**Exhibit 3.1**

 

**LIMITED PARTNERSHIP AGREEMENTOFREEF GLOBAL ENERGY I, L.P.A NEVADA LIMITED PARTNERSHIP**

 

This LIMITEDPARTNERSHIP AGREEMENT (the “Agreement”) is made as of the 23rd day of October,2002 by and among Reef Partners LLC, a Texas limited liability company, asManaging General Partner (the “Managing General Partner”), MichaelJ. Mauceli, an individual, as the Initial Limited Partner, and the personswhose names are set forth on attached Exhibit A, as additional generalpartners (the “Additional General Partners”) or as limited partners (the“Limited Partners” and, collectively with Additional General Partners, the“Investor Partners”), pursuant to the provisions of the Nevada Uniform LimitedPartnership Act (the “Act”), on the following terms and conditions:

 

**ARTICLE I**

**THE PARTNERSHIP**

 

1.01                           *Organization.*  The parties to this Agreement hereby form alimited partnership (the “Partnership”) pursuant to the provisions of the Actand subject to the provisions of this Agreement.

 

1.02*                           PartnershipName.*  The name of the Partnershipshall be REEF GLOBAL ENERGY I, L.P., and all business of the Partnership shallbe conducted in such name. The Managing General Partner may change the name ofthe Partnership upon ten days notice to the Investor Partners.

 

1.03                           *Character ofBusiness.*  The principalbusiness of the Partnership shall be:

 

(i)                                     toacquire Leases (as defined);

 

(ii)                                  todrill for oil, gas, hydrocarbons, and other minerals;

 

(iii)                               toproduce and sell oil, gas, hydrocarbons, and other minerals from such properties;and

 

(iv)                              toinvest and generally engage in any and all phases of the oil and gas business.

 

Such business purposes shall include without limitation the purchase,sale, acquisition, disposition, exploration, development, operation, andproduction of oil and gas properties of any character. The Partnership shallnot acquire property in exchange for Units. Without limiting the foregoing,Partnership activities may be undertaken as principal, agent, general partner,syndicate member, joint venturer, participant, or otherwise.

 

1.04*                           PrincipalPlace of Business.*  The principalplace of business of the Partnership shall be 1901 N. Central Expressway, Suite300, Richardson, Texas 75080. The Managing General

 

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Partner may change theprincipal place of business of the Partnership to any other place upon ten daysnotice to the Investor Partners.

 

1.05*                           Termof Partnership.*  The Partnershipshall commence on the date the Partnership is organized, and shall continueuntil terminated as provided in Article IX. Notwithstanding the foregoing,if Investor Partners agreeing to purchase at least 50 Units ($1,000,000)have not subscribed and paid for their Units by the Offering Termination Date,then this Agreement shall be void in all respects, and all investments of theInvestor Partners shall be promptly returned together with any interest earnedthereon and without any deduction therefrom. The Units so purchased by theManaging General Partner and/or its affiliates will be counted towardsatisfying the minimum subscription amount.

 

1.06                           *Filings.*

 

(a)                                  ACertificate of Limited Partnership (the “Certificate”) has been filed in theoffice of the Secretary of State of Nevada in accordance with the provisions ofthe Act. The Managing General Partner shall take any and all other actionsreasonably necessary to perfect and maintain the status of the Partnership as alimited partnership under the laws of Nevada. The Managing General Partnershall cause amendments to the Certificate to be filed whenever required by theAct.

 

(b)                                 TheManaging General Partner shall execute and cause to be filed original oramended Certificates and shall take any and all other actions as may bereasonably necessary to perfect and maintain the status of the Partnership as alimited partnership or similar type of entity under the laws of any otherstates or jurisdictions in which the Partnership engages in business.

 

(c)                                  Theagent for service of process on the Partnership shall be Michael J. Mauceli orany successor as appointed by the Managing General Partner.

 

(d)                                 Uponthe dissolution of the Partnership, the Managing General Partner (or anysuccessor Managing General Partner) shall promptly execute and cause to befiled certificates of dissolution in accordance with the Act and the laws ofany other states or jurisdictions in which the Partnership has filedcertificates.

 

1.07*                           IndependentActivities.*  Each General Partnerand each Limited Partner may, notwithstanding this Agreement, engage inwhatever activities they choose, whether the same are competitive with thePartnership or otherwise, without having or incurring any obligation to offerany interest in such activities to the Partnership or any Partner. However,except as otherwise provided herein, the Managing General Partner and itsaffiliates may pursue business opportunities that are consistent with thePartnership’s investment objectives for their own account only after they havedetermined that such opportunity either cannot be pursued by the Partnershipbecause of insufficient funds or because it is not appropriate for thePartnership under the existing circumstances. Neither this Agreement nor anyactivity undertaken pursuant to it shall prevent the Managing General Partnerfrom engaging in such activities, or require the Managing General Partner topermit the Partnership or any Partner to participate in any such activities,and as a material part of the consideration for the execution of this Agreementby the Managing General

 

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Partner and the admission ofeach Investor Partner, each Investor Partner hereby waives, relinquishes, andrenounces any such right or claim of participation. Notwithstanding theforegoing, the Managing General Partner still has an overriding fiduciaryobligation to the Investor Partners.

 

1.08*                           Definitions.*  Capitalized words and phrases used in thisAgreement shall have the following meanings:

 

(a)                                  “Act”shall mean the Nevada Uniform Limited Partnership Act, as set forth in Nev.Rev. Stat. §88.010, et. seq., as amended from time to time (or anycorresponding provisions of succeeding law).

 

(b)                                 “AdditionalGeneral Partner” shall mean an Investor Partner who purchases Units as anadditional general partner, and such partner’s transferees and assigns.“Additional General Partners” shall mean all such Investor Partners.“Additional General Partner” shall not include, after a conversion, suchInvestor Partner who converts his interest into a Limited Partnership interestpursuant to Section 7.10.

 

(c)                                  “AdministrativeCosts” shall mean all customary and routine expenses incurred by the ManagingGeneral Partner for the conduct of program administration, including legal,finance, accounting, secretarial, travel, office rent, telephone, dataprocessing and other items of a similar nature.

 

(d)                                 “Affiliate”of a specified person means:

 

(1)                                  Anyperson directly or indirectly owning, controlling, or holding with power tovote 10% or more of the outstanding voting securities of such specified person;

 

(2)                                  Anyperson 10% or more of whose outstanding voting securities are directly orindirectly owned, controlled, or held with power to vote, by such specifiedperson;

 

(3)                                  Anyperson directly or indirectly controlling, controlled by, or under commoncontrol with such specified person;

 

(4)                                  Anyofficer, director, trustee or partner of such specified person; and

 

(5)                                  Ifsuch specified person is an officer, director, trustee or partner, any personfor which such person acts in any such capacity.

 

(e)                                  “Agreement”or “Partnership Agreement” shall mean this Limited Partnership Agreement, asamended from time to time.

 

(f)                                    “Assessment”shall mean additional amounts of capital that may be requested from an InvestorPartner in addition to its subscription commitment, where the failure tocontribute such additional amounts may result in a reduction of the InvestorPartner’s interest in the Partnership pursuant to the provisions ofSection 2.03 of this Agreement.

 

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(g)                                 “CapitalAccount” shall mean, with respect to any Partner, the capital accountmaintained for such Partner pursuant to Section 3.01.

 

(h)                                 “CapitalAvailable for Investment” shall mean the sum of all Capital Contributions ofthe Investor Partners and the Managing General Partner, net of totalunderwriting and brokerage discounts, commissions, and expenses, up to anaggregate of 15% of Subscriptions (which includes the Management Fee).

 

(i)                                     “CapitalContribution” shall mean, with respect to any Investor Partner, the totalinvestment, including the original investment, assessments, and amountsreinvested, by an Investor Partner to the capital of the Partnership pursuantto Sections 2.02 and 2.03, and, with respect to the Managing General Partnerand the Initial Limited Partner, the total investment, including the originalinvestment, assessments, and amounts reinvested, to the capital of thePartnership pursuant to Section 2.01.

 

(j)                                     “CapitalExpenditures” shall mean those costs associated with property acquisition andthe drilling and completion of oil and gas wells which are generally acceptedas capital expenditures pursuant to the provisions of the Internal RevenueCode.

 

(k)                                  “Code”shall mean the Internal Revenue Code of 1986, as amended from time to time (orany corresponding provisions of succeeding law).

 

(l)                                     “Cost,”when used with respect to the sale of property by the Managing General Partneror any of its affiliates to the Partnership, shall mean:

 

(1)                                  Thesum of the prices paid by the seller to an unaffiliated person for suchproperty, including bonuses;

 

(2)                                  Titleinsurance or examination costs, brokers’ commissions, filing fees, recordingcosts, transfer taxes, if any, and like charges in connection with theacquisition of such property;

 

(3)                                  Apro rata portion of the seller’s actual necessary and reasonable expenses forseismic and geophysical services; and

 

(4)                                  Rentalsand ad valorem taxes paid by the seller with respect to such property to thedate of its transfer to the buyer, interest and points actually incurred onfunds used to acquire or maintain such property, and such portion of theseller’s reasonable, necessary and actual expenses for geological, engineering,drafting, accounting, legal and other like services allocated to the propertycost in conformity with generally accepted accounting principles and industrystandards, except for expenses in connection with the past drilling of wellsthat are not producers of sufficient quantities of oil or gas to makecommercially reasonable their continued operations, and provided that theexpenses enumerated in this subsection (4) shall have been incurred not morethan 36 months prior to the purchase by the Partnership; provided that suchperiod may be extended, at the

 

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discretion of thestate securities administrator, upon proper justification, When used withrespect to services, “cost” means the reasonable, necessary and actual expenseincurred by the seller on behalf of the Partnership in providing such services,determined in accordance with generally accepted accounting principles. As usedelsewhere, “cost” means the price paid by the seller in an arm’s-lengthtransaction.

 

(m)                               “Depreciation”shall mean, for each fiscal year or other period, an amount equal to thedepreciation, amortization, or other cost recovery deduction allowable withrespect to an asset for such year or other period, except that if the GrossAsset Value of an asset differs from its adjusted basis for federal income taxpurposes at the beginning of such year or other period, Depreciation shall bean amount which bears the same ratio to such beginning Gross Asset Value as thefederal income tax depreciation, amortization, or other cost recovery deductionfor such year or other period bears to such beginning adjusted tax basis;provided, however, that if the federal income tax depreciation, amortization,or other cost recovery deduction for such year is zero, Depreciation shall bedetermined with reference to such beginning Gross Asset Value using anyreasonable method selected by the Managing General Partner.

 

(n)                                 “DevelopmentWell” shall mean a well drilled within the proved area of an oil or gasreservoir to the depth of a stratigraphic horizon known to be productive.

 

(o)                                 “DirectCosts” shall mean all actual and necessary costs directly incurred for thebenefit of the Partnership and generally attributable to the goods and servicesprovided to the Partnership by parties other than the Managing General Partneror its affiliates. Direct costs shall not include any cost otherwise classifiedas Organization and Offering Costs, Administrative Costs, Operating Costs orproperty costs. Direct Costs may include the cost of services provided by theManaging General Partner or its affiliates if such services are provided pursuantto written contracts and in compliance with Section 5.07(e) of thePartnership Agreement.

 

(p)                                 “Drillingand Completion Costs” shall mean all costs, excluding Operating Costs, ofdrilling, completing, testing, equipping and bringing a well into production orplugging and abandoning it, including all labor and other construction andinstallation costs incident thereto, location and surface damages, cementing,drilling mud and chemicals, drillstem tests and core analysis, engineering andwell site geological expenses, electric logs, costs of plugging back,deepening, rework operations, repairing or performing remedial work of anytype, costs of plugging and abandoning any well participated in by thePartnership, and reimbursements and compensation to well operators, includingcharges paid to the Managing General Partner as unit operator during thedrilling and completion phase of a well, plus the cost of the gathering systemand of acquiring leasehold interests.

 

(q)                                 “DryHole” shall mean any well abandoned without having produced oil or gas incommercial quantities.

 

(r)                                    “ExploratoryWell” shall mean a well drilled to find commercially productive hydrocarbons inan unproved area, to find a new commercially productive horizon in a fieldpreviously found to be productive of hydrocarbons at another horizon, or tosignificantly extend a known Prospect.

 

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(s)                                  “Farmout”shall mean an agreement whereby the owner of the leasehold or working interestagrees to assign his interest in certain specific acreage to the assignees,retaining some interest such as an overriding royalty interest, an oil and gaspayment, offset acreage or other type of interest, subject to the drilling ofone or more specific wells or other performance as a condition of theassignment.

 

(t)                                    “GeneralPartners” shall mean the Additional General Partners and the Managing GeneralPartner.

 

(u)                                 “GrossAsset Value” is a term used in certain tax matters, not in defining the basicrights and obligations of the parties, and shall mean, with respect to anyasset, the asset’s adjusted basis for federal income tax purposes, except asfollows:

 

(1)                                  Theinitial Gross Asset Value of any asset contributed by a Partner to thePartnership shall be the gross fair market value of such asset, as determinedby the contributing Partner and the Partnership;

 

(2)                                  TheGross Asset Values of all Partnership assets shall be adjusted to equal theirrespective gross fair market values, as determined by the Managing General Partner,as of the following times: (i) the acquisition of an additionalinterest in the Partnership by any new or existing Partner in exchange for morethan a *deminimis* Capital Contribution; (ii) the distribution by thePartnership of Property as consideration for an interest in the Partnership;and (iii) the liquidation of the Partnership within the meaning of Treas.Reg. Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustmentspursuant to clauses (i) and (ii) above shall be made only if the ManagingGeneral Partner reasonably determines that such adjustments are necessary orappropriate to reflect the relative economic interests of the Partners in thePartnership;

 

(3)                                  TheGross Asset Value of any Partnership asset distributed to any Partner shall bethe gross fair market value of such asset on the date of distribution; and

 

(4)                                  TheGross Asset Values of Partnership assets shall be increased (or decreased) toreflect any adjustments to the adjusted basis of such assets pursuant to CodeSection 734(b) or Code Section 743(b), but only to the extent thatsuch adjustments are taken into account in determining Capital Accountspursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m) andSection 3.02(g); provided, however, that Gross Asset Values shall not beadjusted pursuant to this Section (4) to the extent the Managing GeneralPartner determines that an adjustment pursuant to Subsection (2) is necessaryor appropriate in connection with a transaction that would otherwise result inan adjustment pursuant to this Subsection (4).

 

If the Gross Asset Value of an asset has been determined or adjustedpursuant to Subsection (1), (2) or (4), such Gross Asset Value shall thereafterbe adjusted by the Depreciation taken into account with respect to such assetfor purposes of computing Profits and Losses.

 

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(v)                                 “IDC”shall mean intangible drilling and development costs.

 

(w)                               “IndependentExpert” shall mean a person with no material relationship with the Managing GeneralPartner or its affiliates who is qualified and who is in the business ofrendering opinions regarding the value of oil and gas properties based upon theevaluation of all pertinent economic, financial, geologic and engineeringinformation available to the Managing General Partner.

 

(x)                                   “InitialLimited Partner” shall mean Michael J. Mauceli or any successor to hisinterest.

 

(y)                                 “InvestorPartner” shall mean any Person other than the Managing General Partner (i)whose name is set forth on attached Exhibit A as an Additional General Partneror as a Limited Partner, or who has been admitted as an additional orSubstituted Investor Partner pursuant to the terms of this Agreement, and (ii)who is the owner of a Unit. “Investor Partners” means all such Persons. Allreferences in this Agreement to a majority in interest or a specifiedpercentage of the Investor Partners shall mean Investor Partners holding morethan 50% or such specified percentage, respectively, of the outstanding Unitsthen held.

 

(z)                                   “LandownersRoyalty Interest” shall mean an interest in production, or the proceedstherefrom, to be received free and clear of all costs of development,operation, or maintenance, reserved by a landowner upon the creation of an oiland gas lease.

 

(aa)                            “Lease”shall mean full or partial interests in: (i) undeveloped oil and gasleases; (ii) oil and gas mineral rights; (iii) licenses;(iv) concessions; (v) contracts; (vi) fee rights; or(vii) other rights authorizing the owner thereof to drill for, reduce topossession and produce oil and gas.

 

(bb)                          “LimitedPartner” shall mean an Investor Partner who purchases Units as a LimitedPartner, such partner’s transferees or assignees, and an Additional GeneralPartner who converts his interest to a limited partnership interest pursuant tothe provisions of the Agreement. “Limited Partners” shall mean all suchInvestor Partners.

 

(cc)                            “ManagementFee” shall mean that fee to which the Managing General Partner is entitledpursuant to Section 6.06.

 

(dd)                          “ManagingGeneral Partner” shall mean Reef Partners LLC or its successors, in theircapacity as the Managing General Partner.

 

(ee)                            Reserved.

 

(ff)                                “Mcf”shall mean one thousand cubic feet of natural gas. “MMcf” shall mean onemillion cubic feet of natural gas.

 

(gg)                          “Net Subscriptions”shall mean an amount equal to the total Subscriptions of the Investor Partnersless the amount of Organization and Offering Costs of the Partnership.

 

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(hh)                          “Non-CapitalExpenditures” shall mean those expenditures associated with propertyacquisition and the drilling and completion of oil and gas wells that underpresent law are generally accepted as fully deductible currently for federalincome tax purposes.

 

(ii)                                  “NonrecourseDeductions” is a term used in certain tax matters, not in defining the basicrights and obligations of the parties, and shall have the meaning set forth inTreas. Reg. Section 1.704-2(b)(1). The amount of Nonrecourse Deductionsfor a Partnership fiscal year shall equal the net increase in the amount ofPartnership Minimum Gain during that fiscal year reduced (but not below zero)by the aggregate distributions during that fiscal year of proceeds of aNonrecourse Liability that are allocable to an increase in Partnership MinimumGain, determined according to the provisions of Treas. Reg.Section 1.704-2(c).

 

(jj)                                  “NonrecourseLiability” is a term used in certain tax matters, not in defining the basicrights and obligations of the parties, and shall have the meaning set forth inTreas. Reg. Sections 1.704-2(b)(3) and 1.752-1(a)(2).

 

(kk)                            “OfferingTermination Date” shall mean December 31, 2002 or such earlier date as theManaging General Partner, in its sole and absolute discretion, shall elect.

 

(ll)                                  “Oiland Gas Interest” shall mean any oil or gas royalty or lease, or fractionalinterest therein, or certificate of interest or participation or investmentcontract relative to such royalties, leases or fractional interests, or anyother interest or right which permits the exploration of, drilling for, orproduction of oil and gas or other related hydrocarbons or the receipt of suchproduction or the proceeds thereof.

 

(mm)                      “OperatingCosts” shall mean expenditures made and costs incurred in producing andmarketing oil or gas from completed wells, including, in addition to labor,fuel, repairs, hauling, materials, supplies, utility charges and other costsincident to or therefrom, ad valorem and severance taxes, insurance andcasualty loss expense, and compensation to well operators or others forservices rendered in conducting such operations.

 

(nn)                          “Organizationand Offering Costs” shall mean all costs of organizing and selling the offeringincluding, but not limited to, total underwriting and brokerage discounts andcommissions (including fees of the underwriters’ attorneys), expenses forprinting, engraving, mailing, salaries of employees while engaged in salesactivity, charges of transfer agents, registrars, trustees, escrow holders,depositaries, engineers and other experts, expenses of qualification of thesale of the securities under federal and state law, including taxes and fees,accountants’ and attorneys’ fees and other front-end fees.

 

(oo)                          “OverridingRoyalty Interest” shall mean an interest in the oil and gas produced pursuantto a specified oil and gas lease or leases, or the proceeds from the salethereof, carved out of the working interest, to be received free and clear ofall costs of development, operation, or maintenance.

 

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(pp)                          “PartnerMinimum Gain” is a term used in certain tax matters, not in defining the basicrights and obligations of the parties, and shall mean an amount, with respectto each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain thatwould result if such Partner Nonrecourse Debt were treated as a NonrecourseLiability, determined in accordance with Treas. Reg. Section 1.704-2(i).

 

(qq)                          “PartnerNonrecourse Debt” is a term used in certain tax matters, not in defining thebasic rights and obligations of the parties, and shall have the meaning setforth in Treas. Reg. Section 1.704-2(b)(4).

 

(rr)                                “PartnerNonrecourse Deductions” is a term used in certain tax matters, not in definingthe basic rights and obligations of the parties, and shall have the meaning setforth in Treas. Reg. Section 1.704-2(i)(2). The amount of PartnerNonrecourse Deductions with respect to a Partner Nonrecourse Debt for aPartnership fiscal year shall equal the net increase in the amount of PartnerMinimum Gain attributable to such Partner Nonrecourse Debt during that fiscalyear reduced (but not below zero) by proceeds of the liability distributedduring that fiscal year to the Partner bearing the economic risk of loss forsuch liability that are both attributable to the liability and allocable to anincrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt,determined in accordance with Treas. Reg. Section 1.704-2(i)(3).

 

(ss)                            “Partners”shall mean the Managing General Partner, the Initial Limited Partner and theInvestor Partners. “Partner” shall mean any one of the Partners. All referencesin this Agreement to a majority interest or a specified percentage of thePartners shall mean Partners holding more than 50% or such specified percentage,respectively, of the outstanding Units then held.

 

(tt)                                “Partnership”shall mean the partnership formed pursuant to this Agreement and thepartnership continuing the business of this Partnership in the event ofdissolution as provided in this Agreement.

 

(uu)                          “PartnershipMinimum Gain” is a term used in certain tax matters, not in defining the basicrights and obligations of the parties, and shall have the meaning set forth inTreas. Reg. Sections 1.704-2(b)(2) and 1.704-2(d)(1).

 

(vv)                          Reserved.

 

(ww)                      “PermittedTransfer” shall mean any transfer of Units satisfying the provisions ofSection 7.03.

 

(xx)                              “Person”shall mean any natural person, partnership, corporation, association, trust orother entity.

 

(yy)                          “Profits”and “Losses” shall mean, for each fiscal year or other period, an amount equalto the Partnership’s taxable income or loss for such year or period, determinedin accordance with Code Section 703(a) (for this purpose, all items ofincome, gain, loss, or deduction required to

 

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be stated separately pursuantto Code Section 703(a)(1) shall be included in taxable income or loss),with the following adjustments:

 

(1)                                  Anyincome of the Partnership that is exempt from federal income tax and nototherwise taken into account in computing Profits or Losses pursuant to thisSection 1.08(yy) shall be added to such taxable income or loss;

 

(2)                                  Anyexpenditures of the Partnership described in Code Section 705(a)(2)(B) ortreated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg.Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account incomputing Profits or Losses pursuant to this Subsection (yy) shall besubtracted from such taxable income or loss;

 

(3)                                  Inthe event the Gross Asset Value of any Partnership asset is adjusted pursuantto Section 1.08(t)(2) or Section 1.08(t)(3), the amount of suchadjustment shall be taken into account as gain or loss from the disposition ofsuch asset for purposes of computing Profits or Losses;

 

(4)                                  Gainor loss resulting from any disposition of Partnership property with respect towhich gain or loss is recognized for federal income tax purposes shall becomputed by reference to the Gross Asset Value of the property disposed of,notwithstanding that the adjusted tax basis of such property differs from itsGross Asset Value;

 

(5)                                  Inlieu of the depreciation, amortization, and other cost recovery deductionstaken into account in computing such taxable income or loss, there shall betaken into account Depreciation for such fiscal year or other period, computedin accordance with Section 1.08(1); and

 

(6)                                  Notwithstandingany other provisions of this Subsection (yy), any items that are speciallyallocated pursuant to this Agreement shall not be taken into account incomputing Profits or Losses.

 

(zz)                              “Prospect”shall mean a contiguous oil and gas leasehold estate (or a non-contiguous groupof geologically related oil and gas leasehold estates), or lesser interesttherein, upon which drilling operations may be conducted. In general, aProspect is an area in which the Partnership owns or intends to own one or moreoil and gas interests, which is geographically defined on the basis ofgeological data by the Managing General Partner and which is reasonably anticipatedby the Managing General Partner to contain at least one reservoir. An areacovering lands that are believed by the Managing General Partner to containsubsurface structural or stratigraphic conditions making it susceptible to theaccumulations of hydrocarbons in commercially productive quantities at one ormore horizons. The area, which may be different for different horizons, shallbe designated by the Managing General Partner in writing prior to the conductof Partnership operations and shall be enlarged or contracted from time to timeon the basis of subsequently acquired information to define the anticipatedlimits of the associated hydrocarbon reserves and to include all acreageencompassed therein. A “Prospect” with respect to

 

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a particular horizon may belimited to the minimum area permitted by state law or local practice, whicheveris applicable, to protect against drainage from adjacent wells if the well tobe drilled by the Partnership is to a horizon containing proved reserves.

 

(aaa)                      “prospectus”shall mean that prospectus (including any preliminary prospectus), of whichthis Agreement is a part, pursuant to which the Units are being offered andsold.

 

(bbb)                   “ProvedDeveloped Oil and Gas Reserves” shall mean the proved reserves that can beexpected to be recovered through existing wells with existing equipment andoperating methods. Additional oil and gas expected to be obtained through theapplication of fluid injection or other improved recovery techniques forsupplementing the natural forces and mechanisms of primary recovery should beincluded as “Proved Developed Oil and Gas Reserves” only after testing by apilot project or after the operation of an installed program has confirmedthrough production response that increased recovery will be achieved.

 

(ccc)                      “Proved Oiland Gas Reserves” shall mean the estimated quantities of crude oil, naturalgas, and natural gas liquids that geological and engineering data demonstratewith reasonable certainty to be recoverable in future years from knownreservoirs under existing economic and operating conditions, i.e., prices andcosts as of the date the estimate is made. Prices include consideration ofchanges in existing prices provided only by contractual arrangements, but noton escalations based upon future conditions.

 

(1)                                  Reservoirsare considered proved if economic productibility is supported by either actualproduction or conclusive formation test. The area of a reservoir consideredproved includes (i) that portion delineated by drilling and defined bygas-oil and/or oil-water contacts, if any, and (ii) the immediatelyadjoining portions not yet drilled, but which can be reasonably judged aseconomically productive on the basis of available geological and engineeringdata. In the absence of information on fluid contacts, the lowest knownstructural occurrence of hydrocarbons controls the lower proved limit of thereservoir.

 

(2)                                  Reservesthat can be produced economically through application of improved recoverytechniques (such as fluid injection) are included in the “proved”classification when successful testing by a pilot project, or the operation ofan installed program in the reservoir, provides support for the engineeringanalysis on which the project or program was based.

 

(3)                                  Estimatesor proved reserves do not include the following: (i) oil that may becomeavailable from known reservoirs but is classified separately as “indicatedadditional reserves;” (ii) crude oil, natural gas, and natural gasliquids, the recovery of which is subject to reasonable doubt because ofuncertainty as to geology, reservoir characteristics, or economic factors;(iii) crude oil, natural gas, and natural gas liquids, that may occur inundrilled Prospects; and (iv) crude oil, natural gas, and natural gasliquids, that may be recovered from oil shales, coal, gilsonite and other suchsources.

 

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(ddd)                   “ProvedUndeveloped Reserves” shall mean the reserves that are expected to be recoveredfrom new wells on undrilled acreage, or from existing wells where a relativelymajor expenditure is required for recompletion. Reserves on undrilled acreageshall be limited to those drilling units offsetting productive units that are reasonablycertain of production when drilled. Proved reserves for other undrilled unitscan be claimed only where it can be demonstrated with certainty that there iscontinuity of production from the existing productive formation. Under nocircumstances should estimates for Proved Undeveloped Reserves be attributableto any acreage for which an application of fluid injection or other improvedrecovery technique is contemplated, unless such techniques have been provedeffective by actual tests in the area and in the same reservoir.

 

(eee)                      “Reservoir”shall mean a separate structural or stratigraphic trap containing anaccumulation of oil or gas.

 

(fff)                            “Roll-Up”shall mean a transaction involving the acquisition, merger, conversion, orconsolidation, either directly or indirectly, of the Partnership and theissuance of securities of a roll-up entity. Such term does not include:

 

(1)                                  Atransaction involving securities of the Partnership that have been listed forat least 12 months on a national exchange or traded through the NationalAssociation of Securities Dealers Automated Quotation National Market System;or

 

(2)                                  Atransaction involving the conversion to corporate, trust or association form ofonly the Partnership if, as a consequence of the transaction, there will be nosignificant adverse change in any of the following:

 

(i)                                     votingrights;

 

(ii)                                  theterm of existence of the Partnership;

 

(iii)                               sponsorcompensation; or

 

(iv)                              thePartnership’s investment objectives.

 

(ggg)                   “Roll-UpEntity” shall mean a partnership, trust, corporation or other entity that wouldbe created or survive after the successful completion of a proposed Roll-Uptransaction.

 

(hhh)                   “Subscription”shall mean the amount indicated on the Subscription Agreement that an InvestorPartner has agreed to pay to the Partnership as his Capital Contribution.

 

(iii)                               “SubscriptionAgreement” shall mean the Agreement, attached to the prospectus asAppendix B, pursuant to which a Person subscribes to Units in thePartnership.

 

(jjj)                               “SubstitutedInvestor Partner” shall mean any Person admitted to the Partnership as anInvestor Partner pursuant to Section 7.03(c).

 

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(kkk)                      “Treas.Reg.” or “Regulation” shall mean the income tax regulations promulgated underthe Code, as such regulations may be amended from time to time (includingcorresponding provisions of succeeding regulations).

 

(lll)                               “Unit”shall mean an undivided interest of the Partners in the aggregate interest inthe capital and profits of the Partnership. Each Unit represents CapitalContributions of $20,000 to the Partnership.

 

(mmm)             “Working Interest”shall mean an interest in an oil and gas leasehold that is subject to someportion of the costs of development, operation, or maintenance.

 

**ARTICLE II**

**CAPITALIZATION**

 

2.01                           *Capital Contributions of the Managing General Partnerand Initial Limited Partner.*

 

(a)                                  Onor before the Offering Termination Date, the Managing General Partner, directlyor indirectly through an affiliate, shall purchase at least 5% of the totalUnits issued by the Partnership to all Investor Partners. The Managing GeneralPartner shall contribute to the capital of the Partnership the sum of $20,000for each Unit purchased net of the management fee. In consideration of makingsuch Capital Contribution, becoming a General Partner, subjecting its assets tothe liabilities of the Partnership, and undertaking other obligations as hereinset forth, the Managing General Partner shall receive the Managing GeneralPartner’s interest in the Partnership described in Article III.

 

(b)                                 TheInitial Limited Partner shall contribute $100 in cash to the capital of thePartnership. Upon the earlier to occur of the conversion of an AdditionalGeneral Partner’s interest into a Limited Partner’s interest or the admissionof a Limited Partner to the Partnership, the Partnership shall redeem in full,without interest or deduction, the Initial Limited Partner’s CapitalContribution, and the Initial Limited Partner shall cease to be a Partner.

 

2.02*                           InitialCapital Contributions of the Investor Partners.*

 

(a)                                  Uponexecution of this Agreement, each Investor Partner (whose names and addressesand number of Units to which Subscribed are set forth in Exhibit A) shallcontribute to the capital of the Partnership the sum of $20,000 for each Unitpurchased. The minimum subscription by an Investor Partner is one-quarter Unit($5,000).

 

(b)                                 Thecontributions of the Investor Partners pursuant to Subsection 2.02(a) shall bein cash or by check subject to collection.

 

(c)                                  Untilthe Offering Termination Date and until such subsequent time as thecontributions of the Investor Partners are invested in accordance with theprovisions of the prospectus, all monies received from persons subscribing asInvestor Partners (i) shall continue to be the property of the investor makingsuch payment, (ii) shall be held in escrow for such investor

 

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in the manner and to the extentprovided in the prospectus, and (iii) shall not be commingled with the personalmonies or become an asset of the Managing General Partner or the Partnership.

 

(d)                                 Uponthe original sale of Units by the Partnership, subscribers shall be admitted asPartners no later than 15 days after the release from the escrow account of theCapital Contributions to the Partnership, in accordance with the terms of theprospectus; subscriptions shall be accepted or rejected by the Partnershipwithin 30 days of their receipt; if rejected, all subscription monies shall bereturned to the subscriber forthwith.

 

(e)                                  Exceptas provided in Section 4.03, any proceeds of the offering of Units forsale pursuant to the prospectus not used, committed for use, or reserved asoperating capital in the Partnership’s operations within one year after theclosing of such offering shall be distributed pro rata to the Investor Partnersas a return of capital and the Managing General Partner shall reimburse suchInvestor Partners for selling expenses, management fees, and offering expensesallocable to the return of capital.

 

(f)                                    Untilproceeds from the offering are invested in the Partnership’s operations, suchproceeds may be temporarily invested in income producing short-term, highlyliquid investments, where there is appropriate safety of principal, such asU.S. Treasury Bills. Any such income shall be allocated pro rata to theInvestor Partners providing such capital contributions.

 

2.03                           *Assessments.*  Under the circumstances described in thisSection 2.03, the Managing General Partner may call for Assessments to bemade upon the Investor Partners. In no case shall the Investor Partners berequired or obligated to pay money to the Partnership in regard to theAssessments nor shall any Investor Partner’s Units be subject to forfeiture forany failure to pay any Assessment. However, if an Investor Partner fails orrefuses to pay an Assessment when called for by the Managing General Partner,the interest of the Investor Partner in the Partnership (the “Non-PayingUnits”) shall be subject to certain reductions or charges to be incurred orpaid in favor of any other Investor Partner or new Partner who pays suchAssessments on behalf of such Units.

 

(a)*                                  MaximumAssessments.*  Assessments combinedshall not exceed $20,000 per Unit (that is, 100% of the initial subscriptionsto the Partnership).

 

(b)*                                 Purposeof Assessments.*  All Assessmentsshall be made solely for the purpose of conducting subsequent operations onProspects upon which evaluation had begun during the Partnership’s initialoperations, or on leases sufficiently related to such Prospects as to merit, inthe Managing General Partner’s judgment, additional operations to fully developthose Prospects.

 

(c)*                                  Chargesfor Refusal or Failure to Pay Assessments.* If an Investor Partner refuses or fails to pay any Assessment for thepurpose of drilling or completing a well then such Investor Partner’spercentage interest in the revenues derived from the wells drilled and/orcompleted with the proceeds of the Assessment shall be reduced based on theratio of the Investor Partner’s unpaid Assessment to all Capital Contributionsused for such drilling and/or completion.

 

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(d)*                                 ConditionsApplicable to All Assessments.*  Inorder to make any Assessment, the Managing General Partner shall include withthe call for such Assessment a statement of the purpose and intended use of theproceeds from such Assessment, a statement of the reduction to be imposed forelection of the Investor Partner not to pay the Assessment, and to the extentpracticable, a summary of pertinent geological data on the relevant propertiesto which the Assessments relate and any other information material to anInvestor Partner’s decision to fund the Assessment.

 

2.04*                           AdditionalContributions.*  Except as otherwiseprovided in this Agreement, no Investor Partner shall be required or obligatedto contribute any capital to the Partnership, or be subject to any charge forfailure to make any capital contribution, other than as provided inSection 2.02 and 2.03. Furthermore, no Investor Partner shall be obligatedto lend any funds to the Partnership.

 

2.05*                           NoInterest On Capital Contributions or Accounts.*  No interest shall be paid on any capital contributed to thePartnership pursuant to this Article II.

 

2.06*                           NoWithdrawals of Contributions.* Except as otherwise provided herein, no Partner, other than the InitialLimited Partner as authorized herein, may withdraw his Capital Contribution.

 

2.07*                           GeneralPartners are Liable for Partnership Obligations.*  General Partners are liable, in addition to their CapitalContributions, for Partnership obligations and liabilities represented by theirownership of interests as general partners, in accordance with Nevada law. AnyGeneral Partner who converts his interest into that of a Limited Partnerretains liability as a General Partner for the time period during which he wasa General Partner.

 

**ARTICLE III**

**CAPITAL ACCOUNTS AND ALLOCATIONS**

 

3.01*                           CapitalAccounts.*

 

(a)*                                  General.*  A separate Capital Account shall be establishedand maintained for each Partner on the books and records of the Partnership.Capital Accounts shall be maintained in accordance with Treas. Reg.Section 1.704-1(b) and any inconsistency between the provisions of thisSection 3.01 and such regulation shall be resolved in favor of the regulation.In the event the Managing General Partner shall determine that it is prudent tomodify the manner in which the Capital Accounts, or any debits or creditsthereto (including, without limitation, debits or credits relating toliabilities that are secured by contributed or distributed property or that areassumed by the Partnership or the Partners), are computed in order to complywith such regulations, the Managing General Partner may make such modification.The Managing General Partner also shall:

 

(1)                                  Makeany adjustments that are necessary or appropriate to maintain equality betweenthe Capital Accounts of the Partners and the amount of Partnership capitalreflected on the Partnership’s balance sheet, as computed for book purposes, inaccordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(q), and

 

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(2)                                  Makeany appropriate modifications in the event unanticipated events might otherwisecause this Agreement not to comply with Treas. Reg. Section 1.704-1(b).

 

(b)*                                 Increasesto Capital Accounts.*  Each Partner’sCapital Account shall be credited with:

 

(1)                                  Theamount of money contributed by him to the Partnership;

 

(2)                                  Theamount of any Partnership liabilities that are assumed by him (within themeaning of Treas. Reg. Section 1.704-1(b)(2)(iv)(c)), but not by increasesin his share of Partnership liabilities within the meaning of CodeSection 752(a); and

 

(3)                                  Allocationsto him of Partnership Profits (or items thereof), including income and gainexempt from tax and income and gain described in Treas. Reg.Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect bookvalue).

 

The Regulations also provide that each Partner’s Capital Account shallbe credited with the Gross Asset Value of property contributed by him to thePartnership (net of liabilities securing such contributed property that thePartnership is considered to assume or take subject to under CodeSection 752); but under the terms of this Agreement all contributions byany Partner to the Partnership must be made in cash, not in property.

 

(c)*                                  Decreasesto Capital Accounts.*  Each Partner’sCapital Account shall be debited with:

 

(1)                                  Theamount of money distributed to him by the Partnership;

 

(2)                                  Theamount of his individual liabilities that are assumed by the Partnership (otherthan liabilities described in Treas. Reg. Section 1.704-1(b)(2)(iv)(b)(2)that are assumed by the Partnership and other than decreases in his share ofPartnership liabilities within the meaning of Code Section 752(b));

 

(3)                                  TheGross Asset Value of property distributed to him by the Partnership (net ofliabilities securing such distributed property that he is considered to assumeor take subject to under Code Section 752);

 

(4)                                  Allocationsto him of expenditures of the Partnership not deductible in computingPartnership taxable income and not properly chargeable to Capital Account (asdescribed in Code Section 705(a)(2)(B)); and

 

(5)                                  Allocationsto him of Partnership Losses (or item thereof), including loss and deductiondescribed in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating toadjustments to reflect book value), but excluding items described in (4) aboveand excluding loss or deduction described in Treas. Reg. Section 1.704-1(b)(4)(iii)(relating to excess percentage depletion).

 

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(d)*                                 Adjustmentsto Capital Accounts Related to Depletion.*

 

(1)                                  Solelyfor purposes of maintaining the Capital Accounts, each year the Partnership shallcompute (in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(k)) asimulated depletion allowance for each oil and gas property using that method,as between the cost depletion method and the percentage depletion method(without regard to the limitations of Code Section 613A(c)(3) whichtheoretically could apply to any Partner), which results in the greatestsimulated depletion allowance. The simulated depletion allowance with respectto each oil and gas property shall reduce the Partners’ Capital Accounts in thesame proportion as the Partners were allocated adjusted basis with respect tosuch oil and gas property under Section 3.03(a). In no event shall thePartnership’s aggregate simulated depletion allowance with respect to an oiland gas property exceed the Partnership’s adjusted basis in the oil and gasproperty (maintained solely for Capital Account purposes).

 

(2)                                  Uponthe taxable disposition of an oil and gas property by the Partnership, thePartnership shall determine the simulated (hypothetical) gain or loss withrespect to such oil and gas property (solely for Capital Account purposes) bysubtracting the Partnership’s simulated adjusted basis for the oil and gasproperty (maintained solely for Capital Account purposes) from the amount realizedby the Partnership upon such disposition. Simulated adjusted basis shall bedetermined by reducing the adjusted basis by the aggregate simulated depletioncharged to the Capital Accounts of all Partners in accordance with Section3.01(d)(1). The Capital Accounts of the Partners shall be adjusted upward bythe amount of any simulated gain on such disposition in proportion to suchPartners’ allocable share of the portion of total amount realized from thedisposition of such property that exceeds the Partnership’s simulated adjustedbasis in such property. The Capital Accounts of the Partners shall be adjusteddownward by the amount of any simulated loss in proportion to such Partners’allocable shares of the total amount realized from the disposition of suchproperty that represents recovery of the Partnership’s simulated adjusted basisin such property.

 

(e)*                                  Restorationof Negative Capital Accounts.* Except as otherwise provided in this Agreement, neither the InitialLimited Partner nor any other Limited Partner shall be obligated to thePartnership or to any other Partner to restore any negative balance in hisCapital Account, except for those Limited Partners who converted from GeneralPartner status, and in such case only to the extent such Partners had negativecapital account balances in their Capital Accounts at the time of suchconversion and such negative balances have not been previously restored throughsubsequent allocations of credits or contributions to the Partnership by suchPartner. The Managing General Partner and all Additional General Partners shallbe obligated to restore the deficit balance in their Capital Accounts.

 

3.02*                           Allocationof Profits, Losses, Revenues, and Expenses.*

 

(a)*                                  General.*  Except as otherwise provided in thisSection 3.02 or in Section 3.03, Profits shall be allocated asfollows:

 

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(i)                                     firstto the Units in an amount equal to the excess, if any, of (A) the cumulativeLosses allocated to the Units pursuant to (a)(vi) below for all prior fiscalyears plus (B) the cumulative specially allocated deductions allocated to theUnits pursuant to Section 3.02(a)(1)-(6) below for all prior fiscal years;over the cumulative Profits allocated to Units pursuant to this Section 3.02(a)(i)for all prior fiscal years;

 

(ii)                                  nextto the Managing General Partner in an amount equal to the excess, if any, ofthe cumulative Losses and specially allocated deductions allocated to theManaging General Partner for all prior fiscal years to avoid the creation orincrease of any Limited Partner Capital Account Deficit pursuant toSection 3.02(b); over the cumulative Profits allocated to the ManagingGeneral Partner pursuant to this Section 3.02(a)(ii) for all prior fiscalyears; and

 

(iii)                               thebalance shall be allocated 89% to the Units and 11% to the Managing GeneralPartner.

 

Except as otherwise provided in this Section 3.02 or inSection 3.03, Losses shall be allocated as follows:

 

(iv)                              89%to the Units and 11% to the Managing General Partner in an amount equal to theexcess, if any, of the cumulative Profits allocated pursuant toSection 3.02(a)(iii) above for all prior fiscal years over the cumulativeLosses allocated pursuant to this Section 3.02(a)(iv) for all prior fiscalyears;

 

(v)                                 nextto the Managing General Partner to extent necessary to prevent the creation orincrease of any Limited Partner Capital Account Deficit pursuant toSection 3.02(b); and

 

(vi)                              thebalance shall be allocated 100% to the Units.

 

If the Partnership acquires producing oil and gas interests and thevalue of such interests is materially in excess of the combined cost of (i)such interests and (ii) related non-producing interests acquired by thePartnership in the same acquisition transaction, the Managing General Partner’sinterest with respect to such producing interests shall be limited to 11% forthe producing life of such properties. These provisions regarding intereststhat were producing oil or gas at the time of their acquisition are referred toas “Production Acquisition” provisions. Notwithstanding the foregoingallocations, the following special allocations shall be made:

 

(1)                                  IDC and recapture ofIDC shall be allocated 99% to the Units issued by the Partnership and 1% to theManaging General Partner (the Managing General Partner shall purchase at least5% of the Units issued by the Partnership and such Units shall bear theirpro-rata share of IDC).

 

(2)                                  Deductions withrespect to Organization and Offering Costs net of commissions, due diligenceexpenses and wholesaling fees payable to the dealer manager and the solicitingdealers shall be allocated by the Managing General Partner. Deductions

 

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with respect to commissions, due diligence expenses and wholesaling feespayable to the dealer manager and the soliciting dealers shall be allocated100% to the Units; except that Organization and Offering Costs including suchcommissions, expenses and fees, in excess of 15% of Subscriptions shall beallocated 100% to the Managing General Partner and 0% to the Investor Partners.

 

(3)                                  Deductions withrespect to the Management Fee shall be allocated 100% to the Units.

 

(4)                                  Deductions withrespect to Costs of Leases and Costs of tangible equipment, includingdepreciation or cost recovery benefits, shall be allocated 99% to the Units and1% to the Managing General Partner.

 

(5)                                  Deductions withrespect to Drilling and Completion Costs shall be allocated 99% to the Unitsand 1% to the Managing General Partner.

 

(6)                                  Deductions with respectto Direct Costs and Operating Costs attributable to oil or gas interests towhich the Production Acquisition provisions of Section 3.02(a) apply,shall always be allocated in the same proportion in which Profits from suchinterests are allocated.

 

(7)                                  In no case shall anyexpenditure be counted more than one time for the purpose of any allocationdescribed above.

 

(b)*                                 CapitalAccount Deficits.*  Notwithstandinganything to the contrary in Section 3.02(a), no Limited Partner shall beallocated any item to the extent that such allocation would create or increasea deficit in such Limited Partner’s Capital Account.

 

(1)*                                  Obligationsto Restore.*  For purposes of thisSection 3.02(b), in determining whether an allocation would create orincrease a deficit in a Partner’s Capital Account, such Capital Account shallbe reduced for those items described in Treas. Reg. Sections1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any amountswhich such Partner is obligated to restore or is deemed obligated to restorepursuant to the penultimate sentences of Treas. Reg. Sections 1.704-2(g)(1) and1.704-2(i)(5). Further, such Capital Accounts shall otherwise meet therequirements of Treas. Reg. Section 1.704-1(b)(2)(ii)(d).

 

(2)*                                  Reallocations.*  Any loss or deduction of the Partnership,the allocation of which to any Partner is prohibited by thisSection 3.02(b), shall be reallocated to those Partners not having adeficit in their Capital Accounts (as adjusted in Section 3.02(b)(1))(excluding any Capital Account balances allocable to or attributable to theManaging General Partner’s carried interest) in the proportion that thepositive balance of each such Partner’s adjusted Capital Account bears to theaggregate balance of all such Partners’ adjusted Capital Accounts, with anyremaining losses or deductions being allocated to the Managing General Partner.No reallocations of losses shall be made to the Managing General Partner inregard to its Managing General Partner’s carried interest.

 

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(3)*                                  QualifiedIncome Offset.*  In the event anyInvestor Partner unexpectedly receives any adjustments, allocations, ordistributions described in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)(4),(5), or (6), items of Partnership income and gain shall be specificallyallocated to such Partner in an amount and manner sufficient to eliminate (tothe extent required by the Regulations) the total of the deficit balance in hisCapital Account (as adjusted in Section 3.02(b)(1)) created by suchadjustments, allocations, or distributions, provided that an allocationpursuant to this Section 3.02(b)(3) shall be made if and only to the extentthat such Partner would have a deficit in his Capital Account (as adjusted inSection 3.02(b)(1)) after all other allocations provided for in thisArticle III have been tentatively made as if this Section 3.02(b)(3) werenot in the Agreement.

 

(4)*                                  GrossIncome Allocations.*  In the event aLimited Partner has a deficit Capital Account at the end of any Partnershipfiscal year which is in excess of the sum of

 

(i)                                     The amount suchPartner is obligated to restore pursuant to any provision of this Agreement,and

 

(ii)                                  The amount suchPartner is deemed to be obligated to restore pursuant to the penultimate sentencesof Treas. Reg. Sections 1.704-2(g)(1) and 1.704-2(i)(5),

 

such Partner shall be specially allocated items of Partnership incomeand gain in the amount of such excess as quickly as possible, provided that anallocation pursuant to this Section 3.02(b)(4) shall be made only if andto the extent that such Partner would have a deficit Capital Account in excessof such sum after all other allocations provided for in this Article IIIhave been made as if Section 3.02(b)(3) and this Section 3.02(b)(4)were not in the Agreement.

 

(c)*                                  MinimumGain Chargeback.*  Notwithstandingany other provision of this Section 3.02, if there is a net decrease inPartnership Minimum Gain during any taxable year, pursuant to Treas. Reg.Section 1.704-2(f)(1), all Partners shall be allocated items ofPartnership income and gain for that year equal to that Partner’s share of thenet decrease in Partnership Minimum Gain (within the meaning of Treas. Reg.Section 1.704-2(g)(2)). Notwithstanding the preceding sentence, no suchchargeback shall be made to the extent one or more of the exceptions and/orwaivers provided for in Treas. Reg. Section 1.704-2(f)(2)-(5) applies.Allocations pursuant to the previous sentence shall be made in proportion tothe respective amounts required to be allocated to each Partner pursuantthereto. The items to be so allocated shall be determined in accordance withTreas. Reg. Section 1.704-2(f)(6). This Section 3.02(c) is intendedto comply with the minimum gain chargeback requirement in such Section ofthe Regulations and shall be interpreted consistently therewith. To the extentpermitted by such Section of the Regulations and for purposes of thisSection 3.02(c) only, each Partner’s Capital Account (as adjusted inSection 3.02(b)(1)) shall be determined prior to any other allocationspursuant to this Article III with respect to such tax year and without regardto any net decrease in Partner Minimum Gain during such tax year.

 

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(d)*                                 PartnerMinimum Gain Chargeback.* Notwithstanding any other provision of this Article III exceptSection 3.02(c), if there is a net decrease in Partner Minimum Gainattributable to a Partner Nonrecourse Debt during any Partnership fiscal year,rules similar to those contained in Section 3.02(c) shall apply in amanner consistent with Treas. Reg. Section 1.704-2(i)(4). ThisSection 3.02(d) is intended to comply with the minimum gain chargebackrequirement in such Section of the Regulations and shall be interpretedconsistently therewith. Solely for purposes of this Section 3.02(d), eachperson’s Capital Account deficit (as so adjusted) shall be determined prior toany other allocations pursuant to this Article III with respect to suchfiscal year, other than allocations pursuant to Section 3.02(c).

 

(e)*                                  NonrecourseDeductions.*  Nonrecourse Deductionsfor any fiscal year or other period shall be specially allocated to thePartners (in proportion to their Units), in accordance with Treas. Reg.Section 1.704-2.

 

(f)*                                    PartnerNonrecourse Deductions.*  Any PartnerNonrecourse Deductions for any fiscal year or other period shall be speciallyallocated to the Partner who bears the economic risk of loss with respect tothe Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions areattributable in accordance with Treas. Reg. Section 1.704-2(i).

 

(g)*                                 CodeSection 754 Adjustments.*  Tothe extent an adjustment to the adjusted tax basis of any Partnership assetpursuant to Code Section 734(b) or Section 743(b) is required, pursuant toTreas. Reg. Section 1.704-1(b)(2)(iv)(m), to be taken into account indetermining Capital Accounts, the amount of such adjustment to the CapitalAccounts shall be treated as an item of gain (if the adjustment increases thebasis of the asset) or loss (if the adjustment decreases such basis) and suchgain or loss shall be specially allocated to the Partners in a mannerconsistent with the manner in which their Capital Accounts are required to beadjusted pursuant to such Section of the Regulations.

 

(h)*                                 CurativeAllocations.*

 

(1)                                  The “RegulatoryAllocations” consist of the “Basic Regulatory Allocations,” as defined inSection 3.02(h)(2), the “Nonrecourse Regulatory Allocations,” as definedin Section 3.02(h)(3), and the “Partner Nonrecourse Regulatory Allocations,”as defined in Section 3.02(h)(4).

 

(2)                                  The “Basic RegulatoryAllocations” consist of allocations pursuant to Section 3.02(b)(2), (3),and (4). Notwithstanding any other provision of this Agreement, other than theRegulatory Allocations, the Basic Regulatory Allocations shall be taken intoaccount in allocating items of income, gain, loss, and deduction among thePartners so that, to the extent possible, the net amount of such allocations ofother items and the Basic Regulatory Allocations to each Partner shall be equalto the net amount that would have been allocated to each such Partner if theBasic Regulatory Allocations had not occurred. For purposes of applying theforegoing sentence, allocations pursuant to this Section 3.02(h)(2) shallonly be made with respect to allocations pursuant to Section 3.02(g) tothe extent the Managing General Partner reasonably determines that such

 

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allocations will otherwise be inconsistent with the economic agreementamong the parties to this Agreement.

 

(3)                                  The “NonrecourseRegulatory Allocations” consist of all allocations pursuant toSection 3.02(c) and 3.02(e). Notwithstanding any other provision of thisAgreement, other than the Regulatory Allocations, the Nonrecourse RegulatoryAllocations shall be taken into account in allocating items of income, gain,loss, and deduction among the Partners so that, to the extent possible, the netamount of such allocations of other items and the Nonrecourse Regulatory Allocationsto each Partner shall be equal to the net amount that would have been allocatedto each Partner if the Nonrecourse Regulatory Allocations had not occurred. Forpurposes of applying the foregoing sentence (i) no allocations pursuant to thisSection 3.02(h)(3) shall be made prior to the Partnership fiscal yearduring which there is a net decrease in Partnership Minimum Gain, and then onlyto the extent necessary to avoid any potential economic distortions caused bysuch net decrease in Partnership Minimum Gain, and (ii) allocationspursuant to this Section 3.02(h)(3) shall be deferred to the extent theManaging General Partner reasonably determines that such allocations are likelyto be offset by subsequent allocations pursuant to Section 3.02(c).

 

(4)                                  The “PartnerNonrecourse Regulatory Allocations” consist of all allocations pursuant toSections 3.02(d) and 3.02(f). Notwithstanding any other provision of thisAgreement, other than the Regulatory Allocations, the Partner NonrecourseRegulatory Allocations shall be taken into account in allocating items ofincome, gain, loss, and deduction among the Partners so that, to the extentpossible, the net amount of such allocations of other items and the PartnerNonrecourse Regulatory Allocations to each Partner shall be equal to the netamount that would have been allocated to each such Partner if the PartnerNonrecourse Regulatory Allocations had not occurred. For purposes of applyingthe foregoing sentence (i) no allocations pursuant to this Section 3.02(h)(4)shall be made with respect to allocations pursuant to Section 3.02(f)relating to a particular Partner Nonrecourse Debt prior to the Partnershipfiscal year during which there is a net decrease in Partner Minimum Gainattributable to such Partner Nonrecourse Debt, and then only to the extentnecessary to avoid any potential economic distortions caused by such netdecrease in Partner Minimum Gain, and (ii) allocations pursuant to thisSection 3.02(h)(4) shall be deferred with respect to allocations pursuantto Section 3.02(f) relating to a particular Partner Nonrecourse Debt tothe extent the Managing General Partner reasonably determines that suchallocations are likely to be offset by subsequent allocations pursuant toSection 3.02(d).

 

(5)                                  The Managing GeneralPartner shall have reasonable discretion with respect to each Partnershipfiscal year, to apply the provisions of Sections 3.02(h)(2), (3), and (4) amongthe Partners in a manner that is likely to minimize such economic distortions.

 

(i)*                                     OtherAllocations.*  Except as otherwiseprovided in this Agreement, all items of Partnership income, loss, deduction,and any other allocations not otherwise provided for shall be divided among theInvestor Partners in the same proportions as they share Profits or Losses, asthe case may be, for the year.

 

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(j)*                                     Agreementto be Bound.*  The Partners are awareof the income tax consequences of the allocations made by thisSection 3.02 and hereby agree to be bound by the provisions of thisSection 3.02 in reporting their shares of Partnership income and loss forincome tax purposes.

 

(k)*                                  ExcessNonrecourse Liabilities.*  Solely forpurposes of determining a Partner’s proportionate share of the “excessnonrecourse liabilities” of the Partnership within the meaning of Treas. Reg.Section 1.752-3(a)(3), the Partners’ interests in Partnership profits areas follows: the Partners, 89% (in proportion to their Units) and the ManagingGeneral Partner, 11%.

 

(l)*                                     AllocationVariations.*  The Managing GeneralPartner shall have the authority to vary allocations to preserve and protectthe intention of the Partners as follows:

 

(1)                                  It is the intentionof the Partners that each Partner’s distributive share of income, gain, loss,deduction or credit (or any item thereof) shall be determined and allocated inaccordance with this Article III to the fullest extent permitted by CodeSection 704(b). In order to preserve and protect the allocations providedfor in this Article III, the Managing General Partner shall have the authorityto allocate income, gain, loss, deduction or credit (or any item thereof)arising in any year differently than that expressly provided for in thisArticle III, if and to the extent that determining and allocating income, gain,loss, deduction or credit (or any item thereof) in the manner expresslyprovided for in this Article III would cause the allocations of each Partner’sdistributive share of income, gain, loss, deduction or credit (or any itemthereof) not to be permitted by Code Section 704(b) and the Regulationspromulgated thereunder. Any allocation made pursuant to thisSection 3.02(l) shall be deemed to be a complete substitute for anyallocation otherwise expressly provided for in this Article III, and no amendmentof this Agreement or further consent of any Partner shall be required therefor.

 

(2)                                  In making any suchallocation (the “new allocation”) under this Section 3.02(l) the ManagingGeneral Partner shall be authorized to act only after having been advised bythe Partnership’s accountants and/or counsel that, under CodeSection 704(b) and the Regulations thereunder, (i) the new allocation isnecessary, and (ii) the new allocation is the minimum modification of theallocations otherwise expressly provided for in this Article III which isnecessary in order to assure that, either in the then current year or in anypreceding year, each Partner’s distributive share of income, gain, loss,deduction or credit (or any item thereof) is determined and allocated inaccordance with this Article III to the fullest extent permitted by CodeSection 704(b) and the Regulations thereunder.

 

(3)                                  If the ManagingGeneral Partner is required by this Section 3.02(l) to make any newallocation in a manner less favorable to the Investor Partners than isotherwise expressly provided for in this Article III, then the Managing GeneralPartner shall have the authority, only after having been advised by thePartnership’s accountants and/or counsel that they are permitted by Code Section 704(b),to allocate income, gain, loss, deduction or credit (or any item thereof)arising in later years in such a manner as will make the allocations of income,gain, loss, deduction or credit (or any item thereof) to the Investor

 

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Partners as comparable as possible to the allocations otherwiseexpressly provided for or contemplated by this Article III.

 

(4)                                  Any new allocationmade by the Managing General Partner under this Section 3.02(l) in relianceupon the advice of the Partnership’s accountants and/or counsel shall be deemedto be made pursuant to the fiduciary obligation of the Managing General Partnerto the Partnership and the Investor Partners, and no such new allocation shallgive rise to any claim or cause of action by any Investor Partner.

 

(m)*                               TaxAllocations.*  In accordance withCode Section 704(c) and the Regulations thereunder, income, gain, loss,and deduction with respect to any property contributed to the capital of thePartnership shall, solely for tax purposes, be allocated among the Partners soas to take account of any variation between the adjusted basis of such propertyto the Partnership for federal income tax purposes and its initial Gross AssetValue (computed in accordance with Section 1.08(u)(1)).

 

In the eventthe Gross Asset Value of any Partnership asset is adjusted pursuant toSection 1.08(u)(2), subsequent allocations of income, gain, loss, anddeduction with respect to such asset shall take account of any variation betweenthe adjusted basis of such asset for federal income tax purposes and its GrossAsset Value in the same manner as under Code Section 704(c) and theRegulations thereunder.

 

Any electionsor other decisions relating to such allocations shall be made by the ManagingGeneral Partner in any manner that reasonably reflects the purpose andintention of this Agreement. Allocations pursuant to this Section 3.02(m)are solely for purposes of federal, state, and local taxes and shall notaffect, or in any way be taken into account in computing, any Partner’s CapitalAccount or share of Profits, Losses, other items, or distributions pursuant toany provision of this Agreement.

 

3.03*                           Depletion.*

 

(a)                                  Thedepletion deduction with respect to each oil and gas property of thePartnership shall be computed separately for each Partner in accordance withCode Section 613A(c)(7)(D) for federal income tax purposes. For purposesof such computation, the adjusted basis of each oil and gas property shall beallocated in accordance with the Partners’ interests in the capital of thePartnership. Among the Investor Partners, such adjusted basis shall beapportioned among them in accordance with the number of Units held.

 

(b)                                 Uponthe taxable disposition of an oil or gas property by the Partnership, theamount realized from and the adjusted basis of such property shall be allocatedamong the Partners (for purposes of calculating their individual gain or losson such disposition for federal income tax purposes) as follows:

 

(1)                                  The portion of thetotal amount realized upon the taxable disposition of such property thatrepresents recovery of its simulated adjusted tax basis therein (as calculatedpursuant to Section 3.01(d)) shall be allocated to the Partners in thesame proportion as the

 

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aggregate adjusted basis of such property was allocated to suchPartners (or their predecessors in interest) pursuant to Section 3.03(a);and

 

(2)                                  The portion of thetotal amount realized upon the taxable disposition of such property thatrepresents the excess over the simulated adjusted tax basis therein shall beallocated in accordance with the provisions of Section 3.02 as if suchgain constituted an item of Profit.

 

3.04*                           ApportionmentAmong Partners.*

 

(a)                                  Exceptas otherwise provided in this Agreement, all allocations and distributions tothe Investor Partners and the Managing General Partner shall be apportionedamong them pro rata based on Units held by the Partners.

 

(b)                                 Forpurposes of Section 3.04(a), an Investor Partner’s pro rata share in Unitsshall be calculated as of the end of the taxable year for which such allocationhas been made; provided, however, that if a transferee of a Unit is admitted asan Investor Partner during the course of the taxable year, the apportionment ofallocations and distributions between the transferor and transferee of suchUnit shall be made in the manner provided in Section 3.04(c).

 

(c)                                  If,during any taxable year of the Partnership, there is a change in any Partner’sinterest in the Partnership, each Partner’s allocation of any item of income,gain, loss, deduction, or credit of the Partnership for such taxable year,other than “allocable cash basis items” shall be determined by taking intoaccount the varying interests of the Partners pursuant to such method as ispermitted by Code Section 706(d) and the regulations thereunder. EachPartner’s share of “allocable cash basis items” shall be determined inaccordance with Code Section 706(d)(2) by (i) assigning the appropriateportion of each item to each day in the period to which it is attributable, and(ii) allocating the portion assigned to any such day among the Partners inproportion to their interests in the Partnership at the close of such day.“Allocable cash basis item” shall have the meaning ascribed to it by CodeSection 706(d)(2)(B) and the regulations thereunder.

 

**ARTICLE IV**

**DISTRIBUTIONS**

 

4.01*                           Timeof Distribution.*  Cash available fordistribution shall be determined by the Managing General Partner. The ManagingGeneral Partner shall distribute, in its discretion, such cash deemed availablefor distribution, but such determinations shall be made not less frequentlythan quarterly.

 

4.02*                           Distributions.*

 

(a)                                  Alldistributions (other than those made to wind up the Partnership in accordancewith Section 9.03) initially shall be made 89% to the Investor Partners inregard to, and in proportion to, the Units owned by them and 11% to theManaging General Partner.

 

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(b)                                 ThePartnership shall not require that Investor Partners reinvest their share ofcash available for distribution in the Partnership. In no event shall funds beadvanced or borrowed for purposes of distributions, if the amount of suchdistributions would exceed the Partnership’s accrued and received revenues forthe previous four quarters, less paid and accrued Operating Costs with respectto such revenues. The determination of such revenues and costs shall be made inaccordance with generally accepted accounting principles, consistently applied.Cash distributions from the Partnership to the Managing General Partner shallonly be made in conjunction with distributions to Investor Partners and onlyout of funds properly allocated to the Managing General Partner’s account.

 

4.03*                           CapitalAccount Deficits.*  No distributionsshall be made to any Investor Partner to the extent such distribution wouldcreate or increase a deficit in such Investor Partner’s Capital Account (asadjusted in Section 3.02(b)(1)). Any distribution which is herebyprohibited shall be made to those Investor Partners not having a deficit intheir Capital Accounts (as adjusted in Section 3.02(b)(1)) in theproportion that the positive balance of each such Investor Partner’s adjusted CapitalAccount bears to the aggregate balance of all such Investor Partners’ adjustedCapital Accounts.

 

4.04*                           LiabilityUpon Receipt of Distributions.*

 

(a)                                  Ifa Partner has received a return of any part of his Capital Contribution withoutviolation of the Partnership Agreement or the Act, he is liable to thePartnership for a period of one year thereafter for the amount of such returnedcontribution, but only to the extent necessary to discharge the Partnership’sliabilities to creditors who extended credit to the Partnership during theperiod the Capital Contribution was held by the Partnership.

 

(b)                                 Ifa Partner has received a return of any part of his Capital Contribution inviolation of either the Partnership Agreement or the Act, he is liable to thePartnership for a period of six years thereafter for the amount of the CapitalContribution wrongfully returned.

 

(c)                                  APartner receives a return of his Capital Contribution to the extent that thedistribution to him reduces his share of the fair value of the net assets ofthe Partnership below the value, as set forth in the records required to bekept by Nevada law, of his Capital Contribution which has not been distributedto him.

 

**ARTICLE V**

**ACTIVITIES**

 

5.01*                           Management.*  The Managing General Partner shall conduct,direct, and exercise full and exclusive control over all activities of thePartnership. Investor Partners shall have no power over the conduct of theaffairs of the Partnership or otherwise commit or bind the Partnership in anymanner. The Managing General Partner shall manage the affairs of thePartnership in a prudent and businesslike fashion and shall use its bestefforts to carry out the purposes and character of the business of thePartnership.

 

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5.02*                           Conductof Operations.*

 

(a)                                  Operationsof the Partnership shall be conducted as follows:

 

(1)                                  The Managing GeneralPartner shall establish a program of operations for the Partnership.

 

(2)                                  The Investor Partnersagree to participate in the Partnership’s program of operations as establishedby the Managing General Partner; provided, that no well drilled to the point ofsetting casing need be completed if, in the Managing General Partner’s opinion,such well is unlikely to be productive of oil or gas in quantities sufficientto justify the expenditures required for well completion. The Partnership mayand it is expected that it will participate with others in the drilling ofwells and it may enter into joint ventures, partnerships, or other such arrangements.

 

(b)                                 Alltransactions between the Partnership and the Managing General Partner or itsaffiliates shall be on terms no less favorable than those terms which could beobtained between the Partnership and independent third parties dealing atarm’s-length, subject to the provisions of Section 5.07.

 

(c)                                  ThePartnership shall not participate in any joint operations on any co-owned Leaseunless there has been acquired or reserved on behalf of the Partnership theright to take in-kind or separately dispose of its proportionate share of theoil and gas produced from such Lease exclusive of production which may be usedin development and production operations on the Lease and productionunavoidably lost, and, if an affiliate of the Managing General Partner is theoperator of such Lease, the Managing General Partner has entered into writtenagreements with every other person or entity owning any working or operatinginterest reserving to such person or entity a similar right to take in-kind,unless, in the opinion of counsel to the Partnership, the failure to reservesuch right to take in-kind will not result in the Partnership being treated asa member of an association taxable as a corporation for federal income taxpurposes.

 

(d)                                 Therelationship of the Partnership and the Managing General Partner (or anyaffiliate retaining or acquiring an interest) as co-owners in Leases, except tothe extent superseded by an operating agreement consistent with the precedingparagraph and except to the extent inconsistent with this PartnershipAgreement, shall be governed by the AAPL Form 610 Model OperatingAgreement-1982, with a provision reserving the right to take production in-kindand with a current accounting procedure promulgated by the Council of PetroleumAccountant Societies of North America to govern as the accounting proceduresunder such operating agreement.

 

(e)                                  TheManaging General Partner may designate or agree to (and enter into writtenAgreements with and for) such other Persons as it deems appropriate to conductthe actual drilling and producing operations of the Partnership.

 

(f)                                    Inthe event that any affiliate of the Managing General Partner serves as anoperator on any partnership wells, it will do so pursuant to a model formoperating agreement issued by the

 

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American Association ofPetroleum Landmen and an accounting procedure for joint operations issued bythe Council of Petroleum Accountants Societies of North America. Such affiliateshall receive fees not in excess of the competitive rate for the area,typically in the form of per well charges for each producing well.

 

(g)                                 TheManaging General Partner shall be reimbursed by the Partnership for DirectCosts and Administrative Costs incurred and paid by it. All other expensesshall be borne by the Partnership.

 

(h)                                 TheManaging General Partner and its affiliates may but are not required to enterinto other transactions (embodied in a written contract) with the Partnership,such as providing services, supplies, and equipment, and shall be entitled tocompensation for such services at prices and on terms that are competitive inthe geographic area of operations.

 

(i)                                     ThePartnership shall make no loans to the Managing General Partner or anyaffiliate thereof.

 

(j)                                     Neitherthe Managing General Partner nor any affiliate shall loan any funds to thePartnership.

 

(k)                                  Thefunds of the Partnership shall not be commingled with the funds of any otherPerson.

 

(l)                                     Notwithstandingany provision herein to the contrary, no creditor shall receive, as a result ofmaking any loan, a direct or indirect interest in the profits, capital, orproperty of the Partnership other than as a secured creditor.

 

(m)                               TheManaging General Partner shall have a fiduciary responsibility for thesafekeeping and use of all funds and assets of the Partnership, whether or notin the Managing General Partner’s possession or control, and shall not employor permit another to employ such funds or assets in any manner except for theexclusive benefit of the Partnership. Except as permitted underSection (II)(H)(3) of the North American Securities AdministratorsAssociation Statement of Policy on Oil and Gas Programs, no agreement(including this Agreement) between the Managing General Partner and the Partnershipshall limit any fiduciary duty to the Partnership owed by the Managing GeneralPartner under any applicable law.

 

5.03*                           Acquisitionand Sale of Leases.*

 

(a)                                  Tothe extent the Partnership does not acquire a full interest in a Lease from theManaging General Partner, the remainder of the interest in such Lease may atcertain times be held by the Managing General Partner which may either retainand exploit it for its own account or sell or otherwise dispose of all or apart of such remaining interest. Profits from such exploitation and/ordisposition shall be for the benefit of the Managing General Partner to theexclusion of the Partnership. Any Leases acquired by the Partnership from theManaging General Partner shall be acquired only at the Managing GeneralPartner’s Cost, unless the Managing General Partner shall have reason tobelieve that Cost is in excess of the fair market value of such property, inwhich

 

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case the price shall not exceedthe fair market value. The Managing General Partner shall obtain an appraisalfrom a qualified independent expert with respect to sales of properties of theManaging General Partner and its affiliates to the Partnership. Neither theManaging General Partner nor any affiliate shall acquire or retain any carried,reversionary, or Overriding Royalty Interest on the Lease interests acquired bythe Partnership, nor shall the Managing General Partner enter into any farmoutarrangements with respect to its retained interest, except as provided inSection 5.05.

 

(b)                                 ThePartnership shall acquire only Leases, and parts thereof, reasonably expectedto meet the stated purposes of the Partnership. No Leases shall be acquired forthe purpose of a subsequent sale or farmout unless the acquisition is madeafter a well has been drilled to a depth sufficient to indicate that such anacquisition would be in the Partnership’s best interest.

 

5.04*                           Titleto Leases.*

 

(a)                                  Recordtitle to each Lease acquired by the Partnership may be temporarily held in thename of the Managing General Partner, or in the name of any nominee designatedby the Managing General Partner, as agent for the Partnership until aproductive well is completed on a Lease. Thereafter, record title to Leasesshall be assigned to and placed in the name of the Partnership if suchassignment is practical and permissible under the circumstances and local lawand regulations. The Partnership may enter into written agreements with theManaging General Partner to explore and/or develop mineral properties locatedoutside of the United States subject to concessions or production sharingagreements or other agreements where it is not possible or practical to causerecord title of the Partnership’s interest in such properties to be placed inthe name of the Partnership. In such case the record title (or concession orproduction sharing agreement or other agreement) may be held by a specialnominee entity organized by the Managing General Partner provided that the solepurpose of the entity is to hold record title to oil and gas properties and itdoes not engage in any other business or incur any other liabilities. Inaddition, the Managing General Partner shall obtain either a ruling from theInternal Revenue Service or an opinion of tax counsel to the effect that sucharrangement shall not change the ownership status of the Partnership forfederal income tax purposes.

 

(b)                                 TheManaging General Partner shall take the necessary steps in its best judgment torender title to the Leases to be assigned to the Partnership acceptable for thepurposes of the Partnership. No operation shall be commenced on any Prospectacquired by the Partnership unless the Managing General Partner is satisfiedthat the undertaking of such operation would be in the best interest ofInvestor Partners and the Partnership. The Managing General Partner shall befree, however, to use its own best judgment in waiving title requirements andshall not be liable to the Partnership or the Investor Partners for any mistakesof judgment unless such mistakes were made in a manner not in accordance withgeneral industry standards in the geographic area and such mistakes were notthe result of negligence by the Managing General Partner; nor shall theManaging General Partner or its affiliates be deemed to be making anywarranties or representations, express or implied, as to the validity ormerchantability of the title to any Lease assigned to the Partnership or theextent of the interest covered thereby.

 

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5.05*                           Farmouts.*

 

(a)                                  NoPartnership Lease shall be farmed out, sold, or otherwise disposed of unlessthe Managing General Partner, exercising the standard of a prudent operator,determines that:

 

(1)                                  The Partnership lackssufficient funds to drill on such Lease and is unable to obtain suitablefinancing;

 

(2)                                  The Leases have beendowngraded by events occurring after assignment to the Partnership;

 

(3)                                  Drilling on theLeases would result in an excessive concentration of Partnership fundscreating, in the Managing General Partner’s opinion, undue risk to thePartnership; or

 

(4)                                  The farmout is in thebest interests of the Partnership.

 

(b)                                 Farmoutsbetween the Partnership and the Managing General Partner or its affiliates,including any other affiliated limited partnership, shall be effected on termsdeemed fair by the Managing General Partner. The Managing General Partner,exercising the standard of a prudent operator, shall determine that the farmoutis in the best interest of the Partnership and the terms of the farmout areconsistent with and, in any case, no less favorable to the Partnership thanthose utilized in the geographic area of operations for similar arrangements.The respective obligations and revenue sharing of all affiliated parties to thetransactions shall be substantially the same, and the compensation arrangementor any other interest or right of either the Managing General Partner or itsaffiliates shall be substantially the same in each participating partnershipor, if different, shall be reduced to reflect the lower compensationarrangement.

 

5.06*                           Release,Abandonment, and Sale or Exchange of Properties.*  Except as provided elsewhere in this Article V and in Section6.03, the Managing General Partner shall have full power to dispose of theproduction and other assets of the Partnership, including the power todetermine which Leases shall be released or permitted to terminate, those wellsto be abandoned, whether any Lease or well shall be sold or exchanged, and theterms therefor.

 

5.07*                           CertainTransactions.*

 

(a)                                  Wheneverthe Managing General Partner or its affiliates sell, transfer, or assign aninterest in a Prospect to the Partnership, they shall assign to the Partnershipan equal proportionate interest in each of the Leases comprising the Prospect.If the Managing General Partner or its affiliates (except another affiliatedpartnership in which the interest of the Managing General Partner or itsaffiliates is identical to or less than their interest in the Partnership)subsequently propose to acquire an interest in a Prospect in which thePartnership possesses an interest or in a Prospect abandoned by the Partnershipwithin one year preceding such proposed acquisition, the Managing GeneralPartner or its affiliates shall offer an equivalent interest therein to thePartnership; and, if funds, including borrowings, are not available to thePartnership to enable it to consummate a purchase of an equivalent interest insuch property and pay the development costs

 

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thereof, neither the ManagingGeneral Partner nor any of its affiliates shall acquire such interest orproperty. The term “abandoned” shall mean the termination, either voluntarilyor by operation of the Lease or otherwise, of all of the Partnership’s interestin the Prospect. These limitations shall not apply after the lapse of fiveyears from the date of formation of the Partnership.

 

(b)                                 Thegeological limits of a Prospect shall be enlarged or contracted on the basis ofsubsequently acquired geological data that further defines the productivelimits of the underlying oil and/or gas reservoir and shall include all of theacreage determined by such subsequent data to be encompassed by such reservoir;further, where the Managing General Partner or its affiliate owns a separateproperty interest in such enlarged area, such interest shall be sold to thePartnership if the activities of the Partnership were material in establishingthe existence of Proved Undeveloped Reserves which are attributable to suchseparate property interest; provided, however, that the Partnership shall notbe required to expend additional funds unless they are available from theinitial capitalization of the Partnership or if the Managing General Partnerbelieves it is prudent to borrow for the purpose of acquiring such additionalacreage.

 

(c)                                  ThePartnership shall not purchase properties from or sell properties to any otheraffiliated partnership. This prohibition, however, shall not apply totransactions among affiliated partnerships by which property is transferredfrom one to another in exchange for the transferee’s obligation to conductdrilling activities on such property or to joint ventures among such affiliatedpartnerships, provided that the respective obligations and revenue sharing ofall parties to the transaction are substantially the same and the compensationarrangement or any other interest or right of either the Managing GeneralPartner or its affiliates is the same in each affiliated partnership, or, ifdifferent, the aggregate compensation of the Managing General Partner isreduced to reflect the lower compensation arrangement.

 

(d)                                 Duringthe existence of the Partnership, and before it has ceased operations, neither theManaging General Partner nor any of its affiliates (excluding anotherpartnership where the Managing General Partner’s or its affiliates’ interest insuch partnership is identical to or less than their interest in thePartnership) shall acquire, retain, or drill for their own account any oil andgas interest in any Prospect in which the Partnership possesses an interest,except for transactions whereby the Managing General Partner or such affiliateacquires or retains a proportionate Working Interest, the respectiveobligations of the Managing General Partner or the affiliate and thePartnership are substantially the same after the sale of the interest to thePartnership, and the Managing General Partner’s or affiliate’s interest inrevenues does not exceed the amount proportionate to its Working Interest.

 

(e)                                  Ifthe Managing General Partner or the affiliate is engaged to a substantialextent, as an ordinary and ongoing business, in providing such services,equipment, or supplies to others in the industry, then the compensation, priceor rental for any oil field, equipage, or other services, and any equipment andsupplies rendered, sold or leased by such person to the Partnership shall be atprices competitive with those charged by others in the geographical area ofoperations that reasonably could be available to the Partnership. If neitherthe Managing General Partner nor its affiliates is engaged in the business asset forth above, then the compensation, price or rental shall be the cost ofsuch services, equipment or supplies to such entity, or the competitive ratethat could be obtained in the area, whichever is less. No turnkey drillingcontracts shall be made between the

 

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Managing General Partner or itsaffiliates and the Partnership. Neither the Managing General Partner nor itsaffiliates shall profit by drilling in contravention of its fiduciaryobligations to the Partnership. Any such services for which the ManagingGeneral Partner or an affiliate is to receive compensation shall be embodied ina written contract that precisely describes the services to be rendered and allcompensation to be paid.

 

(f)                                    Advancepayments by the Partnership to the Managing General Partner are prohibited,except where necessary to secure tax benefits of prepaid drilling costs. Thesepayments, if any, shall not include nonrefundable payments for completion costsprior to the time that a decision is made that the well or wells warrant acompletion attempt.

 

(g)                                 Neitherthe Managing General Partner nor its affiliates shall make any futurecommitments of the Partnership’s production which do not primarily benefit thePartnership, nor shall the Managing General Partner or any affiliate utilizePartnership funds as compensating balances for the benefit of the ManagingGeneral Partner or the affiliate.

 

(h)                                 Norebates or give-ups may be received by the Managing General Partner or any ofits affiliates, nor may the Managing General Partner or any affiliateparticipate in any reciprocal business arrangements that would circumvent theserestrictions.

 

(i)                                     Duringa period of five years from the date of formation of the Partnership, if theManaging General Partner or any of its affiliates proposes to acquire from anunaffiliated person an interest in a Prospect in which the Partnershippossesses an interest or in a Prospect in which the Partnership’s interest hasbeen terminated without compensation within one year preceding such proposedacquisition, the following conditions shall apply:

 

(1)                                  If the ManagingGeneral Partner or the affiliate does not currently own property in theProspect separately from the Partnership, then neither the Managing GeneralPartner nor the affiliate shall be permitted to purchase an interest in theProspect.

 

(2)                                  If the ManagingGeneral Partner or the affiliate currently owns a proportionate interest in theProspect separately from the Partnership, then the interest to be acquiredshall be divided between the Partnership and the Managing General Partner orthe affiliate in the same proportion as is the other property in the Prospect;provided, however, if cash or financing is not available to the Partnership toenable it to consummate a purchase of the additional interest to which it isentitled, then neither the Managing General Partner nor the affiliate shall bepermitted to purchase any additional interest in the Prospect.

 

(j)                                     Ifthe Partnership acquires property pursuant to a farmout or joint venture froman affiliated program, the Managing General Partner’s and/or its affiliates’aggregate compensation associated with the property and any direct and indirectownership interest in the property may not exceed the lower of the compensationand ownership interest the Managing General Partner and/or its affiliates couldreceive if the property were separately owned or retained by either one of theprograms.

 

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(k)                                  Neitherthe Managing General Partner nor any affiliate, including affiliated programs,may purchase or acquire any property from the Partnership, directly orindirectly, except pursuant to transactions that are fair and reasonable to theInvestor Partners of the Partnership and then subject to the followingconditions:

 

(1)                                  A sale, transfer orconveyance, including a farmout, of an undeveloped property from thePartnership to the Managing General Partner or an affiliate, other than anaffiliated program, must be made at the higher of cost or fair market value.

 

(2)                                  A sale, transfer orconveyance of a developed property from the Partnership to the Managing GeneralPartner or an affiliate, other than an affiliated program in which the interestof the Managing General Partner is substantially similar to or less than itsinterest in the subject Partnership, shall not be permitted except inconnection with the liquidation of the Partnership and then only at fair marketvalue.

 

(3)                                  Except in connectionwith farmouts or joint ventures made in compliance with Section 5.07(j)above, a transfer of an undeveloped property from the Partnership to anaffiliated drilling program must be made at fair market value if the propertyhas been held for more than two years. Otherwise, if the Managing GeneralPartner deems it to be in the best interest of the Partnership, the transfermay be made at cost.

 

(4)                                  Except in connectionwith farmouts or joint ventures made in compliance with Section 5.07(j)above, a transfer of any type of property from the Partnership to an affiliatedproduction purchase or income program must be made at fair market value if theproperty has been held for more than six months or there have been significantexpenditures made in connection with the property. Otherwise, if the ManagingGeneral Partner deems it to be in the best interest of the Partnership, thetransfer may be made at cost as adjusted for intervening operations.

 

(l)                                     Ifthe Partnership participates in other partnerships or joint ventures(multi-tier arrangements), the terms of any such arrangements shall not resultin the circumvention of any of the requirements or prohibitions contained inthis Partnership Agreement, including the following:

 

(1)                                  There will be noduplication or increase in Organization and Offering Costs, the ManagingGeneral Partner’s compensation, Partnership expenses or other fees and costs;

 

(2)                                  There will be nosubstantive alteration in the fiduciary and contractual relationship betweenthe Managing General Partner and the Investor Partners; and

 

(3)                                  There will be nodiminishment in the voting rights of the Investor Partners.

 

(m)                               Inconnection with a proposed Roll-Up, the following shall apply:

 

(1)                                  An appraisal of allPartnership assets shall be obtained from a competent independent expert. Ifthe appraisal will be included in a prospectus used to offer the

 

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securities of a Roll-Up Entity, the appraisal shall be filed with theSecurities and Exchange Commission and the Administrator as an exhibit to theregistration statement for the offering. The appraisal shall be based on allrelevant information, including current reserve estimates prepared by anindependent petroleum consultant, and shall indicate the value of thePartnership’s assets assuming an orderly liquidation as of a date immediatelyprior to the announcement of the proposed Roll-Up transaction. The appraisalshall assume an orderly liquidation of Partnership assets over a 12-monthperiod. The terms of the engagement of the independent expert shall clearlystate that the engagement is for the benefit of the Partnership and theInvestor Partners. A summary of the independent appraisal, indicating allmaterial assumptions underlying the appraisal, shall be included in a report tothe Investor Partners in connection with a proposed Roll-Up.

 

(2)                                  In connection with aproposed Roll-Up, Investor Partners who vote “no” on the proposal shall beoffered the choice of:

 

(i)                                     Accepting thesecurities of the Roll-Up Entity offered in the proposed Roll-Up; or

 

(ii)                                  (aa)                            Remainingas Investor Partners in the Partnership and preserving their interests thereinon the same terms and conditions as existed previously; or

 

(bb)                          Receiving cash in an amountequal to the Investor Partners’ pro-rata share of the appraised value of thenet assets of the Partnership.

 

(3)                                  The Partnership shallnot participate in any proposed Roll-Up which, if approved, would result in thediminishment of any Investor Partner’s voting rights under the Roll-Up Entity’schartering agreement. In no event shall the democracy rights of InvestorPartners in the Roll-Up Entity be less than those provided for under Sections7.07 and 7.08 of this Agreement. If the Roll-Up Entity is a corporation, thedemocracy rights of Investor Partners shall correspond to the democracy rightsprovided for in this Agreement to the greatest extent possible.

 

(4)                                  The Partnership shallnot participate in any proposed Roll-Up transaction which includes provisionswhich would operate to materially impede or frustrate the accumulation ofshares by any purchaser of the securities of the Roll-Up Entity (except to theminimum extent necessary to preserve the tax status of the Roll-Up Entity); norshall the Partnership participate in any proposed Roll-Up transaction whichwould limit the ability of an Investor Partner to exercise the voting rights ofits securities of the Roll-Up Entity on the basis of the number of PartnershipUnits held by that Investor Partner.

 

(5)                                  The Partnership shallnot participate in a Roll-Up in which Investor Partners’ rights of access tothe records of the Roll-Up Entity will be less than those provided for underSection 8.01 of this Agreement.

 

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(6)                                  The Partnership shallnot participate in any proposed Roll-Up transaction in which any of the costsof the transaction would be borne by the Partnership if the Roll-Up is notapproved by the Investor Partners.

 

(7)                                  The Partnership shallnot participate in a Roll-Up transaction unless the Roll-Up transaction isapproved by at least 662/3% in interest of the InvestorPartners.

 

**ARTICLE VI**

**MANAGING GENERAL PARTNER**

 

6.01*                           ManagingGeneral Partner.*  The ManagingGeneral Partner shall have the sole and exclusive right and power to manage andcontrol the affairs of and to operate the Partnership and to do all thingsnecessary to carry on the business of the Partnership for the purposesdescribed in Section 1.03 and to conduct the activities of the Partnershipas set forth in Article V. No financial institution or any other person,firm, or corporation dealing with the Managing General Partner shall berequired to ascertain whether the Managing General Partner is acting inaccordance with this Agreement, but such financial institution or such otherperson, firm, or corporation shall be protected in relying solely upon thedeed, transfer, or assurance of and the execution of such instrument orinstruments by the Managing General Partner. The Managing General Partner shalldevote so much of its time to the business of the Partnership as in itsjudgment the conduct of the Partnership’s business shall reasonably require andshall not be obligated to do or perform any act or thing in connection with thebusiness of the Partnership not expressly set forth herein. The ManagingGeneral Partner may engage in business ventures of any nature and descriptionindependently or with others and neither the Partnership nor any of itsInvestor Partners shall have any rights in and to such independent ventures orthe income or profits derived therefrom. However, except as otherwise providedherein, the Managing General Partner and any of its affiliates may pursuebusiness opportunities that are consistent with the Partnership’s investmentobjectives for their own account only after they have determined that suchopportunity either cannot be pursued by the Partnership because of insufficientfunds or because it is not appropriate for the Partnership under the existingcircumstances.

 

6.02*                           Authorityof Managing General Partner.*  TheManaging General Partner is specifically authorized and empowered, on behalf ofthe Partnership, and by consent of the Investor Partners herein given, to doany act or execute any document or enter into any contract or any agreement ofany nature necessary or desirable, in the opinion of the Managing GeneralPartner, in pursuance of the purposes of the Partnership. Without limiting thegenerality of the foregoing, in addition to any and all other powers conferredupon the Managing General Partner pursuant to this Agreement and the Act, andexcept as otherwise prohibited by law or hereunder, the Managing GeneralPartner shall have the power and authority to:

 

(a)                                  Acquireleases and other interests in oil and/or gas properties in furtherance of thePartnership’s business;

 

(b)                                 Enterinto and execute pooling agreements, farmout agreements, operating agreements,unitization agreements, dry and bottom hole and acreage contribution letters,construction contracts, and any and all documents or instruments customarilyemployed in the oil

 

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and gas industry in connectionwith the acquisition, sale, exploration, development, or operation of oil andgas properties, and all other instruments deemed by the Managing GeneralPartner to be necessary or appropriate to the proper operation of oil or gasproperties or to effectively and properly perform its duties or exercise itspowers hereunder;

 

(c)                                  Makeexpenditures and incur any obligations it deems necessary to implement thepurposes of the Partnership; employ and retain such personnel as it deemsdesirable for the conduct of the Partnership’s activities, including employees,consultants, and attorneys; and exercise on behalf of the Partnership, in suchmanner as the Managing General Partner in its sole judgment deems best, of allrights, elections, and obligations granted to or imposed upon the Partnership;

 

(d)                                 Manage,operate, and develop any Partnership property, and enter into operatingagreements with any party with respect to properties acquired by thePartnership, which agreements may contain such terms, provisions, andconditions as are usual and customary within the industry and as the ManagingGeneral Partner shall approve;

 

(e)                                  Compromise,sue, or defend any and all claims in favor of or against the Partnership;

 

(f)                                    Subjectto the provisions of Section 8.04, make or revoke any election permitted thePartnership by any taxing authority;

 

(g)                                 Performany and all acts it deems necessary or appropriate for the protection andpreservation of the Partnership assets;

 

(h)                                 Maintainat the expense of the Partnership such insurance coverage for public liability,fire and casualty, loss of well control, and any and all other insurancenecessary or appropriate to the business of the Partnership in such amounts andof such types as it shall determine from time to time, provided that the publicliability coverage shall at all times be equal to at least two times thePartnership’s capitalization and shall at no time be less than $10,000,000;

 

(i)                                     Buy,sell, or lease property or assets on behalf of the Partnership;

 

(j)                                     Enterinto agreements to hire services of any kind or nature;

 

(k)                                  Assigninterests in properties to the Partnership;

 

(l)                                     Enterinto soliciting dealer agreements and perform all of the Partnership’sobligations thereunder, to issue and sell Units pursuant to the terms andconditions of this Agreement, the Subscription Agreements, and the prospectus,to accept and execute on behalf of the Partnership Subscription Agreements, andto admit original and substituted Partners; and

 

(m)                               Performany and all acts, and execute any and all documents it deems necessary orappropriate to carry out the purposes of the Partnership.

 

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6.03*                           CertainRestrictions on Managing General Partner’s Power and Authority.*  Notwithstanding any other provisions of thisAgreement to the contrary, neither the Managing General Partner nor anyaffiliate of the Managing General Partner shall have the power or authority to,and shall not, do, perform, or authorize any of the following:

 

(a)                                  Borrowany money in the name or on behalf of the Partnership prior to the completionof drilling activities and the conversion of Additional General Partnerinterests into Limited Partner interests;

 

(b)                                 Useany revenues from Partnership operations for the purposes of acquiring Leasesin new or unrelated Prospects or paying any Organization and Offering Costs;provided, however, that revenues from Partnership operations may be used forother Partnership operations, including without limitation, for the purposes ofdrilling, completing, maintaining, recompleting, and operating wells onexisting Partnership Prospects and acquiring and developing new Leases to theextent such Leases are considered by the Managing General Partner in its solediscretion to be a part of a Prospect in which the Partnership then owns aLease;

 

(c)                                  Withouthaving first received the prior consent of the holders of a majority of thethen outstanding Units entitled to vote,

 

(1)                                  Sell all orsubstantially all of the assets of the Partnership (except upon liquidation ofthe Partnership pursuant to Article IX), unless cash funds of the Partnershipare insufficient to pay the obligations and other liabilities of thePartnership;

 

(2)                                  Dispose of thegoodwill of the Partnership;

 

(3)                                  Do any other actwhich would make it impossible to carry on the ordinary business of thePartnership; or

 

(4)                                  Agree to thetermination or amendment of any operating agreement to which the Partnership isa party, or waive any rights of the Partnership thereunder, except foramendments to the operating agreement which the Managing General Partnerbelieves are necessary or advisable to ensure that the operating agreementconforms to any changes in or modifications to the Code or that do notadversely affect the Investor Partners in any material respect;

 

(d)                                 Guaranteein the name or on behalf of the Partnership the payment of money or theperformance of any contract or other obligation of any Person other than thePartnership;

 

(e)                                  Bindor obligate the Partnership with respect to any matter outside the scope of thePartnership business;

 

(f)                                    Usethe Partnership name, credit, or property for other than Partnership purposes;

 

(g)                                 Takeany action, or permit any other Person to take any action, with respect to theassets or property of the Partnership which does not benefit the Partnership,including, among other

 

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things, utilization of funds ofthe Partnership as compensating balances for its own benefit or the commitmentof future production;

 

(h)                                 Benefitfrom any arrangement for the marketing of oil and gas production or otherrelationships affecting the property of the Managing General Partner and thePartnership, unless such benefits are fairly and equitably apportioned amongthe Managing General Partner, its affiliates, and the Partnership;

 

(i)                                     UtilizePartnership funds to invest in the securities of another Person except in thefollowing instances:

 

(1)                                  Investments inworking interests or undivided lease interests made in the ordinary course ofthe Partnership’s business;

 

(2)                                  Temporary investmentsmade in compliance with Section 2.02(f) of this Agreement;

 

(3)                                  Investments involvingless than 5% of Partnership capital which are a necessary and incidental partof a property acquisition transaction; and

 

(4)                                  Investments inentities established solely to limit the Partnership’s liabilities associatedwith the ownership or operation of property or equipment, provided, in suchinstances duplicative fees and expenses shall be prohibited.

 

(j)                                     Votewith respect to any Unit held by it on matters submitted to the partnersregarding the removal of the Managing General Partner or regarding anytransaction between the Partnership and the Managing General Partner.

 

6.04*                           Indemnificationof Managing General Partner.*  TheManaging General Partner shall have no liability to the Partnership or to anyInvestor Partner for any loss suffered by the Partnership which arises out ofany action or inaction of the Managing General Partner if the Managing GeneralPartner, in good faith, determined that such course of conduct was in the bestinterest of the Partnership, that the Managing General Partner was acting onbehalf of or performing services for the Partnership, and that such course ofconduct did not constitute negligence or misconduct of the Managing GeneralPartner. The Managing General Partner shall be indemnified by the Partnershipagainst any losses, judgments, liabilities, expenses, and amounts paid insettlement of any claims sustained by it in connection with the Partnership,provided that the Managing General Partner has determined in good faith thatthe course of conduct which caused the loss or liability was in the bestinterests of the Partnership, that the Managing General Partner was acting onbehalf of or performing services for the Partnership, and that the same werenot the result of negligence or misconduct on the part of the Managing GeneralPartner. Indemnification of the Managing General Partner is recoverable onlyfrom the tangible net assets of the Partnership, including the insuranceproceeds from the Partnership’s insurance policies and the insurance andindemnification of the Partnership’s subcontractors, and is not recoverablefrom the Investor Partners. Notwithstanding the above, the Managing GeneralPartner and any person acting as a broker-dealer shall not be indemnified forliabilities arising under federal and state

 

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securities laws unless (a) therehas been a successful adjudication on the merits of each count involvingsecurities law violations, (b) such claims have been dismissed with prejudiceon the merits by a court of competent jurisdiction, or (c) a court of competentjurisdiction approves a settlement of such claims against a particularindemnitee and finds that indemnification of the settlement and the relatedcosts should be made, and the court considering the request for indemnificationhas been advised of the position of the Securities and Exchange Commission andof any state securities regulatory authority in which securities of thePartnership were offered or sold as to indemnification for violations ofsecurities laws; provided, however, the court need only be advised of thepositions of the securities regulatory authorities of those states (i) whichare specifically set forth in the Partnership Agreement and (ii) in whichplaintiffs claim they were offered or sold Units.

 

In any claimfor indemnification for federal or state securities laws violations, the partyseeking indemnification shall place before the court the position of theSecurities and Exchange Commission, or respective state securities division, asthe case may be, with respect to the issue of indemnification for securitieslaw violations.

 

Theadvancement of Partnership funds to the Managing General Partner or itsaffiliates for legal expenses and other costs incurred as a result of any legalaction for which indemnification is being sought is permissible only if thePartnership has adequate funds available and the following conditions aresatisfied:

 

(a)                                  The legal actionrelates to acts or omissions with respect to the performance of duties orservices on behalf of the Partnership, and

 

(b)                                 The legal action isinitiated by a third party who is not a participant, or the legal action isinitiated by a participant and a court of competent jurisdiction specificallyapproves such advancement, and

 

(c)                                  The Managing GeneralPartner or its affiliates undertake to repay the advanced funds to thePartnership, together with the applicable legal rate of interest thereon, incases in which such party is found not to be entitled to indemnification.

 

The Partnership shall not incur the cost of the portion of anyinsurance that insures the Managing General Partner against any liability as towhich the Managing General Partner is herein prohibited from being indemnified.

 

6.05*                           Withdrawal.*

 

(a)                                  Notwithstandingthe limitations contained in Section 6.03(k), the Managing General Partnershall have the right, by giving written notice to the other Partners, tosubstitute in its stead as Managing General Partner any successor entity or anyentity controlled by the Managing General Partner, provided that the successorManaging General Partner must have a tangible net worth of at least $5 million,and the Investor Partners, by execution of this Agreement, expressly consent tosuch a transfer, unless it would adversely affect the status of the Partnershipas a partnership for federal income tax purposes.

 

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(b)                                 TheManaging General Partner may not voluntarily withdraw from the Partnershipprior to the Partnership’s completion of its primary drilling and/oracquisition activities, and then only after giving 120 days written notice. TheManaging General Partner may not partially withdraw its property interests heldby the Partnership unless such withdrawal is necessary to satisfy the bona fiderequest of its creditors or approved by a majority-in-interest vote of theInvestor Partners. The Managing General Partner shall fully indemnify thePartnership against any additional expenses which may result from a partialwithdrawal of property interests and such withdrawal may not result in agreater amount of Direct Costs or Administrative Costs being allocated to theInvestor Partners. The withdrawing Managing General Partner shall pay allexpenses incurred as a result of its withdrawal. If the Managing GeneralPartner withdraws and the Partners elect to continue the Partnership, theManaging General Partner’s interest shall be valued in accordance with theprovisions of Section 7.06(c) hereof.

 

6.06*                           ManagementFee.*  The Partnership shall pay theManaging General Partner, on the date the Partnership is organized, a one-timemanagement fee equal to the difference between (i) 15% of the totalSubscriptions and (ii) the total underwriting and brokerage discounts,commissions, and expenses incurred in regard to the organization of thePartnership and the selling of the Units. This Management Fee is included inthe 15% of total Subscriptions that is payable to the Managing General Partneron the date the Partnership is organized.

 

6.07*                           TaxMatters and Financial Reporting Partner.* The Managing General Partner shall serve as the tax matters partner forpurposes of Code Sections 6221 through 6233 and as the financial reportingpartner. The Partnership may engage its accountants and/or attorneys to assistthe tax matters partner in discharging its duties hereunder.

 

**ARTICLE VII**

**INVESTOR PARTNERS**

 

7.01*                           Management.*  No Investor Partner shall take part in thecontrol or management of the business or transact any business for thePartnership, and no Investor Partner shall have the power to sign for or bindthe Partnership. Any action or conduct of Investor Partners on behalf of thePartnership is hereby expressly prohibited. Any Investor Partner who violatesthis Section 7.01 shall be liable to the remaining Investor Partners, theManaging General Partner, and the Partnership for any damages, costs, orexpenses any of them may incur as a result of such violation. The InvestorPartners hereby grant to the Managing General Partner or its successors orassignees the exclusive authority to manage and control the Partnershipbusiness in its sole discretion and to thereby bind the Partnership and allPartners in its conduct of the Partnership business. Investor Partners shallhave the right to vote only with respect to those matters specifically providedfor in these Articles. No Investor Partner shall have the authority to:

 

(a)                                  Assignthe Partnership property in trust for creditors or on the assignee’s promise topay the debts of the Partnership;

 

(b)                                 Disposeof the goodwill of the business;

 

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(c)                                  Doany other act that would make it impossible to carry on the ordinary businessof the Partnership;

 

(d)                                 Confessa judgment;

 

(e)                                  Submita Partnership claim or liability to arbitration or reference;

 

(f)                                    Makea contract or bind the Partnership to any agreement or document;

 

(g)                                 Usethe Partnership’s name, credit, or property for any purpose;

 

(h)                                 Doany act which is harmful to the Partnership’s assets or business or by whichthe interests of the Partnership shall be imperiled or prejudiced; or

 

(i)                                     Performany act in violation of any applicable law or regulations thereunder, orperform any act that is inconsistent with the terms of this Agreement.

 

7.02*                           Indemnificationof Additional General Partners.*  TheManaging General Partner agrees to indemnify each of the Additional GeneralPartners for the amounts of obligations, risks, losses, or judgments of thePartnership or the Managing General Partner which exceed the amount ofapplicable insurance coverage and amounts which would become available from thesale of all Partnership assets. Such indemnification applies to casualty lossesand to business losses, such as losses incurred in connection with the drillingof an unproductive well, to the extent such losses exceed the AdditionalGeneral Partners’ interest in the undistributed net assets of the Partnership.If, on the other hand, such excess obligations are the result of the negligenceor misconduct of an Additional General Partner, or the contravention of theterms of the Partnership Agreement by the Additional General Partner, then theforegoing indemnification by the Managing General Partner shall beunenforceable as to such Additional General Partner and such Additional GeneralPartner shall be liable to all other Partners for damages and obligationsresulting therefrom.

 

7.03*                           Assignmentof Units.*

 

(a)                                  AnInvestor Partner may transfer all or any portion of his Units and thetransferee shall become a Substituted Investor Partner subject to all dutiesand obligations of an Investor Partner, including those contained inSection 4.04, except to the extent excepted in the Act, subject to thefollowing conditions (any transfer of such Units satisfying such conditionsbeing referred to herein as a “Permitted Transfer”):

 

(1)                                  Except in the case ofa transfer of Units at death or involuntarily by operation of law, thetransferor and transferee shall execute and deliver to the Partnership suchdocuments and instruments of conveyance as may be necessary or appropriate inthe opinion of counsel to the Partnership to effect such transfer and toconfirm the agreement of the transferee to be bound by the provisions of thisArticle VII. In any case not described in the preceding sentence, the transfershall be confirmed by presentation to the Partnership of legal evidence of suchtransfer, in form and substance satisfactory to counsel to the Partnership. Inall cases, the Partnership shall be reimbursed by the transferor and/or

 

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transferee for all costs and expenses that it reasonably incurs inconnection with such transfer;

 

(2)                                  The transferor andtransferee shall furnish the Partnership with the transferee’s taxpayeridentification number and sufficient information to determine the transferee’sinitial tax basis in the Units transferred; and

 

(3)                                  The written consentof the Managing General Partner to such transfer shall have been obtained, thegranting or denial of which shall be within the absolute discretion of theManaging General Partner.

 

(b)                                 APerson who acquires one or more Units but who is not admitted as a SubstitutedInvestor Partner pursuant to Section 7.03(c) shall be entitled only toallocations and distributions with respect to such Units in accordance withthis Agreement, but shall have no right to any information or accounting of theaffairs of the Partnership, shall not be entitled to inspect the books orrecords of the Partnership, and shall not have any of the rights of anAdditional General Partner or a Limited Partner under the Act or the Agreement.

 

(c)                                  Subjectto the other provisions of this Article VII, a transferee of Units may beadmitted to the Partnership as a Substituted Investor Partner only uponsatisfaction of the conditions set forth below in this Section 7.03(c):

 

(1)                                  The Managing GeneralPartner consents to such admission, which consent can be withheld in itsabsolute discretion;

 

(2)                                  The Units withrespect to which the transferee is being admitted were acquired by means of aPermitted Transfer;

 

(3)                                  The transfereebecomes a party to this Agreement as a Partner and executes such documents andinstruments as the Managing General Partner may reasonably request (including,without limitation, amendments to the Certificate of Limited Partnership) asmay be necessary or appropriate to confirm such transferee as a Partner in thePartnership and such transferee’s agreement to be bound by the terms andconditions hereof;

 

(4)                                  The transferee paysor reimburses the Partnership for all reasonable legal, filing, and publicationcosts that the Partnership incurs in connection with the admission of thetransferee as a Partner with respect to the transferred Units;

 

(5)                                  If the transferee isnot an individual of legal majority, the transferee provides the Partnershipwith evidence satisfactory to counsel for the Partnership of the authority ofthe transferee to become a Partner and to be bound by the terms and conditionsof this Agreement; and

 

(6)                                  In any calendarquarter in which a Substituted Investor Partner is admitted to the Partnership,the Managing General Partner shall amend the certificate of limited partnershipto effect the substitution of such Substituted Investor Partner, although the

 

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Managing General Partner may do so more frequently. In the case ofassignments, where the assignee does not become a Substituted Investor Partner,the Partnership shall recognize the assignment not later than the last day ofthe calendar month following receipt of notice of assignment and requireddocumentation.

 

(d)                                 EachInvestor Partner hereby covenants and agrees with the Partnership for thebenefit of the Partnership and all Partners that (i) he is not currentlymaking a market in Units and (ii) he will not transfer any Unit on anestablished securities market or a secondary market (or the substantialequivalent thereof) within the meaning of Code Section 7704(b) (and anyregulations, proposed regulations, revenue rulings, or other officialpronouncements of the Service or Treasury Department that may be promulgated orpublished thereunder). Each Investor Partner further agrees that he will nottransfer any Unit to any Person unless such Person agrees to be bound by thisSection 7.03 and to transfer such Units only to Persons who agree to besimilarly bound.

 

7.04*                           ProhibitedTransfers.*

 

(a)                                  Anypurported Transfer of Units that is not a Permitted Transfer shall be null andvoid and of no effect whatever; provided, that, if the Partnership is requiredto recognize a transfer that is not a Permitted Transfer (or if the ManagingGeneral Partner, in its sole discretion, elects to recognize a transfer that isnot a Permitted Transfer), the interest transferred shall be strictly limitedto the transferor’s rights to allocations and distributions as provided by thisAgreement with respect to the transferred Units, which allocations anddistributions may be applied (without limiting any other legal or equitablerights of the Partnership) to satisfy the debts, obligations, or liabilitiesfor damages that the transferor or transferee of such Units may have to thePartnership.

 

(b)                                 Inthe case of a transfer or attempted transfer of Units that is not a PermittedTransfer, the parties engaging or attempting to engage in such transfer shallbe liable to indemnify and hold harmless the Partnership and the other Partnersfrom all cost, liability, and damage that any of such indemnified Persons mayincur (including, without limitation, incremental tax liability and lawyersfees and expenses) as a result of such transfer or attempted transfer andefforts to enforce the indemnity granted hereby.

 

7.05*                           Withdrawalby Investor Partners.*  Neither aLimited Partner nor an Additional General Partner may withdraw from thePartnership, except as otherwise provided in this Agreement.

 

7.06*                           Removalof Managing General Partner.*

 

(a)                                  TheManaging General Partner may be removed at any time, upon 90 days priorwritten notice, with the consent of Investor Partners owning a majority of thethen outstanding Units, and upon the selection of a successor Managing GeneralPartner or Partners, within such 90-day period by Investor Partners owning amajority of the then outstanding Units.

 

(b)                                 Anysuccessor Managing General Partner may be removed upon the terms and conditionsprovided in this Section.

 

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(c)                                  Inthe event a Managing General Partner is removed, or withdraws in accordancewith Section 6.05 hereof and the Partners elect to continue thePartnership, its respective interest in the assets of the Partnership shall bedetermined by independent appraisal by a qualified independent petroleumengineering consultant who shall be selected by mutual agreement of theManaging General Partner and the incoming sponsor. Such appraisal will takeinto account an appropriate discount to reflect the risk of recovery of oil andgas reserves, and, at its election, the removed Managing General Partner’sinterest in the Partnership assets may be distributed to it or the interest ofthe Managing General Partner in the Partnership may be retained by it as aLimited Partner in the successor limited partnership; provided, however, thatif immediate payment to the removed Managing General Partner would imposefinancial or operational hardship upon the Partnership, as determined by thesuccessor Managing General Partner in the exercise of its fiduciary duties tothe Partnership, payment (plus reasonable interest) to the removed ManagingGeneral Partner may be postponed to that time when, in the determination of thesuccessor Managing General Partner, payment will not cause a hardship to thePartnership. In the event the Managing General Partner is involuntarilyremoved, the partnership may, at its option, elect to make payment for theManaging General Partner’s interest in the form of an interest-bearingpromissory note coming due in no less than five years with equal installmentspayable each year. In the event the Managing General Partner voluntarilywithdraws from the Partnership the Partnership may, at its option, elect to makepayment for the Managing General Partner’s interest in the form of anon-interest bearing, unsecured promissory note with principal payable fromdistributions which the Managing General Partner would have received under theAgreement had it not withdrawn. The cost of such appraisal shall be borne bythe Partnership. The successor Managing General Partner shall have the optionto purchase at least 20% of the removed Managing General Partner’s interest forthe value determined by the independent appraisal. The removed Managing GeneralPartner, at the time of its removal shall cause, to the extent it is legallypossible, its successor to be transferred or assigned all its rights,obligations, and interests in contracts entered into by it on behalf of the Partnership.In any event, the removed Managing General Partner shall cause its rights,obligations, and interests in any such contract to terminate at the time of itsremoval.

 

(d)                                 Uponeffectiveness of the removal of the Managing General Partner, the assets, books,and records of the Partnership shall be surrendered to the successor ManagingGeneral Partner, provided that the successor Managing General Partner shallhave first (i) agreed to accept the responsibilities of the Managing GeneralPartner, and (ii) made arrangements satisfactory to the original ManagingGeneral Partner to remove such Managing General Partner from personal liabilityon any Partnership borrowings or, if any Partnership creditor will not consentto such removal, agreed to indemnify the original Managing General Partner forany subsequent liabilities in respect to such borrowings. Immediately after theremoval of the Managing General Partner, the successor Managing General Partnershall prepare, execute, file for recordation, and cause to be published, suchnotices or certificates as may be required by the Act.

 

7.07*                           Callingof Meetings.*  Investor Partnersowning 10% or more of the then outstanding Units entitled to vote shall havethe right to request that the Managing General Partner call a meeting of thePartners. The Managing General Partner shall call such a meeting and shalldeposit in the United States mails within 15 days after receipt of suchrequest, written notice to all Investor Partners of the meeting and the purposeof the meeting, which shall be held on a date not less than

 

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30 nor more than 60 days afterthe date of mailing of such notice, at a reasonable time and place. InvestorPartners shall have the right to submit proposals to the Managing GeneralPartner for inclusion in the voting materials for the next meeting of InvestorPartners for consideration and approval by the Investor Partners. InvestorPartners shall have the right to vote in person or by proxy.

 

7.08*                           AdditionalVoting Rights.*  Investor Partnersshall be entitled to all voting rights granted to them by and under thisAgreement and as specified by the Act. Each Unit is entitled to one vote on allmatters; each fractional Unit is entitled to that fraction of one vote equal tothe fractional interest in the Unit. Except as otherwise provided herein or inthe prospectus, at any meeting of Investor Partners, a vote of a majority ofUnits represented at such meeting, in person or by proxy, with respect tomatters considered at the meeting at which a quorum is present shall berequired for approval of any such matters. In addition, except as otherwiseprovided in this Section, holders of a majority of the then outstanding Unitsmay, without the concurrence of the Managing General Partner, vote to (a)approve or disapprove the sale of all or substantially all of the assets of thePartnership, (b) dissolve the Partnership, (c) remove the Managing GeneralPartner and elect a new Managing General Partner, (d) amend the Agreement;provided, however, any such amendment may not increase the duties orliabilities of any participant or the Managing General Partner or increase ordecrease the profit or loss sharing or required capital contribution of anyparticipant or the Managing General Partner without the approval of suchparticipant or the Managing General Partner, nor may any such amendment affectthe classification of partnership income or loss for federal income taxpurposes without the unanimous approval of all the Partners, (e) elect a newManaging General Partner if the Managing General Partner elects to withdrawfrom the Partnership, and (f) cancel any contract for services with theManaging General Partner or any affiliates without penalty upon 60 days’notice. The Partnership shall not participate in a Roll-Up unless the Roll-Upis approved by at least 662/3% in interest of theInvestor Partners. A majority in interest of the then outstanding Unitsentitled to vote shall constitute a quorum. In determining the requisitepercentage in interest of Units necessary to approve a matter on which theManaging General Partner and its affiliates may not vote or consent, any Unitsowned by the Managing General Partner and its affiliates shall not be included.

 

7.09*                           Votingby Proxy.*  The Investor Partners mayvote either in person or by proxy.

 

7.10*                           Conversionof Additional General Partner Interests into Limited Partner Interests.*

 

(a)                                  Asprovided herein, Additional General Partners may elect to convert, transfer,and exchange their interests for Limited Partner interests in the Partnershipupon receipt by the Managing General Partner of written notice of suchelection. An Additional General Partner may request conversion of his interestsfor Limited Partner interests at any time one year following the closing of thesecurities offering which relates to the Agreement and the disbursement to thePartnership of the proceeds of such securities offering.

 

(b)                                 TheManaging General Partner shall notify all Additional General Partners at least30 days prior to any material change in the amount of the Partnership’sinsurance coverage. Within this 30-day period, and notwithstandingSection 7.10(a), Additional General Partners shall have the

 

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right to immediately converttheir Units into Units of limited partnership interest by giving written noticeto the Managing General Partner.

 

(c)                                  TheManaging General Partner shall convert the interests of all Additional GeneralPartners in a particular Partnership to interests of Limited Partners in thatPartnership upon completion of drilling of that Partnership.

 

(d)                                 TheManaging General Partner shall cause the conversion to be effected as promptlyas possible as prudent business judgment dictates. Conversion of an AdditionalGeneral Partnership interest to a Limited Partnership interest in a particularPartnership shall be conditioned upon a finding by the Managing General Partnerthat such conversion will not cause a termination of the Partnership forfederal income tax purposes, and will be effective upon the Managing GeneralPartner’s filing an amendment to its Certificate of Limited Partnership. TheManaging General Partner is obligated to file an amendment to its Certificateat any time during the full calendar month after receipt of the required noticeof the Additional General Partner and a determination of the Managing GeneralPartner that the conversion will not constitute a termination of thePartnership for tax purposes. Effecting conversion is subject to thesatisfaction of the condition that the electing Additional General Partnerprovide written notice to the Managing General Partner of such intent toconvert. Upon such transfer and exchange, such Additional General Partnersshall be Limited Partners; however, they will remain liable to the Partnershipfor any additional Capital Contribution(s) required for their proportionateshare of any Partnership obligation or liability arising prior to theconversion.

 

(e)                                  LimitedPartners may not convert and/or exchange their interests for Additional GeneralPartner interests.

 

7.11*                           Liabilityof Partners.*  Except as otherwiseprovided in this Agreement or as otherwise provided by the Act, each GeneralPartner shall be jointly and severally liable for the debts and obligations ofthe Partnership. In addition, each Additional General Partner shall be jointlyand severally liable for any wrongful acts or omissions of the Managing GeneralPartner and/or the misapplication of money or property of a third party by theManaging General Partner acting within the scope of its apparent authority tothe extent such acts or omissions are chargeable to the Partnership.

 

**ARTICLE VIII**

**BOOKS AND RECORDS**

 

8.01*                           Booksand Records.*

 

(a)                                  Foraccounting and income tax purposes, the Partnership shall operate on a calendaryear.

 

(b)                                 TheManaging General Partner shall keep just and true records and books of accountwith respect to the operations of the Partnership and shall maintain andpreserve during the term of the Partnership and for four years thereafter allsuch records, books of account, and other relevant Partnership documents. TheManaging General Partner shall maintain for at least six years

 

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all records necessary to substantiatethe fact that Units were sold only to purchasers for whom such Units weresuitable. Such books shall be maintained at the principal place of business ofthe Partnership and shall be kept on the accrual method of accounting.

 

(c)                                  TheManaging General Partner shall keep or cause to be kept complete and accuratebooks and records with respect to the Partnership’s business, which books andrecords shall at all times be kept at the principal office of the Partnership.Any records maintained by the Partnership in the regular course of itsbusiness, including the names and addresses of Investor Partners, books ofaccount, and records of Partnership proceedings, may be kept on or be in theform of RAM disks, magnetic tape, photographs, micrographics, or any otherinformation storage device, provided that the records so kept are convertibleinto clearly legible written form within a reasonable period of time. The booksand records of the Partnership shall be made available for review by anyInvestor Partner or his representative at any reasonable time. The ManagingGeneral Partner shall maintain all records of appraisals of fair market valuedone by independent experts with supporting documentation for a period of atleast six years from their date.

 

(d)                                 ThePartner List shall be maintained as follows:

 

(1)                                  An alphabetical listof the names, addresses and business telephone numbers of the Investor Partnersof the Partnership along with the number of Units held by each of them (the“Partner List”) shall be maintained as a part of the books and records of thePartnership and shall be available for the inspection by a QualifiedRepresentative (as defined in Section 8.01(e)) of any Investor Partner atthe home office of the Partnership upon the request of the Investor Partner;

 

(2)                                  The Partner Listshall be updated at least quarterly to reflect changes in the informationcontained therein;

 

(3)                                  A copy of the PartnerList shall be mailed to the Qualified Representative of any Investor Partnerrequesting the Partner List within ten days of the request and the receipt bythe Managing General Partner of a confidentiality agreement executed by theQualified Representative. The copy of the Partner List shall be printed inalphabetical order, on white paper, and in a readily readable type size (in noevent smaller than 10-point type). A reasonable charge for copy work may becharged by the Partnership;

 

(4)                                  The purposes forwhich an Investor Partner may request a copy of the Partner List include,without limitation, matters relating to voting rights under the PartnershipAgreement and the exercise of Investor Partners’ rights under federal proxylaws; and

 

(5)                                  If the ManagingGeneral Partner of the Partnership neglects or refuses to exhibit, produce, ormail a copy of the Partner List as requested, the Managing General Partnershall be liable to any Investor Partner requesting the list for the costs,including attorneys fees, incurred by that Investor Partner for compelling theproduction of the Partner List, and for actual damages suffered by any InvestorPartner by reason of such refusal or neglect. It shall be a defense that theactual purpose and reason for the requests

 

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for inspection or for a copy of the Partner List is to secure the listof Investor Partners or other information for the purpose of selling such listor information or copies thereof, or of using the same for a commercial purposeother than in the interest of the applicant as an Investor Partner relative tothe affairs of the Partnership. The Managing General Partner may require theInvestor Partners requesting the Partner List to represent that the list is notrequested for a commercial purpose unrelated to the Investor Partner’s interestin the Partnership. The remedies provided hereunder to Investor Partnersrequesting copies of the Partner List are in addition to, and shall not in anyway limit, other remedies available to Investor Partners under federal law, orthe laws of any state.

 

(e)                                  AQualified Representative for the purposes of this Article is any law firm orfirm of Certified Public Accountants that (i) agrees to maintain theconfidentiality of the Partner List and (ii) maintains adequate insurancethat covers any breach of the confidentiality agreement.

 

8.02*                           Reports.*  The Managing General Partner shall deliverto each Investor Partner the following financial statements and reports at thetimes indicated below:

 

(a)                                  Within75 days after the end of the first six months of each fiscal year (for such sixmonth period) and within 120 days after the end of each fiscal year (forsuch year), financial statements, including a balance sheet and statements ofincome, Partners’ equity, and cash flows, all of which shall be prepared inaccordance with generally accepted accounting principles. The annual financialstatements shall be accompanied by (i) a report of an independentcertified public accountant designated by the Managing General Partner statingthat an audit of such financial statements has been made in accordance withgenerally accepted auditing standards and that in its opinion such financialstatements present fairly the financial condition, results of operations, andcash flow of the Partnership in accordance with generally accepted accountingprinciples and (ii) a reconciliation of such financial statements with theinformation furnished to the Investor Partners for federal income tax reportingpurposes.

 

(b)                                 Annuallyby March 15 of each year, a report containing such information as may be deemedto enable each Investor Partner to prepare and file his federal income taxreturn and any required state income tax return.

 

(c)                                  Annuallywithin 120 days after the end of each fiscal year (i) a summary ofthe computations of the total estimated proved oil and gas reserves of thePartnership as of the end of such fiscal year and the dollar value thereof atthen existing prices and a computation of each Investor Partner’s interest insuch value, such reserve computations to be based upon engineering reportsprepared by qualified independent petroleum engineers, (ii) an estimate ofthe time required for the extraction of such proved reserves and the presentworth thereof (discounted at a rate generally accepted in the oil and gasindustry and undiscounted), and (iii) a statement that because of the timeperiod required to extract such reserves the present value of revenues to beobtained in the future is less than if such revenues were immediatelyreceivable. Each such report shall be prepared in accordance with customary andgenerally accepted standards and practices for petroleum engineers and shall beprepared by a recognized independent petroleum engineer selected from time totime by the Managing General Partner. No later than 90 days following theoccurrence of an event resulting in a reduction in an amount of 10% or more ofthe estimated value

 

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of the proved oil and gasreserves as last reported to the Investor Partners, other than a reductionresulting from production, a new summary conforming to the requirements setforth above in this Section 8.02(c) shall be delivered to the InvestorPartners.

 

(d)                                 Within75 days after the end of the first six months of each fiscal year and within120 days after the end of each fiscal year, (i) a summaryitemization, by type and/or classification, of any transaction of thePartnership since the date of the last such report with the Managing GeneralPartner or any Affiliate thereof and the total fees, compensation, andreimbursement paid by the Partnership (or indirectly on behalf of thePartnership) to the Managing General Partner and its affiliates, and(ii) a schedule reflecting (A) the total costs of the Partnership(and, where applicable, the costs pertaining to each Lease) and the costs paidby the Managing General Partner and by the Investor Partners and (B) thetotal revenues of the Partnership and the revenues received by or credited tothe accounts of the Managing General Partner and the Investing Partners. Eachsemi-annual report delivered by the Managing General Partner may containsummary estimates of the information described in subdivision (i) ofSection 8.02(c).

 

(e)                                  Monthlywithin 15 days after the end of each calendar month while the Partnership isparticipating in the drilling and completion of wells in which it has aninterest until the end of such activity, and thereafter for a period of threeyears within 75 days after the end of the first six months of each fiscal yearand within 120 days after the end of each fiscal year, (i) a descriptionof each Prospect or field in which the Partnership owns Leases including thecost, location, number of acres under lease, and the interest owned therein bythe Program (provided that after the initial description of each such Prospector field has been provided to the Investor Partners only material changes, ifany, with respect to such Prospect or field need be described), (ii) adescription of all farmins and farmouts of the Partnership made since the dateof the last such report, including the reason therefor, the location and timingthereof, the Person to whom made and the terms thereof, and (iii) asummary of the wells drilled by the Partnership, indicating whether each ofsuch wells has been completed, a statement of the cost of each well completedor abandoned and the reason for abandoning any well after commencement ofproduction. Each report delivered by the Managing General Partner may containsummary estimates of the information described in subsection (iii).

 

(f)                                    TheManaging General Partner shall cause the Partnership’s independent auditors toaudit the financial statements of the Partnership in accordance with generallyaccepted auditing standards. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,which would include an assessment as to whether or not the method used to makeallocations of costs was consistent with the method described in theprospectus. If the Managing General Partner subsequently decides to allocateexpenses in a manner different from the manner described in the prospectus,such change shall be reported by the Managing General Partner to the InvestorPartners together with an explanation of why such change was made and the basisfor determining the reasonableness of the new allocation method.

 

(g)                                 Suchother reports and financial statements as the Managing General Partner shalldetermine from time to time.

 

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(h)                                 Concurrentlywith their transmittal to Investor Partners and as required, the ManagingGeneral Partner shall file a copy of each such report with the CaliforniaCommissioner of Corporations and with the securities divisions of other states.

 

8.03*                           BankAccounts.*  All funds of thePartnership shall be deposited in such separate bank account or accounts,short-term obligations of the U.S. Government or its agencies, or otherinterest-bearing investments and money market or liquid asset mutual funds asshall be determined by the Managing General Partner. All withdrawals therefromshall be made upon checks signed by the Managing General Partner or any Personauthorized to do so by the Managing General Partner.

 

8.04*                           FederalIncome Tax Elections.*

 

(a)                                  Exceptas otherwise provided in this Section 8.04, all elections required orpermitted to be made by the Partnership under the Code shall be made by theManaging General Partner in its sole discretion. Each Partner agrees to providethe Partnership with all information necessary to give effect to any electionto be made by the Partnership.

 

(b)                                 ThePartnership shall elect to currently deduct IDC as an expense for income taxpurposes and shall require any partnership, joint venture, or other arrangementin which it is a party to make such an election.

 

**ARTICLE IX**

**DISSOLUTION; WINDING-UP**

 

9.01*                           Dissolution.*

 

(a)                                  Exceptas otherwise provided herein, the retirement, withdrawal, removal, death,insanity, incapacity, dissolution, or bankruptcy of any Investor Partner shallnot dissolve the Partnership. The successor to the rights of such InvestorPartner shall have all the rights of an Investor Partner for the purpose ofsettling or administering the estate or affairs of such Investor Partner;provided, however, that no successor shall become a substituted InvestorPartner except in accordance with Article VII; provided, further, thatupon the withdrawal of an Additional General Partner, the Partnership shall bedissolved and wound up unless at that time there is at least one other GeneralPartner, in which event the business of the Partnership shall continue to becarried on. Neither the expulsion of any Investor Partner nor the admission orsubstitution of an Investor Partner shall work a dissolution of thePartnership. The estate of a deceased, insane, incompetent, or bankruptInvestor Partner shall be liable for all his liabilities as an InvestorPartner.

 

(b)                                 ThePartnership shall be dissolved upon the earliest to occur of:

 

(1)                                  The written consentof the Investor Partners owning a majority of the then-outstanding Units todissolve and wind up the affairs of the Partnership;

 

(2)                                  Subject to theprovisions of Subsection (c) below, the retirement, withdrawal, removal,death, adjudication of insanity or incapacity, or bankruptcy (or, in the

 

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case of a corporate Managing General Partner, the withdrawal, removal,filing of a certificate of dissolution, liquidation, or bankruptcy) of theManaging General Partner;

 

(3)                                  The sale, forfeiture,or abandonment of all or substantially all of the Partnership’s property;

 

(4)                                  The thirtiethanniversary of the Offering Termination Date;

 

(5)                                  A dissolution eventdescribed in Subsection (a) above; or

 

(6)                                  Any event causingdissolution of the Partnership under the Act.

 

(c)                                  Inthe case of any event described in Subsection (b)(2) above, if a successorManaging General Partner is selected by Investor Partners owning a majority ofthe then outstanding Units within 90 days after such 9.01(b)(2) event, and ifsuch Investor Partners agree, within such 90-day period to continue thebusiness of the Partnership, or if the remaining Managing General Partner, ifany, continues the business of the Partnership, then the Partnership shall notbe dissolved.

 

(d)                                 Ifthe retirement, withdrawal, removal, death, insanity, incapacity, dissolution,liquidation, or bankruptcy of any Partner, or the assignment of a Partner’sinterest in the Partnership, or the substitution or admission of a new Partner,shall be deemed under the Act to cause a dissolution of the Partnership, then,except as provided in Section 9.01(c), the remaining Partners may, inaccordance with the Act, continue the Partnership business as a new partnershipand all such remaining Partners agree to be bound by the provisions of thisAgreement.

 

9.02*                           Liquidation.*  Upon a dissolution and final termination ofthe Partnership, the Managing General Partner, or in the event there is noManaging General Partner, any other person or entity selected by the InvestorPartners (hereinafter referred to as a “Liquidator”) shall cause the affairs ofthe Partnership to be wound up and shall take account of the Partnership’sassets (including contributions, if any, of the Managing General Partnerpursuant to Section 3.01(e)) and liabilities, and the assets shall,subject to the provisions of Section 9.03(b), be liquidated as promptly asis consistent with obtaining the fair market value thereof, and the proceedstherefrom (which dissolution and liquidation may be accomplished over a periodspanning one or more tax years in the sole discretion of the Managing GeneralPartner or Liquidator), to the extent sufficient therefor, shall be applied anddistributed in accordance with Section 9.03.

 

9.03*                           Winding-up.*

 

(a)                                  Uponthe dissolution of the Partnership and winding up of its affairs, the assets ofthe Partnership shall be distributed as follows:

 

(1)                                  All of thePartnership’s debts and liabilities to Persons other than the Managing GeneralPartner shall be paid and discharged;

 

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(2)                                  All outstanding debtsand liabilities to the Managing General Partner shall be paid and discharged;

 

(3)                                  Assets shall bedistributed to the Partners to the extent of their positive Capital Accountbalances, pro rata, in accordance with such positive Capital Account balances;and

 

(4)                                  Any assets remainingafter the Partners’ Capital Accounts have been reduced to zero pursuant toSection 9.03(c) shall be distributed in accordance with the provisions ofArticle III.

 

(b)                                 Distributionspursuant to this Section 9.03 shall be made in cash or in-kind to thePartners, at the election of the Partners. Notwithstanding the provision ofthis Section 9.03(b), in no event shall the Partners reserve the right totake in-kind and separately dispose of their share of production. Anydistribution made in-kind shall be subject to the provisions ofSection 9.03(c).

 

(c)                                  Anyin-kind property distributions to the Investor Partners shall be made to aliquidating trust or similar entity for the benefit of the Investor Partners,unless at the time of the distribution:

 

(1)                                  The Managing GeneralPartner shall offer the Investor Partners the election of receiving in-kindproperty distributions and the Investor Partners accept such offer after beingadvised of the risks associated with such direct ownership; or

 

(2)                                  There are alternativearrangements in place which assure the Investor Partners that they will not, atany time, be responsible for the operation or disposition of Partnershipproperties.

 

The winding-up of the affairs of the Partnership and the distributionof its assets shall be conducted exclusively by the Managing General Partner orthe Liquidator, who is hereby authorized to do any and all acts and thingsauthorized by law for these purposes.

 

**ARTICLE X**

**POWER OF ATTORNEY**

 

10.01*                     ManagingGeneral Partner as Attorney-in-Fact.* The undersigned makes, constitutes, and appoints the Managing GeneralPartner the true and lawful attorney for the undersigned, and in the name,place, and stead of the undersigned from time to time to make, execute, sign,acknowledge, and file:

 

(a)                                  Anynotices or certificates as may be required under the Act and under the laws ofany other state or jurisdiction in which the Partnership shall engage, or seekto engage, to do business and to do such other acts as are required toconstitute the Partnership as a limited partnership under such laws.

 

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(b)                                 Anyamendment to the Agreement pursuant to and which complies withSection 11.09.

 

(c)                                  Suchcertificates, instruments, and documents as may be required by, or may beappropriate under the laws of any state or other jurisdiction in which thePartnership is doing or intends to do business and with the use of the name ofthe Partnership by the Partnership.

 

(d)                                 Suchcertificates, instruments, and documents as may be required by, or as may beappropriate for the undersigned to comply with, the laws of any state or otherjurisdiction to reflect a change of name or address of the undersigned.

 

(e)                                  Suchcertificates, instruments, and documents as may be required to be filed withthe Department of Interior (including any bureau, office or other unit thereof,whether in Washington, D.C. or in the field, or any officer or employeethereof), as well as with any other federal or state agencies, departments,bureaus, offices, or authorities and pertaining to (i) any and all offersto lease, leases (including amendments, modifications, supplements, renewals,and exchanges thereof) of, or with respect to, any lands under the jurisdictionof the United States or any state including without limitation lands within thepublic domain, and acquired lands, and provides for the leasing thereof;(ii) all statements of interest and holdings on behalf of the Partnershipor the undersigned; (iii) any other statements, notices, or communicationsrequired or permitted to be filed or which may hereafter be required orpermitted to be filed under any law, rule, or regulation of the United States,or any state relating to the leasing of lands for oil or gas exploration ordevelopment; (iv) any request for approval of assignments or transfers ofoil and gas leases, any unitization or pooling agreements and any otherdocuments relating to lands under the jurisdiction of the United States or anystate; and (v) any other documents or instruments which saidattorney-in-fact in its sole discretion shall determine should be filed.

 

(f)                                    Anyfurther document, including furnishing verified copies of the Agreement and/orexcerpts therefrom, which said attorney-in-fact shall consider necessary orconvenient in connection with any of the foregoing, hereby giving saidattorney-in-fact full power and authority to do and perform each and every actand thing whatsoever requisite and necessary to be done in and about theforegoing as fully as the undersigned might and could do if personally present,and hereby ratifying and confirming all that said attorney-in-fact shalllawfully do to cause to be done by virtue hereof.

 

10.02*                     Natureas Special Power.*  The foregoinggrant of authority:

 

(a)                                  Isa special Power of Attorney coupled with an interest, is irrevocable, and shallsurvive the death of the undersigned;

 

(b)                                 Shallsurvive the delivery of any assignment by the undersigned of the whole or anyportion of his Units; except that where the assignee thereof has been approvedby the Managing General Partner for admission to the Partnership as asubstitute General or Limited Partner as the case may be, the Power of Attorneyshall survive the delivery of such assignment for the sole purpose of enablingsaid attorney-in-fact to execute, acknowledge, and file any instrumentnecessary to effect such substitution; and

 

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(c)                                  Maybe exercised by said attorney-in-fact with full power of substitution andresubstitution and may be exercised by a listing of all of the Partnersexecuting any instrument with a single signature of said attorney-in-fact.

 

**ARTICLE XI**

**MISCELLANEOUS PROVISIONS**

 

11.01*                     Liabilityof Parties.*  By entering into thisAgreement, no party shall become liable for any other party’s obligationsrelating to any activities beyond the scope of this Agreement, except asprovided by the Act. If any party suffers, or is held liable for, any loss orliability of the Partnership which is in excess of that agreed upon herein,such party shall be indemnified by the other parties, to the extent of theirrespective interests in the Partnership, as provided herein.

 

11.02*                     Notices.*  Any notice, payment, demand, orcommunication required or permitted to be given by any provision of thisAgreement shall be deemed to have been sufficiently given or served for allpurposes if delivered personally to the party or to an officer of the party towhom the same is directed or sent by registered or certified mail, postage andcharges prepaid, addressed as follows (or to such other address as the partyshall have furnished in writing in accordance with the provisions of thisSection): If to the Managing General Partner, at Reef Partners LLC,1901 N. Central Expressway, Suite 300, Richardson, Texas 75080;if to an Investor Partner, at such Investor Partner’s address for purposes ofnotice which is set forth on attached Exhibit A. Unless otherwiseexpressly set forth in this Agreement to the contrary, any such notice shall bedeemed to be given on the date on which the same was deposited in a regularlymaintained receptacle for the deposit of United States mail, addressed and sentas aforesaid.

 

11.03*                     ParagraphHeadings.*  The headings in thisAgreement are inserted for convenience and identification only and are in noway intended to describe, interpret, define, or limit the scope, extent, orintent of this Agreement or any provision hereof.

 

11.04*                     Severability.*  Every portion of this Agreement is intendedto be severable. If any term or provision hereof is illegal or invalid by anyreason whatsoever, such illegality or invalidity shall not affect the validityof the remainder of this Agreement.

 

11.05*                     SoleAgreement.*  This Agreementconstitutes the entire understanding of the parties hereto with respect to thesubject matter hereof and no amendment, modification, or alteration of theterms hereof shall be binding unless the same be in writing, dated subsequentto the date hereof and duly approved and executed by the Managing GeneralPartner and such percentage of Investor Partners as provided in Section 11.09of this Agreement.

 

11.06*                     ApplicableLaw.*  This Agreement, which shall begoverned exclusively by its terms, is intended to comply with the Code and withthe Act and shall be interpreted consistently therewith, provided, however,that causes of action for violations of federal or state securities laws shallnot be governed by this Section 11.06.

 

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11.07*                     Executionin Counterparts.*  This Agreement maybe executed in any number of counterparts with the same effect as if allparties hereto had all signed the same document. All counterparts shall be construedtogether and shall constitute one agreement.

 

11.08*                     Waiverof Action for Partition.*  Each ofthe parties irrevocably waives, during the term of the Partnership, any rightthat it may have to maintain any action for partition with respect to the Partnershipand the property of the Partnership.

 

11.09*                     Amendments.*

 

(a)                                  Unlessotherwise specifically herein provided, this Agreement shall not be amendedwithout the consent of the Investor Partners owning a majority of the thenoutstanding Units entitled to vote.

 

(b)                                 TheManaging General Partner may, without notice to, or consent of, any InvestorPartner, amend any provisions of the Certificate of Limited Partnership or thisAgreement, or consent to and execute any amendment to the Certificate ofLimited Partnership or this Agreement, to reflect:

 

(1)                                  A change in the nameor location of the principal place of business of the Partnership;

 

(2)                                  The admission ofsubstituted or additional Investor Partners in accordance with this Agreement;

 

(3)                                  A reduction in,return of, or withdrawal of, all or a portion of any Investor Partner’s CapitalContribution;

 

(4)                                  A correction of anytypographical error or omission;

 

(5)                                  A change which isnecessary in order to qualify the Partnership as a limited partnership under thelaws of any other state or which is necessary or advisable, in the opinion ofthe Managing General Partner, to ensure that the Partnership will be treated asa partnership and not as an association taxable as a corporation for federalincome tax purposes;

 

(6)                                  A change in theallocation provisions, in accordance with the provisions ofSection 3.02(l), in a manner that, in the sole opinion of the ManagingGeneral Partner (which opinion shall be determinative), would result in themost favorable aggregate consequences to the Investor Partners as nearly aspossible consistent with the allocations contained herein, for such allocationsto be recognized for federal income tax purposes due to developments in thefederal income tax laws or otherwise; or

 

(7)                                  Any other amendmentsimilar to the foregoing; provided, however, that the Managing General Partnershall have no authority, right, or power under this Section to amend the votingrights of the Investor Partners.

 

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11.10*                     Consentto Allocations and Distributions.* The methods herein set forth by which allocations and distributions aremade and apportioned are hereby expressly consented to by each Partner as anexpress condition to becoming a Partner.

 

11.11*                     Ratification.*  The Investor Partner whose signature appearsat the end of this Agreement hereby specifically adopts and approves everyprovision of this Agreement to which the signature page is attached.

 

11.12*                     Substitutionof Signature Pages.*  This Agreement hasbeen executed in duplicate by the undersigned Investor Partners and oneexecuted copy of the signature page is attached to the undersigned’s copy ofthis Agreement. It is agreed that the other executed copy of such signaturepage may be attached to an identical copy of this Agreement together with thesignature pages from counterpart Agreements which may be executed by otherInvestor Partners.

 

11.13*                     Incorporationby Reference.*  Every exhibit,schedule, and other appendix attached to this Agreement and referred to hereinis hereby incorporated in this Agreement by reference.

 

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**SIGNATUREPAGE**

 

IN WITNESSWHEREOF, the undersigned have executed this Agreement as of the day and yearfirst written above.

 
| MANAGING  GENERAL PARTNER:               |                          | INITIAL  LIMITED PARTNER: |
|------------------------------------------|-------------------------------|---------------------------|
| Reef  Partners LLC                       |                          |                      |
| 1901 North  Central Expressway-Suite 300 |                          |                      |
| Richardson,  Texas 75080                 |                          | By:                       | /s/ Michael  J. Mauceli |   |
|                                     |                          |                      | Michael J. Mauceli |
|                                     |                          |                      |
| By:                                      | /s/ Michael  J. Mauceli       |                      |   |   |
|                                     | Michael J. Mauceli, *Manager* |                      |   |   |

 

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**INVESTOR PARTNERS**

 

**COMPLETE TO INVEST ASADDITIONAL GENERAL PARTNER**

 

**ADDITIONAL GENERALPARTNER(S):**

 

 
|                        |                              | Name of Subscriber:    |         |   |
|-----------------------------|-----------------------------------|------------------------|--------------|--------|
| NUMBER OF  UNITS  PURCHASED |                              |                   | (Print Name) |   |
|                        |                              |                   |
|                        |                              |                   |
|                        |                              |                   |
| SUBSCRIPTION  PRICE         |                              |                   |
| $                           |                              | Address of Subscriber: |
|                        |                              |                   |         |
|                        |                              |                   |         |
|                        |                              |                   |         |
|                        |                              |                   |
|                        |                              |                   |
| By:  Reef Partners LLC |                              |                   |
|                        |                              |                   |
|                        |                              |                   |
| By:                         |                              |                   |         |
|                        | Michael J.  Mauceli, Manager      |                   |         |   |
|                        | *Attorney-in-Fact for subscriber* |                   |         |   |
|                             |                                   |                        |              |        |  |  |  |

 

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**COMPLETE TO INVEST ASLIMITED PARTNER**

 

**LIMITED PARTNER(S):**

 

 
|                        |                              | Name of Subscriber:    |         |   |
|-----------------------------|-----------------------------------|------------------------|--------------|--------|
| NUMBER OF  UNITS  PURCHASED |                              |                   | (Print Name) |   |
|                        |                              |                   |
|                        |                              |                   |
|                        |                              |                   |
| SUBSCRIPTION  PRICE         |                              |                   |
| $                           |                              | Address of Subscriber: |
|                        |                              |                   |         |
|                        |                              |                   |         |
|                        |                              |                   |         |
|                        |                              |                   |
|                        |                              |                   |
| By:  Reef Partners LLC |                              |                   |
|                        |                              |                   |
|                        |                              |                   |
| By:                         |                              |                   |         |
|                        | Michael J.  Mauceli, Manager      |                   |         |   |
|                        | *Attorney-in-Fact for subscriber* |                   |         |   |
|                             |                                   |                        |              |        |  |  |  |

 

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