Exhibit 10.31


 


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


 


ROCKY ARROYO, 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


 


ROCKY ARROYO, L. P.


 


This AGREEMENT OF LIMITED PARTNERSHIP OF ROCKY ARROYO,
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.


 


“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.


 


2





















 


“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.


 


“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.


 


3





















 


“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.


 


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 “ROCKY ARROYO,
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.


 


4





















 


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.


 


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:


 


5





















 


(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;


 


(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;


 


6





















 


(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 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


 


7





















 


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


 


8





















 


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.


 


(a)   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.


 


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(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.


 


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


 


11





















 


expenses allocated
and charged to the General Partner pursuant to Section 6.01 and
elsewhere herein, and (ii) an undivided 5% 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 encumbrances, the General Partner shall use reasonable
efforts 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.


 


(a)   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


 


12





















 


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.


 


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


 


13





















 


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 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


 


14





















 


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 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


 


15





















 


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 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


 


16





















 


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) 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


 


17





















 


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.


 


(a)   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 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


 


18





















 


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 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


 


19





















 


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:


 


(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 ROCKY ARROYO, 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


ROCKY ARROYO, L. P.


 


Schedule of
Limited Partners


 


	
  Name

  	
   

  	
  No. of

  Units

  	
   

  	
  Initial

  Capital

  Contributions

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Lyssy, Sam

  	
   

  	
  13.25

  	
   

  	
  $

  	
  132.50

  	
   

  
	
  Groner, Jerry

  	
   

  	
  13.25

  	
   

  	
  $

  	
  132.50

  	
   

  
	
  Benton, Greg

  	
   

  	
  13.00

  	
   

  	
  $

  	
  130.00

  	
   

  
	
  Ron Johnson

  	
   

  	
  10.00

  	
   

  	
  $

  	
  100.00

  	
   

  
	
  Latham, Paul

  	
   

  	
  7.00

  	
   

  	
  $

  	
  70.00

  	
   

  
	
  Riggs, Mel

  	
   

  	
  7.00

  	
   

  	
  $

  	
  70.00

  	
   

  
	
  Kennedy, John

  	
   

  	
  7.00

  	
   

  	
  $

  	
  70.00

  	
   

  
	
  Irvin, Logan

  	
   

  	
  5.00

  	
   

  	
  $

  	
  50.00

  	
   

  
	
  Pollard, Mike

  	
   

  	
  3.00

  	
   

  	
  $

  	
  30.00

  	
   

  
	
  Swierc, Matt

  	
   

  	
  2.50

  	
   

  	
  $

  	
  25.00

  	
   

  
	
  Gasser, Ron

  	
   

  	
  2.50

  	
   

  	
  $

  	
  25.00

  	
   

  
	
  Wellborn, Greg

  	
   

  	
  2.50

  	
   

  	
  $

  	
  25.00

  	
   

  
	
  Howard, Randy

  	
   

  	
  2.50

  	
   

  	
  $

  	
  25.00

  	
   

  
	
  Tisdale, Mark

  	
   

  	
  2.00

  	
   

  	
  $

  	
  20.00

  	
   

  
	
  Polson, Dennis

  	
   

  	
  1.50

  	
   

  	
  $

  	
  15.00

  	
   

  
	
  Knape, David

  	
   

  	
  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


 


ROCKY ARROYO, L. P.


 


 


Area of Interest


 


Lot 4, SW4 NW4, W2SW4 Section 3.  All of Sections 4, 5, 6, 7, 8, 9, 16, 17, 18,
19, 20 and 21, all in T-22-S, R-22-E, Eddy County, New Mexico


 


The W/4 of Section 3
and Section 4, 5, 6, 7, 8, 9, 16, 17, 18, 19, 20 and 21 Eddy County, New
Mexico


 


B-1





















 


EXHIBIT C


 


to Partnership Agreement of


 


ROCKY ARROYO, L. P.


 


 


Wells


 




	
  Well Name

  	
   

  	
  County, State

  
	
   

  	
   

  	
   

  
	
  Existing Wells:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  [List to come]

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Wells Drilled:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  [To be
  determined]

  	
   

  	
   

  






 





















 


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 ROCKY ARROYO, L. P. dated February 2,
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:


 


D-1





















 


(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]