Exhibit 10.28


 


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


 


 


AGREEMENT OF LIMITED PARTNERSHIP


 


OF


 


CWEI COTTON VALLEY I, L.P.


 

















 


TABLE OF CONTENTS


 


	
  ARTICLE I

  DEFINITIONS

  
	
   

  	
   

  
	
  1.01

  	
  Certain Definitions

  
	
  1.02

  	
  Construction

  
	
  ARTICLE II

  ORGANIZATION

  
	
   

  
	
  2.01

  	
  Formation

  
	
  2.02

  	
  Name

  
	
  2.03

  	
  Registered
  Office; Registered Agent; Other Offices

  
	
  2.04

  	
  Purposes

  
	
  2.05

  	
  Certificate;
  Foreign Qualification

  
	
  2.06

  	
  Term

  
	
   

  	
   

  
	
  ARTICLE III

  GENERAL PARTNER; MANAGEMENT

  
	
   

  
	
  3.01

  	
  Authority of General Partner

  
	
  3.02

  	
  Certain Restrictions on General Partner’s
  Power and Authority

  
	
  3.03

  	
  Duties
  and Services of General Partner

  
	
  3.04

  	
  Operating
  Agreements

  
	
  3.05

  	
  Admission
  of Additional General Partners

  
	
  3.06

  	
  Withdrawal
  of General Partner

  
	
  3.07

  	
  General
  Partner as Limited Partner

  
	
   

  	
   

  
	
  ARTICLE IV

  LIMITED PARTNERS

  
	
   

  
	
  4.01

  	
  Restrictions
  on Limited Partners

  
	
  4.02

  	
  Access
  to Information

  
	
  4.03

  	
  Admission of Additional Limited Partners

  
	
  4.04

  	
  Investment Representations of the Limited Partners

  
	
  4.05

  	
  Transfer Restrictions

  
	
  4.06

  	
  Permitted Transfers; Status as Assignee

  
	
  4.07

  	
  General Partner’s Right of Purchase

  
	
  4.08

  	
  Specific Performance

  
	
   

  	
   

  
	
  ARTICLE V

  CAPITAL CONTRIBUTIONS

  
	
   

  
	
  5.01

  	
  Capital Contributions of General Partner

  
	
  5.02

  	
  Initial Capital Contributions of Limited
  Partners

  
	
  5.03

  	
  Additional Capital Contributions of Limited
  Partners

  
	
  5.04

  	
  Capital Accounts

  
	
  5.05

  	
  Return of Capital Contribution

  



 


i

















 


	
  ARTICLE VI

  SHARING, ALLOCATIONS AND DISTRIBUTIONS

  
	
   

  
	
  6.01

  	
  Sharing and Allocation of Costs and
  Expenses

  
	
  6.02

  	
  Sharing and Allocation of Revenues

  
	
  6.03

  	
  Allocations for Capital Account and Tax
  Purposes

  
	
  6.04

  	
  Distributions

  
	
  6.05

  	
  Withholding Taxes

  
	
   

  	
   

  
	
  ARTICLE VII

  BOOKS, RECORDS AND BANK ACCOUNTS

  
	
   

  
	
  7.01

  	
  Maintenance of Books

  
	
  7.02

  	
  Accounts

  
	
   

  	
   

  
	
  ARTICLE VIII

  DISSOLUTION, LIQUIDATION AND TERMINATION

  
	
   

  
	
  8.01

  	
  Dissolution

  
	
  8.02

  	
  Liquidation and Termination

  
	
  8.03

  	
  Termination

  
	
   

  	
   

  
	
  ARTICLE IX

  GENERAL PROVISIONS

  
	
   

  
	
  9.01

  	
  Offset

  
	
  9.02

  	
  Notices

  
	
  9.03

  	
  Entire Agreement

  
	
  9.04

  	
  Effect of Waiver or Consent

  
	
  9.05

  	
  Amendment or Modification

  
	
  9.06

  	
  Binding
  Effect

  
	
  9.07

  	
  Governing
  Law; Severability

  
	
  9.08

  	
  Further Assurances

  
	
  9.09

  	
  Waiver of Certain Rights

  
	
  9.10

  	
  Insurance

  
	
  9.11

  	
  Indemnification

  
	
  9.12

  	
  Counsel to the Partnership

  
	
  9.13

  	
  Power of Attorney

  
	
  9.14

  	
  Counterparts

  
	
  9.15

  	
  No Employment Contract

  
	
   

  	
   

  
	
  Exhibit
  A – Schedule of Limited Partners

  
	
  Exhibit
  B – Area of Interest

  
	
  Exhibit
  C – Wells

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

  



 


ii

















 


AGREEMENT OF LIMITED PARTNERSHIP


 


OF


 


CWEI COTTON VALLEY I, L.P.


 


This AGREEMENT OF LIMITED PARTNERSHIP OF CWEI COTTON VALLEY I, L.P.
(this “Agreement”) is made and
entered into as of October 1, 2002 (the “Effective
Date”), by and among the Partners (as defined below).


 


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


 


ARTICLE
I


DEFINITIONS


 


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


 


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


 


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


 


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


 


“Agreed
Rate” means 3.596% per annum.


 


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


 

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


2

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


3

















 


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


 


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


 


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


 


ARTICLE
II


ORGANIZATION


 


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


 


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


 


4

















 


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


 


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


 


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


 


2.06         Term.  The term of Partnership shall commence on
the date of filing of the Certificate and shall continue until the close of
business on December 31, 2012, unless the Partnership is dissolved and
liquidated before such time in accordance with this Agreement.


 


ARTICLE
III


GENERAL
PARTNER; MANAGEMENT


 


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


 


5

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


6

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


3.03         Duties and Services of
General Partner. 
The General Partner shall comply in all respects with the terms of this
Agreement and shall use its reasonable efforts to cause the Partnership to: (i)
comply in all material respects with the terms and provisions of all agreements
to which the Partnership is a party or to which its properties are subject;
(ii) comply in all material respects with all applicable laws, ordinances or
governmental rules and regulations to which the Partnership is subject; and
(iii) obtain all licenses, permits, franchises and other governmental
authorizations material and necessary with respect to the ownership of
Partnership properties and the conduct of Partnership business and
operations.  During the existence of the
Partnership, the General Partner shall devote such time and effort to the
Partnership business and operations as shall be necessary for the furtherance
of the purposes of the Partnership; provided, however, that the
Partners acknowledge and agree that neither the General Partner nor any
Affiliate thereof nor any of their respective officers, directors, employees or
agents shall be required to devote full time to Partnership business and may
from time to time engage in and possess interests in other business ventures of
any and every type and description, independently


 


7

















 


or with others, including
without limitation, the ownership, acquisition, exploration, development,
operation and management of oil and gas properties, oil and gas drilling
programs and other partnerships similar to this Partnership, and that neither
the Partnership nor any Limited Partner shall by virtue of this Agreement have
any right, title, interest or expectancy in or to such activities or
ventures.  The Partners acknowledge and
agree that the General Partner engages in the same business as the Partnership,
and that that General Partner has no duty to any Limited Partner with regard to
the operation of the General Partner’s business affairs or prospects outside of
the Partnership.  The Partners also
agree and acknowledge that the General Partner may operate the General
Partner’s business affairs or prospects outside of the Partnership without
offering the Partnership or any Limited Partner the right to participate in
such other affairs or prospects.


 


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


 


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


 


3.06         Withdrawal of General
Partner.  A
General Partner shall cease to be a General Partner and shall be deemed to have
withdrawn from the Partnership upon the General Partner’s written notice of its
withdrawal to the other Partners.  A
General Partner may not be removed as a General Partner.


 


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


 


ARTICLE
IV


LIMITED
PARTNERS


 


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


 


8

















 


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


 


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


 


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


 


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


 


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


 


(f)            be entitled to
withdraw from the Partnership.


 


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


 


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


 


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


 


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


 


9

















 


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


 


4.04         Investment Representations of the Limited Partners.


 


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


 


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


 


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


 


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


 


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


 


10

















 


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


 


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


 


ARTICLE
V


CAPITAL
CONTRIBUTIONS


 


5.01         Capital Contributions of General Partner.  The General Partner shall contribute to the
Partnership (i) cash in such amounts as shall be necessary to pay timely the
costs and expenses allocated and charged to the General Partner pursuant to Section
6.01 and elsewhere herein, and (ii) an undivided 5% of the General
Partner’s interest in Partnership Property. 
In the event any Partnership Property contributed to the Partnership are
subject to any liens or similar encumbrances, the General Partner shall use
reasonable efforts to cause such liens or similar encumbrances to be released
prior to any dissolution of the Partnership.


 


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


 


5.03         Additional Capital Contributions of Limited
Partners.


 


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


 


(b)           If a Limited Partner
does not make an additional Capital Contribution to the Partnership in the
amount, at the time or in the manner provided in Section 5.03(a) (a “Non-Contributing Limited Partner”), the
General Partner, in its sole discretion, may make the additional Capital
Contribution that the Non-Contributing Limited Partner failed to make within 20
days after the Contribution Date, in which case the Non-Contributing Limited
Partner, without further action on his or her part, shall be deemed to have
assigned to the General Partner on the Contribution Date the economic rights to
the Units held by the Non-Contributing Limited


 


11

















 


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


 


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


 


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


 


ARTICLE
VI


SHARING, ALLOCATIONS AND DISTRIBUTIONS


 


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


 


(a)           Acquisition Costs shall be allocated
(i) 100% to the General Partner before Payout and (ii) 1% to the General
Partner and 99% to the Limited Partners as a class after Payout;


 


(b)           Well Costs shall be allocated (i)
100% to the General Partner before Payout and (ii) 1% to the General Partner
and 99% to the Limited Partners as a class after Payout;


 


(c)           All other costs and expenses of the
Partnership not specifically allocated above shall be allocated (i) 100% to the
General Partner before Payout and (ii) 1% to the General Partner and 99% to the
Limited Partners as a class after Payout.


 


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


 


6.02         Sharing and Allocation of Revenues.  All revenues of the Partnership (which shall
not include Capital Contributions and proceeds of loans to the Partnership)
shall be allocated (i) 100% to the General Partner before Payout and (ii) 1% to
the General Partner and 99% to the Limited Partners as a class after Payout.


 


12

















 


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


 


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


 


6.05         Withholding Taxes. 
The Partnership shall at all times be entitled (but not obligated) to
make payments required to discharge any obligation of the Partnership or the
General Partner to withhold or make payments to any governmental authority with
respect to any federal, state or local tax liability of any Limited Partner for
such taxes arising out of such Limited Partner’s interest in the
Partnership.  The amount of each such
payment made by the Partnership with respect to any Limited Partner shall be
deducted from any distributions otherwise payable to such Limited Partner
pursuant to this Agreement. 
Notwithstanding anything contained in this Agreement to the contrary, in
the event the Partnership fails to withhold any federal, state or local taxes
in respect of any Limited Partner when required to do so (including as a result
of any change in law or interpretation thereof or otherwise) any liability
incurred by the Partnership (including any interest and penalties) as a result
of such failure shall be borne by such Limited Partner (and charged to such
Limited Partner’s Capital Account), and such Limited Partner shall indemnify
and hold harmless the Partnership and the General Partner from and against any
and all claims, demands, liabilities, costs, damages and causes of action of
any nature whatsoever related to such withholding obligation.


 


ARTICLE
VII

BOOKS, RECORDS AND BANK ACCOUNTS


 


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


 


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


 


13

















 


ARTICLE
VIII


DISSOLUTION, LIQUIDATION AND TERMINATION


 


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


 


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


 


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


 


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


 


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


 


(i)            Any Person,
including a “group” as determined in accordance with Section 13(d)(3) of the
Exchange Act and the rules and regulations promulgated thereunder, is or
becomes, through one or a series of related transactions or through one or more
intermediaries, the beneficial owners, directly or indirectly, of securities of
CWEI representing 25% or more of the combined voting power of CWEI’s then
outstanding securities, other than a Person who is such a beneficial owner on
the Effective Date and any Affiliate of such Person;


 


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


 


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


 


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


 


(v)           CWEI or a subsidiary
of CWEI transfers more than 50% of its assets, or the last of a series of
transfers results in the transfer of more than 50% of the assets of CWEI, to
another corporation the capital stock of which is not wholly-owned by CWEI.


 


14

















 


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


 


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


 


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


 


(b)           From Partnership
funds, the liquidator shall pay all of the debts and liabilities of the
Partnership (including, without limitation, all expenses incurred in
liquidation) or otherwise make adequate provision for such debts and
liabilities, including, without limitation, by establishing a cash escrow fund
for contingent liabilities in such amount and for such term as the liquidator
may reasonably determine; and


 


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


 


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


 


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


 


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


 


(iv)          Partnership Property and
other assets shall then be distributed among the Partners in accordance with
the positive Capital Account balances of the Partners, as


 


15

















 


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


 


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


 


All distributions in kind to the Partners shall be made subject to the
liability of each distributee for his, her or its allocable share of costs,
expenses and liabilities previously incurred or for which the Partnership has
committed prior to the date of termination and those costs, expenses and
liabilities shall be allocated to the distributee under this Section 8.02.
The distribution of cash or property to a Partner in accordance with the provisions
of this Section 8.02 constitutes a complete return to the Partner of
his, her or its Capital Contributions and a complete distribution to the
Partner of his, her or its Units and all the Partnership Property and other
assets and constitutes a compromise to which all Partners have consented within
the meaning of Section 5.02(d) of the Act. To the extent that a Partner returns
funds to the Partnership, it has no claim against any other Partner for those
funds.


 


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


 


ARTICLE
IX

GENERAL PROVISIONS


 


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


 


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


 


16

















 


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


 


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


 


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


 


9.05         Amendment or Modification.


 


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


 


(b)           The General Partner
may amend this Agreement without the consent of any Limited Partner (i) to
remove or correct any inconsistency, ambiguity or error contained herein,
provided that such amendment does not materially and adversely affect the
Limited Partners, (ii) to admit additional Partners pursuant to Sections
3.04 or 4.03 or (iii) to reflect any assignment of Units pursuant to
Section 5.03(b).


 


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


 


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


 


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


 


17

















 


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


 


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


 


9.11         Indemnification.


 


(a)           The Partnership
agrees to indemnify and hold harmless the General Partner, its Affiliates, and
their respective officers, directors, partners, members, managers, employees
and agents (each, an “Indemnified Person”)
to the fullest extent permitted by law, from and against all losses, costs,
liabilities, damages, and expenses (including, without limitation, costs of
suit and attorneys’ fees) paid or incurred in connection with or resulting from
any and all claims, actions or demands against such Indemnified Person that
arise out of or in any way relate to or are incidental to the Partnership, the
Partnership Property or the business or affairs of the Partnership; provided,
however, that this indemnity shall not extend to any bad faith, willful
misconduct, gross negligence or deliberate or intentional breach of any
material provision of this Agreement by such Indemnified Person.  THE PARTIES INTEND THAT THE INDEMNIFIED
PERSONS BE INDEMNIFIED PURSUANT TO THIS AGREEMENT FROM LIABILITY FOR THEIR OWN
SOLE, PARTIAL OR CONCURRENT NEGLIGENCE.


 


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


 


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


 


18

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


(f)            to comply with
applicable assumed name laws.


 


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


 


9.15         No Employment Contract.  Nothing
contained in this Agreement shall be construed as conferring upon any Limited
Partner who is or may become an employee of CWEI


 


19

















 


or any Affiliate of CWEI any
right to continue in the employment of CWEI or any Affiliate of CWEI for any
period of time or interfere with or restrict in any way the rights of CWEI or
any Affiliate of CWEI or such Limited Partner to terminate the employment of
such Limited Partner at any time for any reason (or without any reason)
whatsoever, with or without cause.


 


[Signature Pages Follow]


 


20

















 


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


 


	
   

  	
  GENERAL PARTNER:

  
	
   

  	
   

  
	
   

  	
  CLAYTON WILLIAMS ENERGY, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  L. PAUL LATHAM

  
	
   

  	
   

  	
  L. Paul Latham

  
	
   

  	
   

  	
  Executive Vice President

  



 


Signature Page for Agreement of Limited
Partnership


 


21

















 


SIGNATURE PAGE FOR LIMITED PARTNER


 


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


 


	
  Date:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Type or Print Name of Limited Partner

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Signature

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Fax:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Taxpayer I.D. No.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Number of Units:

  	
   

  
								



 


Signature Page for Agreement of Limited
Partnership


 


22

















 


EXHIBIT A


 


to Partnership
Agreement of

CWEI Cotton Valley I, L.P.


 


Schedule of Limited
Partners


 


	
  Limited Partners:

  	
   

  	
  No. of

  Units

  	
   

  	
  Initial

  Capital

  Contributions

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Samuel L. Lyssy

  	
   

  	
  20.00

  	
   

  	
  $

  	
  200.00

  	
   

  
	
  Jerry F. Groner

  	
   

  	
  16.85

  	
   

  	
  $

  	
  168.50

  	
   

  
	
  David Gregory Benton

  	
   

  	
  12.85

  	
   

  	
  $

  	
  128.50

  	
   

  
	
  John F. Kennedy

  	
   

  	
  7.82

  	
   

  	
  $

  	
  78.20

  	
   

  
	
  L. Paul Latham

  	
   

  	
  6.67

  	
   

  	
  $

  	
  66.70

  	
   

  
	
  Mel G.Riggs

  	
   

  	
  6.67

  	
   

  	
  $

  	
  66.70

  	
   

  
	
  Clarence Wolfshohl

  	
   

  	
  4.00

  	
   

  	
  $

  	
  40.00

  	
   

  
	
  Logan Irvin

  	
   

  	
  3.21

  	
   

  	
  $

  	
  32.10

  	
   

  
	
  Michael L. Pollard

  	
   

  	
  2.42

  	
   

  	
  $

  	
  24.20

  	
   

  
	
  Jimmy Collins

  	
   

  	
  2.00

  	
   

  	
  $

  	
  20.00

  	
   

  
	
  Robert Eller

  	
   

  	
  2.00

  	
   

  	
  $

  	
  20.00

  	
   

  
	
  David L. Knape

  	
   

  	
  2.00

  	
   

  	
  $

  	
  20.00

  	
   

  
	
  Joe Stembridge

  	
   

  	
  2.00

  	
   

  	
  $

  	
  20.00

  	
   

  
	
  T. Mark Tisdale

  	
   

  	
  1.82

  	
   

  	
  $

  	
  18.20

  	
   

  
	
  Danny R. Alford

  	
   

  	
  1.21

  	
   

  	
  $

  	
  12.10

  	
   

  
	
  Michael G. Cunningham

  	
   

  	
  1.21

  	
   

  	
  $

  	
  12.10

  	
   

  
	
  Janet Hazlett

  	
   

  	
  1.21

  	
   

  	
  $

  	
  12.10

  	
   

  
	
  Kim Jones

  	
   

  	
  1.21

  	
   

  	
  $

  	
  12.10

  	
   

  
	
  Dennis B. Polson

  	
   

  	
  1.21

  	
   

  	
  $

  	
  12.10

  	
   

  
	
  Donnie J. Pruitt

  	
   

  	
  1.21

  	
   

  	
  $

  	
  12.10

  	
   

  
	
  Robert L. Thomas

  	
   

  	
  1.21

  	
   

  	
  $

  	
  12.10

  	
   

  
	
  Denise Kelly

  	
   

  	
  0.61

  	
   

  	
  $

  	
  6.10

  	
   

  
	
  Matthew D. Swierc

  	
   

  	
  0.61

  	
   

  	
  $

  	
  6.10

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  100.00

  	
   

  	
  $

  	
  1,000.00

  	
   

  



 


A-1

















 


EXHIBIT
B


 


to Partnership Agreement of



CWEI Cotton Valley I, L.P.


 


 


Area of Interest


 


The Area of Interest shall be well sites in Robertson, Burleson and
Milam Counties, Texas


 


B-1

















 


EXHIBIT
C


 


to Partnership Agreement of


 


CWEI Cotton Valley I, L.P.


 


 


Wells


 


	
  Well Name

  	
   

  	
  County, State

  
	
   

  	
   

  	
   

  
	
  Cotropia Gas Unit #1

  	
   

  	
  Robertson, Texas

  
	
   

  	
   

  	
   

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

  	
   

  	
   

  



 


C-1

















 


EXHIBIT D


 


Allocations of Profits and Losses and Other Tax
Matters


 


 


ARTICLE I


 


TAX DEFINITIONS


 


Section
1.01  Definitions.  All capitalized terms used herein shall have the meanings
assigned to them in the Agreement of Limited Partnership of CWEI Cotton Valley
I, L.P. dated October 1, 2002 (the “Agreement”), or as follows:


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


ARTICLE II


 


ALLOCATIONS OF PROFIT AND LOSS


 


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


 


D-1

















 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


D-2

















 


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


 


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


 


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


 


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


 


D-3

















 


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


 


ARTICLE III


 


OTHER TAX MATTERS


 


Section
3.01  Tax Elections.


 


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


 


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


 


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


 


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


 


D-4

















 


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


 


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


 


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


 


ARTICLE IV


 


CAPITAL ACCOUNT MAINTENANCE


 


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


 


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


 


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


 


D-5

















 


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


 


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


 


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


 


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


 


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


 


D-6