Exhibit
10.1
















PARTICIPATION
AGREEMENT
  between
  BLACK
OAK RESOURCES, LLC
  and
  LEGACY
RESERVES OPERATING LP
     
  TABLE
OF CONTENTS
  ARTICLE
1
 DEFINITIONS
 ARTICLE
2
 PARTICIPATION
 2.01
                Participation
                92.02
                Acquisitions
                92.03
                Development
                102.04
                Property
      Interests
                10
 ARTICLE
3
 FUNDING
 3.01
                Startup
      Costs
                113.02
                Billings
      and Payments.
                113.03
                Disposition
      of Production
                113.04
                Existing
      Burdens
                113.05
                Abandonment
      Costs
                12
 ARTICLE
4
 OPERATIONS
 4.01
                Operatorship;
      Operating Agreement.
                124.02
                Authority
      Generally
                124.03
                Geophysical
      Operations
                134.04
                Insurance.
                14
 ARTICLE
5
 TITLE
MATTERS
 5.01
                Title
      Review
                145.02
                Lease
      Records
                155.03
                Lease
      Maintenance
                15
 ARTICLE
6
 OPPORTUNITIES
 6.01
                Legacy
      Identified Opportunities
                156.02
                Black
      Oak Resources Identified Opportunities
                156.03
                No
      Other Development Companies
                16
 ARTICLE
7
 RIGHT OF
FIRST OFFER
 7.01
                Right
      Of First Offer
                167.02
                Qualified
      Offer
                167.03
                Sale
                167.04
                Cooperation
                177.05
                Drag-Along
      Rights
                177.06
                Tag-Along
      Rights
                17
  
  ARTICLE
8
 TERM
 8.01
                Term
                188.02
                Event
      of Default
                188.03
                Effect
      of Termination.
                18
 ARTICLE
9
 RELATIONSHIP
OF PARTIES
 9.01
                No
      Partnership
                189.02
                Income
      Tax Election
                189.03
                Confidentiality
                18
 ARTICLE
10
 ACKNOWLEDGEMENT
OF LEGACY INTEREST
 10.01
                Series
      B Units
                19
 ARTICLE
11
 MISCELLANEOUS
 11.01
                Assignment.
                1911.02
                Public
      Announcements
                2011.03
                Legacy
      Representations
                2011.04
                Black
      Oak Resources Representations
                2211.05
                Notices
                2311.06
                Further
      Assurances
                2411.07
                Waiver
      of Partition
                2411.08
                Remedies
      Not Exclusive
                2411.09
                No
      Waiver
                2411.10
                Construction
                2411.11
                Entire
      Agreement
                2511.12
                Force
      Majeure
                2511.13
                Standard
      of Care and Joint Liabilities
                2511.14
                Binding
      Effect
                2611.15
                GOVERNING
      LAW; EXCLUSIVE JURISDICTION.
                2611.16
                Disclaimer
                2611.17
                Drafting
      of Agreement
                2711.18
                Counterparts
                27
 EXHIBITS
 Exhibit
      A
                  Operating
      AgreementExhibit
      B
                  Existing
      AMI’s




PARTICIPATION
AGREEMENT
  This
Participation Agreement is entered into this 24th day of
September, 2008 by and among Legacy Reserves
Operating L.P., a Delaware limited partnership (“Legacy”)and
Black Oak Resources, LLC, a Delaware limited liability company (“Black Oak
Resources”).  Legacy and
Black Oak Resources are referred to herein individually as a “Party” and
collectively as the “Parties”.
  W I T N E S S E T H
:
  WHEREAS,
Legacy desires to participate with Black Oak Resources in the acquisition and
development of oil and gas properties; and
  WHEREAS,
Black Oak Resources and Legacy desire to set forth their respective rights
and obligations with respect to the acquisition and development of such oil and
gas properties;
  NOW
THEREFORE, in consideration of the premises and the mutual benefits and
obligations set forth herein, Black Oak Resources and Legacy hereby agree as
follows:
  ARTICLE 1
  DEFINITIONS
  The
following terms when used in this Agreement shall have the following
meanings:
  “Acquisition
Agreement” means any purchase agreement or other agreement for the
acquisition of Properties.
  “Acquisition Costs”
means all direct costs of evaluating and acquiring Properties, including,
without limitation, purchase price, engineering costs, environmental consulting
costs, legal costs, due diligence costs, brokerage or finders fees, recordation
costs and other direct expenses incurred in connection with such
acquisition.
  “Acquisition Period”
means the period commencing on the date of this Agreement and ending on the
earlier of (i) the date that is three years after the date of this Agreement as
the same may be extended by mutual written agreement of the Parties, (ii) at the option of Black Oak Resources, the
date specified by Black Oak Resources by notice to Legacy following a Legacy
Change of Control, or (iii)at the option of Legacy, the date specified by Legacy by
notice to Black Oak Resources followinga
Black Oak Change of Control.
  “Additional Well”
means any well drilled on any Property after the acquisition of such Property by
the Parties.
  “AFE” means an
authority for expenditure consisting of an estimate of the costs of a single
operation specified therein, as commonly used in the United States oil and gas
industry.
  “Affiliate” means, when used with reference to a specified Person,
any other Person that directly, or indirectly through one or more
intermediaries, Controls, is Controlled by or is under common Control with the
specified Person.  Notwithstanding anything herein to the contrary, in
no event shall any Legacy Party (or any of any Affiliate of any Legacy Party) be
considered an Affiliate of Black Oak Resources nor shall Black Oak Resources be
considered an Affiliate of any Legacy Party (or any of its
Affiliates).
  1
  “Agreement” means this
Participation Agreement, as amended from time to time.
  “Asset Sale Notice”
shall have the meaning set forth in Section 7.01.
  “Black Oak Change of
Control” means the occurrence of either of
the following:  (i)Crown
Investment Partnersno longer owns at least5%
Class A Units in Black Oak Resources;or(ii)Michael E.Black is
no longer a Manager of Black Oak Resources.
 
 “Black Oak Operating”
means Black Oak Operating Corp., a Delaware corporation.
 
 “Black Oak Resources”
has the meaning set forth in the preamble.
 
 “Black Oak Resources
Identified Opportunity” shall have the
meaning set forth in Section 6.02.
  “Business Day” shall
mean a day other than any day that banking institutions are required or
permitted to be closed under the laws of the State of Texas.
  “Cash Call” has the
meaning provided to such term in Section 3.02(b).
  “Code” means the
Internal Revenue Code of 1986, as amended and in effect on the date hereof and,
to the extent applicable, as subsequently amended.
  “Commitment” means
$20,000,000.
  “Confidential
Information” shall have the meaning set
forth in Section 9.03.
  “Control” shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or
otherwise.  For the purposes of this definition, and without limiting
the generality of the foregoing, any Person that owns directly or indirectly 10%
or more of the equity interests having ordinary voting power for the election of
the directors or other governing body of a Person (other than as a limited
partner of such other Person) will be deemed to “control” such other
Person.
  “Default Rate” means
the prime rate published by the Wall Street Journal on the
first day of each month the payment is delinquent, plus three percent (3%)per annum, or the
maximum interest rate permitted by the applicable usury laws, whichever is the
lesser.  If the Wall
Street Journal ceases to be published or discontinues publishing a prime
rate, the Default Rate shall be the prime rate publicly announced by JPMorgan
Chase Bank, N.A. or its successor plus three percent (3%) per
annum.
  2
  “Development Costs”
means (a) all direct costs, expenses and liabilities incurred in conducting
Development Operations and (b) the indirect charges that are applicable to the
operations described in the clause (a) under the terms of any applicable
Operating Agreement.
  “Development
Operations” means (a) obtaining, acquiring, licensing, processing,
reprocessing and evaluating Seismic Data, (b) permitting, drilling, testing,
completing, recompleting, equipping, reequipping, and plugging and abandoning
Wells, (c) acquiring and installing Equipment and (d) all other activities or
operations related to the exploration and development of the
Properties.
  “Drag-Along
Transaction” shall have the meaning set forth in Section
7.05.
  “Environmental
Laws” means any and all Governmental
Requirements pertaining to health, safety or the environment in effect in any
and all jurisdictions in which the Properties are located or in which activities
relating to the Properties have been conducted, including without limitation,
the Oil Pollution Act of 1990 (“OPA”), the Clean Air Act, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980 (“CERCLA”), the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, the Resource Conservation and Recovery Act of 1976 (“RCRA”),
the Safe Drinking Water Act, the Toxic Substances Control Act, the Superfund
Amendments and Reauthorization Act of 1986, the Hazardous Materials
Transportation Act, and other environmental conservation or protection laws,
including all amendments to any of the foregoing.  The term “oil”
shall have the meaning specified in OPA, the terms “hazardous substance” and
“release” (or “threatened release”) have the meanings specified in CERCLA, and
the terms “solid waste” and “disposal” (or “disposed”) have the meanings
specified in RCRA; provided, however, that (i) in the event either OPA, CERCLA
or RCRA is amended so as to broaden the meaning of any term defined thereby,
such broader meaning shall apply subsequent to the effective date of such
amendment and (ii) to the extent the laws of the state in which any Property is
located or any activity relating to the assets has been conducted, establish a
meaning for “oil,” “hazardous substance,” “release,” “solid waste” or “disposal”
which is broader than that specified in either OPA, CERCLA or RCRA, such broader
meaning shall apply.
  “Equipment” means all
wells, equipment, facilities pumps, well equipment (surface and subsurface),
saltwater disposal wells, water wells, lines and facilities, sulfur recovery
facilities, compressors, compressor stations, dehydration facilities, treatment
facilities, pipeline gathering lines, flow lines, transportation lines, valves,
meters, separators, tanks, tank batteries, and other equipment and facilities
situated on or used in connection with the production, handling, treatment,
gathering, transporting or marketing of oil and gas from any
Property.
  “Event of Default”
means (a) with respect to any Legacy Party one or more of the
following:
  (i)
              failure
      by Legacy to acquire its Ownership Percentage of a Property pursuant to
      Section 2.02, failure by Legacy to participate Development Operations
      pursuant to Section 2.03, with such failure continuing for five (5) days
      after written notice from Black Oak Resources specifying the failure and
      demanding that the same be remedied, or failure to pay money when due
      pursuant to this Agreement, in each case with such failure continuing for
      five (5) days after written notice from Black Oak Resources specifying the
      failure and demanding that the same be
remedied;
  3
  (ii)
              default
      by such Legacy Party in the observance or performance in any material
      respect of any of the material obligations of such Legacy Party (other
      than defaults described in clause (i) preceding) with such default
      continuing for thirty (30) days after written notice from Black Oak
      Resources specifying the default and demanding that the same be
      remedied;
  (iii)
              an
      entry of a decree or order which remains in force, undischarged or
      unstayed for sixty (60) days relating to such Legacy Party by a court
      having jurisdiction (A) granting relief under Title 11 of the United
      States Code; (B) approving as properly filed a petition seeking
      reorganization of such Party under Title 11 of the United States Code, or
      any other state or federal law; (C) for the appointment of a receiver or
      liquidator or trustee in bankruptcy or insolvency of such Legacy Party or
      of the property of such Legacy Party; (D) appointing a custodian, trustee,
      receiver or agent with authorization to take charge of a material portion
      of the property of such Legacy Party for the purpose of enforcing a lien
      against such property; or (E) for the winding up or liquidation of the
      affairs of such Legacy Party; or
  (iv)
              such
      Legacy Party having taken any of the following actions: (A) instituting
      proceedings or consent to the institution of proceedings under any state
      or federal law relating to debtor rehabilitation, insolvency, bankruptcy,
      liquidation or reorganization, including specifically Title 11 of the
      United States Code; (B) consenting to the appointment of a receiver,
      liquidator or trustee in bankruptcy or other insolvency proceedings of it
      or of its property or any substantial portion of its property; (C)
      procuring, permitting or suffering the appointment of a custodian,
      trustee, receiver or agent with authorization to take charge of a material
      portion of its property or for the purposes of enforcing a lien against
      such property; (D) making an assignment for the benefit of creditors, or
      admitting it is generally not able to pay its debts as they become due; or
      (E) failing to pay its material debts as they become
  due.
  (b)           with
respect to Black Oak Resources one or more of the following:
  (i)
              default
      by Black Oak Resources in the observance or performance in any material
      respect of any of the material obligations of Black Oak Resources with
      such default continuing for thirty (30) days (or five (5) days in the case
      of failure to pay money) after written notice from Legacy specifying the
      default and demanding that the same be
remedied;
  (ii)
              an
      entry of a decree or order which remains in force, undischarged or
      unstayed for sixty (60) days relating to Black Oak Resources by a court
      having jurisdiction (A) granting relief under Title 11 of the United
      States Code; (B) approving as properly filed a petition seeking
      reorganization of such Party under Title 11 of the United States Code, or
      any other state or federal law; (C) for the appointment of a receiver or
      liquidator or trustee in bankruptcy or insolvency of Black Oak Resources
      or of the property of Black Oak Resources; (D) appointing a custodian,
      trustee, receiver or agent with authorization to take charge of a material
      portion of the property of Black Oak Resources for the purpose of
      enforcing a lien against such property; or (E) for the winding up or
      liquidation of the affairs of Black Oak Resources;
  or
  4
  (iii)
              Black
      Oak Resources having taken any of the following actions: (A) instituting
      proceedings or consent to the institution of proceedings under any state
      or federal law relating to debtor rehabilitation, insolvency, bankruptcy,
      liquidation or reorganization, including specifically Title 11 of the
      United States Code; (A) consenting to the appointment of a receiver,
      liquidator or trustee in bankruptcy or other insolvency proceedings of it
      or of its property or any substantial portion of its property; (C)
      procuring, permitting or suffering the appointment of a custodian,
      trustee, receiver or agent with authorization to take charge of a material
      portion of its property or for the purposes of enforcing a lien against
      such property; (D) making an assignment for the benefit of creditors, or
      admitting it is generally not able to pay its debts as they become due; or
      (E) failing to pay its material debts as they become
  due.
  “Existing Burdens”
means with respect to a Lease (a) the royalties reserved to the lessor in a
Lease, (b) all overriding royalties, production payments and other similar
burdens on production whether or not of record to which the Lease is subject, or
Black Oak Resources is obligated to create, at the time of the acquisition of
such Lease by the Parties, (c) any “backin” working interest or deferred,
carried or reversionary working interest whether or not of record to which the
Lease is subject, or Black Oak Resources is obligated to create, at the time of
the acquisition of such Lease by the Parties, Black Oak Resources is subject,
and (f) all agreements, contracts, easements and other instruments whether or
not of record to which the Lease is subject, or Black Oak Resources is obligated
to create, at the time of the acquisition of such Lease by the
Parties.
  “Existing Well” means
any well located on any Property at the time of acquisition thereof by the
Parties.
  “Fair Market
Value” means for any asset
the  price that could be obtained for the sale of the assets on such
date in a negotiated, arm’s length transaction with a party unaffiliated with
the seller thereof.
  “General and Administrative
Costs” means all general, administrative and overhead costs and expenses
incurred by Black Oak Resources and/or any of its Affiliates in connection with
searching for, identifying and evaluating opportunities for the acquisition of
Properties, acquiring Properties, analyzing and evaluating opportunities for the
development of Properties, conducting, supervising and monitoring Development
Operations and operating and maintaining Properties, less any amounts of any
indirect charges paid to Black Oak Resources and/or any of its Affiliates under
any Operating Agreement under which it is operator of Properties.
  5
  “Governmental
Authority” means (a) any federal, state,
local, municipal or other government, (b) any governmental, regulatory or
administrative agency, commission or other authority lawfully exercising or
entitled to exercise any administrative, executive, judicial, legislative,
police, regulatory or taxing authority or power, and (c) any court or
governmental tribunal.
  “Governmental
Requirement” means any law, statute, code,
ordinance, order, determination, rule, regulation, judgment, decree, injunction,
franchise, permit, certificate, license, authorization or other directive or
requirement, whether now or hereinafter in effect, including, without
limitation, Environmental Laws, energy regulations and occupational, safety and
health standards or controls, of any Governmental Authority.
  “Hydrocarbons” means
oil, gas and all other hydrocarbons and substances produced in association with
oil or gas, and any of them.
  “Lease” means any
right, title or interest in and to any oil and gas lease and any contractual
right to acquire any interest in any oil and gas lease including, without
limitation, farmin and farmout, option, acreage contribution and similar
agreements.
  “Lease Maintenance
Costs” means all costs, expenses and liabilities incurred in maintaining,
renewing and/or extending any Lease, including without limitation, option
payments, bonus payments, shut in payments and delay rental payments, but
excluding royalty payments and Development Costs.
  “Legacy” has the
meaning set forth in the preamble.
  “Legacy/Black
Agreement” means that certain Agreement dated September__,
2008 between Legacy and Michael E. Black.
  “Legacy Change of
Control” means the occurrence of either of the following:  (i)
Legacy GP fails to Control Legacy, (ii) any entity, person (within the meaning
of Section
14(d) of the Securities Exchange Act of 1934, as amended the “Exchange
Act”)) or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) that theretofore was beneficial owner (as defined in Rule 13d-3
under the Exchange Act) of less than 20% of the Legacy Parent then outstanding
equity interests either (A) acquires equity interests of Legacy
Parent in a transaction or series of transactions that results in such entity,
person or group directly or indirectly owning beneficially 20% or more of the
outstanding equity interests of Legacy Parent, or (B) acquires, by proxy or otherwise,
the right to vote, for the election of directors, for any merger, combination or
consolidation of Legacy GP or Legacy Parent, or for any other matter or
question, more than 20% of the then outstanding voting securities of Legacy GP
or Legacy Parent (except where such acquisition is made by a person or persons
appointed by at least a majority of the board of directors of Legacy GP or
Legacy Parent to act as proxy for any purpose); (ii) the election or
appointment, within a twelve-month period, of persons to Legacy GP’s or Legacy
Parent’s board of directors or similar managing body who were not directors or
managers of Legacy GP or Legacy Parent at the beginning of such twelve-month
period, and whose election or appointment was not approved by a majority of
those persons who were directors at the beginning of such period, where such
newly elected or appointed directors or managers constitute 30% or more of the
directors or managers of the board of directors or similar governing body of
Legacy GP or Legacy Parent; or (iii) the unitsrepresenting limited partner interests of Legacy Parent cease to be
listed and traded on a National Securities Exchange, as defined in the Exchange
Act or cease to be registered under Section 12 of the Exchange Act.
  6
  “Legacy GP” means Legacy Reserves Operating GP, LLC, a Delaware
limited liability company.
  “Legacy Identified
Opportunity” shall have the meaning set
forth in Section 6.01.
  “Legacy Parent”means Legacy
Reserves LP, a Delaware limited partnership.
  “Liabilities” has the
meaning provided such term in Section 10.13.
  “LLC Agreement” means
the Limited Liability Company Agreement of Black Oak Resources as of the date
hereof.
  “Offered Assets” shall
have the meaning set forth in Section 7.01.
  “Offeree” shall have the meaning set forth in Section
7.01.
  “Operating Agreement”
means with respect to any Property an operating agreement in substantially the
form of the operating agreement attached hereto as Exhibit A designating Black
Oak Operating as operator, unless a Third Party Operating Agreement is
applicable thereto, in which case it means such Third Party Operating
Agreement.
  “Operating Costs” with
respect to any Property means (a) all direct costs, expenses and liabilities
incurred pursuant to the terms of this Agreement or any Operating Agreement in
connection with operating and maintaining the Wells and Equipment associated
with such Property and handling, marketing, transporting or disposing of the
production therefrom, and (b) the indirect charges that are applicable to the
operations described in the clause (a) under the terms of the applicable
Operating Agreement.
  “Operator” shall mean
Black Oak Operating or such other Person that is designated as operator under
the applicable Operating Agreement.
  “Opportunity” shall mean any right, title, interest and estate, to
be acquired directly or indirectly, in and to oil and gas leases, oil, gas and
mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee
interests, overriding royalty and royalty interests, net profits interests and
production payment interests, including any reserved or residual interests of
whatever nature and including equity, partnership or other ownership interests
in entities owning any of such properties.
  “Offeree” shall have the meaning set forth in Section
7.01.
  7
  “Option Period” shall have the meaning set forth in Section
7.02.
  “Ownership Percentage”
means (a) an undivided ninety two percent (92%) as to Black Oak Resources and
(b) an undivided eight percent (8%) as to Legacy.
  “Parties” means Black
Oak Resources and Legacy and “Party” means either of the Parties.
  “Person” means any
individual, corporation, limited liability company, partnership, limited
partnership, trust, association, or other entity.
  “Property” means all
Leases and interests therein acquired by the Parties pursuant to this Agreement
and all Equipment, permits, licenses, rights-of-way, easements, surface rights,
contracts, agreements and other rights and interests acquired in connection
therewith.
  “Qualified Offer”
shall have the meaning set forth in Section 7.02.
  “Remaining Amount”
means as of any point in time the Commitment, less all Acquisition Costs,
Development Costs and General & Administrative Costs paid by Legacy as of
such point in time.
  “Revenues” means (i)
all production revenues received by Legacy with respect to its Ownership
Percentage in the Properties after excluding all Existing Burdens applicable
thereto and (ii) the amount of all cash and the Fair Market Value of all other
compensation received by Legacy for the sale of other disposition of any
Property, less Legacy’s share of the costs and expenses of any such sale or
other disposition.
  “Seismic Data” means
all geophysical data collected or obtained from any seismic survey (2-D or 3-D),
gravity meter survey, or other geophysical technique applicable to any Property,
including any processed or reprocessed data.
  “Selling Party” shall
have the meaning set forth in Section 7.01.
  “Series B Units” shall
have the meaning set forth in the LLC Agreement.
  “Tag Notice” shall
have the meaning set forth in Section 7.06.
  “Tag Right” shall have
the meaning set forth in Section 7.06.
  “Tag Transferee” shall
have the meaning set forth in Section 7.06.
  “Tag-Along
Transaction” shall have the meaning set forth in Section
7.06.
  “Third Party Operating
Agreement” means any operating agreement with any third party to which
any Property or any portion thereof is subject.
  “Third Party Tag
Offer” shall have the meaning set forth in Section 7.06.
  “Well” means any
Existing Well or Additional Well.
  8
  ARTICLE
2
  PARTICIPATION
  2.01           Participation.  Subject
to the terms of this Agreement, Legacy shall participate with Black Oak
Resources in the acquisition of all Properties acquired by Black Oak Resources
during the Acquisition Period and all Development Operations with respect to the
Properties in which Black Oak Resources participates.
  2.02           Acquisitions.
  (a)           Legacy
shall acquire its Ownership Percentage of each Property acquired by Black Oak
Resources during the Acquisition Period provided that the Remaining Amount is
greater than zero and Legacy’s Ownership Percentage of the Acquisition Costs of
such Property shall not exceed the Remaining Amount as of the date an
Acquisition Agreement to acquire such Property is entered into by Black Oak
Resources.  Legacy shall have no right or obligation to participate
with Black Oak Resources in the acquisition of any Property by Black Oak
Resources after the Acquisition Period or if Legacy’s Ownership Percentage of
the Acquisition Costs of such Property would exceed the Remaining Amount as of
the date an Acquisition Agreement to acquire such Property is entered into by
Black Oak Resources.  Additionally, Black Oak Resources will not,
without Legacy’s written consent, pursue an acquisition of Properties that have
anticipated Development Operations if Legacy’s Ownership Percentage of the
Acquisition Costs and anticipated Development Costs with respect to such
acquisition would cause the Remaining Amount to be less than or equal to
zero.
  (b)           Prior
to committing to acquire any Property, Black Oak Resources shall consult with
Legacy regarding the proposed acquisition and the proposed price and terms of
the proposed acquisition, but Black Oak Resources shall determine in its sole
discretion (A) whether to acquire any
Property and(B) the price and terms under
which any Property shall be acquired.
  (c)           At
the request of Black Oak Resources, Legacy shall join with Black Oak Resources
in the execution of any Acquisition Agreement for any acquisition of Properties
in which Legacy is obligated to participate under Section
2.02(a).  Any such Acquisition Agreement shall contain such terms and
provisions as Black Oak Resources in its sole discretion determines are
appropriate for such acquisition and shall provide that the rights and interests
to be acquired under such agreement shall be owned by the Parties in accordance
with their Ownership Percentages and that all obligations of the Parties under
such agreement are several and not joint and shall be performed by the Parties
in accordance with their Ownership Percentages.
  (d)           Black
Oak Resources shall provide Cash Calls to Legacy for Legacy’s Ownership
Percentage of any amounts payable under the terms of any Acquisition Agreement
for any acquisition of Properties in which Legacy is obligated to participate
under Section 2.02(a).  Such Cash Calls shall be for Legacy’s
Ownership Percentage of any deposit or other amount to be paid by the Parties in
connection with the execution of any such Acquisition Agreement, any amount to
be paid in connection with the closing of any such acquisition and any other
amount to be paid in connection with any such acquisition. Each such Cash Call
shall include the amount due by the Parties, Legacy’s Ownership Percentage of
such amount, the date such amount is expected to be due and the Black Oak
Resources account to which such amount shall be transferred by
Legacy.  Not later than one Business Day prior to the date such amount
is anticipated to be due as set forth in such Cash Call, Legacy will transfer
such amount in immediately available U.S. funds to the account designated by
Black Oak Resources.
  9
  2.03           Development.
  (a)           Legacy
shall participate with Black Oak Resources in each Development Operation in
which Black Oak Resources participates, provided that the Remaining Amount is
greater than zero and Legacy’s Ownership Percentage of the estimated Development
Costs of any such Development Operation does not exceed the Remaining Amount as
of the date Black Oak Resources proposes, or receives a proposal to participate
in, such Development Operation.
  (b)           In
the event any Development Operation with respect to which Legacy is not required
to participate pursuant to Section 2.03(a) is proposed under any Operating
Agreement, Legacy shall elect whether or not to participate in such Development
Operation in  accordance with the terms of the applicable Operating
Agreement.
  (c)           
For as long as Black Oak Resources owns an interest in the Properties, Legacy
hereby authorizes Black Oak Resources to elect on Legacy’s behalf the same
election(s) as made by Black Oak Resources with respect to any Development
Operation with respect to which Legacy is required to participate pursuant to
Section 2.03(a), including but not limited to (i) any proposal to drill any
Additional Well, (ii) any proposal to complete, sidetrack, plug back or deepen
any Well, (iii) any proposal to acquire and install Equipment, (iv) any proposal
to plug and abandon any Well and (v) any other proposed Development
Operation.  Legacy shall execute such AFE’s and other instruments as
Black Oak Resources may request to evidence Legacy’s participation in any
Development Operation with respect to which Legacy is required to participate
pursuant to Section 2.03(a).  Black Oak Resources agrees to consult
from time to time with Legacy regarding the development of the Properties, but
Black Oak Resources shall determine in its sole discretion whether to conduct or
participate in any proposed Development Operation.
  2.04           Property
Interests.  With respect to each Property with respect to which
Legacy participates with Black Oak Resources in the acquisition thereof pursuant
to the terms of this Agreement, subject to the terms of this Agreement and the
applicable Operating Agreement, Legacy shall own an undivided 8% and Black Oak
Resources shall own an undivided 92% of the interest acquired by the Parties in
each such Property, subject to the Existing Burdens.  Any defects of
title shall be the joint responsibility of Black Oak Resources and Legacy and,
if a title loss occurs, it shall be the joint loss of Black Oak Resources and
Legacy, with each bearing its pro rata part of the loss and of any liabilities
incurred in the loss. If such a loss occurs, there shall be no change in, or
adjustment of, the relative interests of Black Oak Resources and Legacy under
this Agreement in the remaining portion of or interest in the
Property.
  10
  ARTICLE
3
  FUNDING
  3.01           Startup
Costs.  Legacy shall reimburse Black Oak Resources for 8% of
all reasonable costs, fees and expenses incurred by Post Oak Energy Capital,
L.P. and Black Oak Resources in connection with forming and organizing Black Oak
Resources and preparing and negotiating this Agreement.  All legal
fees and expenses incurred by Legacy in connection with preparing and
negotiating this Agreement shall be borne and paid by Legacy.
  3.02           Billingsand
Payments.
  (a)           Black
Oak Resources will bill Legacy monthly for Legacy’s Ownership Percentage of all
Acquisition Costs, Lease Maintenance Costs, Development Costs, Operating Costs
other than Operating Costs that are billed directly to Legacy by any third party
Operator, and General and Administrative Costs.  Black Oak Resources
will adjust each monthly billing to reflect Cash Calls received from
Legacy.   Legacy will pay the adjusted amounts billed within
fifteen (15) days of receipt of the bill.
  (b)           Black
Oak Resources may require Legacy to advance Legacy’s Ownership Percentage of
estimated Acquisition Costs (other than Acquisition Costs that are Cash Called
pursuant to Section 2.02(d)), Lease Maintenance Costs, Development Costs,
Operating Costs and General and Administrative Costs within fifteen (15) days
after receipt of an advance billing therefor.   Amounts that are
billed in advance pursuant to this Section 3.02(b) and amounts that are Cash
Called pursuant to Section 2.02(d) are “Cash
Calls”.
  (c)           For
the avoidance of doubt, it is understood and agreed that Legacy shall be
responsible for, and shall pay, its working interest share of any cost overruns
incurred in the conduct of Development Operations in which it is required to, or
elects to, participate pursuant to the provisions hereof, notwithstanding any
estimates that may have been made with respect to any such costs.
  3.03           Disposition of
Production.  Subject to the remaining provisions of this
Section 3.03, each Party shall take in kind and separately dispose of its share
of production from the Properties in accordance with the terms of the applicable
Operating Agreement.  At the request of Legacy, Black Oak Resources
shall use commercially reasonable efforts to market Legacy’s share of the
production from the Properties on the same terms and prices that Black Oak
Resources markets its own share of such production.  Any sale by Black
Oak Resources of Legacy’s share of such production shall be for such reasonable
periods of time as Black Oak Resources in its discretion determines are
consistent with industry practices under the circumstances, but in no event
shall a contract for such sale be for a period in excess of one (1) year without
the consent of Legacy.  Legacy shall have the right to terminate Black
Oak Resources’ right and obligation to market Legacy’s share of production at
any time, subject to any sales commitments or contracts that Black Oak Resources
may have entered into prior to such termination.
  3.04           Existing
Burdens.  Each Party shall pay or cause to be paid its share of
the Existing Burdens on such production.
  11
  3.05           Abandonment
Costs.  Each Party shall be responsible for paying its
Ownership Percentage of the costs of plugging, decommissioning and abandoning,
in accordance with all applicable legal and contractual requirements, all Wells
and Equipment associated with the Properties.
  ARTICLE
4
  OPERATIONS
  4.01           Operatorship; Operating
Agreement.
  (a)           Black
Oak Operating or an Affiliate of Black Oak Resources shall be the Operator of
each Property or portion thereof that is not subject to a Third Party Operating
Agreement.   If Black Oak Operating is the Operator, prior to the
commencement of Development Operations on such Properties, the Parties will
enter into an Operating Agreement for such Properties on the form attached
hereto as Exhibit B.
  (b)           All
Development Operations with respect to any Property shall be conducted subject
to the terms of this Agreement and the applicable Operating
Agreement.  In the event of any conflict between the provisions of
this Agreement and the provisions of any Operating Agreement, the provisions of
this Agreement shall prevail as between Black Oak Resources and
Legacy.  All operations conducted after termination of this Agreement
shall be conducted subject to the terms of the applicable Operating
Agreement.
  (c)           From
time to time, Properties may be acquired that are subject to Third Party
Operating Agreements or Third Party Operating Agreements may be entered into in
connection with the acquisition or development of Properties.  The
decision of Black Oak Resources or Legacy to propose any operation or
acquisition under any agreement with any third party or to participate in any
operation or acquisition proposed by any third party under any such agreement
shall be made subject to and in accordance with the terms of this
Agreement.
  4.02           Authority
Generally.  Black Oak Resources shall be responsible for the
conduct and management of the Properties.  As among the Parties,
subject to the Operating Agreements, except to the extent that any Operating
Agreement conflicts with this Agreement, Black Oak Resources shall conduct all
Development Operations, including the drilling, testing, completion, fracing,
deepening, plugging back, recompleting, and equipping of all Wells and the
plugging and abandonment of any Wells that are not capable of being produced
economically.  To this end, subject to the Operating Agreements,
except to the extent that any Operating Agreement conflicts with this Agreement,
Black Oak Resources shall have all powers and authority necessary or appropriate
for the performance of its obligations to conduct any and all Development
Operations, production and operational activities with respect to the
Properties, including, but not limited to, the following powers and
authority:
  (a)           to
conduct or cause to be conducted geological, seismic and other geophysical
operations and other investigations in connection with the evaluation of
potential areas for acquisition of Properties and/or the drilling of a
Well;
  (b)           to
purchase or rent equipment, material and supplies for carrying on operations
hereunder;
  12
  (c)           to
arrange for such outside geological, geophysical, engineering, land, legal,
accounting and other services as may be necessary to carry on the operations
hereunder;
  (d)           to
negotiate, acquire and execute farmout or farmin agreements, prospect
acquisition agreements, joint exploration or development agreements, assignments
and other instruments related to the acquisition of Properties;
  (e)           to
acquire Properties and to bid at lease sales for the purposes of acquiring
Properties;
  (f)           to
make dry hole and bottom hole contributions to third parties;
  (g)           to
arrange for the drilling of Wells and make such decisions of a technical nature
as may be required in connection with the drilling, testing, completing,
equipping and operating of any and all such Wells as Black Oak Resources deems
appropriate;
  (h)           to
negotiate and execute contracts with drilling contractors and other service
contractors for the drilling and completion of Wells and providing for services
incident thereto (including any such contract on a turnkey, footage or daywork
basis, or a combination thereof, or pursuant to whatever type of drilling
contract, operating agreement or arrangement, Black Oak Resources deems
appropriate at the time of entering into same);
  (i)           to
execute and prosecute applications and permits necessary to be obtained from
appropriate governmental authorities for all operations to be conducted
hereunder, including agreements relating thereto, to conduct or participate in
environmental impact studies relative to operations with respect to Properties
and opportunities to acquire Properties, and to take all action necessary to
comply with applicable governmental regulations in connection with operations to
be conducted hereunder;
  (j)           in
the case of explosion, blowout, fire or other sudden emergency endangering life
or property, to take such steps and incur such expenses as in its opinion are
required to deal with the emergency, to safeguard life and property or to comply
with governmental regulations; and
  (k)           to
negotiate other agreements necessary or appropriate to the conduct by Black Oak
Resources of the operations contemplated hereunder in accordance with the terms
hereof.
  4.03           Geophysical
Operations.  Any licensed Seismic Data acquired in connection
with Development Operations shall be licensed only to Black Oak Resources or an
Affiliate of Black Oak Resources unless Black Oak Resources is able, using
commercially reasonable efforts, to obtain a license for Legacy covering such
Seismic Data and Legacy agrees to pay the costs of such license and to be bound
by the terms thereof.  With respect to all licensed Seismic Data
related to the Properties, Legacy shall have no right or access to view such
data whatsoever, unless the license obtained by Black Oak Resources or its
Affiliate permits such access or a license for such Seismic Data has been
obtained for Legacy.  Seismic Data may be subject to license
agreements between Black Oak Resources and/or its Affiliates which prohibits
Black Oak Resources from disclosing such data except for conditions as may be
expressly provided in any such agreement.  However, for any such
proprietary Seismic Data obtained by Black Oak Resources which is not subject to
a license to or from a third party, Legacy may view such data on workstations
located in Black Oak Resources’ offices during reasonable business hours to the
extent such access would not (a) breach any agreement relating to such rights,
data or interpretations or (b) subject Black Oak Resources or other owner of the
Seismic Data to any payment, penalty or other consideration.
  13
  4.04           Insurance.
  (a)           At
all times that operations are conducted under this Agreement, Black Oak
Resources shall maintain the same insurance (except with respect to Workers’
Compensation and Employer’s Liability) for Legacy which Black Oak Resources
maintains for itself.  Legacy shall be named as an additional insured
thereunder except with respect to the Worker’s Compensation and Employer’s
Liability Insurance.  Black Oak Resources shall charge Legacy and
Legacy shall pay Legacy’s share of the costs of such insurance.  In
the event insurance markets for property damage or well control insurance should
change which would make it impractical for Black Oak Resources to maintain such
insurance coverage for Legacy for Legacy’s Ownership Percentage in the
Properties and Wells pursuant to this Agreement, then Black Oak Resources will
provide written notice to Legacy as soon as reasonably possible at which time
Legacy shall be required to secure such insurance coverage as provided in the
applicable Operating Agreement.  In the event that Legacy obtains and
maintains any insurance on its own and provides Black Oak Resources satisfactory
evidence thereof, Legacy shall cease to be carried as an additional insured on
Black Oak Resources’ policies relating to such insurance and will not be charged
for the cost thereof.  Black Oak Resources and Legacy agree to waive
subrogation if they separately insure.
  (b)           Black
Oak Resources shall obtain and maintain all bonds and financial guarantees
required by applicable law, regulation or rule.  Legacy’s Ownership
Percentage of the entire cost of those bonds and financial guarantees acquired
exclusively for the conduct of activities and operations under this Agreement
shall be charged to and paid by Legacy, and Legacy’s Ownership Percentage of the
ratable portion of the cost of any bonds and financial guarantees acquired in
part for the conduct of activities and operations under this Agreement and in
part for other activities and operations of Black Oak Resources shall be charged
to and paid by Legacy.
  ARTICLE
5
  TITLE
MATTERS
  5.01           Title
Review.  With respect to each acquisition of Properties, Black
Oak Resources shall cause to be conducted such title examination or title review
as Black Oak Resources deems appropriate under the circumstances.  In
the event of a title defect or title change relating to a Property, all costs
incurred, losses or benefits arising from the title defect or title change shall
be shared by the Parties hereto in accordance with their respective Ownership
Percentages in the applicable Property.  Promptly after any Party
learns of any material title defect or title change, such Party will notify the
other Party thereof and upon request furnish such Party copies of all
information in such Party’s possession relating thereto.
  14
  5.02           Lease
Records.  Black Oak Resources will maintain, or caused to be
maintained, complete and accurate records of all Properties and of the
acquisition and disposition of all leases and Equipment in connection with
conducting Development Operations, and all insurance policies (or copies or
certificates thereof) in effect.  Copies of all of such leases,
assignments thereof or of parts or portions thereof, lease purchase reports,
title reports and title opinions (and curative instruments relating to
requirements therein) acquired in connection therewith, delay rental receipts
and any other pertinent information relating to such leases in the possession of
Black Oak Resources will be furnished to Legacy upon request at Legacy’s sole
cost and expense.
  5.03           Lease
Maintenance.  Black Oak Resources shall pay, or cause to be
paid, all Lease Maintenance Costs and Legacy shall reimburse Black Oak Resources
for Legacy’s share of the amounts so paid.  Black Oak Resources shall
have no liability to Legacy for losses sustained as a result of improper payment
of Lease Maintenance Costs, REGARDLESS OF THE NEGLIGENCE OF Black Oak
Resources.
  ARTICLE 6
  OPPORTUNITIES
  6.01           Legacy Identified
Opportunities.  If any Legacy
Party becomes aware of any Opportunity that(i)the Legacy
Parties do not desire to pursue in whole or in part or (ii) any Legacy Party
desires to pursue, in whole or in part, jointly with a third Person (other than
under a farmout arrangement) (a
“Legacy
Identified Opportunity”), the Legacy
Parties shall (i) notify Black Oak Resources thereof, (ii) provide Black Oak
Resources all information regarding the Legacy Identified Opportunity that is
obtained or developed by the Legacy Parties or their Affiliates, subject to any
third party contractual provisions precluding disclosure (provided that the
Legacy Parties have used their commercially reasonable efforts to cause any such
confidentiality restrictions not to apply to the disclosure to Black Oak
Resources) and (iii) offer Black Oak Resources the opportunity to pursue such
Legacy Identified Opportunity.  Black Oak Resources understands that
in order to obtain access to information that is subject to third party
contractual provisions precluding disclosure, it may be required by such third
party to agreetobe subject to the same confidentiality and
non-disclosure terms to which Legacy is bound or other confidentiality agreement
with such third party related to theOpportunity.  The Legacy Parties shall not advise any
third Person of any Legacy Identified Opportunity or offer any third Person the
opportunity to pursue any Legacy Identified Opportunity or join with any Legacy
Party in the acquisition of any Legacy Identified Opportunity unless the Legacy
Parties have first complied with the provisions of this Section 6.01 and Black
Oak Resources has notified the Legacy Parties that it is not interested in
pursuing such Legacy Identified Opportunity;provided that,subject to Section 6.03, nothing in this Section 6.01
shall preclude Legacy from pursuing oil and natural gas acquisition
opportunities jointly with unaffiliated third parties in the normal course ofbusiness consistent with past
practices.
  6.02           Black Oak Resources
Identified Opportunities.  If
Black Oak Resources becomes aware of any Opportunity that Black Oak Resources
does not desire to pursue in whole or in part or Black Oak Resources desires a
third Person to join with it in the acquisition of any Opportunity (the portion
of any such Opportunity that Black Oak Resources does not desire to pursue in
whole or Black Oak Resources desires a third Person to join with it in the
acquisition thereof is a “Black Oak Resources
Identified Opportunity”), Black Oak
Resources shall (i) notify Legacy thereof, (ii) provide Legacy all information
regarding the Black Oak Resources Identified Opportunity that is obtained or
developed by Black Oak Resources or its Affiliates, subject to any third party
contractual provisions precluding disclosure (provided that Black Oak Resources
has used its commercially reasonable efforts to cause any such confidentiality
restrictions not to apply to the disclosure to the Legacy Parties) and (iii)
offer Legacy the opportunity to pursue such Black Oak Resources Identified
Opportunity.   Black Oak Resources shall not advise any third
Person of any Black Oak Resources Identified Opportunity or offer any third
Person the opportunity to pursue any Black Oak Resources Identified Opportunity
or join with Black Oak Resources in the acquisition of any Black Oak Resources
Identified Opportunity unless Legacy has first complied with the provisions of
this Section 6.02 and Legacy has notified Black Oak Resources that it is not
interested in pursuing such Black Oak Resources Identified
Opportunity.
  15
  6.03           No Other Development
Companies.  The Legacy Parties
will not, and will not permit any of their Affiliates to, enter into any
arrangement with any other party similar toits arrangements with Black Oak Resources hereunder and
with Michael E. Black under the Legacy/Black Agreement.
  ARTICLE
7
  RIGHT OF FIRST
OFFER
  7.01           Right Of First
Offer.For so long as Black Oak
Resources owns an interest in the Property, if any Party (a “Selling Party”) desires to sell of any of its interest in any
Propertywith value in excess of $1 million
in a bona fide transaction to one or more Persons not Affiliated with the
Selling Party, it shall first notify the other Party (the “Offeree”) in writing of the proposed sale (the “Asset Sale
Notice”).  Each Asset Sale Notice
shall (i) identify the assets that the Selling Party wishes to sell (the
“Offered
Assets”),  (ii) include a summary
of any material terms required by the Selling Party in connection with the
proposed sale, and (iii) offer to the Offeree the right to make an offer to
purchase the Offered Assets.
  7.02           Qualified Offer.  The Offeree shall have the right for a
period of thirty (30) days from the date the Asset Sale Notice is received (the
“Option
Period”) to submit an offer to purchase all
of the Offered Assets. Any such offer shall be in writing, shall be a
valid offer legally binding on Offeree, shall contain the price offered for the
Offered Assets, and an acknowledgment that any sale between the Parties shall be
subject to the terms set forth in the notice given by the Selling
Party.  Any offer submitted by Offeree that meets the requirements of
this Section 7.02 is a “Qualified
Offer”.
  7.03           Sale.  If theOfferee does not submit a
Qualified Offer to the Selling Party within such thirty (30) day period, or if a
Qualified Offer is submitted by the Offeree and is rejected by the Selling
Party, the Selling Party is free tosell the
Offered Assets to one or more Persons not Affiliated with the Selling Party;
provided, however, that the Selling Party shall be prohibited from accepting any
offer for the Offered Assets from a Person not Affiliated with the Selling Party
if (a) the Fair Market Value of the consideration offered by such Person does
not exceed the Fair Market Value of the consideration offered in the rejected
Qualified Offer by the lesser of (i) 10% or (ii) $10 million and (b) the
Qualified Offer continues to be valid and binding on
Offeree.
  16
  7.04           Cooperation.  The Selling Party shall use commercially
reasonable efforts to cooperate fully with Offeree and its agents and
representatives in conducting due diligence of the Offered Assets during the
Option Period.  In connection therewith Selling Party shall use
commercially reasonable efforts to take customary actions reasonably requested
by Offeree, including making the Offered Assets and Selling Party’s books and
records relating thereto  reasonably available for inspection by
Offeree during normal business hours, establishing a data room including
materials customarily made available to potential acquirors in connection with
such processes and making its employees reasonably available for interviews and
other diligence activities during normal business hours, in each case subject to
the terms of any confidentiality or other agreements with third Persons relating
to the Offered Assets.
  7.05           Drag-Along
Rights.If Black Oak
Resources decides to sell all its interest in any of the Properties (a “Drag-Along
Transaction”),  at the request of Black Oak Resources Legacy
shall agree to sell its interest in such Properties on the terms and conditions
and for the same price and consideration (adjusted to reflect Legacy’s relative
ownership of such Properties) as applicable to Black Oak Resources under such
Drag-Along Transaction.  Legacy shall promptly take all necessary and
desirable actions requested by Black Oak Resources in connection with the
consummation of the sale by Legacy of its interest in the Properties that are
subject to the Drag-Along Transaction, including the execution of such
agreements and such instruments and other actions reasonably necessary to
effectuate such sale and to provide customary representations, warranties,
indemnities, and escrow/holdback arrangements relating thereto, in each case to
the extent that Black Oak Resources is similarly obligated.  Legacy
and Black Oak Resources shall each bear and be responsible for all costs and
expenses, including legal fees and expenses, incurred by it in connection with
any such transaction.
  7.06           Tag-Along Rights.If Black Oak Resources desires to
sell its interest in any of the Properties to a bona fide third Person (a “Tag Transferee”, and
the transaction, a “Tag-Along
Transaction”) pursuant to an offer from such Tag Transferee (a “Third Party Tag
Offer”), then Black Oak Resources shall require the Tag Transferee to
purchase the interest of Legacy in such Properties on the same terms and
conditions and for the same price and consideration (adjusted as appropriate to
reflect Legacy’s relative interest in such Properties). Notwithstanding the
foregoing, this Section 7.06 shall not be applicable to, and Black Oak Resources
may sell or transfer its interest in any of the Properties without complying
with any of the provisions of this Section 7.06 in connection with any sale or
transfer of its interests in the Properties (i) to an Affiliate of Black Oak
Resources or (ii) made pursuant to a Drag-Along Transaction.  Black
Oak Resources shall cause any such Third Party Tag Offer to be reduced to
writing and shall send written notice of such Third Party Tag Offer and of the
offer to purchase Legacy’s interest in the applicable Properties (the “Tag Notice”) to
Legacy.  Legacy shall have the right (a “Tag Right”) to elect
to sell its interest in the applicable Properties to the Tag Transferee pursuant
to the terms and conditions of the offer to Legacy set forth in the Tag Notice
by executing such offer and delivering the same to the Tag Transferee within 10
days after receipt by Legacy of the Tag Notice.
  17
  ARTICLE
8
  TERM
  8.01           Term.  The term of this Agreement (the
“Term”) shall
commence on the date first set forth above and shall continue until Black Oak
Resources has dissolved and terminated.
  8.02           Event of
Default.  If during the Term an Event of Default occurs, then
the non-defaulting party may proceed by appropriate court action to enforce
performance of this Agreement or to recover from the defaulting party any and
all damages or expenses (including, without limitation, reasonable attorney’s
fees) sustained by reason of such Event of Default or on account of enforcement
of remedies hereunder, and/or terminate this Agreement effective as of the date
of such Event of Default.
  8.03           Effect of
Termination.
  (a)           Termination
of this Agreement for any reason shall not relieve any Party of any obligation
arising prior to such termination or as a result of any operation or activity
conducted prior to such termination.
  (b)           Upon
the termination of this Agreement, the rights and obligations of the Parties
with respect to any Property shall be governed by the applicable Operating
Agreement.
  (c)           Notwithstanding
the preceding, the provisions of this Section 8.03 and the provisions of
Articles 9 and 11 shall survive the termination of this Agreement.
  ARTICLE
9
  RELATIONSHIP OF
PARTIES
  9.01           No
Partnership.  This Agreement is not intended to create, and
shall not be construed to create, a relationship of partnership, mining or
otherwise, or an association for profit between the Parties.
  9.02           Income Tax
Election.  Notwithstanding that the rights and liabilities
hereunder are several and not joint or collective or that this Agreement and the
operations hereunder shall not constitute a partnership, for purposes of income
tax reporting only, each Party hereto agrees with respect to all operations
conducted hereunder to elect to be excluded from the application of the
provisions of Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue
Code of 1986, as amended.  The results of operations hereunder shall
not be reported as a partnership for federal and state income tax
purposes.
  9.03           Confidentiality.  For
two (2) years after the termination of this Agreement, the Legacy Parties shall
keep confidential all data and information that is identified as confidential
and all data and information regarding Black Oak Resources and the Properties
(the “ConfidentialInformation”), except
to the extent that the Confidential Information (a) is or has become public
other than by virtue of a breach of this Section 9.03 by any Legacy Party or has
been disclosed to a Legacy Party by a third party which is not itself in breach
of any confidentiality undertaking, (b) is required to be disclosed pursuant to
applicable Governmental Requirement, including the rules of any stock exchange
on which the shares of the party or its Affiliates are listed, or (c) is
disclosed to Affiliates, lenders, accountants, attorneys, advisers or
representatives of the receiving party, but only if the recipients of such
Confidential Information have agreed to be bound by the provisions of this
Section 9.03.  The Legacy Parties acknowledge that a breach of the
provisions of this Section 9.03 may cause irreparable injury to Black Oak
Resources for which monetary damages (or other remedy at law) are inadequate,
difficult to compute, or both.  Accordingly, the Parties agree that
the provisions of this Section 9.03 may be enforced by injunctive action or
specific performance.
  18
  ARTICLE
10
  ACKNOWLEDGEMENT OF LEGACY
INTEREST
  10.01                      Series B
Units.  The Parties acknowledge that Michael E. Black has
acquired the Series B Units in Black Oak Resources.  The Parties
further acknowledge that as an inducement for Legacy to enter into this
Agreement, Legacy and Michael E. Black have, simultaneously with this Agreement,
entered into the Legacy/Black Agreement.  Under the LLC Agreement, the
consent of Black Oak Resources is required for certain provisions of the
Legacy/Black Agreement.  In consideration of Legacy entering into this
Agreement, Black Oak Resources hereby consents to such terms of the Legacy/Black
Agreement.  Further, Black Oak Resources agrees to consider at the
request of Legacy from time the time making distributions to Michael E. Black
with respect to the Series B Units in Properties rather than in cash, but the
decision whether to make any distribution with respect to the Series B Units in
Properties or in cash shall be made by Black Oak Resources in its sole
discretion.
  ARTICLE
11
  MISCELLANEOUS
  11.01                      Assignment.
  (a)           Legacy
may not directly or indirectly convey, assign, transfer, sell, farmout, or
otherwise dispose of all or any part of any Property or Well without the prior
written consent of Black Oak Resources, such consent not to be unreasonably
withheld.  Any disposition of a Property or Well by Legacy that is
consented to by Black Oak Resources shall be made expressly subject to this
Agreement and the applicable Operating Agreement and the assignee shall
expressly assume all of Legacy’s obligations under this Agreement and the
applicable Operating Agreement related to the assigned interest.
  (b)           Legacy
shall not directly or indirectly convey, assign, transfer, sell or otherwise
dispose of its rights or obligations under this Agreement without the prior
written consent of Black Oak Resources, which consent Black Oak Resources is
under no obligation to grant, except in connection with an assignment under
Section 12.01(a) that is consented to by Black Oak Resources.
  (c)           Legacy
shall not directly or indirectly convey, assign, transfer, sell or otherwise
dispose of its rights under any agreement with Michael E. Black relative to
Series B Units in Black Oak Resources, or distributions with respect thereto or
proceeds thereof, without the prior written consent of Black Oak Resources,
which consent Black Oak Resources is under no obligation to grant.
  19
  (d)           Should
Legacy desire to convey, assign, transfer, sell, farmout or otherwise dispose of
(each a “Disposition”), all or any part of its interest in any Property or Well,
it shall promptly give written notice to Black Oak Resources with full
information concerning its proposed Disposition, which shall include the name
and address of the prospective transferee (who must be ready, willing and able
to acquire the interest to be Disposed of), the purchase price or other
consideration, and all other terms of the offer.  Black Oak Resources
shall then have an optional prior right, for a period of ten (10) days after
receipt of the notice, to acquire on the same terms and conditions the interest
which Legacy proposes to Dispose of.  However, there shall be no
preferential right in those cases where Legacy wishes to mortgage its interest,
or to dispose of its interest by merger, reorganization, consolidation, or sale
of all or substantially all of its assets to a subsidiary or parent company or
to a subsidiary of a parent company, or to any company in which Legacy owns a
majority of the stock.
  11.02                      Public
Announcements.  Subject to the confidentiality provisions of
this Agreement and the Operating Agreements, any Party shall have the right to
make public announcements of the existence of this Agreement and the results of
operations conducted hereunder provided that no such announcement will be made
by any Party unless the same is in writing and the form and contents thereof
have been approved in writing by the other Party, which approval shall not be
unreasonably withheld.
  11.03                      Legacy
Representations.  Legacy represents, warrants and agrees
that:
  (a)           it
is an experienced and knowledgeable investor in the oil, gas and natural
resources industry, it has heretofore expended substantial amounts in
exploration activities for oil and gas, and it has heretofore examined and
analyzed numerous agreements similar to this Agreement;
  (b)           prior
to entering into this Agreement, (i) it has made such investigation of Black Oak
Resources and has been furnished such information with respect to Black Oak
Resources and the activities and  operations to be conducted pursuant
hereto as it deems necessary to evaluate the merits and risks involved in an
investment hereunder, has been advised that Black Oak Resources (and officers
and employees thereof) are available to answer questions about an investment
hereunder, and has asked any questions of Black Oak Resources (and officers and
employees thereof) which it desires to ask and has received answers with respect
to all such questions; (ii) it understands that the transferability of its
interest hereunder is restricted as set forth in this Agreement and that it
cannot expect to be able readily to liquidate its investment in case of an
emergency, it may have to continue to bear the risk of holding the interest for
an indefinite period, prior to the date hereof there has been no public market
for such interests and it is likely that after the date hereof there will be no
such market for such interests, and Black Oak Resources is not registering, nor
does it have any present intention ever to register, the interests under the
Securities Act of 1933, as amended, or any state securities laws; (iii) it
recognizes that Black Oak Resources has been recently organized and has no
history of operations or earnings and that an investment in hereunder is of a
speculative nature; (iv) it understands that no state or federal governmental
authority has made any findings or determination relating to the fairness of the
investment hereunder and that no state or federal governmental authority has
recommended or will recommend or endorse such an investment; and (v) it has
consulted with its attorney and/or with such other Persons as it deemed
appropriate concerning this Agreement, including its representations and
warranties that are contained in this Agreement;
  20
  (c)           it
will not transfer or dispose of its interest or any portion thereof in a manner
which violates the Securities Act of 1933, as amended, or any applicable state
securities laws;
  (d)           it
is a limited partnership duly organized, validly existing, and in good standing
under the laws of the State of Delaware, and is authorized to conduct business
and is in good standing in the State of Delaware and the State of
Texas;
  (e)           it
is not a “foreign person” within the meaning of Sections 1445 and 7701 of the
Code (i.e. Legacy is not a nonresident alien, foreign corporation, foreign
partnership, foreign trust or foreign estate as those terms are defined in the
code and any regulations promulgated thereunder);
  (f)           it
has full corporate power and authority to enter into this Agreement and to
perform its obligations hereunder.  Its execution, delivery and
performance of this Agreement have been duly authorized by all necessary
corporate action and no other act or proceeding on its part is necessary to
authorize and consummate this Agreement or the documents, agreements and
transactions contemplated hereby.  Such authorization, execution,
delivery and performance do not violate or conflict with any other material
agreement or arrangement to which Legacy is a party or by which it is
bound;
  (g)           it
is an “accredited investor” as defined in Rule 501(a) of Regulation D
promulgated under the Securities Act of 1933, as amended;
  (h)           it
is acquiring its interest hereunder for its own account for investment, and not
with a view to any distribution, resale, subdivision, or fractionalization
thereof in violation of the Securities Act of 1933, as amended, or any other
applicable domestic or foreign securities law, and it has no present plans to
enter into any contract, undertaking, agreement, or arrangement for any such
distribution, resale, subdivision, or fractionalization;
  (i)           in
entering into this Agreement, Legacy has relied solely on its own independent
investigation, review and analysis of the activities to be conducted pursuant
hereto and not on any representations or warranties of Black Oak Resources or
any Affiliate of Black Oak Resources or their respective representatives, other
than the representations and warranties contained in Section 11.04;
  (j)           except
as set forth in Exhibit B, neither Legacy nor any of its Affiliates is subject
to any agreement with any third party that would allow participation or an
opportunity to participate by such third party in the transactions covered by
this Agreement, any Property acquired pursuant to the terms hereof or any well
drilled pursuant to the terms hereof; and
  (k)           Legacy
is not an “investment company” or a company “controlled” by an “investment
company” within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations promulgated thereunder or an “investment advisor”
within the meaning of such Investment Company Act.
  21
  11.04                      Black Oak Resources
Representations.  Black Oak Resources represents, warrants and
agrees that:
  (a)            it
is an experienced and knowledgeable investor in the oil, gas and natural
resources industry, its members have heretofore expended substantial amounts in
exploration activities for oil and gas, and its members have heretofore examined
and analyzed numerous agreements similar to this Agreement;
  (b)            (i)
it understands that the transferability of its interest hereunder is restricted
as set forth in this Agreement and that it cannot expect to be able readily to
liquidate its investment in case of an emergency, it may have to continue to
bear the risk of holding the interest for an indefinite period, prior to the
date hereof there has been no public market for such interests and it is likely
that after the date hereof there will be no such market for such interests, and
Legacy is not registering, nor does it have any present intention ever to
register, the interests under the Securities Act of 1933, as amended, or any
state securities laws; (ii) it understands that no state or federal governmental
authority has made any findings or determination relating to the fairness of the
investment hereunder and that no state or federal governmental authority has
recommended or will recommend or endorse such an investment; and (iii) it has
consulted with its attorney and/or with such other Persons as it deemed
appropriate concerning this Agreement, including its representations and
warranties that are contained in this Agreement;
  (c)           it
will not transfer or dispose of its interest or any portion thereof in a manner
which violates the Securities Act of 1933, as amended, or any applicable state
securities laws;
  (d)           it
is duly organized, validly existing, and in good standing under the laws of the
State of Delaware, and is authorized to conduct business and is in good standing
in the State of its formation and the State of Texas;
  (e)           it
is not a “foreign person” within the meaning of Sections 1445 and 7701 of the
Code (i.e. Black Oak Resources is not a nonresident alien, foreign corporation,
foreign partnership, foreign trust or foreign estate as those terms are defined
in the code and any regulations promulgated thereunder);
  (f)           neither
Black Oak Resources nor any of its Affiliates is subject to any agreement with
any third party that would allow participation or an opportunity to participate
by such third party in the transactions covered by this Agreement, any Property
acquired pursuant to the terms hereof or any Well drilled pursuant to the terms
hereof; and
  (g)           it
has full power and authority to enter into this Agreement and to perform its
obligations hereunder.  Its execution, delivery and performance of
this Agreement have been duly authorized by all necessary action and no other
act or proceeding on its part is necessary to authorize and consummate this
Agreement or the documents, agreements and transactions contemplated
hereby.  Such authorization, execution, delivery and performance do
not violate or conflict with any other material agreement or arrangement to
which Black Oak Resources is a party or by which it is bound.
  22
  (h)           it
is an “accredited investor” as defined in Rule 501(a) of Regulation D
promulgated under the Securities Act of 1933, as amended;
  (i)           it
is acquiring its interest hereunder for its own account for investment, and not
with a view to any distribution, resale, subdivision, or fractionalization
thereof in violation of the Securities Act of 1933, as amended, or any other
applicable domestic or foreign securities law, and it has no present plans to
enter into any contract, undertaking, agreement, or arrangement for any such
distribution, resale, subdivision, or fractionalization;
  (j)           in
entering into this Agreement, Black Oak Resources has relied solely on its own
independent investigation, review and analysis of the activities to be conducted
pursuant hereto and not on any representations or warranties of Legacy or any
Affiliate of Legacy or their respective representatives, other than the
representations and warranties contained in Section 11.03;
  (k)           neither
Black Oak Resources nor any of its Affiliates is subject to any agreement with
any third party that would allow participation or an opportunity to participate
by such third party in the transactions covered by this Agreement, any Property
acquired pursuant to the terms hereof or any Well drilled pursuant to the terms
hereof; and
  (l)           Black
Oak Resources is not an “investment company” or a company “controlled” by an
“investment company” within the meaning of the Investment Company Act of 1940,
as amended, and the rules and regulations promulgated thereunder or an
“investment advisor” within the meaning of such Investment Company
Act.
  11.05                      Notices.  All
notices required or permitted under this Agreement shall be in writing (including facsimile, electronic mail, or similar
writing) and delivered personally, sent by overnight delivery service, or mailed
by certified mail, postage prepaidand
return receipt requested, or sent by facsimile or electronic mail, as
follows:
  If to
Black Oak Resources:
 
 Black
Oak Resources, LLC
 c/o
Post Oak Black Oak Resources, LLC
 1111
Bagby, Suite 4900
 Houston,
TX 77002
 Attention:
 
 Rob
Walls
 walls@postoakenergy.com
 Facsimile:  (713)
554-9406
 
 Michael
E. Black
 mblack@usaonline.net
 Facsimile:
(432) 686-0600
  23
  If to
Legacy:
 
 Legacy
Reserves Operating GP, LLC
 303 W.
Wall, Suite 1400
 Midland,
TX 79701
 Attention:
 
 Cary
Brown
 cbrown@legacylp.com
 Facsimile:
(432) 689-5299
 
 Steven
H. Pruett
 spruett@legacylp.com
 Facsimile:
(432) 689-5299
 
 Any
notice given as provided above shall be effective when received by the party to
which it is given.  Each party to this Agreement may change the
address provided for above by notifying the other parties in writing at least
thirty (30) days prior to the date such address change shall become
effective.
 
 11.06                      Further
Assurances.  Each Party hereto shall, from time to time, do and
perform such further acts and execute and deliver such further instruments,
assignments and documents as may be required or reasonably requested by any
other Party to establish, maintain or protect the respective rights and remedies
of the Parties hereto and to carry out and effect the intentions and purposes of
this Agreement.
  11.07                      Waiver of
Partition.  Each Party hereby waives any and all right to
partition its interest in any Property, or other asset acquired pursuant to this
Agreement.
  11.08                      Remedies Not
Exclusive.  The rights, remedies and powers granted to the
Parties under this Agreement shall be cumulative and shall not be exclusive
rights, remedies and powers, but shall be in addition to all other rights,
remedies and powers available at law or in equity, by virtue of any statute or
otherwise and may be exercised from time to time, concurrently or independently,
and as often and in such order as may be deemed expedient.
  11.09                      No
Waiver.  The failure of any Party hereto to insist upon strict
performance of any provision hereof shall not constitute a waiver of, or
estoppel against asserting, the right to require such performance in the future,
nor shall a waiver or estoppel in any one instance constitute a waiver or
estoppel with respect to a later breach of a similar nature or
otherwise.
  11.10                      Construction.  The
headings in this Agreement are inserted for convenience and identification only
and are not intended to describe, interpret, define or limit the scope, extent
or intent of this Agreement or any provision hereof.  Whenever the
context requires, the gender of all words used in this Agreement shall include
the masculine, feminine, and neuter, and the number of all words shall include
the singular and the plural.  In the event of a conflict between this
Agreement and the Exhibits, this Agreement shall control.
  24
  11.11                      Entire
Agreement.  This Agreement, which incorporates all prior
understandings relating to the subject matter hereof, sets forth the entire
agreement of the Parties with respect to the matters set forth herein and shall
not be modified except by written instrument executed by all
Parties.
  11.12                      Force
Majeure.  This Agreement shall not be terminated in whole or in
part, nor may any Party be held liable for damages or otherwise responsible for
failure to perform any obligation under the this Agreement or any Operating
Agreement other than the payment of money, because of a force majeure event,
including, but not limited to, break down of equipment or machinery, the
exercise of governmental authority, action, inaction, restraint or delay of
governmental agencies, arrest, war, armed hostilities, blockage, acts of God,
strike, lockout, industrial disturbance, insurrection, riot, civil disturbance,
fire, explosion, flood, washout, extreme weather conditions, landslide,
lightening, earthquake, storm, lack of water, non-availability of drilling
equipment or seismic crews, or any other cause, whether of the kind specifically
enumerated above or otherwise, which is not reasonably within the control of the
Party affected.  The term force majeure event shall include the
inability of a Party to acquire or delay on the part of Party in acquiring, at
reasonable cost, any right-of-way, permit, license, material or
supplies.  The affected Party shall use all reasonable diligence to
remove the force majeure situation as quickly as practicable. The requirement
that any force majeure shall be remedied with all reasonable dispatch shall not
require the settlement of strikes, lockouts, or other labor difficulty by the
Party involved, contrary to its wishes; how all such difficulties shall be
handled shall be entirely within the discretion of the Party
concerned.
  11.13                      Standard of Care and Joint
Liabilities.  In acquiring Properties and conducting
Development Operations under this Agreement or any applicable Operating
Agreement and in carrying out (or causing to be carried out) the exploration,
development, and maintenance of the Leases, Black Oak Resources shall act as a
reasonable prudent operator in accordance with good oil field practices, but
neither Black Oak Resources, any of its Affiliates or any officer, director or
employee of Black Oak Resources or any of its Affiliates shall have any
liability to Legacy for any failure so to act as a reasonable prudent operator
in accordance with good oil field practices, or for any loss, damage, cost, or
expense to the extent caused by any such failure, EVEN IF SUCH LOSS, DAMAGE, COST OR
EXPENSE AROSE SOLELY OR IN PART FROM THE ACTIVE, PASSIVE, SOLE OR CONCURRENT
NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF BLACK OAK RESOURCES, ANY OF ITS
AFFILIATES OR ANY OFFICER, DIRECTOR OR EMPLOYEE OF BLACK OAK RESOURCES OR ANY OF
ITS AFFILIATES, OTHER THAN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF BLACK OAK
RESOURCES, ANY OF ITS AFFILIATES OR ANY OFFICER, DIRECTOR OR EMPLOYEE OF BLACK
OAK RESOURCES OR ANY OF ITS AFFILIATES, it being understood by each Party
hereto that such loss, damage, cost or expense (other than that caused by the
gross negligence or willful misconduct of Black Oak Resources, its Affiliates or
any officer, director or employee of Black Oak Resources or any of its
Affiliates), shall be borne severally by the parties hereto in proportion to
their interests in the operations or activities giving rise to such loss,
damage, cost or expense.  In addition, all Liabilities (as hereafter
defined) incurred by Black Oak Resources in conducting activities or operations
under this Agreement or any applicable Operating Agreement shall be borne and
paid by the Parties, or their respective insurers,  in proportion to
the Parties' respective interests in the activity or operation giving rise to
such Liabilities, EVEN IF SUCH
LIABILITY AROSE SOLELY OR IN PART FROM THE ACTIVE, PASSIVE, SOLE OR CONCURRENT
NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF THE OPERATOR OR ANY OF ITS
AFFILIATES, OTHER THAN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF BLACK OAK
RESOURCES, ANY OF ITS AFFILIATES OR ANY OFFICER, DIRECTOR OR EMPLOYEE OF BLACK
OAK RESOURCES OF ANY OF ITS AFFILIATES.  As used in this
Section 11.13, “Liabilities” shall mean all liabilities, fines, penalties,
damages, losses, remediation costs and expenses and other costs and expenses,
including without limitation, attorneys fees and expenses and other costs and
expenses incurred in investigating and defending claims, actions or proceedings,
arising out of relating to damage to property of any third party, violation of
any law, rule or regulation, including any environmental law, rule or
regulation, or injury to or death of any Person.
  25
  11.14                      Binding
Effect.  Subject to the other provisions of this Agreement, all
of the terms and provisions hereof shall be binding upon and inure to the use
and benefit of the Parties and their respective heirs, successors, legal
representatives and assigns.
  11.15                      GOVERNING LAW; EXCLUSIVE
JURISDICTION.
  (a)           THIS
AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS WITHOUT REGARD TO THE APPLICATION OF THE PRINCIPLES OF CONFLICTS
OF LAWS OF SUCH STATE.
  (b)           ANY
LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR THE OPERATIONS AND
ACTIVITIES TAKEN IN CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT IN THE
COURTS OF THE STATE OF TEXAS SITTING IN HARRIS COUNTY OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS AND BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH OF THE PARTIES HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT
PERMITTED BY APPLICABLE LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID
COURTS.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT TO WHICH THEY
MAY BE ENTITLED TO SUBMIT A DISPUTE UNDER THE LAWS OR COURTS OF ANOTHER
JURISDICTION INCLUDING ANY OBJECTION TO VENUE OR ON THE GROUNDS OF FORUM NON
CONVENIENS.
  11.16                      Disclaimer.  EACH
PARTY ACKNOWLEDGES THAT NO OTHER PARTY NOR ANY AFFILIATE OF ANY OTHER PARTY HAS
MADE, AND EACH PARTY ON BEHALF OF ITSELF AND ITS AFFILIATES HEREBY EXPRESSLY
DISCLAIMS AND NEGATES, AND EACH OTHER PARTY HEREBY EXPRESSLY WAIVES, ANY
REPRESENTATION OR WARRANTY OF ANY NATURE, EXPRESS, STATUTORY OR IMPLIED, WITH
RESPECT TO (A) TITLE TO ANY, (B) THE ACCURACY OF COST ESTIMATES CONTAINED HEREIN
OR MADE IN CONNECTION HEREWITH, (C) THE HYDROCARBON POTENTIAL OF ANY PROPERTY
PROPOSED FOR ACQUISITION OR ANY WELL PROPOSED HEREUNDER, (D) THE ACCURACY OR
QUALITY OF ANY SEISMIC DATA ACQUIRED, PROCESSED OR OTHERWISE USED HEREUNDER, (E)
PRODUCTION RATES, RECOMPLETION OPPORTUNITIES, DECLINE RATES, OR THE QUALITY,
QUANTITY OR VOLUME OF THE RESERVES OF HYDROCARBONS, IF ANY, ATTRIBUTABLE TO ANY
PROPERTY OR ANY WELL PROPOSED IN CONNECTION HEREWITH OR (F) THE ACCURACY,
COMPLETENESS OR QUALITY OF ANY INFORMATION, DATA, GEOLOGIC OR GEOPHYSICAL MAPS,
ANALYSIS, INTERPRETATIONS, EVALUATIONS OR OTHER MATERIALS (WRITTEN OR ORAL) NOW,
HERETOFORE OR HEREAFTER FURNISHED TO SUCH PARTY BY OR ON BEHALF OF ANY OTHER
PARTY.   Each Party agrees that, to the extent required by
applicable law to be effective, the disclaimers of certain warranties contained
in this section are “conspicuous” disclaimers for the purposes of any applicable
law, rule or order.  The express representations and warranties of the
Parties contained in this Agreement are exclusive and are in lieu of all other
representations and warranties, express, implied or statutory.
  26
  11.17                      Drafting of
Agreement.  Each Party acknowledges that it and its attorneys
have contributed to the drafting of this Agreement.  It is expressly
agreed that this Agreement shall not be construed against any Party on the basis
of who drafted this Agreement or who supplied the form of
Agreement.  Each Party agrees that it has been purposefully drawn and
correctly reflects its understanding of the transactions contemplated
hereby.  Each Party further acknowledges that it has been advised and
represented by its own counsel in negotiating and entering into this
Agreement.
  11.18                      Counterparts.  This
Agreement may be executed in multiple counterparts, each of which shall be
deemed an original but all of which shall constitute but one
Agreement.
  [Signature Page Follows]
  27




WITNESS,
the execution hereof as of the date first set forth above.
 
 BLACK OAK RESOURCES,
      LLCBy:
              /s/ Michael
      E. BlackMichael
      E. BlackPresident




LEGACY RESERVES OPERATING
      L.P.
                
                by
      LEGACY RESERVES OPERATING GP, LLC
                its General
    PartnerBy:
              /s/ Steven
      H. PruettSteven
      H. PruettPresident
      and Chief Financial Officer











A.A.P.L.
FORM 610-1982
 
 MODEL
FORM OPERATING AGREEMENT
 
 
 
 
 
 
 
 
 
 
 
 OPERATING
AGREEMENT
 
 DATED
 
 September 23,
              ,
              2008
              ,yearOPERATOR
              BLACK OAK RESOURCES OPERATING, INC.CONTRACT
      AREA
              As described in Exhibit ACOUNTY
      OR PARISH OF
              
              STATE
      OF
 
 
 
 
 
 COPYRIGHT
1982 – ALL RIGHTS RESERVED AMERICAN ASSOCIATION OF PETROLEUM LANDMEN, 4100
FOSSIL CREEK BLVD., FORT WORTH, TEXAS, 76137-2791, APPROVED FORM. A.A.P.L. NO.
610 – 1982 REVISED
 
 
 TABLE OF
CONTENTS
 
 
 Article                                                                 Title                                                                 Page
 
 I.DEFINITIONS                                                                                                                         1
 II.EXHIBITS                                                                                                                         1
 III.INTERESTS OF
PARTIES                                                                                                                         2
 A.         OIL
AND GAS
INTERESTS                                                                                                                 2
 B.         INTERESTS
OF PARTIES IN COSTS AND
PRODUCTION                                                                                                                 2
 C.         EXCESS
ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS2
 D.         SUBSEQUENTLY
CREATED
INTERESTS                                                                                                                 2
 IV.TITLES                                                                                                                         2
 A.         TITLE
EXAMINATION                                                                                                                 2-3
 B.         LOSS
OF
TITLE                                                                                                                 3
 1.                                                                                                                     Failure
of Title3
 2.                                                                                                                     Loss
by Non-Payment or Erroneous Payment of Amount Due3
 3.                                                                                                                     Other
Losses3
 V.OPERATOR                                                                                                                         4
 A.         DESIGNATION
AND RESPONSIBILITIES OF
OPERATOR                                                                                                                 4
 B.         RESIGNATION
OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR4
 1.                                                                                                                     Resignation
or Removal of Operator4
 2.                                                                                                                     Selection
of Successor Operator4
 C.         EMPLOYEES                                                                                                                 4
 D.         DRILLING
CONTRACTS                                                                                                                 4
 VI.DRILLING AND
DEVELOPMENT                                                                                                                         4
 A.         INITIAL
WELL                                                                                                                 4-5
 B.         SUBSEQUENT
OPERATIONS                                                                                                                 5
 1.                                                                                                                     Proposed
Operations5
 2.                                                                                                                     Operations
by Less than All Parties5-6-7
 3.                                                                                                                     Stand-By
Time7
 4.                                                                                                                     Sidetracking7
 C.         TAKING
PRODUCTION IN
KIND                                                                                                                 7
 D.         ACCESS
TO CONTRACT AREA AND
INFORMATION                                                                                                                 8
 E.         ABANDONMENT
OF
WELLS                                                                                                                 8
 1.                                                                                                                     Abandonment
of Dry Holes8
 2.                                                                                                                     Abandonment
of Wells that have Produced8-9
 3.                                                                                                                     Abandonment
of Non-Consent Operations9
 VII.          EXPENDITURES AND LIABILITY
OF
PARTIES                                                                                                                         9
 A.         LIABILITY
OF
PARTIES                                                                                                                 9
 B.         LIENS
AND PAYMENT
DEFAULTS                                                                                                                 9
 C.         PAYMENTS
AND
ACCOUNTING                                                                                                                 9
 D.         LIMITATION
OF
EXPENDITURES                                                                                                                 9-10
 1.                                                                                                                     Drill
or Deepen9-10
 2.                                                                                                                     Rework
or Plug Back10
 3.                                                                                                                     Other
Operations10
 E.         RENTALS,
SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES10
 F.         TAXES                                                                                                                 10
 G.         INSURANCE                                                                                                                 11
 VIII.              ACQUISITION, MAINTENANCE OR
TRANSFER OF
INTEREST                                                                                                                     11
 A.         SURRENDER
OF
LEASES                                                                                                                 11
 B.         RENEWAL
OR EXTENSION OF
LEASES                                                                                                                 11
 C.         ACREAGE
OR CASH
CONTRIBUTIONS                                                                                                                 11-12
 D.         MAINTENANCE
OF UNIFORM
INTEREST                                                                                                                 12
 E.         WAIVER
OF RIGHTS TO
PARTITION                                                                                                                 12
 F.         PREFERENTIAL
RIGHT TO
PURCHASE                                                                                                                 12
 IX.INTERNAL REVENUE CODE
ELECTION                                                                                                                         12
 X.CLAIMS AND
LAWSUITS                                                                                                                         13
 XI.FORCE
MAJEURE                                                                                                                         13
 XII.          NOTICES                                                                                                                         13
 XIII.              TERM OF
AGREEMENT                                                                                                                     13
 XIV.              COMPLIANCE WITH LAWS AND
REGULATIONS                                                                                                                     14
 A.         LAWS,
REGULATIONS AND
ORDERS                                                                                                                 14
 B.         GOVERNING
LAW                                                                                                                 14
 C.         REGULATORY
AGENCIES                                                                                                                 14
 XV.          OTHER
PROVISIONS                                                                                                                         14
 XVI.              MISCELLANEOUS                                                                                                                     15
 
 
  OPERATING
AGREEMENT
 
 
 
 THIS AGREEMENT, entered into by and
betweenBlack Oak Resources
Operating, Inc.
 
 ,
hereinafter designated and
 
 referred
to as “Operator”, and the signatory party or parties other than Operator,
sometimes hereinafter referred to individually herein
 
 as
“Non-Operator”, and collectively as “Non-Operators”.
 
 
 
 WITNESSETH:
 
 
 
 WHEREAS, the parties to this
agreement are owners of oil and gas leases and/or oil and gas interests in the
land identified in
 
 Exhibit
“A”, and the parties hereto have reached an agreement to explore and develop
these leases and/or oil and gas interests for the
 
 production
of oil and gas to the extent and as hereinafter provided,
 
 
 
 NOW, THEREFORE, it is agreed as
follows:
 
 
 
 ARTICLE
I.
 
 DEFINITIONS
 
 
 
 As used in this agreement, the
following words and terms shall have the meanings here ascribed to
them:
 
 A. The term “oil and gas” shall mean
oil, gas, casinghead gas, gas condensate, and all other liquid or gaseous
hydrocarbons
 
 and other
marketable substances produced therewith, unless an intent to limit the
inclusiveness of this term is specifically stated.
 
 B. The terms “oil and gas lease”,
“lease” and “leasehold” shall mean the oil and gas leases covering tracts of
land
 
 lying
within the Contract Area which are owned by the parties to this
agreement.
 
 C. The term “oil and gas interests”
shall mean unleased fee and mineral interests in tracts of land lying within
the
 
 Contract
Area which are owned by parties to this agreement.
 
 D. The term “Contract Area” shall
mean all of the lands, oil and gas leasehold interests and oil and gas interests
intended to be
 
 developed
and operated for oil and gas purposes under this agreement. Such lands, oil and
gas leasehold interests and oil and gas interests
 
 are
described in Exhibit “A”.
 
 E. The term “drilling unit” shall
mean the area fixed for the drilling of one well by order or rule of any state
or
 
 federal
body having authority. If a drilling unit is not fixed by any such rule or
order, a drilling unit shall be the drilling unit as establish-
 
 ed by the
pattern of drilling in the Contract Area or as fixed by express agreement of the
Drilling Parties.
 
 F. The term “drillsite” shall mean
the oil and gas lease or interest on which a proposed well is to be
located.
 
 G. The terms “Drilling Party” and
“Consenting Party” shall mean a party who agrees to join in and pay its share of
the cost of
 
 any
operation conducted under the provisions of this agreement.
 
 H. The terms “Non-Drilling Party” and
“Non-Consenting Party” shall mean a party who elects not to
participate
 
 in a
proposed operation.
 
 
 
 Unless the context otherwise clearly
indicates, words used in the singular include the plural, the plural includes
the
 
 singular,
and the neuter gender includes the masculine and the feminine.
 
 
 
 ARTICLE
II.
 
 EXHIBITS
 
 
 
 The following exhibits, as indicated
below and attached hereto, are incorporated in and made a part
hereof:
 
 þ      A.
Exhibit “A”, shall include the following information:
 
 (1)  Identification of
lands subject to this agreement,
 
 (2)  Restrictions, if any,
as to depths, formations, or substances,
 
 (3)  Percentages or
fractional interests of parties to this agreement,
 
 (4)  Oil and gas leases
and/or oil and gas interests subject to this agreement,
 
 (5)  Addresses of parties
for notice purposes.
 
 o      B.
Exhibit “B”, Form of Lease.
 
 þ      C.
Exhibit “C”, Accounting Procedure.
 
 þ      D.
Exhibit “D”, Insurance.
 
 o      E.
Exhibit “E”, Gas Balancing Agreement.
 
 þ      F.
Exhibit “F”, Non-Discrimination and Certification of Non-Segregated
Facilities.
 
 o      G.
Exhibit “G”, Tax Partnership.
 
 If any provision of any exhibit,
except Exhibits “E” and “G”, is inconsistent with any provision contained in the
body
 
 of this
agreement, the provisions in the body of this agreement shall
prevail.
 
 
  
 ARTICLE
III.
 
 INTERESTS
OF PARTIES
 
 
 
 A.      Oil
and Gas Interests:
 
 
 
 If any party owns an oil and gas
interest in the Contract Area, that interest shall be treated for all purposes
of this agreement
 
 and
during the term hereof as if it were covered by the form of oil and gas lease
attached hereto as Exhibit “B”, and the owner thereof
 
 shall be
deemed to own both the royalty interest reserved in such lease and the interest
of the lessee thereunder.
 
 
 
 B.      Interests
of Parties in Costs and Production:
 
 
 
 Unless changed by other provisions,
all costs and liabilities incurred in operations under this agreement shall be
borne and
 
 paid, and
all equipment and materials acquired in operations on the Contract Area shall be
owned, by the parties as their interests are set
 
 forth in
Exhibit “A”. In the same manner, the parties shall also own all production of
oil and gas from the Contract Area subject to the
 
 payment
of royalties to the extent
of                                                           which shall be borne as hereinafter set
forth.
 
 
 
 Regardless of which party has
contributed the lease(s) and/or oil and gas interest(s) hereto on which royalty
is due and
 
 payable,
each party entitled to receive a share of production of oil and gas from the
Contract Area shall bear and shall pay or deliver, or
 
 cause to
be paid or delivered, to the extent of its interest in such production, the
royalty amount stipulated hereinabove and shall hold the
 
 other
parties free from any liability therefor. No party shall ever be responsible,
however, on a price basis higher than the price received
 
 by such
party, to any other party’s lessor or royalty owner, and if any such other
party’s lessor or royalty owner should demand and
 
 receive
settlement on a higher price basis, the party contributing the affected lease
shall bear the additional royalty burden attributable to
 
 such
higher price.
 
 
 
 Nothing contained in this Article
III.B. shall be deemed an assignment or cross-assignment of interests covered
hereby.
 
 
 
 C.      Excess
Royalties, Overriding Royalties and Other Payments:
 
 
 
 Unless changed by other provisions,
if the interest of any party in any lease covered hereby is subject to any
royalty,
 
 overriding
royalty, production payment or other burden on production in excess of the
amount stipulated in Article III.B., such party so
 
 burdened
shall assume and alone bear all such excess obligations and shall indemnify and
hold the other parties hereto harmless from any
 
 and all
claims and demands for payment asserted by owners of such excess
burden.
 
 
 
 D.      Subsequently
Created Interests:
 
 
 See Article XV
 /
 
 
 
 
 ARTICLE
IV.
 
 TITLES
 
 
 
 A.      Title
Examination:
 
 
 
 Title examination shall be made on
the drillsite of any proposed well prior to commencement of drilling operations
or, if
 
 the
Drilling Parties so request, title examination shall be made on the leases
and/or oil and gas interests included, or planned to be includ-
 
 ed, in
the drilling unit around such well. The opinion will include the ownership of
the working interest, minerals, royalty, overriding
 
 royalty
and production payments under the applicable leases. At the time a well is
proposed, each party contributing leases and/or oil and
 
 gas
interests to the drillsite, or to be included in such drilling unit, shall
furnish to Operator all abstracts (including federal lease status
 
 reports),
title opinions, title papers and curative material in its possession free of
charge. All such information not in the possession of or
 
 made
available to Operator by the parties, but necessary for the examination of the
title, shall be obtained by Operator. Operator shall
 
 cause
title to be examined by attorneys on its staff or by outside attorneys. Copies
of all title opinions shall be furnished to each party
 upon written request to
Operator
 hereto
/.  The cost incurred by Operator in this title program shall be borne
as follows:
 
 
 
 o      Option No.
1:  Costs incurred by Operator in procuring abstracts and title
examination (including preliminary, supplemental,
 
 shut-in
gas royalty opinions and division order title opinions) shall be a part of the
administrative overhead as provided in Exhibit “C”,
 
 and shall
not be a direct charge, whether performed by Operator’s staff attorneys or by
outside attorneys.
 
 
 
  
  þ      Option No.
2:  Costs incurred by Operator in procuring abstracts and fees
paid outside attorneys for title examination
  
  (including
preliminary, supplemental, shut-in gas royalty opinions and division order title
opinions) shall be borne by the Drilling Parties
  
 in the
proportion that the interest of each Drilling Party bears to the total interest
of all Drilling Parties as such interests appear in Ex-
 
 hibit
“A”. Operator shall make no charge for services rendered by its staff attorneys
or other personnel in the performance of the above
 
 functions.
 
 
 
 Each party shall be responsible for
securing curative matter and pooling amendments or agreements required in
connection
 
 with
leases or oil and gas interests contributed by such party. Operator shall be
responsible for the preparation and recording of pooling
 
 designations
or declarations as well as the conduct of hearings before governmental agencies
for the securing of spacing or pooling orders.
 
 This
shall not prevent any party from appearing on its own behalf at any such
hearing.
 
 
 
 No well shall be drilled on the
Contract Area until after (1) the title to the drillsite or drilling unit has
been examined as above
 
 provided,
and (2) the title has been approved by the examining attorney or title has been
accepted by all of the parties who are to par-
 
 ticipate
in the drilling of the well.
 
 
 
 B.      Loss
of Title:
 
 
 
 
 
 Title                title
 3. /
Losses:  All / losses incurred shall be joint
losses
 
 and shall
be borne by all parties in proportion to their interests. There shall be no
readjustment of interests in the remaining portion of
 
 the
Contract Area.
 
 
 
 
 
 ARTICLE
V.
 
 OPERATOR
 
 
 
 A.      Designation
and Responsibilities of Operator:
 
 
 Black Oak Resources Operating,
Inc.
 shall be
the
 
 Operator
of the Contract Area, and shall conduct and direct and have full control of all
operations on the Contract Area as permitted and
 
 required
by, and within the limits of this agreement. It shall conduct all such
operations in a good and workmanlike manner, but it shall
 
 have no
liability as Operator to the other parties for losses sustained or liabilities
incurred, except such as may result from gross
 
 negligence
or willful misconduct.
 
 
 
 B.      Resignation
or Removal of Operator and Selection of Successor:
 
 
 
 1. Resignation or Removal of
Operator:  Operator may resign at any time by giving written
notice thereof to Non-Operators.
 
 If
Operator terminates its legal existence, or is no longer capable of serving
as
 
 Operator,
Operator shall be deemed to have resigned without any action by Non-Operators,
except the selection of a successor. Operator
 
 may be
removed if it fails or refuses to carry out its duties hereunder, or becomes
insolvent, bankrupt or is placed in receivership, by the
 one (1)
 affirmative
vote of / or more Non-Operators owning a majority interest based on ownership as
shown on Exhibit “A” remaining
 
 after
excluding the voting interest of Operator. Such resignation or removal shall not
become effective until 7:00 o’clock A.M. on the
 
 first day
of the calendar month following the expiration of ninety (90) days after the
giving of notice of resignation by Operator or action
 
 by the
Non-Operators to remove Operator, unless a successor Operator has been selected
and assumes the duties of Operator at an earlier
 
 date.
Operator, after effective date of resignation or removal, shall be bound by the
terms hereof as a Non-Operator. A change of a cor-
 
 porate
name or structure of Operator or transfer of Operator’s interest to any single
subsidiary, parent or successor corporation shall not
 
 be the
basis for removal of Operator.
 
 
 
 2. Selection of Successor
Operator:  Upon the resignation or removal of Operator, a
successor Operator shall be selected by
 
 the
parties. The successor Operator shall be selected from the parties owning an
interest in the Contract Area at the time such successor
 
 Operator
is selected. The successor Operator shall be selected by the affirmative vote of
two (2) or more parties owning a majority interest
 
 based on
ownership as shown on Exhibit “A”; provided, however, if an Operator which has
been removed fails to vote or votes only to
 
 succeed
itself, the successor Operator shall be selected by the affirmative vote of two
(2) or more parties owning a majority interest based
 
 on
ownership as shown on Exhibit “A” remaining after excluding the voting interest
of the Operator that was removed.
 
 
 
 C.      Employees:
 
 
 
 The number of employees used by
Operator in conducting operations hereunder, their selection, and the hours of
labor and the
 
 compensation
for services performed shall be determined by Operator, and all such employees
shall be the employees of Operator.
 
 
 
 D.      Drilling
Contracts:
 
 
 
 All wells drilled on the Contract
Area shall be drilled on a competitive contract basis at the usual rates
prevailing in the area. If it so
 
 desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor shall not exceed the prevailing
 
 rates in
the area and the rate of such charges shall be agreed upon by the parties in
writing before drilling operations are commenced, and
 
 such work
shall be performed by Operator under the same terms and conditions as are
customary and usual in the area in contracts of in-
 
 dependent
contractors who are doing work of a similar nature.
 
 
 
 
 
 
 
 
 
 ARTICLE
VI.
 
 DRILLING
AND DEVELOPMENT
 
 
 
 A.      Initial
Well:
 
 
 
  
 
 
 
 .
 
 
 
  
 .
 
 
 
 
 
 
 
 B.      Subsequent
Operations:
 
 
 
 1. Proposed
Operations:  Should any party hereto desire to drill any well
on the Contract Area other than the well provided
 
 for in
Article VI.A., or to rework, deepen or plug back a dry hole drilled at the joint
expense of all parties or a well jointly owned by all
 
 the
parties and not then producing in paying quantities, the party desiring to
drill, rework, deepen or plug back such a well shall give the
 
 other
parties written notice of the proposed operation, specifying the work to be
performed, the location, proposed depth, objective forma-
 
 tion and
the estimated cost of the operation. The parties receiving such a notice shall
have thirty (30) days after receipt of the notice
 
 within
which to notify the party wishing to do the work whether they elect to
participate in the cost of the proposed operation. If a drill-
 
 ing rig
is on location, notice of a proposal to rework, plug back or drill deeper may be
given by telephone and the response period shall be
 twenty-four (24)
 limited
to / hours, exclusive of Saturday, Sunday, and legal holidays. Failure of a
party receiving such notice to reply within
 
 the
period above fixed shall constitute an election by that party not to participate
in the cost of the proposed operation. Any notice or
 
 response
given by telephone shall be promptly confirmed in writing.
 
 
 
 
 
 
 
 If all parties elect to participate
in such a proposed operation, Operator shall, within ninety (90) days after
expiration of the notice
 twenty-four
(24)
 period of
thirty (30) days (or as promptly as possible after the expiration of the / hour
period when a drilling rig is on loca-
 
 tion, as
the case may be), actually commence the proposed operation and complete it with
due diligence at the risk and expense of all par-
 
 ties
hereto; provided, however, said commencement date may be extended upon written
notice of same by Operator to the other parties,
 
 for a
period of up to thirty (30) additional days if, in the sole opinion of Operator,
such additional time is reasonably necessary to obtain
 
 permits
from governmental authorities, surface rights (including rights-of-way) or
appropriate drilling equipment, or to complete title ex-
 amination
or curative matter required for title approval or
acceptance.  Notwithstanding the force majeure provisions of Article
XI, if the
 
 actual
operation has not been commenced within the time provided (including any
extension thereof as specifically permitted herein) and
 
 if any
party hereto still desires to conduct said operation, written notice proposing
same must be resubmitted to the other parties in accor-
 
 dance
with the provisions hereof as if no prior proposal had been made.
 
 
 See
Article XV D.
 
 
 
 
 2. Operations by Less than All
Parties:  If any party receiving such notice as provided in
Article VI.B.1. or VII.D.1. (Option
 
 No. 2)
elects not to participate in the proposed operation, then, in order to be
entitled to the benefits of this Article, the party or parties
 
 giving
the notice and such other parties as shall elect to participate in the operation
shall, within ninety (90) days after the expiration of
 twenty-four
(24)
 the
notice period of thirty (30) days (or as promptly as possible after the
expiration of the / hour period when a drilling rig is
 
 on
location, as the case may be) actually commence the proposed operation and
complete it with due diligence.  Operator shall perform
all
 
 work for
the account of the Consenting Parties; provided, however, if no drilling rig or
other equipment is on location, and if Operator is
 
 a
Non-Consenting Party, the Consenting Parties shall either: (a) request Operator
to perform the work required by such proposed opera-
 
 tion for
the account of the Consenting Parties, or (b) designate one (1) of the
Consenting Parties as Operator to perform such work. Con-
 
 senting
Parties, when conducting operations on the Contract Area pursuant to this
Article VI.B.2., shall comply with all terms and con-
 
 ditions
of this agreement.
 
 
 
 
 
 
 
 If less than all parties approve any
proposed operation, the proposing party, immediately after the expiration of the
applicable
 
 notice
period, shall advise the Consenting Parties of the total interest of the parties
approving such operation and its recommendation as
 twenty-four (24)
 to
whether the Consenting Parties should proceed with the operation as proposed.
Each Consenting Party, within / hours
 
 (exclusive
of Saturday, Sunday and legal holidays) after receipt of such notice, shall
advise the proposing party of its desire to (a) limit par-
 
 ticipation
to such party’s interest as shown on Exhibit “A” or (b) carry its proportionate
part of Non-Consenting Parties’ interests, and
 
 failure
to advise the proposing party shall be deemed an election under (a). In the
event a drilling rig is on location, the time permitted for
 twenty-four
(24)
 such a
response shall not exceed a total of / hours (inclusive of
Saturday, Sunday and legal holidays). The proposing party,
 
 at
its election, may withdraw such proposal if there is insufficient participation
and shall promptly notify all parties of such decision.
 
 
 
 
 
 
 
 The entire cost and risk of
conducting such operations shall be borne by the Consenting Parties in the
proportions they have
 
 elected
to bear same under the terms of the preceding paragraph. Consenting Parties
shall keep the leasehold estates involved in such
 
 operations
free and clear of all liens and encumbrances of every kind created by or arising
from the operations of the Consenting Parties.
 
 If such
an operation results in a dry hole, the Consenting Parties shall plug and
abandon the well and restore the surface location at their
 
 sole
cost, risk and expense. If any well drilled, reworked, deepened or plugged back
under the provisions of this Article results in a pro-
 
 ducer of
oil and/or gas in paying quantities, the Consenting Parties shall complete and
equip the well to produce at their sole cost and risk,
 
 
 
 
  and the
well shall then be turned over to Operator and shall be operated by it at the
expense and for the account of the Consenting Par-
  
 ties.
Upon commencement of operations for the drilling, reworking, deepening or
plugging back of any such well by Consenting Parties
 
 in
accordance with the provisions of this Article, each Non-Consenting Party shall
be deemed to have relinquished to Consenting Parties,
 
 and the
Consenting Parties shall own and be entitled to receive, in proportion to their
respective interests, all of such Non-Consenting
 
 Party’s
interest in the well and share of production therefrom until the proceeds of the
sale of such share, calculated at the well, or
 
 market
value thereof if such share is not sold, (after deducting production taxes,
excise taxes, royalty, overriding royalty and other in-
 
 terests
not excepted by Article III.D. payable out of or measured by the production from
such well accruing with respect to such interest
 
 until it
reverts) shall equal the total of the following:
 
 
 
 
 
 
 
 (a)  100% of each such
Non-Consenting Party’s share of the cost of any newly acquired surface equipment
beyond the wellhead
 
 connections
(including, but not limited to, stock tanks, separators, treaters, pumping
equipment and piping), plus 100% of each such
 
 Non-Consenting
Party’s share of the cost of operation of the well commencing with first
production and continuing until each such Non-
 
 Consenting
Party’s relinquished interest shall revert to it under other provisions of this
Article, it being agreed that each Non-
 
 Consenting
Party’s share of such costs and equipment will be that interest which would have
been chargeable to such Non-Consenting
 
 Party had
it participated in the well from the beginning of the operations;
and
 
 (b)          % of that portion of the costs
and expenses of drilling, reworking, deepening, plugging back, testing and
completing,
 
 after
deducting any cash contributions received under Article VIII.C., and% of that portion of the cost of newly acquired
equip-
 
 ment in
the well (to and including the wellhead connections), which would have been
chargeable to such Non-Consenting Party if it had
 
 participated
therein.
 An election not to participate in the
drilling or the deepening of a well shall be deemed an election not to
participate in any re-
 
 working
or plugging back operation proposed in such a well, or portion thereof, to which
the initial Non-Consent election applied that is
 
 conducted
at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party’s recoupment account. Any such
 
 reworking
or plugging back operation conducted during the recoupment period shall be
deemed part of the cost of operation of said well
 
 and there
shall be added to the sums to be recouped by the Consenting Parties one hundred
percent (100%) of that portion of the costs of
 
 the
reworking or plugging back operation which would have been chargeable to such
Non-Consenting Party had it participated therein. If
 
 such a
reworking or plugging back operation is proposed during such recoupment period,
the provisions of this Article VI.B. shall be ap-
 
 plicable
as between said Consenting Parties in said well.
 During the period of time Consenting
Parties are entitled to receive Non-Consenting Party’s share of production, or
the
 
 proceeds
therefrom, Consenting Parties shall be responsible for the payment of all
production, severance, excise, gathering and other
 
 taxes,
and all royalty, overriding royalty and other burdens applicable to
Non-Consenting Party’s share of production not excepted by Ar-
 
 ticle
III.D.
 In the case of any reworking,
plugging back or deeper drilling operation, the Consenting Parties shall be
permitted to use, free
 
 of cost,
all casing, tubing and other equipment in the well, but the ownership of all
such equipment shall remain unchanged; and upon
 
 abandonment
of a well after such reworking, plugging back or deeper drilling, the Consenting
Parties shall account for all such equip-
 
 ment to
the owners thereof, with each party receiving its proportionate part in kind or
in value, less cost of salvage.
 
 Within sixty (60) days after the
completion of any operation under this Article, the party conducting the
operations for the
 
 Consenting
Parties shall furnish each Non-Consenting Party with an inventory of the
equipment in and connected to the well, and an
 
 itemized
statement of the cost of drilling, deepening, plugging back, testing,
completing, and equipping the well for production; or, at its
 
 option,
the operating party, in lieu of an itemized statement of such costs of
operation, may submit a detailed statement of monthly bill-
 
 ings.
Each month thereafter, during the time the Consenting Parties are being
reimbursed as provided above, the party conducting the
 
 operations
for the Consenting Parties shall furnish the Non-Consenting Parties with an
itemized statement of all costs and liabilities in-
 
 curred in
the operation of the well, together with a statement of the quantity of oil and
gas produced from it and the amount of proceeds
 
 realized
from the sale of the well’s working interest production during the preceding
month. In determining the quantity of oil and gas
 
 produced
during any month, Consenting Parties shall use industry accepted methods such
as, but not limited to, metering or periodic
 
 well
tests. Any amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation
 
 which
would have been owned by a Non-Consenting Party had it participated therein
shall be credited against the total unreturned costs
 
 of the
work done and of the equipment purchased in determining when the interest of
such Non-Consenting Party shall revert to it as
 
 above
provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
 
 
 
 
  If and when the Consenting Parties
recover from a Non-Consenting Party’s relinquished interest the amounts provided
for above,
  
 the
relinquished interests of such Non-Consenting Party shall automatically revert
to it, and, from and after such reversion, such Non-
 
 Consenting
Party shall own the same interest in such well, the material and equipment in or
pertaining thereto, and the production
 
 therefrom
as such Non-Consenting Party would have been entitled to had it participated in
the drilling, reworking, deepening or plugging
 
 back of
said well. Thereafter, such Non-Consenting Party shall be charged with and shall
pay its proportionate part of the further costs of
 
 the
operation of said well in accordance with the terms of this agreement and the
Accounting Procedure attached hereto.
 
 
 
 
 
 
 Notwithstanding the provisions of
this Article VI.B.2., it is agreed that without the mutual consent of all
parties, no wells shall
 
 be
completed in or produced from a source of supply from which a well located
elsewhere on the Contract Area is producing, unless such
 
 well
conforms to the then-existing well spacing pattern for such source of
supply.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 3. Stand-By
Time:  When a well which has been drilled or deepened has
reached its authorized depth and all tests have been
 
 completed,
and the results thereof furnished to the parties, stand-by costs incurred
pending response to a party’s notice proposing a
 
 reworking,
deepening, plugging back or completing operation in such a well shall be charged
and borne as part of the drilling or deepen-
 
 ing
operation just completed. Stand-by costs subsequent to all parties responding,
or expiration of the response time permitted, whichever
 
 first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second gram-
 
 matical
paragraph of Article VI.B.2., shall be charged to and borne as part of the
proposed operation, but if the proposal is subsequently
 
 withdrawn
because of insufficient participation, such stand-by costs shall be allocated
between the Consenting Parties in the proportion
 
 each
Consenting Party’s interest as shown on Exhibit “A” bears to the total interest
as shown on Exhibit “A” of all Consenting Par-
 
 ties.
 
 
 
 
 
 
 
 4. Sidetracking:  Except
as hereinafter provided, those provisions of this agreement applicable to a
“deepening” operation shall
 
 also be
applicable to any proposal to directionally control and intentionally deviate a
well from vertical so as to change the bottom hole
 
 location
(herein call “sidetracking”), unless done to straighten the hole or to drill
around junk in the hole or because of other
 
 mechanical
difficulties. Any party having the right to participate in a proposed
sidetracking operation that does not own an interest in the
 
 affected
well bore at the time of the notice shall, upon electing to participate, tender
to the well bore owners its proportionate share (equal
 
 to its
interest in the sidetracking operation) of the value of that portion of the
existing well bore to be utilized as follows:
 
 
 
 
 
 
 
 (a)  If the proposal is for
sidetracking an existing dry hole, reimbursement shall be on the basis of the
actual costs incurred in
 
 the
initial drilling of the well down to the depth at which the sidetracking
operation is initiated.
 
 
 
 
 
 
 
 (b)  If the proposal is for
sidetracking a well which has previously produced, reimbursement shall be on the
basis of the well’s
 
 salvable
materials and equipment down to the depth at which the sidetracking operation is
initiated, determined in accordance with the
 
 provisions
of Exhibit “C”, less the estimated cost of salvaging and the estimated cost of
plugging and abandoning.
 
 
 
 
 
 
 
 In the event that notice for a
sidetracking operation is given while the drilling rig to be utilized is on
location, the response period
 twenty-four (24)
 shall be
limited to / hours, exclusive of Saturday, Sunday and legal holidays; provided,
however, any party may request and
 twenty-four (24)
 receive
up to eight (8) additional days after expiration of the / hours within which to
respond by paying for all stand-by time
 
 incurred
during such extended response period. If more than one party elects to take such
additional time to respond to the notice, stand
 
 by costs
shall be allocated between the parties taking additional time to respond on a
day-to-day basis in the proportion each electing par-
 
 ty’s
interest as shown on Exhibit “A” bears to the total interest as shown on Exhibit
“A” of all the electing parties. In all other in-
 
 stances
the response period to a proposal for sidetracking shall be limited to thirty
(30) days.
 
 
 
 
 
 
 
 C.      TAKING
PRODUCTION IN KIND:
 
 
 
 Each party shall take in kind or
separately dispose of its proportionate share of all oil and gas produced from
the Contract Area,
 
 exclusive
of production which may be used in development and producing operations and in
preparing and treating oil and gas for
 
 marketing
purposes and production unavoidably lost. Any extra expenditure incurred in the
taking in kind or separate disposition by any
 
 party of
its proportionate share of the production shall be borne by such party. Any
party taking its share of production in kind shall be
 
 
 
  
  required
to pay for only its proportionate share of such part of Operator’s surface
facilities which it uses.
 Each party shall execute such
division orders and contracts as may be necessary for the sale of its interest
in production from
 
 the
Contract Area, and, except as provided in Article VII.B., shall be entitled to
receive payment directly from the purchaser thereof for
 
 its share
of all production.
 
 
 
 In the event any party shall fail to
make the arrangements necessary to take in kind or separately dispose of its
proportionate share of
 
 the oil
produced from the Contract Area, Operator shall have the right, subject to the
revocation at will by the party owning it, but not
 
 the
obligation, to purchase such oil or sell it to others at any time and from time
to time, for the account of the non-taking party at the
 
 best
price obtainable in the area for such production. Any such purchase or sale by
Operator shall be subject always to the right of the
 
 owner of
the production to exercise at any time its right to take in kind, or separately
dispose of, its share of all oil not previously
 
 delivered
to a purchaser. Any purchase or sale by Operator of any other party’s share of
oil shall be only for such reasonable periods of
 
 time as
are consistent with the minimum needs of the industry under the particular
circumstances, but in no event for a period in excess
 
 of one
(1) year.
 
 In the event one or more parties’
separate disposition of its share of the gas causes split-stream deliveries to
separate pipelines and/or
 
 deliveries
which on a day-to-day basis for any reason are not exactly equal to a party’s
respective proportionate share of total gas sales to
 
 be
allocated to it, the balancing or accounting between the respective accounts of
the parties shall be in accordance with any gas balancing
 
 agreement
between the parties hereto, whether such an agreement is attached as Exhibit
“E”, or is a separate agreement.
 
 
 
 D.      Access
to Contract Area and Information:
 
 
 
 Each party shall have access to the
Contract Area at all reasonable times, at its sole cost and risk to inspect or
observe operations,
 
 and shall
have access at reasonable times to information pertaining to the development or
operation thereof, including Operator’s books
 
 and
records relating thereto. Operator, upon request, shall furnish each of the
other parties with copies of all forms or reports filed with
 
 governmental
agencies, daily drilling reports, well logs, tank tables, daily gauge and run
tickets and reports of stock on hand at the first of
 
 each
month, and shall make available samples of any cores or cuttings taken from any
well drilled on the Contract Area. The cost of
 
 gathering
and furnishing information to Non-Operator, other than that specified above,
shall be charged to the Non-Operator that re-
 
 quests
the Information.
 
 
 
 E.      
Abandonment of Wells:
 
 
 
 1. Abandonment of Dry
Holes:  Except for any well drilled or deepened pursuant to
Article VI.B.2., any well which has been
 
 drilled
or deepened under the terms of this agreement and is proposed to be completed as
a dry hole shall not be plugged and abandoned
 
 without
the consent of all parties. Should Operator, after diligent effort, be unable to
contact any party, or should any party fail to reply
 
 within
forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after
receipt of notice of the proposal to plug and abandon
 
 such
well, such party shall be deemed to have consented to the proposed abandonment.
All such wells shall be plugged and abandoned in
 
 accordance
with applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or deepening
 
 such
well. Any party who objects to plugging and abandoning such well shall have the
right to take over the well and conduct further
 
 operations
in search of oil and/or gas subject to the provisions of Article
VI.B.
 
 
 
 2. Abandonment of Wells that
have Produced:  Except for any well in which a Non-Consent
operation has been conducted
 
 hereunder
for which the Consenting Parties have not been fully reimbursed as herein
provided, any well which has been completed as a
 
 producer
shall not be plugged and abandoned without the consent of all parties. If all
parties consent to such abandonment, the well shall
 
 be
plugged and abandoned in accordance with applicable regulations and at the cost,
risk and expense of all the parties hereto. If, within
 
 thirty
(30) days after receipt of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well,
 
 those
wishing to continue its operation from the interval(s) of the formation(s) then
open to production shall tender to each of the other
 
 parties
its proportionate share of the value of the well’s salvable material and
equipment, determined in accordance with the provisions of
 
 Exhibit
“C”, less the estimated cost of salvaging and the estimated cost of plugging and
abandoning. Each abandoning party shall assign
 
 the
non-abandoning parties, without warranty, express or implied, as to title or as
to quantity, or fitness for use of the equipment and
 
 material,
all of its interest in the well and related equipment, together with its
interest in the leasehold estate as to, but only as to, the in-
 
 terval or
intervals of the formation or formations then open to production. If the
interest of the abandoning party is or includes an oil and
 
 gas
interest, such party shall execute and deliver to the non-abandoning party or
parties an oil and gas lease, limited to the interval or in-
 
 tervals
of the formation or formations then open to production, for a term of one (1)
year and so long thereafter as oil and/or gas is pro-
 
 duced
from the interval or intervals of the formation or formations covered thereby,
such lease to be on the form attached as Exhibit
 
 
 
 
 
  
  required
to pay for only its proportionate share of such part of Operator’s surface
facilities which it uses.
 
 
 
 Each party shall execute such
division orders and contracts as may be necessary for the sale of its interest
in production from
 
 the
Contract Area, and, except as provided in Article VII.B., shall be entitled to
receive payment directly from the purchaser thereof for
 
 its share
of all production.
 
 
 
 In the event any party shall fail to
make the arrangements necessary to take in kind or separately dispose of its
proportionate share of
 
 the oil
and gas produced from the Contract Area, Operator shall have the right, subject
to the revocation at will by the party owning it,
 
 but not
the obligation, to purchase such oil and gas or sell it to others at any time
and from time to time, for the account of the non-
 
 taking
party at the best price obtainable in the area for such production. Any such
purchase or sale by Operator shall be subject always to
 
 the right
of the owner of the production to exercise at any time its right to take in
kind, or separately dispose of, its share of all oil and gas
 
 not
previously delivered to a purchaser. Any purchase or sale by Operator of any
other party’s share of oil and gas shall be only for such
 
 reasonable
periods of time as are consistent with the minimum needs of the industry under
the particular circumstances, but in no event
 
 for a
period in excess of one (1) year. Notwithstanding the foregoing, Operator shall
not make a sale, including one into interstate com-
 
 merce, of
any other party’s share of gas production without first giving such other party
thirty (30) days notice of such intended sale.
 
 
 
 D.      Access
to Contract Area and Information:
 
 
 
 Each party shall have access to the
Contract Area at all reasonable times, at its sole cost and risk to inspect or
observe operations,
 
 and shall
have access at reasonable times to information pertaining to the development or
operation thereof, including Operator’s books
 
 and
records relating thereto. Operator, upon request, shall furnish each of the
other parties with copies of all forms or reports filed with
 
 governmental
agencies, daily drilling reports, well logs, tank tables, daily gauge and run
tickets and reports of stock on hand at the first of
 
 each
month, and shall make available samples of any cores or cuttings taken from any
well drilled on the Contract Area. The cost of
 
 gathering
and furnishing information to Non-Operator, other than that specified above,
shall be charged to the Non-Operator that re-
 
 quests
the Information.
 
 
 
 E.      
Abandonment of Wells:
 
 
 
 1. Abandonment of Dry
Holes:  Except for any well drilled or deepened pursuant to
Article VI.B.2., any well which has been
 
 drilled
or deepened under the terms of this agreement and is proposed to be completed as
a dry hole shall not be plugged and abandoned
 
 without
the consent of all parties. Should Operator, after diligent effort, be unable to
contact any party, or should any party fail to reply
 twenty-four (24)
 within /
hours (exclusive of Saturday, Sunday and legal holidays) after receipt of notice
of the proposal to plug and abandon
 
 such
well, such party shall be deemed to have consented to the proposed abandonment.
All such wells shall be plugged and abandoned in
 
 accordance
with applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or deepening
 
 such
well. Any party who objects to plugging and abandoning such well shall have the
right to take over the well and conduct further
 
 operations
in search of oil and/or gas subject to the provisions of Article
VI.B.
 
 
 
 2. Abandonment of Wells that
have Produced:  Except for any well in which a Non-Consent
operation has been conducted
 
 hereunder
for which the Consenting Parties have not been fully reimbursed as herein
provided, any well which has been completed as a
 
 producer
shall not be plugged and abandoned without the consent of all parties. If all
parties consent to such abandonment, the well shall
 
 be
plugged and abandoned in accordance with applicable regulations and at the cost,
risk and expense of all the parties hereto. If, within
 
 thirty
(30) days after receipt of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well,
 
 those
wishing to continue its operation from the interval(s) of the formation(s) then
open to production shall tender to each of the other
 
 parties
its proportionate share of the value of the well’s salvable material and
equipment, determined in accordance with the provisions of
 
 Exhibit
“C”, less the estimated cost of salvaging and the estimated cost of plugging and
abandoning. Each abandoning party shall assign
 
 the
non-abandoning parties, without warranty, express or implied, as to title or as
to quantity, or fitness for use of the equipment and
 
 material,
all of its interest in the well and related equipment, together with its
interest in the leasehold estate as to, but only as to, the in-
 
 terval or
intervals of the formation or formations then open to production. If the
interest of the abandoning party is or includes an oil and
 
 gas
interest, such party shall execute and deliver to the non-abandoning party or
parties an oil and gas lease, limited to the interval or in-
 
 tervals
of the formation or formations then open to production, for a term of one (1)
year and so long thereafter as oil and/or gas is pro-
 
 duced
from the interval or intervals of the formation or formations covered thereby,
such lease to be on the form attached as Exhibit
 
 
 
 
  
  “B”. The
assignments or leases so limited shall encompass the “drilling unit” upon which
the well is located. The payments by, and the
  
 assignments
or leases to, the assignees shall be in a ratio based upon the relationship of
their respective percentage of participation in the
 
 Contract
Area to the aggregate of the percentages of participation in the Contract Area
of all assignees. There shall be no readjustment of
 
 interests
in the remaining portion of the Contract Area.
 
 
 
 Thereafter, abandoning parties shall
have no further responsibility, liability, or interest in the operation of or
production from
 
 the well
in the interval or intervals then open other than the royalties retained in any
lease made under the terms of this Article. Upon re-
 
 quest,
Operator shall continue to operate the assigned well for the account of the
non-abandoning parties at the rates and charges con-
 
 templated
by this agreement, plus any additional cost and charges which may arise as the
result of the separate ownership of the assigned
 
 well.
Upon proposed abandonment of the producing interval(s) assigned or leased, the
assignor or lessor shall then have the option to
 
 repurchase
its prior interest in the well (using the same valuation formula) and
participate in further operations therein subject to the pro-
 
 visions
hereof.
 
 
 
 3. Abandonment of Non-Consent
Operations:  The provisions of Article VI.E.1. or VI.E.2 above
shall be applicable as between
 
 Consenting
Parties in the event of the proposed abandonment of any well excepted from said
Articles; provided, however, no well shall be
 
 permanently
plugged and abandoned unless and until all parties having the right to conduct
further operations therein have been notified
 
 of the
proposed abandonment and afforded the opportunity to elect to take over the well
in accordance with the provisions of this Article
 
 VI.E.
 
 
 
 ARTICLE
VII.
 
 EXPENDITURES
AND LIABILITY OF PARTIES
 
 
 
 A.      Liability
of Parties:
 
 
 
 The liability of the parties shall be
several, not joint or collective. Each party shall be responsible only for its
obligations, and
 
 shall be
liable only for its proportionate share of the costs of developing and operating
the Contract Area. Accordingly, the liens granted
 
 among the
parties in Article VII.B. are given to secure only the debts of each severally.
It is not the intention of the parties to create, nor
 
 shall
this agreement be construed as creating, a mining or other partnership or
association, or to render the parties liable as partners.
 
 
 
 B.      Liens
and Payment Defaults:
 
 
 
 Each Non-Operator grants to Operator
a lien upon its oil and gas rights in the Contract Area, and a security interest
in its share
 
 of oil
and/or gas when extracted and its interest in all equipment, to secure payment
of its share of expense, together with interest thereon
 
 at the
rate provided in Exhibit “C”. To the extent that Operator has a security
interest under the Uniform Commercial Code of the
 
 state,
Operator shall be entitled to exercise the rights and remedies of a secured
party under the Code. The bringing of a suit and the ob-
 
 taining
of judgment by Operator for the secured indebtedness shall not be deemed an
election of remedies or otherwise affect the lien
 
 rights or
security interest as security for the payment thereof. In addition, upon default
by any Non-Operator in the payment of its share
 
 of
expense, Operator shall have the right, without prejudice to other rights or
remedies, to collect from the purchaser the proceeds from
 
 the sale
of such Non-Operator’s share of oil and/or gas until the amount owed by such
Non-Operator, plus interest, has been paid. Each
 
 purchaser
shall be entitled to rely upon Operator’s written statement concerning the
amount of any default. Operator grants a like lien
 
 and
security interest to the Non-Operators to secure payment of Operator’s
proportionate share of expense.
 
 
 
 If any party fails or is unable to
pay its share of expense within sixty (60) days after rendition of a statement
therefor by
 
 Operator,
the non-defaulting parties, including Operator, shall, upon request by Operator,
pay the unpaid amount in the proportion that
 
 the
interest of each such party bears to the interest of all such parties. Each
party so paying its share of the unpaid amount shall, to obtain
 
 reimbursement
thereof, be subrogated to the security rights described in the foregoing
paragraph.
 
 
 
 C.      Payments
and Accounting:
 
 
 
 Except as herein otherwise
specifically provided, Operator shall promptly pay and discharge expenses
incurred in the development
 
 and
operation of the Contract Area pursuant to this agreement and shall charge each
of the parties hereto with their respective propor-
 
 tionate
shares upon the expense basis provided in Exhibit “C”. Operator shall keep an
accurate record of the joint account hereunder,
 
 showing
expenses incurred and charges and credits made and received.
 
 
 
 Operator, at its election, shall have
the right from time to time to demand and receive from the other parties payment
in advance
 
 of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding
 
 month,
which right may be exercised only by submission to each such party of an
itemized statement of such estimated expense, together
 
 with an
invoice for its share thereof. Each such statement and invoice for the payment
in advance of estimated expense shall be submitted
 
 on or
before the 20th day of the next preceding month. Each party shall pay to
Operator its proportionate share of such estimate within
 
 fifteen
(15) days after such estimate and invoice is received. If any party fails to pay
its share of said estimate within said time, the amount
 
 due shall
bear interest as provided in Exhibit “C” until paid. Proper adjustment shall be
made monthly between advances and actual ex-
 
 pense to
the end that each party shall bear and pay its proportionate share of actual
expenses incurred, and no more.
 
 
 
 D.      Limitation
of Expenditures:
 
 
 
 1. Drill or
Deepen:  Without the consent of all parties, no well shall be
drilled or deepened, except any well drilled or deepened
 
 pursuant
to the provisions of Article VI.B.2. of this agreement. Consent to the drilling
or deepening shall include:
 
 
 
 
  
  o      Option No.
1:  All necessary expenditures for the drilling or deepening,
testing, completing and equipping of the well, including
  
  necessary
tankage and/or surface facilities.
 
 
 
 þ      Option No.
2:  All necessary expenditures for the drilling or deepening
and testing of the well. When such well has reached its
 
 authorized
depth, and all tests have been completed, and the results thereof furnished to
the parties, Operator shall give immediate notice
 twenty-four
(24)
 to the
Non-Operators who have the right to participate in the completion costs. The
parties receiving such notice shall have /
 
 hours
(exclusive of Saturday, Sunday and legal holidays) in which to elect to
participate in the setting of casing and the completion at-
 
 tempt.
Such election, when made, shall include consent to all necessary expenditures
for the completing and equipping of such well, in-
 
 cluding
necessary tankage and/or surface facilities. Failure of any party receiving such
notice to reply within the period above fixed shall
 
 constitute
an election by that party not to participate in the cost of the completion
attempt. If one or more, but less than all of the parties,
 
 elect to
set pipe and to attempt a completion, the provisions of Article VI.B.2. hereof
(the phrase “reworking, deepening or plugging
 
 back” as
contained in Article VI.B.2. shall be deemed to include “completing”) shall
apply to the operations thereafter conducted by less
 
 than all
parties.
 
 
 
 2. Rework or Plug
Back:  Without the consent of all parties, no well shall be
reworked or plugged back except a well reworked or
 
 plugged
back pursuant to the provisions of Article VI.B.2. of this agreement. Consent to
the reworking or plugging back of a well shall
 
 include
all necessary expenditures in conducting such operations and completing and
equipping of said well, including necessary tankage
 
 and/or
surface facilities.
 
 
 
 3. Other
Operations:  Without the consent of all parties, Operator shall
not undertake any single project reasonably estimated
 
 to
require an expenditure in excess
of                                                      Fifty
thousand                                         
Dollars ($$50,000 )
 
 except in
connection with a well, the drilling, reworking, deepening, completing,
recompleting, or plugging back of which has been
 
 previously
authorized by or pursuant to this agreement; provided, however, that, in case of
explosion, fire, flood or other sudden
 
 emergency,
whether of the same or different nature, Operator may take such steps and incur
such expenses as in its opinion are required
 
 to deal
with the emergency to safeguard life and property but Operator, as promptly as
possible, shall report the emergency to the other
 
 parties.
If Operator prepares an authority for expenditure (AFE) for its own use,
Operator shall furnish any Non-Operator so requesting
 
 an
information copy thereof for any single project costing in excess of Twenty-five
thousand
 
 Dollars
($                                                25,000) but less than the amount first set forth
above in this paragraph.
 
 
 
 E.      Rentals,
Shut-in Well Payments and Minimum Royalties:
 
 
 Operator
 Rentals, shut-in well payments and
minimum royalties which may be required under the terms of any lease shall be
paid by / . In the event two or more parties own and have con-
 
 tributed
interests in the same lease to this agreement, such parties may designate one of
such parties to make said payments for and on
 
 behalf of
all such parties. Any party may request, and shall be entitled to receive,
proper evidence of all such payments. In the event of
 
 failure
to make proper payment of any rental, shut-in well payment or minimum royalty
through mistake or oversight where such pay-
 
 ment is
required to continue the lease in force, any loss which results from such
non-payment shall be borne in accordance with the pro-
 
 visions
of Article IV.B.2.
 
 
 
 Operator shall notify Non-Operator of
the anticipated completion of a shut-in gas well, or the shutting in or return
to production
 
 of a
producing gas well, at least five (5) days (excluding Saturday, Sunday and legal
holidays), or at the earliest opportunity permitted by
 
 circumstances,
prior to taking such action, but assumes no liability for failure to do so. In
the event of failure by Operator to so notify
 
 Non-Operator,
the loss of any lease contributed hereto by Non-Operator for failure to make
timely payments of any shut-in well payment
 
 shall be
borne jointly by the parties hereto under the provisions of Article
IV.B.3.
 
 
 
 F.      Taxes:
 
 
 
 Beginning with the first calendar
year after the effective date hereof, Operator shall render for ad valorem
taxation all property
 
 subject
to this agreement which by law should be rendered for such taxes, and it shall
pay all such taxes assessed thereon before they
 
 become
delinquent. Prior to the rendition date, each Non-Operator shall furnish
Operator information as to burdens (to include, but not
 
 be
limited to, royalties, overriding royalties and production payments) on leases
and oil and gas interests contributed by such Non-
 
 Operator.
If the assessed valuation of any leasehold estate is reduced by reason of its
being subject to outstanding excess royalties, over-
 
 riding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall inure to the benefit of the owner or
 
 owners of
such leasehold estate, and Operator shall adjust the charge to such owner or
owners so as to reflect the benefit of such reduc-
 
 tion. If
the ad valorem taxes are based in whole or in part upon separate valuations of
each party’s working interest, then notwithstanding
 
 anything
to the contrary herein, charges to the joint account shall be made and paid by
the parties hereto in accordance with the tax
 
 value
generated by each party’s working interest. Operator shall bill the other
parties for their proportionate shares of all tax payments in
 
 the
manner provided in Exhibit “C”.
 
 
 
 If Operator considers any tax
assessment improper, Operator may, at its discretion, protest within the time
and manner
 
 prescribed
by law, and prosecute the protest to a final determination, unless all parties
agree to abandon the protest prior to final deter-
 
 mination.
During the pendency of administrative or judicial proceedings, Operator may
elect to pay, under protest, all such taxes and any
 
 interest
and penalty. When any such protested assessment shall have been finally
determined, Operator shall pay the tax for the joint ac-
 
 count,
together with any interest and penalty accrued, and the total cost shall then be
assessed against the parties, and be paid by them, as
 
 provided
in Exhibit “C”.
 
 
 
 Each party shall pay or cause to be
paid all production, severance, excise, gathering and other taxes imposed upon
or with respect
 
 to the
production or handling of such party’s share of oil and/or gas produced under
the terms of this agreement.
 
 
 
 
 
  G.      Insurance:
 
 
 
 At all times while operations are
conducted hereunder, Operator shall comply with the workmen’s compensation law
of
 
 the state
where the operations are being conducted; provided, however, that Operator may
be a self-insurer for liability under said com-
 
 pensation
laws in which event the only charge that shall be made to the joint account
shall be as provided in Exhibit “C”. Operator shall
 
 also
carry or provide insurance for the benefit of the joint account of the parties
as outlined in Exhibit “D”, attached to and made a part
 
 hereof.
Operator shall require all contractors engaged in work on or for the Contract
Area to comply with the workmen’s compensation
 
 law of
the state where the operations are being conducted and to maintain such other
insurance as Operator may require.
 
 
 
 In the event automobile public
liability insurance is specified in said Exhibit “D”, or subsequently receives
the approval of the
 
 parties,
no direct charge shall be made by Operator for premiums paid for such insurance
for Operator’s automotive equipment.
 
 
 
 ARTICLE
VIII.
 
 ACQUISITION,
MAINTENANCE OR TRANSFER OF INTEREST
 
 
 
 A.      Surrender
of Leases:
 
 
 
 The leases covered by this agreement,
insofar as they embrace acreage in the Contract Area, shall not be surrendered
in whole
 
 or in
part unless all parties consent thereto.
 
 
 
 However, should any party desire to
surrender its interest in any lease or in any portion thereof, and the other
parties do not
 
 agree or
consent thereto, the party desiring to surrender shall assign, without express
or implied warranty of title, all of its interest in
 
 such
lease, or portion thereof, and any well, material and equipment which may be
located thereon and any rights in production
 
 thereafter
secured, to the parties not consenting to such surrender. If the interest of the
assigning party is or includes an oil and gas in-
 
 terest,
the assigning party shall execute and deliver to the party or parties not
consenting to such surrender an oil and gas lease covering
 
 such oil
and gas interest for a term of one (1) year and so long thereafter as oil and/or
gas is produced from the land covered thereby, such
 
 lease to
be on the form attached hereto as Exhibit “B”. Upon such assignment or lease,
the assigning party shall be relieved from all
 
 obligations
thereafter accruing, but not theretofore accrued, with respect to the interest
assigned or leased and the operation of any well
 
 attributable
thereto, and the assigning party shall have no further interest in the assigned
or leased premises and its equipment and pro-
 
 duction
other than the royalties retained in any lease made under the terms of this
Article. The party assignee or lessee shall pay to the
 
 party
assignor or lessor the reasonable salvage value of the latter’s interest in any
wells and equipment attributable to the assigned or leas-
 
 ed
acreage. The value of all material shall be determined in accordance with the
provisions of Exhibit “C”, less the estimated cost of
 
 salvaging
and the estimated cost of plugging and abandoning. If the assignment or lease is
in favor of more than one party, the interest
 
 shall be
shared by such parties in the proportions that the interest of each bears to the
total interest of all such parties.
 
 
 
 Any assignment, lease or surrender
made under this provision shall not reduce or change the assignor’s, lessor’s or
surrendering
 
 party’s
interest as it was immediately before the assignment, lease or surrender in the
balance of the Contract Area; and the acreage
 
 assigned,
leased or surrendered, and subsequent operations thereon, shall not thereafter
be subject to the terms and provisions of this
 
 agreement.
 
 
 
 B.      Renewal
or Extension of Leases:
 
 
 
 If any party secures a renewal of any
oil and gas lease subject to this agreement, all other parties shall be notified
promptly, and
 
 shall
have the right for a period of thirty (30) days following receipt of such notice
in which to elect to participate in the ownership of the
 
 renewal
lease, insofar as such lease affects lands within the Contract Area, by paying
to the party who acquired it their several proper pro-
 
 portionate
shares of the acquisition cost allocated to that part of such lease within the
Contract Area, which shall be in proportion to the
 
 interests
held at that time by the parties in the Contract Area.
 
 
 
 If some, but less than all, of the
parties elect to participate in the purchase of a renewal lease, it shall be
owned by the parties
 
 who elect
to participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area
 
 to the
aggregate of the percentages of participation in the Contract Area of all
parties participating in the purchase of such renewal lease.
 
 Any
renewal lease in which less than all parties elect to participate shall not be
subject to this agreement.
 
 
 
 Each party who participates in the
purchase of a renewal lease shall be given an assignment of its proportionate
interest therein
 
 by the
acquiring party.
 
 
 
 The provisions of this Article shall
apply to renewal leases whether they are for the entire interest covered by the
expiring lease
 
 or cover
only a portion of its area or an interest therein. Any renewal lease taken
before the expiration of its predecessor lease, or taken or
 
 contracted
for within six (6) months after the expiration of the existing lease shall be
subject to this provision; but any lease taken or con-
 
 tracted
for more than six (6) months after the expiration of an existing lease shall not
be deemed a renewal lease and shall not be subject to
 
 the
provisions of this agreement.
 
 
 
 The provisions in this Article shall
also be applicable to extensions of oil and gas leases.
 
 
 
 C.      Acreage
or Cash Contributions:
 
 
 
 While this agreement is in force, if
any party contracts for a contribution of cash towards the drilling of a well or
any other
 
 operation
on the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be
 
 applied
by it against the cost of such drilling or other operation. If the contribution
be in the form of acreage, the party to whom the con-
 
 tribution
is made shall promptly tender an assignment of the acreage, without warranty of
title, to the Drilling Parties in the proportions
 
 
 
  
  said
Drilling Parties shared the cost of drilling the well. Such acreage shall become
a separate Contract Area and, to the extent possible, be
  
 governed
by provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions
 
 it may
obtain in support of any well or any other operation on the Contract Area. The
above provisions shall also be applicable to op-
 
 tional
rights to earn acreage outside the Contract Area which are in support of a well
drilled inside the Contract Area.
 
 
 
 If any party contracts for any
consideration relating to disposition of such party’s share of substances
produced hereunder, such
 
 consideration
shall not be deemed a contribution as contemplated in this Article
VIII.C.
 
 
 
 D.      Maintenance
of Uniform Interests:
 
 
 
 Every such sale, encumbrance,
transfer or other disposition made by any party shall be made expressly subject
to this agreement
 
 and shall
be made without prejudice to the right of the other parties.
 
 
 
 If, at any time the interest of any
party is divided among and owned by four or more co-owners, Operator, at its
discretion, may
 
 require
such co-owners to appoint a single trustee or agent with full authority to
receive notices, approve expenditures, receive billings for
 
 and
approve and pay such party’s share of the joint expenses, and to deal generally
with, and with power to bind, the co-owners of such
 
 party’s
interest within the scope of the operations embraced in this agreement; however,
all such co-owners shall have the right to enter
 
 into and
execute all contracts or agreements for the disposition of their respective
shares of the oil and gas produced from the Contract
 
 Area and
they shall have the right to receive, separately, payment of the sale proceeds
thereof.
 
 
 
 E.      Waiver
of Rights to Partition:
 
 
 
 If permitted by the laws of the state
or states in which the property covered hereby is located, each party hereto
owning an
 
 undivided
interest in the Contract Area waives any and all rights it may have to partition
and have set aside to it in severalty its undivided
 
 interest
therein.
 
 
 
 F.      Preferential
Right to Purchase:
 
 
 
 
 
 
 
 ARTICLE
IX.
 
 INTERNAL
REVENUE CODE ELECTION
 
 
 
 This agreement is not intended to
create, and shall not be construed to create, a relationship of partnership or
an association
 
 for
profit between or among the parties hereto. Notwithstanding any provision herein
that the rights and liabilities hereunder are several
 
 and not
joint or collective, or that this agreement and operations hereunder shall not
constitute a partnership, if, for federal income tax
 
 purposes,
this agreement and the operations hereunder are regarded as a partnership, each
party hereby affected elects to be excluded
 1986
 from the
application of all of the provisions of Subchapter “K”, Chapter 1, Subtitle “A”,
of the Internal Revenue Code of /, as per-
 
 mitted
and authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to ex-
 
 ecute on
behalf of each party hereby affected such evidence of this election as may be
required by the Secretary of the Treasury of the
 
 United
States or the Federal Internal Revenue Service, including specifically, but not
by way of limitation, all of the returns, statements,
 Treasury
 and the
data required by / Regulations 1.761. Should there be any requirement that each
party hereby affected give further
 
 evidence
of this election, each such party shall execute such documents and furnish such
other evidence as may be required by the
 
 Federal
Internal Revenue Service or as may be necessary to evidence this election. No
such party shall give any notices or take any other
 
 action
inconsistent with the election made hereby. If any present or future income tax
laws of the state or states in which the Contract
 
 Area is
located or any future income tax laws of the United States contain provisions
similar to those in Subchapter “K”, Chapter 1,
 1986
 Subtitle
“A”, of the Internal Revenue Code of /, under which an election similar to that
provided by Section 761 of the Code is per-
 
 mitted,
each party hereby affected shall make such election as may be permitted or
required by such laws. In making the foregoing elec-
 
 tion,
each such party states that the income derived by such party from operations
hereunder can be adequately determined without the
 
 computation
of partnership taxable income.
 
 
 
 
 
 
 
  ARTICLE
X.
 
 CLAIMS
AND LAWSUITS
 
 
 
 Operator may settle any single
uninsured third party damage claim or suit arising from operations hereunder if
the expenditure
 
 does not
exceed                                                        Twenty-five
thousand    Dollars
 
 ($25,000 ) and
if the payment is in complete settlement of such claim or suit. If the amount
required for settlement ex-
 
 ceeds the
above amount, the parties hereto shall assume and take over the further handling
of the claim or suit, unless such authority is
 
 delegated
to Operator. All costs and expenses of handling, settling, or otherwise
discharging such claim or suit shall be at the joint ex-
 
 pense of
the parties participating in the operation from which the claim or suit arises.
If a claim is made against any party or if any party is
 
 sued on
account of any matter arising from operations hereunder over which such
individual has no control because of the rights given
 
 Operator
by this agreement, such party shall immediately notify all other parties, and
the claim or suit shall be treated as any other claim
 
 or suit
involving operations hereunder.
 
 
 
 ARTICLE
XI.
 
 FORCE
MAJEURE
 
 
 
 If any party is rendered unable,
wholly or in part, by force majeure to carry out its obligations under this
agreement, other than
 
 the
obligation to make money payments, that party shall give to all other parties
prompt written notice of the force majeure with
 
 reasonably
full particulars concerning it; thereupon, the obligations of the party giving
the notice, so far as they are affected by the force
 
 majeure,
shall be suspending during, but no longer than, the continuance of the force
majeure. The affected party shall use all reasonable
 
 diligence
to remove the force majeure situation as quickly as practicable.
 
 
 
 The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes,
 
 lockouts,
or other labor difficulty by the party involved, contrary to its wishes; how all
such difficulties shall be handled shall be entirely
 
 within
the discretion of the party concerned.
 
 
 
 The term “force majeure”, as here
employed, shall mean an act of God, strike, lockout, or other industrial
disturbance, act of
 
 the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, governmental action, governmental delay, restraint
 
 or
inaction, unavailability of equipment, and any other cause, whether of the kind
specifically enumerated above or otherwise, which is
 
 not
reasonably within the control of the party claiming suspension.
 
 
 
 ARTICLE
XII.
 
 NOTICES
 
 
 
 All notices authorized or required
between the parties and required by any of the provisions of this agreement,
unless otherwise
 
 specifically
provided, shall be given in writing by mail or telegram, postage or charges
prepaid, or by telex or telecopier and addressed to
 
 the
parties to whom the notice is given at the addresses listed on Exhibit “A”. The
originating notice given under any provision hereof
 
 shall be
deemed given only when received by the party to whom such notice is directed,
and the time for such party to give any notice in
 
 response
thereto shall run from the date the originating notice is received. The second
or any responsive notice shall be deemed given
 
 when
deposited in the mail or with the telegraph company, with postage or charges
prepaid, or sent by telex or telecopier. Each party
 
 shall
have the right to change its address at any time, and from time to time, by
giving written notice thereof to all other parties.
 
 
 ARTICLE
XIII.
 
 TERM
OF AGREEMENT
 
 
 
 This agreement shall remain in full
force and effect as to the oil and gas leases and/or oil and gas interests
subject hereto for the
 
 period of
time selected below; provided, however, no party hereto shall ever be construed
as having any right, title or interest in or to any
 
 lease or
oil and gas interest contributed by any other party beyond the term of this
agreement.
 
 
 
 þ      Option No. 1: So long
as any of the oil and gas leases subject to this agreement remain or are
continued in force as to any part
 
 of the
Contract Area, whether by production, extension, renewal, or
otherwise.
 
 
 
 o      Option No. 2: In the
event the well described in Article VI.A., or any subsequent well drilled under
any provision of this
 
 agreement,
results in production of oil and/or gas in paying quantities, this agreement
shall continue in force so long as any such well or
 
 wells
produce, or are capable of production, and for an additional period ofdays from cessation of all production;
provided,
 
 however,
if, prior to the expiration of such additional period, one or more of the
parties hereto are engaged in drilling, reworking, deepen-
 
 ing,
plugging back, testing or attempting to complete a well or wells hereunder, this
agreement shall continue in force until such opera-
 
 tions
have been completed and if production results therefrom, this agreement shall
continue in force as provided herein. In the event the
 
 well
described in Article VI.A., or any subsequent well drilled hereunder, results in
a dry hole, and no other well is producing, or capable
 
 of
producing oil and/or gas from the Contract Area, this agreement shall terminate
unless drilling, deepening, plugging back or rework-
 
 ing
operations are commenced
within                                                                                                 days from the
date of abandonment of said well.
 
 
 
 It is agreed, however, that the
termination of this agreement shall not relieve any party hereto from any
liability which has
 
 accrued
or attached prior to the date of such termination.
 
 
 
 
  ARTICLE
XIV.
 
 COMPLIANCE
WITH LAWS AND REGULATIONS
 
 
 
 A.      Laws,
Regulations and Orders:
 
 
 
 This agreement shall be subject to
the conservation laws of the state in which the Contract Area is located, to the
valid rules,
 
 regulations,
and orders of any duly constituted regulatory body of said state; and to all
other applicable federal, state, and local laws, or-
 
 dinances,
rules, regulations, and orders.
 
 
 
 B.      Governing
Law:
 
 
 
 This agreement and all matters
pertaining hereto, including, but not limited to, matters of performance,
non-performance, breach,
 
 remedies,
procedures, rights, duties, and interpretation or construction, shall be
governed and determined by the law of the state in which
 
 the
Contract Area is located. If the Contract Area is in two or more states, the law
of the state ofTexas
 
 shall
govern.
 
 
 
 C.      Regulatory
Agencies:
 
 
 
 Nothing herein contained shall grant,
or be construed to grant, Operator the right or authority to waive or release
any rights,
 
 privileges,
or obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated
 
 under
such laws in reference to oil, gas and mineral operations, including the
location, operation, or production of wells, on tracts offset-
 
 ting or
adjacent to the Contract Area.
 
 
 
 With respect to operations hereunder,
Non-Operators agree to release Operator from any and all losses, damages,
injuries, claims
 
 and
causes of action arising out of, incident to or resulting directly or indirectly
from Operator’s interpretation or application of rules,
 
 rulings,
regulations or orders of the Department of Energy or predecessor or successor
agencies to the extent such interpretation or ap-
 
 plication
was made in good faith. Each Non-Operator further agrees to reimburse Operator
for any amounts applicable to such Non-
 
 Operator’s
share of production that Operator may be required to refund, rebate or pay as a
result of such an incorrect interpretation or
 
 application,
together with interest and penalties thereon owing by Operator as a result of
such incorrect interpretation or application.
 
 
 
 Non-Operators authorize Operator to
prepare and submit such documents as may be required to be submitted to the
purchaser
 
 of any
crude oil sold hereunder or to any other person or entity pursuant to the
requirements of the “Crude Oil Windfall Profit Tax Act
 
 of 1980”,
as same may be amended from time to time (“Act”), and any valid regulations or
rules which may be issued by the Treasury
 
 Department
from time to time pursuant to said Act. Each party hereto agrees to furnish any
and all certifications or other information
 
 which is
required to be furnished by said Act in a timely manner and in sufficient detail
to permit compliance with said Act.
 
 
 
 ARTICLE
XV.
 
 OTHER
PROVISIONS
 
 
 
 
 
 
 
 
 
 A.Priority
of Operations
 
 If at any time there is more than one
operation proposed in connection with any well subject to this Operating
Agreement, then unless all participating parties agree on the sequence of such
operations, such proposals shall be considered and disposed of in the following
order of priority:
 (a)Proposals to do additional testing,
coring or logging;
 (b)Proposals to attempt to a completion
in the objective zone;
 (c)Proposals to rework;
 (d)Proposals to plug back and attempt
completions in ascending order;
 (e)Proposals to deepen the
well;
 (f)Proposals to sidetrack the
well;
 (g)Proposals to plug and abandon the
well.
 
 B.Subsequently
Created Interest (Article III. B.)
 
 Notwithstanding the provisions of this
agreement to the contrary, if any party hereto shall create an overriding
royalty, production payment, net proceeds interest, or other similar interest,
which pursuant to the terms of the Participation Agreement to which this
Operating Agreement is attached is not a joint obligation of the parties
thereto, (any such interest shall hereafter be referred to as a "Subsequently
Created Interest), such Subsequently Created Interest shall be specifically
subject to all of the terms and provisions of this Agreement, as
follows:
 
 (1)If non-consent operations are
conducted pursuant to any provision of this agreement, and the party conducting
such operations becomes entitled to receive the production attributable to the
interest out of which the Subsequently Created Interest is derived, such party
shall receive same free and clear of such Subsequently Created
Interest.  The party creating same shall bear and pay all such
Subsequently Created Interests and shall indemnify and hold the other parties
hereto free and harmless from any and all liability resulting
therefrom.
 
 (2)If the owner of the interest from
which a Subsequently Created Interest is derived fails to pay, when due, its
share of expenses chargeable hereunder, the lien granted the other parties
hereto under the provisions of Article VII.B or under the appropriate state
statutes shall cover and affect the Subsequently Created Interest and the rights
of the parties shall be the same as if the Subsequently Created Interest had not
been created.
 
 (3)If the owner of the interest from
which a Subsequently Created Interest is derived (i) elects to abandon a well
under the provisions of Article VI.E hereof, (ii) elects to surrender a lease
(or portion thereof) under the provisions of Article VIII.A hereof, or (iii)
elects not to pay rentals attributable to its interest in any lease and thereby
is required to assign the lease or that portion or interest therein for which it
elects not to pay rentals to those parties paying such rental, any assignment
resulting from such election shall be free and clear of the Subsequently Created
Interest.
 
 (4)The owner creating such interest
shall indemnify and hold the other parties hereto harmless from any claim or
cause of action by the owner of the Subsequently Created Interest.
 
 
 C.Obligatory
Well(s)
 
 Notwithstanding
anything contained in this Operating Agreement to the contrary, if, during the
term of this Operating Agreement, a proposal is made for the drilling,
deepening, reworking, plugging back, sidetracking or recompleting of a well or
wells or any other operation proposed or required within three months of the
expiration of any right and/or interests subject to this Operating Agreement in
order to (1) continue a lease or leases in force and effect, or (2) earn an
interest in and to oil and/or gas and other minerals which may be owned by any
third party or preserve any rights to such interest which, failing such
operations, would revert to a third party, or (3) comply with an order issued by
a regulatory body having jurisdiction over the premises, failing which certain
rights would terminate within such period (hereinafter referred to as
"Obligatory Operation"), the following shall apply:
 
 Should less than all the parties hereto
elect to participate and pay their proportionate part of the costs to be
incurred in such Obligatory Operation as elsewhere herein provided, any party(s)
desiring to participate shall have the right to do so in the manner provided
elsewhere herein, at their sole cost, risk and expense.
 
 Promptly following the conclusion of an
Obligatory Operation, each party not participating in said Obligatory Operation
shall deliver to the party or parties participating in said Obligatory Operation
an assignment of all of the right, title and interest of said non-participating
party in that portion of the leases and/or other rights and interest which are
maintained, perpetuated or earned as a result of said Obligatory Operation. The
right, title and interest assigned and conveyed shall be shared by the
participating parties in the proportion that the interest of each bears to the
total interest of all of the participating parties. Such assignment shall be
executed and delivered within thirty (30) days of the conclusion of such
Obligatory Operation by each party not electing to participate and shall be in a
form acceptable to the participating party or parties, free and clear of any
overriding royalty interest, production payments, mortgages, liens or other
encumbrances placed thereupon or arising out of the assigning party's ownership
and operations subsequent to the date of this Operating Agreement, with the
exception of the lessors royalties and any burdens created by the Participation
Agreement and/or arising under the leases listed on Exhibit “A”, but otherwise
without warranty of title, either express or implied. The leases, rights and
interests in which an interest is assigned pursuant to the terms hereof shall no
longer be subject to this Operating Agreement, but said leases, rights and
interests shall be solely subject to a separate operating agreement which
accurately reflects the interests of the party or parties in the Obligatory
Operation, and which is otherwise identical to this Operating Agreement. It is
agreed that the written notice and/or AFE's covering Obligatory Operations to be
sent to the parties for their election to participate therein as provided in
Article VI.B. I will be clearly marked or identified as a proposal for an
Obligatory Operation as herein defined.
 
 
 D.Disbursements
of Royalties:
 
 If a purchaser of any oil, gas or other
hydrocarbons produced from the Contract Area declines to make disbursement of
all royalties, overriding royalties and other payments out of, or with respect
to production which are payable on the Contract Area, Operator will, if any Non
-Operator so desires, make such disbursements on behalf of said Non-¬Operator at
his direction, provided, Non-Operator shall execute such documents as may be
necessary in the opinion of Operator to enable Operator to receive all payment
for oil, gas or other hydrocarbons directly from said purchaser. In that event,
Operator will use its best efforts to make disbursements correctly but will be
liable for incorrect disbursements only in the event of gross negligence or
willful misconduct.
 
 
 E.Taxes
(Article VII. F.):
 
 During
any time or times that a Non-Operator is exercising the right to take in kind or
separately dispose of its proportionate share of production, the Non-Operator
must pay or arrange for the payment of all production, severance, gathering,
sales or similar taxes imposed upon such party’s share. During any time or times
that Operator is purchasing or selling Non-Operator’s proportionate part of the
production, Operator must pay or arrange for the payment for all such
production, severance, gathering, sales or similar taxes imposed upon such
party’s share.
 
 
 
 
 
 
 
 
 F.Operator’s
Right to Net Out Revenues.
 
 In
addition to the remedies provided in Article VII.D., upon default by any
Non-Operator, Operator shall have the right to receive from all purchasers of
production the proceeds attributable to the interests of said defaulting
Non-Operator(s), and said Non-Operator(s) hereby agree(s) to so authorize and
direct the purchasers of production to make direct payment to Operator of their
respective shares of all proceeds from the sale of production. Operator is
authorized to deduct each month from the proceeds so received from the
purchasers of production all operating costs and charges assessable to said
defaulting Non-Operator(s) permitted under this Agreement, and remit to the
Non-Operator(s) their respective net shares of the said proceeds.
 
 
 G.Abandonment
of Wells.
 
 Notwithstanding
the provisions of Article VI.E., if a party or parties who did not agree to the
abandonment of a well under Article VI.E. shall fail to (i) take over such well,
(ii) conduct further operations thereon, and (iii) make the tender required
under Article VI.E.2., if applicable, within sixty (60) days after expiration of
the notice of thirty (30) days, or as promptly as possible after the expiration
of the forty-eight (48) hour period when a drilling rig is on location, as the
case may be, the Operator may proceed to plug and abandon such a well in
accordance with Article VI.E. at the cost, risk and expense of all parties
owning an interest in such well.
 
 
 
  ARTICLE
XVI.
 
 MISCELLANEOUS
 
 
 
 This agreement shall be binding upon
and shall inure to the benefit of the parties hereto and to their respective
heirs, devisees,
 
 legal
representatives, successors and assigns.
 
 
 
 This instrument may be executed in
any number of counterparts, each of which shall be considered an original for
all purposes.
 
 
 23rd                                          September                                                 2008
 IN WITNESS WHEREOF, this agreement
shall be effective as of
/                                                                                                      day of
/, (year) /.
 
 
 
 
 
 
 O P E R A
T O R
 
 
 
 
 
 BLACK OAK RESOURCES OPERATING,
INC.
 /
 
 
 
 
 Name:  Michael E.
Black
 
 Title:    President
 /
 
 
 
 
 
 
 N O N - O
P E R A T O R S
 
 
 
 
 
 
 
 
 
 LEGACY RESERVES OPERATING
LP
 
 
 
 
 Name:  Cary D.
Brown
 
 Title:    Chairman and
Chief Executive Officer
 
 
 
 
 BLACK OAK RESOURCES, LLC
 
 
 
 Name:  Michael E.
Black
 
 Title:     President