREST IN THE PARTNERSHIP HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES OR BLUE SKY LAWS OF ANY
STATE OR OTHER JURISDICTION.  WITHOUT
SUCH REGISTRATION, SUCH UNITS MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED, EXCEPT UPON DELIVERY TO THE GENERAL PARTNER OF AN
OPINION OF COUNSEL SATISFACTORY TO THE GENERAL PARTNER OF THE PARTNERSHIP THAT
REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE SUBMISSION TO THE GENERAL
PARTNER OF THE PARTNERSHIP OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO THE
GENERAL PARTNER TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION
OF THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE SECURITIES OR BLUE
SKY LAWS OF ANY STATE OR OTHER JURISDICTION. 
IN ADDITION, ANY TRANSFER OF UNITS REQUIRES THE PRIOR WRITTEN CONSENT OF
THE GENERAL PARTNER AND IS SUBJECT TO OTHER RESTRICTIONS PURSUANT TO THIS
AGREEMENT.


 


 


AGREEMENT OF LIMITED PARTNERSHIP




OF




CWEI DESTEFANO, L. P.


 





















 


TABLE OF CONTENTS


 


	
  ARTICLE
  I DEFINITIONS

  
	
   

  	
   

  	
   

  
	
  1.01

  	
  Certain Definitions

  	
   

  
	
  1.02

  	
  Construction

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II ORGANIZATION

  
	
   

  	
   

  	
   

  
	
  2.01

  	
  Formation

  	
   

  
	
  2.02

  	
  Name

  	
   

  
	
  2.03

  	
  Registered Office;
  Registered Agent; Other Offices

  	
   

  
	
  2.04

  	
  Purposes

  	
   

  
	
  2.05

  	
  Certificate;
  Foreign Qualification

  	
   

  
	
  2.06

  	
  Term

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III
  GENERAL PARTNER; MANAGEMENT

  
	
   

  	
   

  	
   

  
	
  3.01

  	
  Authority of General
  Partner

  	
   

  
	
  3.02

  	
  Certain
  Restrictions on General Partner’s Power and Authority

  	
   

  
	
  3.03

  	
  Duties and Services of General
  Partner

  	
   

  
	
  3.04

  	
  Operating
  Agreements

  	
   

  
	
  3.05

  	
  Admission
  of Additional General Partners

  	
   

  
	
  3.06

  	
  Withdrawal
  of General Partner

  	
   

  
	
  3.07

  	
  General Partner as Limited
  Partner

  	
   

  
	
  3.08

  	
  Excluded
  Properties

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV LIMITED PARTNERS

  
	
   

  	
   

  	
   

  
	
  4.01

  	
  Restrictions on Limited
  Partners

  	
   

  
	
  4.02

  	
  Access
  to Information

  	
   

  
	
  4.03

  	
  Admission
  of Additional Limited Partners

  	
   

  
	
  4.04

  	
  Investment Representations of
  the Limited Partners

  	
   

  
	
  4.05

  	
  Transfer
  Restrictions

  	
   

  
	
  4.06

  	
  Permitted Transfers; Status as
  Assignee

  	
   

  
	
  4.07

  	
  General Partner’s Right of
  Purchase

  	
   

  
	
  4.08

  	
  Specific Performance

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V CAPITAL CONTRIBUTIONS

  
	
   

  	
   

  	
   

  
	
  5.01

  	
  Capital Contributions of
  General Partner

  	
   

  
	
  5.02

  	
  Initial Capital Contributions
  of Limited Partners

  	
   

  
	
  5.03

  	
  Additional Capital
  Contributions of Limited Partners

  	
   

  
	
  5.04

  	
  Capital
  Accounts

  	
   

  
	
  5.05

  	
  Return of Capital Contribution

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VI SHARING, ALLOCATIONS AND DISTRIBUTIONS

  
	
   

  	
   

  	
   

  
	
  6.01

  	
  Sharing and Allocation of Costs
  and Expenses

  	
   

  
	
  6.02

  	
  Sharing
  and Allocation of Revenues

  	
   

  
	
  6.03

  	
  Allocations for Capital Account
  and Tax Purposes

  	
   

  
	
  6.04

  	
  Distributions

  	
   

  
	
  6.05

  	
  Withholding
  Taxes

  	
   

  



 





















 


	
  ARTICLE
  VII BOOKS, RECORDS AND BANK ACCOUNTS

  
	
   

  	
   

  	
   

  
	
  7.01

  	
  Maintenance
  of Books

  	
   

  
	
  7.02

  	
  Accounts

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE
  VIII DISSOLUTION, LIQUIDATION AND TERMINATION

  
	
   

  	
   

  	
   

  
	
  8.01

  	
  Dissolution

  	
   

  
	
  8.02

  	
  Liquidation
  and Termination

  	
   

  
	
  8.03

  	
  Termination

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX GENERAL
  PROVISIONS

  
	
   

  	
   

  	
   

  
	
  9.01

  	
  Offset

  	
   

  
	
  9.02

  	
  Notices

  	
   

  
	
  9.03

  	
  Entire
  Agreement

  	
   

  
	
  9.04

  	
  Effect
  of Waiver or Consent

  	
   

  
	
  9.05

  	
  Amendment
  or Modification

  	
   

  
	
  9.06

  	
  Binding
  Effect

  	
   

  
	
  9.07

  	
  Governing
  Law; Severability

  	
   

  
	
  9.08

  	
  Further
  Assurances

  	
   

  
	
  9.09

  	
  Waiver
  of Certain Rights

  	
   

  
	
  9.10

  	
  Insurance

  	
   

  
	
  9.11

  	
  Indemnification

  	
   

  
	
  9.12

  	
  Counsel
  to the Partnership

  	
   

  
	
  9.13

  	
  Power of
  Attorney

  	
   

  
	
  9.14

  	
  Counterparts

  	
   

  
	
  9.15

  	
  No Employment
  Contract

  	
   

  
	
  [Signature Pages Follow]

  	
   

  
	
   

  	
   

  
	
  Exhibit A – Schedule of Limited Partners

  	
   

  
	
  Exhibit B – Area of Interest

  	
   

  
	
  Exhibit C – Wells

  	
   

  
	
  Exhibit D – Allocations of Profits and
  Losses and Other Tax Matters

  	
   

  



 





















 


AGREEMENT OF LIMITED PARTNERSHIP




OF




CWEI DESTEFANO, L. P.




This AGREEMENT OF LIMITED PARTNERSHIP OF CWEI DESTEFANO,
L. P. (this “Agreement”)
is made and entered into February 9, 2005 to be effective as of January 2, 2005
(the “Effective
Date”), by and among the Partners (as defined below).


 


FOR AND IN CONSIDERATION OF the mutual covenants,
rights, and obligations set forth in this Agreement, the benefits to be derived
from them, and other good and valuable consideration, the receipt and the
sufficiency of which is hereby acknowledged, the Partners agree as follows:


 


ARTICLE I

DEFINITIONS


 


1.01         Certain Definitions.   As used in this Agreement, the following terms
have the following meanings:


 


“Acquisition Costs”
means (i) the costs of acquiring a leasehold interest, including, without
limitation, direct costs of seismic data and interpretation, lease broker
services, title examinations, filing fees, and recording costs, and (ii) the
fair value of Partnership Properties contributed to the Partnership by the
General Partner.


 


“Act” means the Texas Revised Limited Partnership Act and any
successor statute, as amended.


 


“Affiliate” means, when used with reference to a specified
Person, (a) any Person directly or indirectly owning, controlling or holding
power to vote 50% or more of the outstanding voting securities of the specified
Person, (b) any Person 50% or more of whose outstanding voting securities are
directly or indirectly owned, controlled or held with power to vote by the
specified Person, (c) any Person directly or indirectly controlling, controlled
by or under common control with the specified Person, (d) if the specified
Person is a corporation, any officer or director of the specified Person or of
any corporation directly or indirectly controlling that specified Person, (e)
if the specified Person is a partnership, any general partner or if the general
partner is a partnership, the general partners of that partnership, and (f) if
the specified Person is an individual, such individual’s spouse and natural and
adoptive lineal descendants and trusts for the benefit of any such
Persons.  For purposes of this
definition, the ability through share ownership or contractual arrangement to
elect or cause the election of a majority of the board of directors of a corporation
shall constitute “control.”


 





















 


“Agreed Rate”
means 4.19% per annum.


 


“Agreement” means this Agreement of Limited Partnership, as
amended or restated from time to time.


 


“Area of Interest” means the area described in Exhibit B.


 


“Capital Account”
has the meaning set forth in Section 5.04.


 


“Capital Contribution” means, for any Partner, the dollar
amount of any cash contributed to the capital of the Partnership and the fair
value of any property contributed to the Partnership by such Partner.


 


“Certificate” means the certificate of limited partnership of
the Partnership filed with the Secretary of State of Texas, as amended or
restated from time to time.


 


“Change in Control”
has the meaning set forth in Section 8.01(d).


 


“Code” means the Internal Revenue Code of 1986, as amended.


 


“Contribution Date”
has the meaning set forth in Section 5.03(a).


 


“Contribution Notice” has
the meaning set forth in Section 5.03(a).


 


“CWEI” means Clayton Williams Energy, Inc., a Delaware
corporation.


 


“Event of Forfeiture”
has the meaning set forth in Section 4.07.


 


“Event of Withdrawal”
means the withdrawal of the General Partner as provided in Section 3.06.  The events described in subdivisions (4), (5)
and (8) of Section 4.02(a) of the Act shall not be Events of Withdrawal, and a
General Partner shall not cease to be a General Partner upon the occurrence of
any of such events.


 


“Exchange  Act” means the Securities Exchange Act of 1934, as amended.


 


“General
Partner” means
CWEI and each other Person admitted as an additional or successor General
Partner pursuant to Section 3.05.


 


“Indemnified Person” has the meaning set forth in Section 9.11.


 


“Lease” means a
lease, mineral interest, royalty or overriding royalty, fee right, mineral
servitude, license, concession or other right covering oil, gas and related
hydrocarbons (or a contractual right to acquire such an interest) or an
undivided interest therein or portion thereof, together with all appurtenances,
easements, permits, licenses, servitudes and rights-of-way situated upon or
used or held for future use in connection with such an interest or the
exploration, development or production thereof. 
A “Lease” shall also mean and include all rights and interests in all
lands and interests unitized or pooled therewith pursuant to any law, rule,
regulation or agreement.


 


2





















 


“Limited Partner”
means each Person listed as a limited partner on Exhibit A and each
other Person admitted as an additional or successor Limited Partner pursuant to
Section 4.03.


 


“Majority in Interest” has the meaning set forth in Section 3.02.


 


“Non-Contributing Limited Partner”
has the meaning set forth in Section 5.03(b).


 


“Operating
Agreement” means an
agreement between the operator and non-operating interest owners in a Lease for
the testing, development and operation of a tract of land or Lease for the
exploration and development of oil, gas, minerals or hydrocarbons.


 


“Partner” means any General Partner or any Limited Partner.


 


“Partnership”
means the limited partnership formed by the Partners pursuant to this
Agreement.


 


“Partnership Counsel”
has the meaning set forth in Section 9.12.


 


“Partnership Property”
means Leases and Wells in which the Partnership owns an undivided interest.


 


“Payout”
means the earliest calendar month during which the General Partner shall have
received distributions pursuant to Section 6.04
in an aggregate amount equal to the sum of (i) the cumulative Capital
Contributions made by the General Partner pursuant to Section 5.01, plus
(ii) an annual rate of return on such Capital Contributions equal to the Agreed
Rate.  For this purpose, each
distribution and Capital Contribution shall be deemed to have been made on the
last day of the month during which it was made or received.


 


“Person” means an individual, corporation, partnership,
limited partnership, limited liability company, business trust or other legal
entity.


 


“Regulations”
mean the regulations promulgated by the United States Department of Treasury
pursuant to the Code.  All references
herein to sections of the Treasury Regulations shall include corresponding
provision or provisions of succeeding, similar, substitute, temporary or final
Treasury Regulations.


 


“Securities Act” means the Securities Act of 1933, as
amended.


 


“Transfer” means any sale, transfer, assignment, pledge,
encumbrance, hypothecation, gift or disposition of a Unit in whole or in part,
or any rights or benefits to which a holder of a Unit may be entitled as
provided in this Agreement or the Act, including, without limitation, the right
to receive distributions in cash or in kind.


 


3





















 


“Unit” means a
Limited Partnership interest, or fraction thereof, in the Partnership.  The number of Units owned by each Limited
Partner and the total number of Units of the Partnership are set forth on Exhibit
A, as amended from time to time.


 


“Well”
means a well in which the Partnership holds
a Working Interest derived from its ownership of one or more Leases.  The name and location of each “Well” is shown
on Exhibit C, as amended from time to
time.


 


“Well Costs” means the Partnership’s share of costs pursuant
to any Operating Agreement for the drilling, completing, equipping, deepening
or sidetracking a Well, including, without limitation:  (i) the costs of surveying and staking
the Well, the costs of any surface damages and the costs of clearing, coring,
testing, logging and evaluating the Well; (ii) the costs of casing, cement
and cement services for the Well; (iii) the cost of plugging and
abandoning the Well (including standard and customary remediation activities
associated therewith), if it is determined that the Well would not produce in
commercial quantities and should be abandoned; (iv) all direct charges and
overhead chargeable to the Partnership with respect to the Well under any
applicable Operating Agreement until such time as all operations are carried
out as required by applicable regulations and sound engineering practices to
make such Well ready for production, including the installation and testing of
wellhead equipment, or to plug and abandon a dry hole; (v) all costs
incurred by the Partnership in recompleting or plugging back any Well;
(vi) all costs incurred by the Partnership in reworking any Well if the
rework is covered by an authority for expenditure under the applicable
Operating Agreement; (vii) all costs incurred by the Partnership in locating,
drilling, completing, equipping, deepening or sidetracking any enhanced
recovery producer or injector Well (including the costs of all necessary
surface equipment such as steam generators, compressors, water treating
facilities, injection pumps, flow lines and steam lines); and (viii) the costs
of constructing production facilities, pipelines and other facilities necessary
to develop Partnership property acquired pursuant to the terms hereof and
produce, collect, store, treat, deliver, market, sell or otherwise dispose of
oil, gas and other hydrocarbons and minerals therefrom; provided, that
Well Costs shall not include any Acquisition Costs.


 


“Working Interest”
means a fractional operating interest in a Lease that permits the Partnership
to explore, develop and produce one or more properties in the Area of Interest
and bear its percentage of the costs and expenses relating to the maintenance
and development of and operations relating to such properties in return for a
share of the mineral production from the property.


 


1.02         Construction.  Whenever
the context requires, the gender of all words used in this Agreement includes
the masculine, feminine and neuter.  All
references to Articles and Sections refer to articles and sections of this
Agreement, and all references to exhibits are to Exhibits attached to this
Agreement, each of which is made a part of this Agreement for all purposes.


 


4





















 


ARTICLE II

ORGANIZATION


 


2.01         Formation.  The
Persons executing this Agreement agree to form the Partnership as a limited
partnership under the Act for the purposes and upon the terms and subject to
the conditions set forth in this Agreement.


 


2.02         Name.  The name of the Partnership is “CWEI DESTEFANO,
L. P.”, and all Partnership business shall be conducted in that name or
such other names that comply with applicable law as the General Partner may
select from time to time.


 


2.03         Registered
Office; Registered Agent; Other Offices.  The registered office of the Partnership in
the State of Texas shall be at such place as the General Partner may designate
from time to time.  The registered agent
for service of process on the Partnership in the State of Texas or in any other
jurisdiction shall be such Person or Persons as the General Partner may
designate from time to time.  The
Partnership may have such other offices as the General Partner may designate
from time to time.


 


2.04         Purposes.  The purposes for which the Partnership is
formed are to (i) acquire, explore, hold, develop, produce, dispose of and
otherwise deal with Partnership Property, (ii) collect proceeds, payments and
other distributions from Partnership Property, (iii) make distributions to the
Partners in accordance with the terms hereof and (iv) engage in any other
business or activity that now or in the future may be necessary, incidental,
proper, advisable or convenient to accomplish the foregoing purposes
(including, without limitation, obtaining appropriate financing) and that is
not prohibited by the law of the jurisdiction in which the Partnership engages
in that business.


 


2.05         Certificate;
Foreign Qualification.  The General Partner shall execute and cause
the Certificate to be filed with the Secretary of State of Texas on or as soon
as practicable after the Effective Date. 
Prior to the Partnership’s conducting business in any jurisdiction other
than Texas, the General Partner shall cause the Partnership to comply, to the
extent those matters are reasonably within the control of the General Partner,
with all requirements necessary to qualify the Partnership as a foreign limited
partnership (or a partnership in which the Limited Partners have limited
liability) in that jurisdiction.  At the
request of the General Partner, each Limited Partner shall execute,
acknowledge, swear to and deliver all certificates and other instruments
conforming with this Agreement that are necessary or appropriate to form,
qualify, continue, dissolve and terminate the Partnership as a limited
partnership under the law of the State of Texas and to qualify, continue,
dissolve and terminate the Partnership as a foreign limited partnership (or a
partnership in which the Limited Partners have limited liability) in all other
jurisdictions in which the Partnership may conduct business, and to this end
the General Partner may use the power of attorney set forth in Section 9.13.


 


2.06         Term.  The term of
Partnership shall commence on the date of filing of the Certificate and shall
continue until the close of business on December 31, 2015, unless the
Partnership is dissolved and liquidated before such time in accordance with
this Agreement.


 


5





















 


ARTICLE III

GENERAL PARTNER; MANAGEMENT


 


3.01         Authority
of General Partner.  In addition to the powers now or hereafter
granted to a general partner of a limited partnership under applicable law or
which are granted to the General Partner under other provisions of this
Agreement, subject only to any express limitations set forth in this Agreement,
the General Partner shall have the full and exclusive power and authority to do
any and all things necessary, incidental, proper, advisable or convenient for
the furtherance of the purposes of the Partnership and for the protection and
benefit of the Partnership, including without limitation:


 


(a)           to
determine whether to acquire, hold, develop or produce Partnership Property and
other assets of the Partnership and whether, when and on what terms to
farm-out, sell, promote or otherwise transfer any particular prospect, or any
interest therein;


 


(b)           to
make all decisions concerning the desirability of payment, and the payment or
supervision of payment, of all delay rentals, shut-in royalty payments, minimum
royalty payments and any other similar or related payments;


 


(c)           to
drill, complete, control, rework, side-track, redrill, recomplete, produce,
plug and/or abandon any or all of the Wells;


 


(d)           to
form and participate in tax partnerships, joint ventures or other relationships
that it deems desirable with regard to Partnership prospects;


 


(e)           to
make any expenditures and incur any obligations it deems appropriate for the
conduct of the activities of the Partnership;


 


(f)            to
acquire (including, without limitation, to purchase at premium prices when
deemed appropriate by the General Partner), exchange, sell, lease, dispose of
or exchange any or all Partnership Property;


 


(g)           to
use Partnership Property or credit of the Partnership (including without
limitation, cash on hand), for any purpose not inconsistent with this Agreement
and on any terms it deems appropriate, including, without limitation, the
financing of Partnership operations and activities, the repayment of
obligations of the Partnership and the contribution obligations of others under
third-party joint operating agreements or similar agreements;


 


(h)           to
negotiate, execute, deliver and perform, in the name and on behalf of the
Partnership, any contracts, conveyances or other instruments which it considers
appropriate for the conduct of Partnership operations or the implementation of
its powers under this Agreement, including, without limitation, Operating
Agreements, unit Operating Agreements and joint development agreements, and the
right to make any and all elections that are required or necessary under the
terms of any agreements;


 


(i)            to
distribute cash, Partnership Property or other assets of the Partnership to the
Partners in accordance with this Agreement;


 


6





















 


(j)            to
select and dismiss attorneys, accountants, consultants and contractors of the
Partnership and to determine their compensation and other terms of engagement;


 


(k)           to
acquire and maintain such insurance, if any, for the benefit of the Partnership
and the Partners as it deems appropriate;


 


(l)            to
establish operating and other offices and facilities;


 


(m)          to
borrow money, incur indebtedness or make guaranties in the name or on behalf of
the Partnership and to secure the same by mortgages, deeds of trust, security
interests, pledges or other liens or encumbrances on all or any part of the
Partnership Property;


 


(n)           to
construct pipelines, drilling and production platforms and facilities, gas
plants, processing plants and other facilities incidental to the development of
Partnership Property and the production and marketing of oil and gas therefrom;


 


(o)           to
execute and deliver division orders and transfer orders upon such terms and
conditions and containing such provisions as the General Partner may consider
appropriate; and


 


(p)           to
control any matters affecting the rights and obligations of the Partnership
including the conduct of litigation and other incurring of legal expenses and
the settlement of claims in litigation; provided, that, the General
Partner shall not be authorized to settle any claims for which any Limited
Partner has, or may have, any individual liability without the Limited Partner’s
prior written consent.


 


Any person
dealing with the Partnership shall be entitled to rely, and shall be fully
protected in relying, on the authority of the General Partner to act for the
Partnership.


 


3.02         Certain
Restrictions on General Partner’s Power and Authority.  The
General Partner shall not have the power or authority to, and shall not, do,
form or authorize any of the following without the prior written consent of
Limited Partners holding a majority of the Units held by all Limited Partners
(a “Majority in Interest”):


 


(a)           do
any act in contravention of this Agreement;


 


(b)           do
any act which would make it impossible to carry on the ordinary business of the
Partnership;


 


(c)           possess
Partnership Property or other assets of the Partnership or assign any rights in
specific Partnership Property or assets for other than a Partnership purpose;


 


(d)           change
or reorganize the Partnership into any other legal form; or


 


(e)           commingle
the funds of the Partnership with the funds of any other person or entity.


 


3.03         Duties
and Services of General Partner.  The General Partner shall comply in all
respects with the terms of this Agreement and shall use its reasonable efforts
to cause the


 


7





















 


Partnership to: (i) comply in all material
respects with the terms and provisions of all agreements to which the
Partnership is a party or to which its properties are subject; (ii) comply in
all material respects with all applicable laws, ordinances or governmental
rules and regulations to which the Partnership is subject; and (iii) obtain all
licenses, permits, franchises and other governmental authorizations material
and necessary with respect to the ownership of Partnership properties and the
conduct of Partnership business and operations. 
During the existence of the Partnership, the General Partner shall
devote such time and effort to the Partnership business and operations as shall
be necessary for the furtherance of the purposes of the Partnership; provided,
however, that the Partners acknowledge and agree that neither the General
Partner nor any Affiliate thereof nor any of their respective officers,
directors, employees or agents shall be required to devote full time to
Partnership business and may from time to time engage in and possess interests
in other business ventures of any and every type and description, independently
or with others, including without limitation, the ownership, acquisition,
exploration, development, operation and management of oil and gas properties,
oil and gas drilling programs and other partnerships similar to this Partnership,
and that neither the Partnership nor any Limited Partner shall by virtue of
this Agreement have any right, title, interest or expectancy in or to such
activities or ventures.  The Partners
acknowledge and agree that the General Partner engages in the same business as
the Partnership, and that that General Partner has no duty to any Limited
Partner with regard to the operation of the General Partner’s business affairs
or prospects outside of the Partnership. 
The Partners also agree and acknowledge that the General Partner may
operate the General Partner’s business affairs or prospects outside of the
Partnership without offering the Partnership or any Limited Partner the right
to participate in such other affairs or prospects.


 


3.04         Operating
Agreements.  The
General Partner shall use its reasonable efforts to cause the Partnership to
become a party to all applicable Operating Agreements for any Partnership
Property.  To the extent the General
Partner is not able to cause the Partnership to become a party to an applicable
Operating Agreement, the General Partner agrees to use its reasonable efforts
to act in accordance with the provisions of such Operating Agreement as if the
Partnership were a party to such Operating Agreement.  In addition, following dissolution and
liquidation of the Partnership, each Partner agrees to become a party to all
Operating Agreements in which the General Partner serves as operator, and
further agrees to use its reasonable efforts to become a party to all other
applicable Operating Agreements.  To the
extent any Partner is not able to become a party to an applicable Operating
Agreement, such Partner agrees to use its reasonable efforts to act in
accordance with the provisions of such Operating Agreement as if it were a
party to such Operating Agreement.


 


3.05         Admission
of Additional General Partners.  After the date of this Agreement, the General
Partner may admit one or more additional General Partners at such times and
upon such terms and conditions as may be determined by the General Partner, in
its sole discretion.  Each such
additional General Partner, as a condition to its admission to the Partnership,
shall adopt and agree to be bound by the terms and provisions of this Agreement
and will assume all obligations and liabilities of the Partnership arising
before its admission as though it had been a General Partner when such
obligations and liabilities were incurred.


 


3.06         Withdrawal
of General Partner.  A General Partner shall cease to be a General
Partner and shall be deemed to have withdrawn from the Partnership upon the
General Partner’s


 


8





















 


written notice of its withdrawal to the other
Partners.  A General Partner may not be
removed as a General Partner.


 


3.07         General
Partner as Limited Partner.  The General Partner shall also be treated as
a Limited Partner to the extent that it acquires, holds or becomes an assignee
of Units of a Limited Partner, whether pursuant to Section 5.03(b) or
otherwise.


 


3.08         Excluded
Properties. 
Notwithstanding any provision of this Agreement to the contrary, the
General Partner may at any time and from time to time and in its sole
discretion determine that Leases acquired by the General Partner in the Area of
Interest, Wells in the Area of Interest or Working Interests derived from the
General Partner’s ownership of Leases in the Area of Interest shall not be
Partnership property and may designate such Leases, Wells or Working Interests
or any portion of the General Partner’s interest therein as “Excluded Property”
for purposes of this Agreement.  The
Limited Partners acknowledge and agree that the General Partner (i) shall not
have any obligation to contribute Excluded Property to the Partnership, (ii)
may acquire, own, hold and develop Excluded Property for itself, its Affiliates
or any other Person and (iii) may transfer, assign or contribute any or all of
its interests in Excluded Property to any other Person, including, without
limitation, to a partnership or other entity formed by the General Partner or
an Affiliate of the General Partner and one or more Limited Partners or other
officers, employees, agents or contractors of the General Partner or an
Affiliate of the General Partner, in which one or more Limited Partners do not
participate or participate on a basis that differs from their ownership of
Units in the Partnership.


 


ARTICLE IV

LIMITED PARTNERS


 


4.01         Restrictions
on Limited Partners.  Notwithstanding any other provision of this
Agreement, a Limited Partner, in his or her capacity as such, shall not:


 


(a)           be
allowed to manage or control or take part in the management or control of the
Partnership business or to act for or bind the Partnership, such power being
vested solely and exclusively in the General Partner;


 


(b)           be
entitled to be paid any fee, salary or other compensation by the Partnership or
General Partner or to have a Partnership drawing account;


 


(c)           be
entitled to receive any interest or a return of Capital Contributions except as
expressly provided for herein;


 


(d)           be
entitled to a partition of Partnership Property or other assets of the
Partnership;


 


(e)           be
bound by, nor be personally liable for, the expenses, liabilities or
obligations of the Partnership; provided, however, that the
foregoing shall not limit or expand any obligation or liability of any Limited
Partner to the Partnership set forth in this Agreement or to the extent such
obligation or liability is required by law; or


 


(f)            be
entitled to withdraw from the Partnership.


 


9





















 


4.02         Access
to Information. 
A Limited Partner or a permitted assignee of Units, on written request
to the General Partner stating the purpose, may examine and copy, at any
reasonable time, for any proper purpose, and at the expense of the Limited
Partner or assignee, records required to be kept by the Partnership under
Section 1.07 of the Act and other information regarding the business affairs
and financial condition of the Partnership as is just and reasonable for the
Person to examine and copy.  On the
written request by any Limited Partner or an assignee of Units made to the
General Partner at the principal place of business of the Partnership, the
Partnership shall provide to the requesting Limited Partner or assignee,
without charge, true copies of:


 


(a)           this
Agreement and the Certificate and all amendments and restatements; and


 


(b)           any
of the tax returns described in Subdivision (2) of Subsection (a) of Section 1.07
of the Act.


 


Information
provided to or obtained by a Limited Partner or an assignee of Units relating
to the Partnership or Partnership Property shall be used by such Limited
Partner or assignee solely in furtherance of his or her interests as a Limited
Partner and shall not be used for any other purpose.  Limited Partners and assignees of Units shall
maintain the confidentiality of all such information and shall not disclose
such information to any other Person.  If
a Limited Partner or assignee of a Unit receives a request to disclose information
relating to the Partnership or Partnership Property under the terms of a
subpoena, investigative demand or order issued by a court or governmental
agency, the Limited Partner or assignee shall promptly notify the General
Partner of the existence, terms and circumstances surrounding such request, so
that the General Partner may seek a protective order or confidential treatment
of such information.


 


4.03         Admission
of Additional Limited Partners.  The General Partner may admit an assignee of
Units who has acquired Units in a Transfer permitted under Sections 4.05,
4.06 or 5.03(b) as an additional or successor Limited Partner to the
Partnership at such times and upon such terms and conditions as may be
determined by the General Partner, in its sole discretion.


 


4.04         Investment
Representations of the Limited Partners.  Each Limited Partner is admitted to the
Partnership in reliance upon such Limited Partner’s representation to the
General Partner and the Partnership, which by executing this Agreement each
Limited Partner hereby confirms, that such Limited Partner is acquiring his or
her Units for his or her own account, for investment purposes only and not with
a view to the resale or distribution thereof, in whole or in part.  Each Limited Partner understands that the
Units have not been registered under the Securities Act and that any Transfer
of the Units may not be made without registration under the Securities Act or
pursuant to an applicable exemption therefrom. 
The Limited Partners understand that no market exists for any Units and
that it is unlikely that a market will ever exist for any Units.


 


(b)           Each
Limited Partner represents that he or she has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in the Units.


 


10





















 


4.05         Transfer
Restrictions. 
Except as provided in Sections 4.06 and
5.03(b), no Limited Partner shall Transfer any Units or any
interest therein without the prior written consent of the General Partner.  Any attempted Transfer in violation of this Section 4.05 shall be null and void, and
the Partnership shall refuse to recognize any such Transfer and shall not
reflect on its records any change in ownership of such Units pursuant to any
such Transfer.


 


4.06         Permitted
Transfers; Status as Assignee.  A Limited Partner may Transfer all or any
portion of his or her Units (i) to the Partnership, (ii) to his or her
spouse, parents or natural or adoptive lineal descendants, or to one or more
trusts or partnerships established exclusively for the benefit of his or her
spouse, parents or natural or adoptive lineal descendants, or (iii) pursuant to
Section 4.07; provided, that any such permitted assignee shall receive and hold
such rights subject to the provisions of this Agreement, including, without
limitation, the provisions of this Article IV.  A Limited Partner intending to Transfer Units
pursuant to this Section 4.06 shall provide at least 10 days prior written
notice of such proposed transfer to the General Partner.  An assignee of Units shall have only the
rights of an assignee under the Act and, except as expressly provided under the
Act, shall not be considered a Partner for any purpose under this Agreement or
otherwise unless and until such assignee is admitted to the Partnership as a
Limited Partner with the approval of the General Partner pursuant to Section
4.03.


 


4.07         General
Partner’s Right of Purchase.  The General Partner shall have the right and
option to purchase any and/or all Units held by a Limited Partner following
such Limited Partner’s admission to or conviction of a felony or misdemeanor
offense against CWEI or any of its Affiliates (“Event of Forfeiture”).  The General Partner may exercise such right
and option of purchase within 60 days of an Event of Forfeiture.  The purchase price to be paid for the Units
held by the Limited Partner shall be equal to such Limited Partner’s Capital
Contribution as set forth on Exhibit A. 
To the extent the General Partner exercises its option to purchase a
Limited Partner’s Units under this provision, such Units shall then be held by
the General Partner in accordance with Section 3.07 hereof.


 


4.08         Specific
Performance. 
The parties agree that the Partnership and each Partner would be
irreparably damaged if any of the provisions of this Article IV are
not performed in accordance with their specific terms and that monetary damages
would not provide an adequate remedy in such event.  Accordingly, it is agreed that, in addition
to any other remedy to which they may be entitled, at law or in equity, the
Partnership, the General Partner and any nondefaulting Limited Partner shall be
entitled to injunctive relief to prevent breaches of the provisions of this Article IV
and specifically to enforce the terms and provisions hereof in any action
instituted in any court of competent jurisdiction.


 


ARTICLE V

CAPITAL CONTRIBUTIONS


 


5.01         Capital
Contributions of General Partner.  The General Partner shall contribute to the
Partnership (i) cash in such amounts as shall be necessary to pay timely the
costs and expenses allocated and charged to the General Partner pursuant to
Section 6.01 and elsewhere herein, and (ii) an undivided 4% of the General
Partner’s interest in Partnership Property. 
In the event any Partnership Property contributed to the Partnership are
subject to any liens or similar


 


11





















 


encumbrances, the General Partner shall use
reasonable efoforts to cause such liens or similar encumbrances to be released
prior to any dissolution of the Partnership.


 


5.02         Initial
Capital Contributions of Limited Partners.  On the Effective Date, each Limited Partner
shall initially contribute to the Partnership cash in the amount of $10.00 per
Unit, as set forth on Exhibit A.


 


5.03         Additional
Capital Contributions of Limited Partners.  After Payout, if the General Partner
determines, in its sole discretion, that additional Capital Contributions from
the Limited Partners are required to fund the payment of costs and expenses
allocated and charged to the Limited Partners pursuant to Section 6.01
and elsewhere in this Agreement, the General Partner shall send written notice
to the Limited Partners (a “Contribution Notice”) setting forth the date on
which such additional Capital Contributions shall be payable (the “Contribution
Date”), which date shall be not less than 10 days after the date of the
Contribution Notice, the total amount of the additional Capital Contributions
required and the amount of the additional Capital Contribution to be made by
each Limited Partner pursuant to this Section 5.03(a).  Each Limited Partner’s additional Capital
Contribution shall be in proportion to the number of Units held by such Limited
Partner.


 


(b)           If
a Limited Partner does not make an additional Capital Contribution to the
Partnership in the amount, at the time or in the manner provided in Section
5.03(a) (a “Non-Contributing Limited
Partner”), the General Partner, in its sole discretion, may make the
additional Capital Contribution that the Non-Contributing Limited Partner
failed to make within 20 days after the Contribution Date, in which case the
Non-Contributing Limited Partner, without further action on his or her part,
shall be deemed to have assigned to the General Partner on the Contribution
Date the economic rights to the Units held by the Non-Contributing Limited
Partner, and the General Partner, as the assignee of the Non-Contributing
Limited Partner and the holder of such Units, shall be entitled to receive all
allocations of income, gain, loss, deduction, credit or similar items, and all
distributions, to which the Non-Contributing Limited Partner would otherwise be
entitled from and after the Contribution Date. 
The General Partner shall hold such economic rights to the Units
attributable to the Non-Contributing Limited Partner until such time as the
General Partner, as the holder of such Units, shall have received distributions
pursuant to Section 6.04 in an aggregate amount equal to the sum of (i)
the additional Capital Contributions made by the General Partner pursuant to
this Section 5.03(b), plus (ii) an annual rate of return on such
additional Capital Contributions from the Contribution Date equal to the prime
rate as established from time to time by Bank One NA, or its successors, plus
2%, whereupon the General Partner, without further action on its part, shall be
deemed to have re-assigned the economic rights to such Units to the
Non-Contributing Limited Partner.  The
General Partner may use the power of attorney set forth in Section 9.13
to reflect any assignment pursuant to this Section 5.03(b).


 


5.04         Capital
Accounts. 
An individual capital account (a “Capital Account”) shall be established
and maintained for each Partner as provided in Exhibit D.


 


5.05         Return
of Capital Contribution.  No interest shall accrue on any Capital
Contributions, and no Partner shall have the right to withdraw or be repaid any
Capital Contributions by such Partner except as expressly provided for herein.


 


12





















 


ARTICLE VI

SHARING, ALLOCATIONS AND DISTRIBUTIONS


 


6.01         Sharing
and Allocation of Costs and Expenses.  All costs and expenses of the Partnership
shall be allocated and charged to the Partners as follows:


 


(a)           Acquisition Costs shall be allocated (i) 100%
to the General Partner before Payout and (ii) 100% to the Limited Partners as a
class after Payout;


 


(b)           Well Costs shall be
allocated (i) 100% to the General Partner before Payout and (ii) 100% to the
Limited Partners as a class after Payout;


 


(c)           All other costs and
expenses of the Partnership not specifically allocated above shall be allocated
(i) 100% to the General Partner before Payout and (ii) 100% to the Limited
Partners as a class after Payout.


 


All
allocations made to Limited Partners “as a class” pursuant to this Agreement
shall be apportioned among the Limited Partners in proportion to the number of
Units held by such Limited Partners.


 


6.02         Sharing
and Allocation of Revenues.  All revenues of the Partnership (which shall
not include Capital Contributions and proceeds of loans to the Partnership)
shall be allocated (i) 100% to the General Partner before Payout and (ii) 100%
to the Limited Partners as a class after Payout.


 


6.03         Allocations
for Capital Account and Tax Purposes.  Subject to Section 8.02(c), all items of
income, gain, deduction, loss, credit and amount realized shall be allocated to
the Partners in accordance with the provisions of Exhibit D.


 


6.04         Distributions.  At least
monthly (commencing with the first full calendar month after the receipt by the
Partnership of its first revenues other than Capital Contributions and proceeds
of loans to the Partnership), all cash funds of the Partnership (exclusive of
Capital Contributions or proceeds of loans) which the General Partner reasonably
determines are not needed for the payment of any existing or reasonably
foreseeable Partnership obligations and expenditures shall be distributed to
the Partners.  All such cash funds of the
Partnership shall be distributed to the Partners in the same respective
percentages as the revenues to which such cash funds are attributable were
allocated to the Partners pursuant to Section 6.02 (after deducting
therefrom the costs and expenses charged to the Partners pursuant to Section
6.01 and elsewhere herein); provided, however, that if Payout
would occur as a result of a distribution of cash funds to the General Partner,
such distribution shall be deemed to constitute two distributions:  (i) the first distribution shall consist of
the amount of cash funds necessary to cause Payout to occur, and (ii) the
second distribution shall consist of the balance of the funds then distributed.


 


6.05         Withholding
Taxes.  The
Partnership shall at all times be entitled (but not obligated) to make payments
required to discharge any obligation of the Partnership or the General Partner
to withhold or make payments to any governmental authority with respect to any
federal, state or local tax liability of any Limited Partner for such taxes
arising out of such


 


13





















 


Limited Partner’s interest in the
Partnership.  The amount of each such
payment made by the Partnership with respect to any Limited Partner shall be
deducted from any distributions otherwise payable to such Limited Partner pursuant
to this Agreement.  Notwithstanding
anything contained in this Agreement to the contrary, in the event the
Partnership fails to withhold any federal, state or local taxes in respect of
any Limited Partner when required to do so (including as a result of any change
in law or interpretation thereof or otherwise) any liability incurred by the
Partnership (including any interest and penalties) as a result of such failure
shall be borne by such Limited Partner (and charged to such Limited Partner’s
Capital Account), and such Limited Partner shall indemnify and hold harmless
the Partnership and the General Partner from and against any and all claims,
demands, liabilities, costs, damages and causes of action of any nature
whatsoever related to such withholding obligation.


 


ARTICLE VII

BOOKS, RECORDS AND BANK ACCOUNTS


 


7.01         Maintenance
of Books. 
The books of account for the Partnership shall be maintained on an
accrual basis in accordance with the terms of this Agreement, except that the
Capital Accounts of the Partners shall be maintained in accordance with Exhibit D.  The accounting year of the Partnership shall
be the calendar year.


 


7.02         Accounts.  The General
Partner shall establish and maintain one or more separate bank and investment
accounts and arrangements for Partnership funds in the Partnership name with
financial institutions and firms that the General Partner determines.


 


ARTICLE VIII

DISSOLUTION, LIQUIDATION AND TERMINATION


 


8.01         Dissolution.  The
Partnership shall dissolve and its business and affairs shall be wound up on
the first to occur of the following:


 


(a)           the expiration of the
term of the Partnership set forth in Section 2.06;


 


(b)           the election of the General Partner, in its
sole discretion, to dissolve and liquidate the Partnership;


 


(c)           an Event of Withdrawal; provided, that upon
the occurrence of an Event of Withdrawal if there is at least one remaining
General Partner, the business of the Partnership shall be carried on by the
remaining General Partner, and the Partnership shall not be dissolved and its
affairs shall not be wound up by reason of such Event of Withdrawal; or


 


(d)           a Change of Control (as
hereinafter defined); provided, that if a Change in Control occurs prior
to Payout, dissolution of the Partnership shall be postponed until Payout
occurs.  For purposes of this Section
8.01(d), “Change in Control”
shall be deemed to have occurred if:


 


(i)            Any
Person, including a “group” as determined in accordance with Section 13(d)(3)
of the Exchange Act and the rules and regulations promulgated thereunder, is or
becomes, through one or a series of related transactions or through one or more
intermediaries, the beneficial owners, directly or indirectly, of securities of


 


14





















 


CWEI
representing 25% or more of the combined voting power of CWEI’s then
outstanding securities, other than a Person who is such a beneficial owner on
the Effective Date and any Affiliate of such Person;


 


(ii)           As
a result of, or in connection with, any tender offer or exchange offer, merger
or other business combination, sale of assets or contested election, or any
combination of the foregoing transactions (a “Transaction”),
the Persons who were directors of the Company before the Transaction shall
cease to constitute a majority of the Board of Directors of CWEI or any
successor to CWEI;


 


(iii)          Following
the Effective Date, CWEI is merged or consolidated with another corporation and
as a result of such merger or consolidation less than 40% of the outstanding
voting securities of the surviving or resulting corporation shall then be owned
in the aggregate by the former stockholders of CWEI, other than any party to
such merger or consolidation or any Affiliates of such party;


 


(iv)          A
tender offer or exchange offer is made and consummated for the ownership of
securities of CWEI representing 25% or more of the combined voting power of
CWEI’s then outstanding voting securities; or


 


(v)           CWEI
or a subsidiary of CWEI transfers more than 50% of its assets, or the last of a
series of transfers results in the transfer of more than 50% of the assets of
CWEI, to another corporation the capital stock of which is not wholly-owned by
CWEI.  For this purpose, the
determination of what constitutes 50% of the assets of CWEI shall be determined
based on the sum of the values attributed to (A) the oil and gas reserves of
CWEI as reflected by the most recent reserve report prepared or audited by CWEI’s
independent petroleum engineers, (B) CWEI’s undeveloped oil and gas properties
as determined by an independent appraisal thereof, and (C) the net book value
of all other assets of CWEI, each taken as of the date of the related transfer
of assets.


 


8.02         Liquidation
and Termination.  Upon dissolution of the Partnership, the
General Partner shall act as liquidator or may appoint one or more other
Persons to act as liquidator.  The
liquidator shall proceed to wind up the affairs of the Partnership and make
final distributions as provided in this Agreement. The costs of liquidation
shall be borne as a Partnership expense. Until final distribution, the
liquidator shall continue to operate the Partnership properties with all of the
power and authority of the General Partner. The steps to be accomplished by the
liquidator are as follows:


 


(a)           As
promptly as practicable after dissolution and again after final liquidation,
the liquidator shall cause a proper accounting to be made of the Partnership’s
assets, liabilities and operations through the last day of the calendar month
in which the dissolution occurs or the final liquidation is completed, as
applicable;


 


(b)           From
Partnership funds, the liquidator shall pay all of the debts and liabilities of
the Partnership (including, without limitation, all expenses incurred in
liquidation) or otherwise make adequate provision for such debts and
liabilities, including, without limitation, by


 


15





















 


establishing a cash escrow fund for contingent liabilities in such
amount and for such term as the liquidator may reasonably determine; and


 


(c)           All
remaining assets of the Partnership shall be distributed to the Partners as
follows:


 


(i)            The liquidator may
sell any or all Partnership Property and other assets, including to Partners,
and any resulting gain or loss from each sale shall be computed and allocated
to the Capital Accounts of the Partners in accordance with Section
8.02(c)(iii);


 


(ii)           With respect to all
Partnership Property and other assets that have not been sold, the fair market
value of that Partnership Property and other assets shall be determined and any
unrealized income, gain, loss, and deduction inherent in property that has not
been reflected in the Capital Accounts of the Partners previously shall be
allocated among the Partners in accordance with Section 8.02(c)(iii);


 


(iii)          All items of income,
gain, loss and deduction referred to in Sections 8.02(c)(i) and (ii)
shall be allocated among the Partners in such a manner as to cause, to the
maximum extent possible, the positive Capital Account balance of each Partner to
equal the distribution such Partner would receive if the distributions upon
liquidation were made in accordance with Section 6.04 of this Agreement;


 


(iv)          Partnership
Property and other assets shall then be distributed among the Partners in
accordance with the positive Capital Account balances of the Partners, as
determined after taking into account all Capital Account adjustments for the
taxable year of the Partnership during which the liquidation of the Partnership
occurs (other than those made by reason of distributions pursuant to this
clause (iv)), and those distributions shall be made by the end of the taxable
year of the Partnership during which the liquidation of the Partnership occurs
(or, if later, 90 days after the date of the liquidation);


 


(v)           It is intended that the
distributions made to each Partner pursuant to this Section
8.02(c) be equal to the distributions to which such Partner would be
entitled if liquidating distributions were made in accordance with Section 6.04 of this Agreement.  To the extent the Partners’ positive Capital
Account balances after application of Section 8.02(c)(iii) do not correspond to
the amounts of such intended distributions, the allocations provided for in Exhibit D for the fiscal year in which the
liquidation occurs shall be adjusted, to the maximum extent possible, to
produce Capital Account balances which correspond to the amount of such
intended distributions.


 


All
distributions in kind to the Partners shall be made subject to the liability of
each distributee for his, her or its allocable share of costs, expenses and
liabilities previously incurred or for which the Partnership has committed
prior to the date of termination and those costs, expenses and liabilities
shall be allocated to the distributee under this Section 8.02. The
distribution of cash or property to a Partner in accordance with the provisions
of this Section 8.02 constitutes a
complete return to the Partner of his, her or its Capital Contributions and a
complete distribution to the Partner of his, her or its Units and all the
Partnership Property and other assets and constitutes a compromise to which all
Partners have consented within the meaning of Section 5.02(d)


 


16





















 


of the Act. To
the extent that a Partner returns funds to the Partnership, it has no claim
against any other Partner for those funds.


 


8.03         Termination.  On
completion of the distribution of Partnership assets as provided in this
Agreement, the Partnership is terminated, and the General Partner (or such
other Person or Persons as the Act may require or permit) shall cause the
cancellation of the Certificate and any filings made as provided in Section
2.05 and shall take such other actions as may be necessary to terminate the
Partnership.


 


ARTICLE IX

GENERAL PROVISIONS


 


9.01         Offset.  Whenever the Partnership or the General
Partner is to pay any sum to any Partner, including pursuant to Section 4.07, any amounts that Partner owes
the Partnership or the General Partner or its Affiliates may be deducted from
that sum before payment.


 


9.02         Notices.  All notices, requests or consents required or
permitted to be given under this Agreement must be in writing and shall be
considered as properly given if mailed by first class United States mail, postage
paid, and registered or certified with return receipt requested, or if
delivered to the recipient in person, by courier or by facsimile
transmission.  Notices, requests and
consents shall be sent to a Limited Partner at the address shown on its Signature
Page for Limited Partners.  A Limited
Partner may change its address by giving written notice to the General
Partner.  Any notice, request or consent
to the Partnership or to the General Partner shall be sent to the General
Partner at its principal place of business, to the attention of the Executive
Vice President and Chief Operating Officer.


 


9.03         Entire Agreement.  This
Agreement constitutes the entire agreement of the Partners relating to the
Partnership and supersedes all prior contracts or agreements with respect to
the Partnership, whether oral or written.


 


9.04         Effect
of Waiver or Consent.  A waiver or consent, express or implied, to
or of any breach or default by any Person in the performance by that Person of
its obligations with respect to the Partnership is not a consent or waiver to
or of any other breach or default in the performance by that Person of the same
or any other obligations of that Person with respect to the Partnership.  Failure on the part of a Person to complain
of any act of any Person or to declare any Person in default with respect to
the Partnership, irrespective of how long that failure continues, does not
constitute a waiver by that Person of its rights with respect to that default
until the applicable statute of limitations period has run.


 


9.05         Amendment
or Modification.  Except as otherwise provided in this Section
9.05, any amendment to this Agreement must be proposed by the General
Partner and approved in writing by the General Partner and at least a Majority
in Interest of the Limited Partners within 90 days of its proposal to be
effective.


 


(b)           The
General Partner may amend this Agreement without the consent of any Limited
Partner (i) to remove or correct any inconsistency, ambiguity or error
contained herein, provided that such amendment does not materially and
adversely affect the Limited Partners, (ii) to admit additional Partners
pursuant to Sections 3.04 or 4.03, (iii) to reflect any assignment


 


17





















 


of Units pursuant to Section 5.03(b) or (iv) to amend Exhibit C to
designate Leases, Wells or Working Interests or any interest therein as
Excluded Properties.


 


9.06         Binding
Effect. 
Subject to the restrictions on Transfers set forth in this Agreement,
this Agreement is binding on and inures to the benefit of the Partners and
their respective successors and assigns.


 


9.07         Governing
Law; Severability.  THIS AGREEMENT IS GOVERNED BY AND SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICT
OF LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION
OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION.  If any provision of this Agreement or its
application to any Person or circumstance is held invalid or unenforceable to
any extent, the remainder of this Agreement and the application of that
provision to other Persons or circumstances is not affected and that provision
shall be enforced to the fullest extent permitted by law.


 


9.08         Further
Assurances. 
In connection with this Agreement and the transactions contemplated by
it, each Partner shall execute and deliver any additional documents and
instruments and perform any additional acts that may be necessary or
appropriate to effectuate and perform the provisions of this Agreement and
those transactions.


 


9.09         Waiver
of Certain Rights.  Except for the General Partner, each Partner
irrevocably waives any right it may have to maintain any action for dissolution
of the Partnership or for partition of the property of the Partnership.


 


9.10         Insurance.  The
Partnership may purchase and maintain insurance or enter into other
arrangements on behalf of the Partnership, the General Partner or any other
Person who is or was a “general partner,” as defined in Section 11.01 of the
Act, or a Limited Partner, who is or was serving at the request of the
Partnership or the General Partner as a “representative,” as defined in Section
11.01 of the Act, of any other enterprise, against any liability asserted
against the Person and incurred by the Person in that capacity or arising out
of the Person’s status in that capacity, regardless of whether the Partnership
would have the power to indemnify the Person against that liability under this
Agreement or the Act.  In the absence of
actual fraud, the judgment of the General Partner as to the terms and
conditions of the insurance or other arrangement and the identity of the
insurer or other Person participating in an arrangement shall be conclusive,
and the insurance or other arrangement shall not be voidable and shall not
subject the General Partner approving the insurance or other arrangement to
liability, on any ground, regardless of whether the General Partner will be a
beneficiary.


 


9.11         Indemnification


 


(a)           The
Partnership agrees to indemnify and hold harmless the General Partner, its
Affiliates, and their respective officers, directors, partners, members,
managers, employees and agents (each, an “Indemnified Person”) to the
fullest extent permitted by law, from and against all losses, costs, liabilities,
damages, and expenses (including, without limitation, costs of suit and
attorneys’ fees) paid or incurred in connection with or resulting from any and
all claims, actions or demands against such Indemnified Person that arise out
of or in any way relate to or


 


18





















 


are incidental to the Partnership, the Partnership Property or the
business or affairs of the Partnership; provided, however, that
this indemnity shall not extend to any bad faith, willful misconduct, gross
negligence or deliberate or intentional breach of any material provision of
this Agreement by such Indemnified Person. 
THE PARTIES INTEND THAT THE INDEMNIFIED PERSONS BE INDEMNIFIED PURSUANT
TO THIS AGREEMENT FROM LIABILITY FOR THEIR OWN SOLE, PARTIAL OR CONCURRENT
NEGLIGENCE.


 


(b)           The
indemnification rights contained in this Section
9.11 shall be cumulative of and in addition to any and all other
rights, remedies and recourses to which any Indemnified Person or their
respective heirs, personal representatives, successors and assigns shall be
entitled, whether pursuant to some other provisions of this Agreement, at law
or in equity.


 


(c)           The
Partnership shall advance to any Indemnified Person all reasonable fees, costs
and expenses (including attorneys’ fees and related costs), of defending any
claim, action or demand that arises out of or in any way relates to or is
incidental to the Partnership, the Partnership Property, business or affairs;
provided, that such Indemnified Person agrees in writing to repay to the
Partnership all such advances in the event that it is finally determined that
such Indemnified Person is not entitled to indemnification hereunder with
respect to such claim, action or demand.


 


(d)           All
damages awarded by any court or paid in settlement in connection with any
action in the nature of a derivative action shall be paid to the Partnership by
the Person bringing such action.  As used
herein, derivative action shall mean an action brought by a Limited Partner on
behalf of the Partnership.


 


9.12         Counsel
to the Partnership.  The General Partner may select and retain
legal counsel to the Partnership and may execute and deliver on behalf of the
Partnership any consent to the representation of the Partnership that counsel
may request pursuant to the rules of professional conduct or similar rules in
any jurisdiction.  Counsel to the
Partnership may also be counsel to the General Partner.  The Partnership has initially selected Vinson
& Elkins L.L.P. (“Partnership Counsel”) as legal counsel to the
Partnership. Each Limited Partner acknowledges that Partnership Counsel does
not represent such Limited Partner as a Limited Partner, and that Partnership
Counsel shall owe no duties directly to such Limited Partner.  Each Limited Partner further acknowledges
that, whether or not Partnership Counsel has in the past represented or is
currently representing such Limited Partner with respect to other matters,
Partnership Counsel has not advised or represented the interests of any Limited
Partner in the negotiation, preparation, execution, delivery and performance of
this Agreement.


 


9.13         Power
of Attorney. 
By the execution of this Agreement, each Limited Partner does
irrevocably constitute and appoint the General Partner, with full power of substitution,
as true and lawful attorney-in-fact and agent with full power and authority to
act in such Limited Partner’s name, place and stead and to execute, file and
record the Certificate as required under the Act and to execute all other
documents which such attorney-in-fact deems necessary or reasonably
appropriate:


 


19





















 


(a)           to
qualify or continue the Partnership as a limited partnership in the State of
Texas and in all jurisdictions in which the Partnership may or intends to
conduct business or own property;


 


(b)           to
reflect a change in the identity of any Limited Partner, the admission of
additional Partners pursuant to this Agreement;


 


(c)           to
reflect any modification or amendment of this Agreement;


 


(d)           to
reflect the transfer or assignment of Units by a Limited Partner from time to
time in accordance with Section 4.08 or pursuant to Section
5.03(b), including without limitation, a transfer or assignment of Units to
the General Partner;


 


(e)           to
reflect the dissolution and termination of the Partnership; or


 


(f)            to
comply with applicable assumed name laws.


 


9.14         Counterparts.  This
Agreement may be executed in any number of counterparts (including by facsimile
transmission) with the same effect as if all signing parties had signed the
same document.  All counterparts shall be
construed together and constitute the same instrument.


 


9.15         No
Employment Contract.  Nothing contained in this Agreement shall be
construed as conferring upon any Limited Partner who is or may become an
employee of CWEI or any Affiliate of CWEI any right to continue in the
employment of CWEI or any Affiliate of CWEI for any period of time or interfere
with or restrict in any way the rights of CWEI or any Affiliate of CWEI or such
Limited Partner to terminate the employment of such Limited Partner at any time
for any reason (or without any reason) whatsoever, with or without cause.


 


[Signature
Pages Follow]


 


20





















 


IN WITNESS WHEREOF, the parties have executed this
Partnership Agreement as of the Effective Date.


 


	
   

  	
  GENERAL PARTNER:

  
	
   

  	
   

  
	
   

  	
  CLAYTON WILLIAMS ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ L.
  Paul Latham

  	
   

  
	
   

  	
   

  	
  L. Paul
  Latham

  
	
   

  	
   

  	
  Executive
  Vice President

  



 





















 


SIGNATURE PAGE FOR LIMITED PARTNER


 


The
undersigned, desiring to become a limited partner in CWEI DESTEFANO, L. P., a Texas
limited partnership (“Partnership”), does hereby agree to all the terms and
provisions of the Agreement of Limited Partnership of the Partnership,
including, without limitation, the power of attorney set forth in Section 9.13 thereof.


 


	
   

  	
  Name:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   Signature

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Fax:

  	
   

  
	
   

  	
   

  
	
   

  	
  Taxpayer I.D. No.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Number of Units:

  	
   

  
								



 





















 


EXHIBIT A


 


to Partnership Agreement of
CWEI DESTEFANO, L. P.


 


Schedule  of Limited Partners


 


	
   

  	
   

  	
   

  	
   

  	
  Initial

  	
   

  
	
   

  	
   

  	
  No. of

  	
   

  	
  Capital

  	
   

  
	
  Name

  	
   

  	
  Units

  	
   

  	
  Contributions

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Lyssy, Sam

  	
   

  	
  23.25

  	
   

  	
  232.50

  	
   

  
	
  Groner, Jerry

  	
   

  	
  12.50

  	
   

  	
  125.00

  	
   

  
	
  Benton, Greg

  	
   

  	
  12.50

  	
   

  	
  125.00

  	
   

  
	
  Latham, Paul

  	
   

  	
  7.88

  	
   

  	
  78.80

  	
   

  
	
  Riggs, Mel

  	
   

  	
  7.87

  	
   

  	
  78.70

  	
   

  
	
  Kennedy, John

  	
   

  	
  6.25

  	
   

  	
  62.50

  	
   

  
	
  Pollard, Mike

  	
   

  	
  3.00

  	
   

  	
  30.00

  	
   

  
	
  Gasser, Ron

  	
   

  	
  1.75

  	
   

  	
  17.50

  	
   

  
	
  Wolfshohl, Clarence

  	
   

  	
  2.00

  	
   

  	
  20.00

  	
   

  
	
  Boring, Rick

  	
   

  	
  1.50

  	
   

  	
  15.00

  	
   

  
	
  Swierc, Matt

  	
   

  	
  1.50

  	
   

  	
  15.00

  	
   

  
	
  Tisdale, Mark

  	
   

  	
  1.50

  	
   

  	
  15.00

  	
   

  
	
  Stembridge, Joe

  	
   

  	
  1.50

  	
   

  	
  15.00

  	
   

  
	
  Eller, Bobby

  	
   

  	
  2.50

  	
   

  	
  25.00

  	
   

  
	
  Knape, David

  	
   

  	
  2.00

  	
   

  	
  20.00

  	
   

  
	
  Polson, Dennis

  	
   

  	
  1.50

  	
   

  	
  15.00

  	
   

  
	
  Irvin, Logan

  	
   

  	
  1.00

  	
   

  	
  10.00

  	
   

  
	
  Wellborn, Greg

  	
   

  	
  2.00

  	
   

  	
  20.00

  	
   

  
	
  Wolfshohl, Jim

  	
   

  	
  1.00

  	
   

  	
  10.00

  	
   

  
	
  Pruitt, Donnie

  	
   

  	
  1.00

  	
   

  	
  10.00

  	
   

  
	
  Cunningham, Mickey

  	
   

  	
  1.00

  	
   

  	
  10.00

  	
   

  
	
  Thomas, Robert

  	
   

  	
  1.00

  	
   

  	
  10.00

  	
   

  
	
  Jones, Kim

  	
   

  	
  1.00

  	
   

  	
  10.00

  	
   

  
	
  Kelly, Denise

  	
   

  	
  1.00

  	
   

  	
  10.00

  	
   

  
	
  Alford, Danny

  	
   

  	
  1.00

  	
   

  	
  10.00

  	
   

  
	
  Roome, Joe

  	
   

  	
  0.50

  	
   

  	
  5.00

  	
   

  
	
  Hamilton, Janet

  	
   

  	
  0.50

  	
   

  	
  5.00

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  100.00

  	
   

  	
  $

  	
  1,000.00

  	
   

  
							



 





















 


EXHIBIT B


 


to Partnership Agreement of




CWEI DESTEFANO, L. P.


 


Area of Interest


 


The area covered by the leases described in the attachment hereto.


 





















 


EXHIBIT C


 


to Partnership Agreement of




CWEI DESTEFANO, L. P.


 


Wells


 


	
  Well Name

  	
   

  	
  County, State

  
	
   

  	
   

  	
   

  
	
  Existing
  Wells:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  [List to
  come]

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Wells
  Drilled:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  [To be
  determined]

  	
   

  	
   

  



 


21





















 


EXHIBIT D


 


Allocations of Profits and Losses and Other Tax
Matters


 


ARTICLE I


 


TAX DEFINITIONS


 


Section 1.01           Definitions.  All
capitalized terms used herein shall have the meanings assigned to them in the
Agreement of Limited Partnership of CWEI DESTEFANO, L. P. dated February 9,
2005 (the “Agreement”), or as follows:


 


“Adjusted Capital Account”
means the Capital Account maintained for each Partner, (a) increased by any
amounts that such Partner is obligated to restore or is treated as obligated to
restore under Regulation Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) and
1.704-2(i)(5)), and (b) decreased by any amounts described in Regulation
Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6) with respect to such Partner.


 


“Minimum Gain” has
the meaning assigned to that term in Regulation Section 1.704-2(d).


 


“Partnership Nonrecourse Liability”
has the meaning assigned to that term in Regulation Section 1.752-1(a)(2).


 


“Partner Nonrecourse Debt”
has the meaning assigned to that term in Regulation Section 1.704-2(b)(4).


 


“Partner Nonrecourse Deductions”
has the meaning assigned to that term in Regulation Section 1.704-2(i)(1).


 


“Simulated
Basis” has the meaning set forth in Section 4.01(b) of this
Exhibit.


 


“Simulated
Depletion” has the meaning set forth in Section 4.01(b) of
this Exhibit.


 


“Simulated
Gain” has the meaning set forth in Section 4.01(b) of this
Exhibit.


 


“Simulated
Loss” has the meaning set forth in Section 4.01(b) of this
Exhibit.


 


ARTICLE II


 


ALLOCATIONS OF PROFIT AND LOSS


 


Section 2.01           Allocations for Capital Account and Tax Purposes.  Subject to Section 8.02 of the Agreement and
except as otherwise provided herein, for purposes of any applicable federal,
state or local income tax law, rule or regulation items of income, gain,
deduction, loss, credit and amount realized shall be allocated to the Partners
as follows:


 





















 


(a)           Income from the sale of
oil or gas production and any credits allowed by Section 29 of the Code
relating thereto shall be allocated in the same manner as revenue therefrom is
allocated and credited pursuant to Section 6.02 of the Agreement.


 


(b)           Cost and percentage
depletion deductions and the gain or loss on the sale or other disposition of
property the production from which is subject to depletion (herein sometimes
called “Depletable
Property”) shall be computed separately by the Partners rather than
the Partnership.  For purposes of
Section 613A(c)(7)(D) of the Code, the Partnership’s adjusted basis in
each Depletable Property shall be allocated to the Partners in proportion to
each Partner’s respective share of the costs and expenses which entered into
the Partnership’s adjusted basis for each Depletable Property, and the amount
realized on the sale or other disposition of each Depletable Property shall be
allocated to the Partners in proportion to each Partner’s respective share of
the revenue from the sale or other disposition of such property provided for in
Section 6.02 of the Agreement. 
For purposes of allocating amounts realized upon any such sale or
disposition which are deemed to be received for federal income tax purposes and
are attributable to Partnership indebtedness or indebtedness to which the
Depletable Property is subject at the time of such sale or disposition, such
amounts shall be allocated in the same manner as Partnership revenues used for
the repayment of such indebtedness would have been allocated under Section
6.02 of the Agreement.


 


(c)           Items of deduction,
loss and credit not specifically provided for above (other than loss from the
sale or other disposition of Partnership property), including depreciation,
cost recovery and amortization deductions, shall be allocated to the Partners
in the same manner that the costs and expenses of the Partnership that gave
rise to such items of deduction, loss and credit were allocated pursuant to Section 6.01
of the Agreement.


 


(d)           Gain from the sale or
other disposition of Partnership property that is not specifically provided for
above shall be allocated to the Partners in a manner which reflects each
Partner’s allocable share of the revenue from the sale of the Partnership
property provided for in Section 6.02 of the Agreement, and loss
from the sale or other disposition of Partnership property that is not specifically
provided for above shall be allocated to the Partners in a manner which
reflects each Partner’s allocable share of the costs and expenses of the
Partnership property provided for in Section 6.01 of the Agreement.


 


(e)           All recapture of income
tax deduction resulting from the sale or other disposition of Partnership
property shall be allocated to the Partner to whom the deduction that gave rise
to such recapture was allocated hereunder to the extent that such Partner is
allocated any gain from the sale or other disposition of such property.


 


(f)            Any other items of
Partnership income or gain not specifically provided for above shall be
allocated in the same manner as the revenue that resulted in such income or
gain is allocated and credited pursuant to Section 6.02 of the
Agreement.


 


(g)           Notwithstanding any of
the foregoing provisions of this Section 2.01 to the contrary:


 





















 


(i)            If
during any fiscal year of the Partnership there is a net increase in Minimum
Gain attributable to a Partner Nonrecourse Debt that gives rise to Partner
Nonrecourse Deductions, each Partner bearing the economic risk of loss for such
Partner Nonrecourse Debt shall be allocated items of Partnership deductions and
losses for such year (consisting first of cost recovery or depreciation
deductions with respect to property that is subject to such Partner Nonrecourse
Debt and then, if necessary, a pro rata portion of the Partnership’s other
items of deductions and losses, with any remainder being treated as an increase
in Minimum Gain attributable to Partner Nonrecourse Debt in the subsequent
year) equal to such Partner’s share of Partner Nonrecourse Deductions, as
determined in accordance with applicable Regulations.


 


(ii)           If
for any fiscal year of the Partnership there is a net decrease in Minimum Gain
attributable to Partnership Nonrecourse Liabilities, each Partner shall be
allocated items of Partnership income and gain for such year (consisting first
of gain recognized, including Simulated Gain, from the disposition of
Partnership property subject to one or more Partnership Nonrecourse Liabilities
and then, if necessary, a pro rata portion of the Partnership’s other items of
income and gain, and if necessary, for subsequent years) equal to such Partner’s
share of such net decrease (except to the extent such Partner’s share of such
net decrease is caused by a change in debt structure with such Partner
commencing to bear the economic risk of loss as to all or part of any
Partnership Nonrecourse Liability or by such Partner contributing capital to
the Partnership that the Partnership uses to repay a Partnership Nonrecourse
Liability), as determined in accordance with applicable Regulations.


 


(iii)          If
for any fiscal year of the Partnership there is a net decrease in Minimum Gain
attributable to a Partner Nonrecourse Debt, each Partner shall be allocated
items of Partnership income and gain for such year (consisting first of gain
recognized, including Simulated Gain, from the disposition of Partnership
property subject to Partner Nonrecourse Debt, and then, if necessary, a pro
rata portion of the Partnership’s other items of income and gain, and if
necessary, for subsequent years) equal to such Partner’s share of such net
decrease (except to the extent such Partner’s share of such net decrease is
caused by a change in debt structure or by the Partnership’s use of capital
contributed by such Partner to repay Partner Nonrecourse Debt) as determined in
accordance with applicable Regulations.


 


(h)           The General Partner
shall use all reasonable efforts to prevent any allocation or distribution from
causing a negative balance in a Limited Partner’s Adjusted Capital
Account.  Consistent therewith, and
notwithstanding any of the foregoing provisions of this Section 2.01
of this Exhibit to the contrary, if for any fiscal year of the Partnership the
allocation of any loss or deduction (net of any income or gain) to any Limited
Partner would cause or increase a negative balance in such Partner’s Adjusted
Capital Account as of the end of such fiscal year (the “Deficit Partner”)
after taking into account the provisions of Section 2.01(g) of this
Exhibit, only the amount of such loss or deduction that reduces the balance to
zero shall be allocated to such Deficit Partner and the remaining loss or
deduction shall be allocated to the Partners whose Adjusted Capital Accounts
have a positive balance remaining at such time (each, a “Positive Partner”).  After any such allocation, any Partnership
income or gain (including Simulated Gain)


 





















 


that would otherwise be allocated to the Deficit Partner shall be
allocated instead to the Positive Partners up to an amount equal to the
Partnership loss or deduction allocated to each Positive Partner under the
preceding sentence; provided, however, that no allocation of income or gain
realized shall be made under this sentence if the effect of such allocation
would be to cause the Adjusted Capital Account of the Deficit Partner to be
less than zero.  If, after taking into
account the allocation in the first sentence of this Section 2.01(h),
the Adjusted Capital Account balance of the Deficit Partner remains less than
zero at the end of a fiscal year, a pro rata portion of each item of
Partnership income or gain (including Simulated Gain) otherwise allocable to
the Positive Partners for such fiscal year (or if there is no such income or
gain allocable to the Positive Partners for such fiscal year, all such income
or gain (including Simulated Gain) so allocable in the succeeding fiscal year
or years) shall be allocated to the Deficit Partner in an amount necessary to
cause its Adjusted Capital Account balance to equal zero; provided, that no
allocation under this sentence shall have the effect of causing the Positive
Partner’s Adjusted Capital Account to be less than zero.  After any such allocation, any Partnership
gain (including Simulated Gain) resulting from the sale or other disposition of
Partnership property that would otherwise be allocated to the Deficit partner
for any fiscal year under this Section 2.01 shall be allocated
instead to the Positive Partners until the amount of gain so allocated equals
the amount of gain (including Simulated Gain) previously allocated to such
Deficit Partner under the preceding sentence of this Section 2.01(h);
provided, however, that no allocation of gain (including Simulated Gain) shall
be made under this sentence if the effect of such allocation would be to cause
the Adjusted Capital Account of a Deficit Partner to be less than zero.


 


ARTICLE III


 


OTHER TAX MATTERS


 


Section 3.01           Tax Elections.


 


(a)           For tax
purposes, the Partnership shall elect to use the calendar as its taxable year,
and to report income and loss under the accrual method of accounting.


 


(b)           For tax
purposes, the Partnership shall elect to deduct expenses incurred in organizing
the Partnership ratably over a 60-month period as provided in section 709 of
the Code.


 


(c)           For tax
purposes, the Partnership shall elect to treat all start-up expenditures as
deferred expenses and to deduct such expenses over a 60-month period as
provided in section 195 of the Code.


 


(d)           In
connection with any Transfer or other assignment of an interest in the
Partnership permitted by the terms and provisions of this Agreement, the
General Partner shall, at the written request of the transferor, transferee or
other successor, cause the Partnership to make an election to adjust the basis
of the Partnership’s property in the manner provided in sections 734(b) and
743(b) of the Code (or any like statute or regulation then in effect), and such
transferor, transferee or other successor shall pay all costs incurred by the
Partnership in connection therewith, including, without limitation, reasonable
attorneys’ and accountants’ fees.


 





















 


(e)           Unless
approved by the Partners, the Partnership shall not file any election pursuant
to sections 761 or 7701 of the Code, section 301.7701-3 of the Regulations or
otherwise, the effect of which would cause the Partnership not to be treated as
a partnership for Federal income tax purposes.


 


(f)            Except as
otherwise specifically provided herein, the General Partner shall have the sole
and absolute discretion to make any other available election under the Code on
behalf of the Partnership without the prior approval by the Partners.


 


Section 3.02           Tax Matters Partner. 
The General Partner is hereby designated the “tax matters partner” of
the Partnership pursuant to Section 6231(a)(7) of the Code.


 


ARTICLE IV


 


CAPITAL ACCOUNT MAINTENANCE


 


Section 4.01           Maintenance of Capital Accounts.  An individual Capital Account (a “Capital Account”)
shall be maintained by the Partnership for each Partner as provided below:


 


(a)           The Capital Account of
each Partner shall, except as otherwise provided herein, be (A) credited by
such Partner’s Capital Contributions when made (net of liabilities secured by
contributed property that the Partnership is considered to assume or take
subject to under Section 752 of the Code), (B) credited with the amount of any
item of taxable income or gain and the amount of any item of income or gain
exempt from tax allocated to such Partner, (C) credited with the Partner’s
share of Simulated Gain as provided in Section 4.01(b) of this Exhibit,
(D) debited by the amount of any item of tax deduction or loss allocated to
such Partner, (E) debited with the Partner’s share of Simulated Loss and
Simulated Depletion as provided in Section 4.01(b) of this Exhibit,
(F) debited by such Partner’s allocable share of expenditures of the
Partnership not deductible in computing the Partnership’s taxable income and
not properly chargeable as capital expenditures, including any non-deductible
book amortizations of capitalized costs, and (G) debited by the amount of cash
or the fair market value of any property distributed to such Partner (net of
liabilities secured by such distributed property that such Partner is
considered to assume or take subject to under Section 752 of the Code).  Immediately prior to any distribution of
assets by the Partnership that is not pursuant to a liquidation of the
Partnership or all or any portion of a Partner’s interest therein, the Partners’
Capital Accounts shall be adjusted by (X) assuming that the distributed assets
were sold by the Partnership for cash at their respective fair market values as
of the date of distribution by the Partnership and (Y) crediting or debiting
each Partner’s Capital Account with its respective share of the hypothetical
gains or losses, including Simulated Gains and Simulated Losses, resulting from
such assumed sales in the same manner as each such Capital Account would be
debited or credited for gains or losses on actual sales of such assets.


 


(b)           The allocation of basis
prescribed by Section 613A(c)(7)(D) of the Code and provided for in Section
2.01(b) of this Exhibit and each Partner’s separately computed depletion
deductions shall not reduce such Partner’s Capital Account, but such Partner’s
Capital Account shall be decreased by an amount equal to the product of the
depletion deductions that would otherwise be allocable to the Partnership in
the absence of Section 613A(c)(7)(D) of the Code


 





















 


(computed
without regard to any limitations which theoretically could apply to any
Partner) times such Partner’s percentage share of the adjusted basis of the
property (determined under Section 2.01(b) of this Exhibit) with respect
to which such depletion is claimed (“Simulated Depletion”).  The Partnership’s basis in any Depletable
Property is adjusted from time to time for the Simulated Depletion allocable to
all Partners (and where the context requires, each Partner’s allocable share
thereof, which share shall be determined in the same manner as the allocation
of basis prescribed in Section 2.01(b) of this Exhibit) is herein called
“Simulated
Basis.”  No Partner’s Capital
Account shall be decreased, however, by Simulated Depletion deductions attributable
to any Depletable Property to the extent such deductions exceed such Partner’s
allocable share of the Partnership’s remaining Simulated Basis in such
property.  The Partnership shall compute
simulated gain (“Simulated
Gain”) or simulated loss (“Simulated Loss”) attributable to
the sale or other disposition of a Depletable Property based on the difference
between the amount realized from such sale or other disposition and the
Simulated Basis of such property, as theretofore adjusted.  Any Simulated Gain shall be allocated to the
Partners and shall increase their respective Capital Accounts in the same
manner as the amount realized from such sale or other disposition in excess of
Simulated Basis shall have been allocated pursuant to Section 2.01(b).  Any Simulated Loss shall be allocated to the
Partners and shall reduce their respective Capital Accounts in the same
percentages as the costs of the property sold were allocated up to an amount
equal to each Partner’s share of the Partnership’s Simulated Basis in such
property at the time of such sale.


 


(c)           Any adjustments of
basis of Partnership property provided for under Sections 734 and 743 of the
Internal Revenue Code and comparable provisions of state law (resulting from an
election under Section 754 of the Code or comparable provisions of state law)
and any election by an individual Partner under Section 59(e)(4) of the Code to
amortize such Partner’s share of intangible drilling and development costs
shall not affect the Capital Accounts of the Partners (unless otherwise
required by applicable Treasury Regulations), and the Partners’ Capital
Accounts shall be debited or credited pursuant to the terms of this Section
4.01 as if no such election had been made.


 


(d)           Capital Accounts shall
be adjusted, in a manner consistent with this Section 4.01, to reflect
any adjustments in items of Partnership income, gain, loss or deduction that
result from amended returns filed by the Partnership or pursuant to an
agreement by the Partnership with the Internal Revenue Service or a final court
decision.


 


(e)           In the case of property
carried on the books of the Partnership at an amount which differs from its
adjusted basis, the Partners’ Capital Accounts shall be debited or credited for
items of depreciation, cost recovery, Simulated Depletion, amortization and
gain or loss (including Simulated Gain or Simulated Loss) with respect to such
property computed in the same manner as such items would be computed if the
adjusted tax basis of such property were equal to such book value, in lieu of
the capital account adjustments provided above for such items, all in
accordance with Regulation Section 1.704-1(b)(2)(iv)(g).


 


(f)            It is the intention of
the Partners that the Capital Accounts of each Partner be kept in the manner
required under Regulation Section 1.704-1(b)(2)(iv).  To the extent any additional adjustment to
the Capital Accounts is required by such regulations, the General Partner is
hereby authorized to make such adjustment after notice to the Limited
Partner.                        [End of Exhibit D]