Exhibit 10.29


 


 


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


 


 


AGREEMENT
OF LIMITED PARTNERSHIP


 


OF


 


CWEI
SOUTH LOUISIANA II, 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

  	
   

  
	
  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

  	
   

  



 


i





















 


	
  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

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  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

  	
   

  



 


ii





















 


AGREEMENT
OF LIMITED PARTNERSHIP


 


OF


 


CWEI
SOUTH LOUISIANA II, L.P.


 


This AGREEMENT OF LIMITED PARTNERSHIP OF CWEI SOUTH
LOUISIANA II, L.P. (this “Agreement”) is made and entered into as of January 1, 2004
(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% 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 Contributuions 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 “CWEI South Louisiana II, 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, 2012, 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;


 


(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;


 


6





















 


(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 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


 


7





















 


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.


 


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.


 


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:


 


8





















 


(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.


 


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.


 


9





















 


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.


 


(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


 


10





















 


Partner’s Units under this provision, such
Units shall then be held by the General Partner in accordance with Section 3.07 hereof.


 


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


 


ARTICLE
V

CAPITAL CONTRIBUTIONS


 


5.01         Capital
Contributions of General Partner. The General Partner shall
contribute to the Partnership (i) cash in such amounts as shall be necessary to
pay timely the costs and expenses allocated and charged to the General Partner
pursuant to Section 6.01 and elsewhere herein, and (ii) an undivided 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


 


11





















 


Partner, and the General
Partner, as the assignee of the Non-Contributing Limited Partner and the holder
of such Units, shall be entitled to receive all allocations of income, gain,
loss, deduction, credit or similar items, and all distributions, to which the
Non-Contributing Limited Partner would otherwise be entitled from and after the
Contribution Date.  The General Partner
shall hold such economic rights to the Units attributable to the
Non-Contributing Limited Partner until such time as the General Partner, as the
holder of such Units, shall have received distributions pursuant to Section
6.04 in an aggregate amount equal to the sum of (i) the additional Capital
Contributions made by the General Partner pursuant to this Section 5.03(b),
plus (ii) an annual rate of return on such additional Capital Contributions
from the Contribution Date equal to the prime rate as established from time to
time by Bank One NA, or its successors, plus 2%, whereupon the General Partner,
without further action on its part, shall be deemed to have re-assigned the
economic rights to such Units to the Non-Contributing Limited Partner.  The General Partner may use the power of
attorney set forth in Section 9.13 to reflect any assignment pursuant to
this Section 5.03(b).


 


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


 


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


 


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)
1% to the General Partner and 99% 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) 1% to the General Partner and 99% 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) 1% to the General Partner and 99% 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) 1% to
the General Partner and 99% to the Limited Partners as a class after Payout.


 


12





















 


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


 


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


 


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


 


13





















 


ARTICLE
VIII

DISSOLUTION, LIQUIDATION AND TERMINATION


 


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


 


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


 


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


 


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


 


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


 


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


 


14





















 


For this purpose, the
determination of what constitutes 50% of the assets of CWEI shall be determined
based on the sum of the values attributed to (A) the oil and gas reserves of
CWEI as reflected by the most recent reserve report prepared or audited by
CWEI’s independent petroleum engineers, (B) CWEI’s undeveloped oil and gas properties
as determined by an independent appraisal thereof, and (C) the net book value
of all other assets of CWEI, each taken as of the date of the related transfer
of assets.


 


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


 


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


 


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


 


15





















 


determined after taking into
account all Capital Account adjustments for the taxable year of the Partnership
during which the liquidation of the Partnership occurs (other than those made
by reason of distributions pursuant to this clause (iv)), and those
distributions shall be made by the end of the taxable year of the Partnership
during which the liquidation of the Partnership occurs (or, if later, 90 days
after the date of the liquidation);


 


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


 


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


 


16





















 


be sent to the General Partner at its
principal place of business, to the attention of the Executive Vice President
and Chief Operating Officer.


 


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


 


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


 


9.05         Amendment
or Modification.


 


(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 or (iii) to reflect any
assignment of Units pursuant to Section 5.03(b).


 


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.


 


17





















 


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


 


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


 


9.11         Indemnification.


 


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


 


18





















 


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


 


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


 


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


 


(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


 


19





















 


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 Agreement of Limited Partnership


 





















 


SIGNATURE PAGE FOR LIMITED PARTNER


 


The
undersigned, desiring to become a limited partner in CWEI South Louisiana II, 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.


 


	
  Date:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Type or Print Name of Limited Partner

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Fax:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Taxpayer
  I.D. No.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Number
  of Units:

  	
   

  	
   

  
								



 





















 


EXHIBIT A


to
Partnership Agreement of


CWEI South
Louisiana II, L.P.


 


Schedule of
Limited Partners


 


	
   

  	
   

  	
   

  	
   

  	
  Initial

  	
   

  
	
   

  	
   

  	
  No. of

  	
   

  	
  Capital

  	
   

  
	
  Limited Partners:

  	
   

  	
  Units

  	
   

  	
  Contributions

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Patrick C. Reesby

  	
   

  	
  26.62

  	
   

  	
  266.20

  	
   

  
	
  Kelly Beckham

  	
   

  	
  11.21

  	
   

  	
  112.10

  	
   

  
	
  Richard Wettaw

  	
   

  	
  8.41

  	
   

  	
  84.10

  	
   

  
	
  Greg Benton

  	
   

  	
  6.28

  	
   

  	
  62.80

  	
   

  
	
  L. Paul Latham

  	
   

  	
  4.94

  	
   

  	
  49.40

  	
   

  
	
  Mel G. Riggs

  	
   

  	
  4.94

  	
   

  	
  49.40

  	
   

  
	
  Kenneth Lipstreuer

  	
   

  	
  4.20

  	
   

  	
  42.00

  	
   

  
	
  Jerry F. Groner

  	
   

  	
  3.59

  	
   

  	
  35.90

  	
   

  
	
  John Kennedy

  	
   

  	
  3.59

  	
   

  	
  35.90

  	
   

  
	
  Ron Halfacre

  	
   

  	
  2.80

  	
   

  	
  28.00

  	
   

  
	
  Clarence Wolfshohl

  	
   

  	
  2.80

  	
   

  	
  28.00

  	
   

  
	
  Michael L. Pollard

  	
   

  	
  2.69

  	
   

  	
  26.90

  	
   

  
	
  Ron Gasser

  	
   

  	
  2.24

  	
   

  	
  22.40

  	
   

  
	
  Jim Wolfshohl

  	
   

  	
  2.24

  	
   

  	
  22.40

  	
   

  
	
  T. Mark Tisdale

  	
   

  	
  1.79

  	
   

  	
  17.90

  	
   

  
	
  Dennis Polson

  	
   

  	
  1.35

  	
   

  	
  13.50

  	
   

  
	
  Mickey Cunningham

  	
   

  	
  1.35

  	
   

  	
  13.50

  	
   

  
	
  Logan Irvin

  	
   

  	
  0.90

  	
   

  	
  9.00

  	
   

  
	
  Matthew Swierc

  	
   

  	
  0.90

  	
   

  	
  9.00

  	
   

  
	
  Robert Thomas

  	
   

  	
  0.90

  	
   

  	
  9.00

  	
   

  
	
  Donnie Pruitt

  	
   

  	
  0.90

  	
   

  	
  9.00

  	
   

  
	
  Danny Alford

  	
   

  	
  0.90

  	
   

  	
  9.00

  	
   

  
	
  Greg Wellborn

  	
   

  	
  0.90

  	
   

  	
  9.00

  	
   

  
	
  Kim Jones

  	
   

  	
  0.89

  	
   

  	
  8.90

  	
   

  
	
  Janet Hazlett

  	
   

  	
  0.89

  	
   

  	
  8.90

  	
   

  
	
  Denise Kelly

  	
   

  	
  0.89

  	
   

  	
  8.90

  	
   

  
	
  Sam Lyssy

  	
   

  	
  0.89

  	
   

  	
  8.90

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  100.00

  	
   

  	
  $

  	
  1,000.00

  	
   

  
							



 


A-1





















 


EXHIBIT B


 


to Partnership Agreement of


 


CWEI South Louisiana II, L.P.


 


 


Area of Interest


 


 


That portion of those leases situated in Louisiana
owned on the date hereof or acquired during the term hereof by CWEI that are
non-producing and upon which a well is spudded by CWEI after January 1, 2004;
save and except the Frazier Creek Prospect, defined as Sections 19-21, 28-30
and 31-32, T-19-N, R-6-E, Claiborne Parish, Louisiana, and further excluding
(i) any area in Louisiana subsequently acquired as part of a producing property
acquisition and (ii) area situated in Louisiana that is subsequently determined
by the Compensation Committee of the Board of Directors to constitute a
separate area of interest.


 


B-1





















 


EXHIBIT C


 


to Partnership Agreement of


 


CWEI South Louisiana II, L.P.


 


 


Wells


 


	
  Well Name

  	
   

  	
  Parish,
  State

  



 


[Such
wells as may be added from time to time]


 


C-1





















 


EXHIBIT D


 


Allocations of Profits and Losses and Other Tax Matters


 


 


ARTICLE
I


 


TAX
DEFINITIONS


 


Section 1.01           Definitions.  All
capitalized terms used herein shall have the meanings assigned to them in the
Agreement of Limited Partnership of CWEI South Louisiana II, L.P. dated January
1, 2004 (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:


 


D-2





















 


(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)


 


D-3





















 


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.


 


D-4





















 


(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


 


D-5





















 


(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]


 


D-6