Participation Agreement


    
      
        

      


      Exhibit
        10.1

      PARTICIPATION
        AGREEMENT

       

      RELATING
        TO

       

      RMS/WARWINK

       

      This
        PARTICIPATION AGREEMENT (this “Agreement”)
        is
        made and entered into as of December 5, 2006 (the “Effective
        Date”),
        by
        and among the Parties (as defined below).

       

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

       

         
        ARTICLE I  

      DEFINITIONS

       

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

       

      “Acquisition
        Costs”
means
        (i) with respect to any Designated Property relating to a Lease that was
        owned by CWEI prior to the date such property became subject to this Agreement,
        the fair market value of the portion of such Lease that is attributable to
        such
        Designated Property as of the date it became subject to this Agreement, and
        (ii)
        with respect to any Designated Property relating to a Lease that was acquired
        by
        CWEI on or after the date such Designated Property became subject to this
        Agreement, the portion of the costs of acquiring such Lease (including,
        without limitation, direct costs of seismic data and interpretation, lease
        broker services, title examinations, filing fees, and recording costs) that
        is
        attributable to the Designated Property.

       

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

       

      “Agreed
        Rate”
means
        4.45% per annum.

       

      “Agreement”
means
        this Participation Agreement, as amended or restated from time to
        time.

       

      “Area
        of Interest”
means
        the area described in Exhibit
        B, as such may amended from time to time by CWEI.

       

      “Capital
        Account”
        has the
        meaning set forth in Section
        5.03.

       

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

       

      “Contribution
        Date”
        has the
        meaning set forth in Section
        5.04(b).

       

      “Contribution
        Notice” has
        the
        meaning set forth in Section
        5.04(b).

       

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

       

      “CWEI
        Counsel”
        has the
        meaning set forth in Section
        8.12.

       

      “Designated
        Property”
        means an
        undivided 5% of CWEI’s interests in the Wells.

       

      “Event
        of Forfeiture”
        has the
        meaning set forth in Section
        4.04.

       

      “Indemnified
        Person”
has
        the
        meaning set forth in Section
        8.11.

       

      “Interest”
        means an
        interest in Designated Property under this Agreement. The number of Interests
        owned by each Participant and the total number of Interests in this Agreement
        are set forth on Exhibit
        A,
        as
        amended from time to time.

       

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

       

      “Majority
        in Interest”
means
        a
        majority of the Interests held by all Participants.

       

      “Non-Contributing
        Party”
        has the
        meaning set forth in Section
        5.04(c).

       

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

       

      “Party”
means
        CWEI or any Participant.

       

      “Participant”
means
        each Person listed as such on Exhibit A.

       

      “Payout”
means
        the earliest calendar month during which CWEI shall have received cumulative
        cash proceeds relating to all Designated Property (but only taking into account
        proceeds received with respect to a Designated Property after such Designated
        Property became subject to this Agreement) in an aggregate amount equal to
        the
        sum of (i) the fair market value of the Designated Property as of the date
        hereof as agreed to and set forth on Exhibit
        C
        and (ii)
        the aggregate amounts contributed after the date hereof by the Company, plus
        the
        Agreed Rate of return.

       

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

       

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

       

      “Tax
        Partnership”
        means
        the relationship (constituting a tax partnership for federal and applicable
        state law tax purposes) between the Parties existing pursuant to this
        Agreement.

       

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

       

      “Well”
means
        a
        well in which CWEI holds
        a
        Working Interest derived from its ownership of one or more Leases in the
        Area of
        Interest, as determined in accordance with Section
        8.16.
        

       

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

       

      “Working
        Interest”
means
        an operating interest in a Lease that permits CWEI to explore, develop and
        produce one or more properties in the Area of Interest and bear its percentage
        of the costs and expenses relating to the maintenance and development of
        and
        operations relating to such properties.

       

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

       

      ARTICLE
        II

      RELATIONSHIP
        OF THE PARTIES

       

      2.01  Formation
        of Tax Partnership; No Partnership for any Other
        Purpose.
        This
        Agreement and its attachments are not intended and shall not be construed
        to
        create a joint venture or other partnership (general, limited, or otherwise)
        or
        association or to render the Parties hereto liable as partners. Each of the
        Parties hereto hereby agrees that this Agreement creates a partnership for
        United States federal and State income tax purposes only, which Tax Partnership
        shall be deemed to own the Designated Property and shall function and exist
        as
        set forth in Exhibit
        D
        attached
        hereto, which is hereby incorporated by reference for all purposes of this
        Agreement. Furthermore, each of the Parties agrees that it shall not make
        an
        election for the Tax Partnership to be excluded from the application of the
        provisions of Subchapter K of Chapter 1 of Subtitle A of the Code (“Subchapter
        K”)
        or any
        similar provisions of applicable state law; provided,
        however,
        that
        each Participant acknowledges that CWEI may currently be, or may become in
        the
        future, party to an Operating Agreement relating to one or more of the Leases
        and/or Wells that requires each party thereto to make an election to be excluded
        from the application of the provisions of Subchapter K and authorizes CWEI
        to
        make such elections in the future on behalf of the Tax Partnership (as an
        entity) if necessary to comply with the applicable Operating
        Agreement.

       

      2.02  Purpose.
        The
        purpose for which this Agreement is being entered is to further align the
        interests of the Participants with those of CWEI by permitting the Participants
        to participate with CWEI in the CWEI oil and gas production (if any) developed,
        directly or indirectly, by CWEI and the Participants.

       

      2.03  Term.
        This
        Agreement shall commence on the Effective Date and continue in effect until
        terminated in accordance with Section
        7.01.

       

      ARTICLE
        III

      MANAGEMENT
        OF LEASES AND WELLS

       

      3.01  Authority
        of CWEI.
        CWEI
        shall have the full and exclusive power and authority to do any and all things
        necessary, incidental, proper, advisable or convenient for the furtherance
        of
        developing the Leases and Wells on behalf of the Tax Partnership, including
        without limitation: 

       

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

       

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

       

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

       

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

       

      (e)  to
        make
        any expenditures and incur any obligations it deems appropriate; 

       

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

       

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

       

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

       

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

       

      (j)  to
        construct pipelines, drilling and production platforms and facilities, gas
        plants, processing plants and other facilities incidental to the development
        of
        the Area of Interest and the production and marketing of oil and gas
        therefrom.

       

      (k)  to
        execute and deliver division orders and transfer orders upon such terms and
        conditions and containing such provisions as CWEI may consider appropriate;
        and


       

      (l)  to
        control any matters affecting the Designated Property including the conduct
        of
        litigation and other incurring of legal expenses and the settlement of claims
        in
        litigation; provided,
        that,
        CWEI shall not be authorized to settle any claims for which any Participant
        has,
        or may have, any individual liability without the Participant’s prior written
        consent. 

       

      3.02  Duties
        and Services of CWEI.
        CWEI
        shall devote such time and effort to the development of the Leases and Wells
        as
        it shall deem appropriate. The Parties acknowledge and agree that neither
        CWEI
        nor any Affiliate thereof nor any of their respective officers, directors,
        employees or agents shall be required to devote full time to the development
        of
        the Leases and Wells and may from time to time engage in and possess interests
        in other business ventures of any and every type and description, independently
        or with others, including without limitation, the ownership, acquisition,
        exploration, development, operation and management of oil and gas properties
        and
        oil and gas drilling programs, and that no Participant shall by virtue of
        this
        Agreement have any right, title, interest or expectancy in or to such activities
        or ventures.

       

      3.03  Operating
        Agreements.
        CWEI
        shall use its reasonable efforts to enter into, and act in accordance with
        the
        provisions of, all applicable Operating Agreements relating to any Lease
        or
        Well. Following termination of this Agreement, each Party agrees to become
        a
        party to all Operating Agreements in which CWEI serves as operator, and further
        agrees to use its reasonable efforts to become a party to all other applicable
        Operating Agreements. To the extent any Party for any reason does not become
        a
        party to an applicable Operating Agreement, such Party agrees to use its
        reasonable efforts to act in accordance with the provisions of such Operating
        Agreement as if it were a party to such Operating Agreement.

       

      ARTICLE
        IV  

      ACCESS
        TO INFORMATION;
        TRANSFER RESTRICTIONS

       

      4.01  Access
        to Information.
        A
        Participant, on written request to CWEI stating the purpose, may examine
        and
        copy, at any reasonable time, for any proper purpose, and at the expense
        of the
        Participant, any information regarding the business affairs and financial
        condition of any Designated Property as is just and reasonable for the
        Participant to examine and copy. Information provided to or obtained by a
        Participant relating to Designated Property shall be used by such Participant
        solely in furtherance of his or her interests hereunder and shall not be
        used
        for any other purpose. Participants shall maintain the confidentiality of
        all
        such information and shall not disclose such information to any other Person.
        If
        a Participant receives a request to disclose information relating to the
        Designated Property or this Agreement under the terms of a subpoena,
        investigative demand or order issued by a court or governmental agency, the
        Participant shall promptly notify CWEI of the existence, terms and circumstances
        surrounding such request, so that CWEI may seek a protective order or
        confidential treatment of such information.

       

      4.02  Transfer
        Restrictions.
        Except
        as provided in Section
        4.03,
        no
        Participant shall Transfer his or her Interests without the prior written
        consent of CWEI. Any attempted Transfer in violation of this Section
        4.02
        shall be
        null and void, and CWEI shall refuse to recognize any such
        Transfer.

       

      4.03  Permitted
        Transfers; Status as Assignee.
        A
        Participant may Transfer all or any portion of his or her Interests to his
        or
        her spouse, parents or natural or adoptive lineal descendants, or to one
        or more
        trusts or partnerships established exclusively for the benefit of his or
        her
        spouse, parents or natural or adoptive lineal descendants; provided,
        that
        any such permitted assignee shall receive and hold such rights subject to
        the
        provisions of this Agreement, including, without limitation, the provisions
        of
        this ARTICLE
        IV,
        and
        as a condition to such Transfer, shall execute and deliver a written agreement
        with the Parties agreeing to be bound hereby.
        A
        Participant intending to Transfer Interests pursuant to this Section
        4.03
        shall
        provide at least 10 days prior written notice of such proposed transfer to
        CWEI.

       

      4.04  Forfeiture
        of Interests.
        A
        Participant shall forfeit any and/or all of his or her Interests held by
        such
        Participant if such Participant admits or enters a plea of no contest to
        or is
        convicted of a felony or misdemeanor offense against CWEI or any of its
        Affiliates (“Event
        of Forfeiture”).

       

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

       

      ARTICLE
        V  

      SHARING,
        ALLOCATIONS AND DISTRIBUTIONS

       

      5.01  Allocation
        of Costs and Expenses.
        All
        costs and expenses, including Acquisition Costs and Well Costs, relating
        to the
        Designated Property shall be shared as follows: (i) 100% to CWEI before Payout
        and (ii) 1% to CWEI and 99% to the Participants after Payout, apportioned
        among
        the Participants in proportion to the percentages listed on Exhibit
        A
        attached
        hereto.

       

      5.02  Allocation
        of Revenues.
        All
        revenues relating to the Designated Property shall be allocated as follows:
        (i)
        100% to CWEI before Payout and (ii) 1% to CWEI and 99% to the Participants
        after
        Payout, apportioned among the Participants in proportion to the percentages
        listed on Exhibit
        A
        attached
        hereto.

       

      5.03  Allocations
        for Capital Account and Tax Purposes.
        An
        individual capital account (a “Capital
        Account”)
        shall
        be established and maintained for each Participant as provided in Exhibit
        D.
        Subject
        to Section
        7.02(c),
        all
        items of income, gain, deduction, loss, credit and amount realized shall
        be
        allocated to the Parties in accordance with the provisions of Exhibit
        D.

       

      5.04  Funding
        of Costs and Expenses.

       

      (a)  The
        Parties agree to pay timely the costs and expenses allocated and charged
        to them
        pursuant to Section
        5.01
        and
        elsewhere herein.

       

      (b)  To
        the
        extent that costs and expenses are allocated and charged to Participants
        pursuant to Section
        5.01
        and
        elsewhere in this Agreement, and not retained by CWEI from a distribution
        to
        Participants pursuant to Section
        5.05,
        CWEI
        shall send written notice to the Participants (a “Contribution
        Notice”)
        setting forth (i) the date on which such additional funds shall be payable
        (the
“Contribution
        Date”),
        which
        date shall be not less than 10 days after the date of the Contribution Notice,
        and (ii) the total amount of funds required to be paid by each Participant
        pursuant to this Section
        5.04.
        The
        funds required of each Participant shall be in proportion to the number of
        Interests held by such Participant.

       

      (c)  If
        a
        Participant does not pay timely the costs and expenses allocated and charged
        to
        such Participant (a “Non-Contributing
        Party”)
        at the
        time or in the manner provided in the Contribution Notice, CWEI, in its sole
        discretion, may pay the costs and expenses that the Non-Contributing Party
        failed to pay within 20 days after the Contribution Notice, in which case
        the
        Non-Contributing Party, without further action on his or her part, shall
        be
        deemed to have assigned to CWEI the economic rights to the Interests held
        by the
        Non-Contributing Party pursuant to this Agreement, and CWEI, as the assignee
        of
        the Non-Contributing Party and the holder of such Interests, shall be entitled
        to receive all allocations of income, gain, loss, deduction, credit or similar
        items, and all distributions, to which the Non-Contributing Party would
        otherwise be entitled from and after the Contribution Date. CWEI shall hold
        such
        Interests attributable to the Non-Contributing Party until such time as CWEI,
        as
        the holder of such Interests, shall have received distributions pursuant
        to
Section
        5.05
        in an
        aggregate amount equal to 200% of the additional funds paid by CWEI pursuant
        to
        this Section
        5.04(c),
        whereupon CWEI, without further action on its part, shall be deemed to have
        re-assigned the economic rights to such Interests to the Non-Contributing
        Party.
        CWEI may use the power of attorney set forth in Section
        8.13
        to
        reflect any assignment pursuant to this Section
        5.04(c).
        Furthermore, a Non-Contributing Party shall indemnify and hold harmless each
        other Party to the fullest extent permitted by law, from and against the
        costs
        and expenses that the Non-Contributing Party failed to pay, including any
        losses, costs, liabilities, damages, and expenses (including, without
        limitation, costs of suit and attorneys’ fees) paid or incurred in attempting to
        collect the costs that the Non-Contributing Party failed to pay.

       

      5.05  Distributions
        of Revenues.
        Subject
        to Section
        5.04(c),
        all
        revenues relating to the Designated Property shall be distributed to the
        Party
        to whom such revenues are allocated pursuant to Section
        5.02;
        provided,
        however,
        that
        CWEI shall, in lieu of issuing Contribution Notices, be entitled to retain
        from
        any distribution to any Participant an amount necessary to discharge the
        costs
        and expenses allocated to such Participant pursuant to Section
        5.01
        that
        remains unpaid; provided,
        further,
        that if
        Payout would occur as a result of a distribution of cash funds to CWEI, such
        distribution shall be deemed to constitute two distributions: (i) the first
        distribution shall consist of the amount of cash funds necessary to cause
        Payout
        to occur, and (ii) the second distribution shall consist of the balance of
        the
        funds then distributed.

       

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

       

      ARTICLE
        VI  

      BOOKS
        AND RECORDS

       

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

       

         
        ARTICLE VII  

      TERMINATION

       

      7.01  Termination.
        This
        Agreement shall terminate on the first to occur of the following:

       

      (a) the
        third
        anniversary of Payout;

      


      (b) the
        election of CWEI, in its sole discretion, to terminate this
        Agreement.

      


      7.02  Distributions
        upon Termination.
        Upon
        termination of this Agreement, CWEI shall distribute all Designated Property
        (or
        proceeds therefrom) to the Parties as follows:

       

      (a)  CWEI
        may
        sell any or all Designated Property and other assets, including to Parties,
        and
        any resulting gain or loss from each sale shall be computed and allocated
        to the
        Capital Accounts of the Parties in accordance with Section
        7.02(c);

       

      (b)  With
        respect to all Designated Property that has not been sold, the fair market
        value
        of such Designated Property shall be determined by CWEI and any unrealized
        income, gain, loss, and deduction inherent in such property that has not
        been
        reflected in the Capital Accounts of the Parties previously shall be allocated
        among the Parties in accordance with Section
        7.02(c);

       

      (c)  All
        items
        of income, gain, loss and deduction referred to in Sections
        7.02(a)
        and (b)
        shall be
        allocated among the Parties in such a manner as to cause, to the maximum
        extent
        possible, the positive Capital Account balance of each Party to equal the
        distribution such Party would receive if the distributions upon liquidation
        of
        the proceeds described in Section
        7.02(a)
        and
        proceeds equal in amount to the fair market value of property described in
        Section
        7.02(d)
        were
        made in accordance with Section
        5.05 of
        this
        Agreement;

       

      (d)  Designated
        Property (and proceeds therefrom) shall then be distributed among the Parties
        in
        accordance with the positive Capital Account balances of the Parties, as
        determined after taking into account all Capital Account adjustments for
        the
        taxable year of the Tax Partnership during which the termination of this
        Agreement occurs (other than those made by reason of distributions pursuant
        to
        this clause (d)), and those distributions shall be made by the end of the
        taxable year of the Tax Partnership during which the termination of this
        Agreement occurs (or, if later, 90 days after the date of the
        liquidation); 

       

      (e)  It
        is
        intended that the distributions made to each Party pursuant to this Section
        7.02
        be equal
        to the distributions to which such Party would be entitled if liquidating
        distributions were made in accordance with Section
        5.05 of
        this
        Agreement. To the extent the Parties’ positive Capital Account balances after
        application of Section 7.02(c)
        do not
        correspond to the amounts of such intended distributions, the allocations
        provided for in Exhibit
        D
        for the
        taxable year in which the liquidation occurs shall be adjusted, to the maximum
        extent possible, to produce Capital Account balances which correspond to
        the
        amount of such intended distributions.

       

      All
        distributions in kind to the Participants shall be made subject to the liability
        of each distributee for his, her or its allocable share of costs, expenses
        and
        liabilities previously incurred or for which CWEI has committed prior to
        the
        date of termination and those costs, expenses and liabilities shall be allocated
        to the distributee under this Section
        7.02.
        The
        distribution of cash or property to a Participant in accordance with the
        provisions of this Section
        7.02 constitutes
        a complete distribution to the Participant of his, her or its Interests and
        all
        the Designated Property and other assets and constitutes a compromise to
        which
        all Parties have consented. To the extent that a Participant returns funds
        to
        CWEI, it has no claim against any other Party for those funds.

       

      7.03  Termination.
        On
        completion of the distribution of Partnership assets as provided in this
        Agreement, the Tax Partnership shall be considered terminated.

       

      ARTICLE
        VIII  

      GENERAL
        PROVISIONS

       

      8.01  Offset.
        Whenever CWEI is to pay any sum to any Participant, any amounts that Participant
        owes CWEI or its Affiliates may be deducted from that sum before
        payment.

       

      8.02  Notices.
        All
        notices, requests or consents required or permitted to be given under this
        Agreement must be in writing and shall be considered as properly given if
        mailed
        by first class United States mail, postage paid, and registered or certified
        with return receipt requested, or if delivered to the recipient in person,
        by
        courier or by facsimile transmission. Notices, requests and consents shall
        be
        sent to a Participant at the address shown on its Signature Page for
        Participants.
        A
        Participant
        may
        change its address by giving written notice to CWEI. Any notice, request
        or
        consent to CWEI shall be sent to CWEI at its principal place of business,
        to the
        attention of Patti Hollums.

       

      8.03  Entire
        Agreement.
        This
        Agreement constitutes the entire agreement of the Parties relating to the
        Tax
        Partnership and the Designated Property, and supersedes all prior contracts
        or
        agreements with respect thereto, whether oral or written.

       

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

       

      8.05  Amendment
        or Modification.

       

      (a)  Except
        as
        otherwise provided in this Section
        8.05,
        any
        amendment to this Agreement must be proposed by CWEI and approved in writing
        by
        CWEI and at least a Majority in Interest of the Participants within 90 days
        of
        its proposal to be effective. 

       

      (b)  CWEI
        may
        amend this Agreement without the consent of any Participant (i) to remove
        or correct any inconsistency, ambiguity or error contained herein, provided
        that
        such amendment does not materially and adversely affect the Participants,
        (ii)
        to reflect any Transfer or forfeiture of Interests pursuant to Sections
        4.03
        and
4.04
        ,
        (iii) to amend Exhibit B
        from
        time to time to amend the Area of Interest.

       

      (c) Upon
        publication of final regulations in the Federal Register (or other official
        pronouncement), CWEI shall have the authority, without any requirement for
        consent by any Participant, to amend this Agreement to the extent CWEI
        determines, in its sole discretion, is necessary (a) to provide for the making
        and filing of any available election to obtain the benefits of a safe harbor
        corresponding to that described under proposed U.S. Treasury Regulations
        section
        1.83-3(1) (or any similar provision) under which the fair market value of
        an
        interest that is transferred in connection with the performance of services
        is
        treated as being equal to the liquidation value of that interest, and (b)
        to
        reflect the agreement of, and the requirement that, the Tax Partnership and
        all
        of the Parties comply with all of the requirements set forth in such regulations
        and Notice 2005-43 (and any other guidance to a substantially similar effect
        provided by the IRS with respect to such election) with respect to all interests
        transferred in connection with the performance of services while the election
        remains effective.

       

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

       

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

       

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

       

      8.09  Waiver
        of Certain Rights.
        Except
        for CWEI, each Party irrevocably waives any right it may have to maintain
        any
        action for partition of the property of the Tax Partnership.

       

      8.10  Insurance.
        CWEI
        may purchase and maintain insurance or enter into other arrangements on behalf
        of a Participant against any liability asserted against the Participant and
        incurred by the Participant in that capacity or arising out of this Agreement.
        In the absence of actual fraud, the judgment of CWEI as to the terms and
        conditions of the insurance or other arrangement and the identity of the
        insurer
        or other Person participating in an arrangement shall be conclusive, and
        the
        insurance or other arrangement shall not be voidable and shall not subject
        CWEI
        approving the insurance or other arrangement to liability, on any ground,
        regardless of whether CWEI will be a beneficiary.

       

      8.11  Indemnification.

       

      (a)  CWEI
        agrees to indemnify and hold harmless the Participants (each, an “Indemnified
        Person”)
        to the
        fullest extent permitted by law, from and against all losses, costs,
        liabilities, damages, and expenses (including, without limitation, costs
        of suit
        and attorneys’ fees) paid or incurred in connection with or resulting from any
        and all claims, actions or demands against such Indemnified Person that arise
        out of or in any way relate to or are incidental to the Tax Partnership,
        the
        Designated Property or the business or affairs of the Tax Partnership that
        occurs prior to the termination of this Agreement; provided,
        however,
        that
        this indemnity shall not extend to (i) any bad faith, willful misconduct,
        or
        gross negligence of such Indemnified Person, or (ii) the failure of such
        Indemnified Person to perform any of its obligations under this Agreement,
        including without limitation obligations set forth in Sections 5.01,
        5.04,
        and
5.06.
        THE
        PARTIES INTEND THAT THE INDEMNIFIED PERSONS BE INDEMNIFIED PURSUANT TO THIS
        AGREEMENT FROM LIABILITY FOR THEIR OWN SOLE, PARTIAL OR CONCURRENT NEGLIGENCE.
        

       

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

       

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

       

      8.12  CWEI
        Counsel.
        CWEI
        has selected Vinson & Elkins L.L.P. (“CWEI
        Counsel”)
        as
        legal counsel to it with respect to this Agreement. Each Participant
        acknowledges that CWEI Counsel does not represent such Participant, and that
        CWEI Counsel shall owe no duties directly to such Participant. Each Participant
        further acknowledges that, whether or not CWEI Counsel has in the past
        represented or is currently representing such Participant with respect to
        other
        matters, CWEI Counsel has not advised or represented the interests of any
        Participant in the negotiation, preparation, execution, delivery and performance
        of this Agreement. 

       

      8.13  Power
        of Attorney.
        By the
        execution of this Agreement, each Participant does irrevocably constitute
        and
        appoint CWEI, with full power of substitution, as true and lawful
        attorney-in-fact and agent with full power and authority to act in such
        Participant's name, place and stead and to execute all documents which such
        attorney-in-fact deems necessary or reasonably appropriate in furtherance
        of
        this Agreement. 

       

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

       

      8.15  No
        Employment Contract.
        Nothing
        contained in this Agreement shall be construed as conferring upon any
        Participant who is or may become an employee of CWEI or any Affiliate of
        CWEI
        any right to continue in the employment of CWEI or any Affiliate of CWEI
        for any
        period of time or interfere with or restrict in any way the rights of CWEI
        or
        any Affiliate of CWEI or such Participant to terminate the employment of
        such
        Participant at any time for any reason (or without any reason) whatsoever,
        with
        or without cause. For the avoidance of doubt, any termination of a Participant’s
        employment with CWEI shall not affect any of such Participant’s rights pursuant
        to this Agreement.

       

      8.16  Designation
        of Wells.
        Each of
        the Parties hereby agrees that all Wells that are located within the Area
        of
        Interest that are commenced after the date hereof and prior to the Cut-Off
        Date
        shall be subject to this Agreement. For purposes of this Agreement, the
“Cut-Off
        Date”
shall
        be the date that CWEI identifies in a written notice delivered to each
        Participant indicating that no Wells within the Area of Interest commenced
        after
        the Cut-Off Date will be made subject to this Agreement. Additionally, each
        Participant acknowledges that certain circumstances may make it appropriate
        for
        CWEI to deliver such a written notice to the Participants and to enter into
        agreements similar to this Agreement with other parties (which may or may
        not
        include certain of the Participants) that relate to Wells that are located
        in
        the Area of Interest but are not subject to this Agreement.

       

      8.17  Acknowledgement
        of 409A Issues.
        Notwithstanding anything herein to the contrary, each Participant (i)
        acknowledges that this Agreement and the underlying transactions, as currently
        structured, may be considered to be a deferral of compensation under section
        409A of the Internal Revenue Code (“section 409A”) and (ii) agrees that CWEI
        may, in its own discretion and upon its own initiative and without any action
        by
        or consent of the Participants, if existing or future guidance from the Internal
        Revenue Service or other interpretative authority indicates that such action
        is
        necessary or advisable, modify this Agreement and/or restructure the
        transactions contemplated by this Agreement in any manner CWEI determines
        is
        appropriate under the circumstances in an effort to avoid any adverse tax
        consequences for the Participants and/or CWEI that may otherwise be imposed
        by
        section 409A and the Treasury Regulations thereunder, and the Participants
        hereby consent to any such action that may be taken by CWEI and expressly
        ratify
        this Agreement as it may be so amended.

      [Signature
        Pages Follow]

      



      
        
          
             

          

          
          

        

        
          
          

          
            

          

        

        
          
          

          
          

        

      



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

       

      CWEI:

      CLAYTON
        WILLIAMS ENERGY, INC.

      


      By:
         /s/
        L.
        Paul Latham   

      L.
        Paul
        Latham

      Executive
        Vice President

       


      
        
          Signature
            Page for Participation Agreement

          


           

          
          

        

        
          
          

          
            

          

        

        
          
          

        

      


      SIGNATURE
        PAGE FOR PARTICIPANT

      The
        undersigned does hereby agree to all the terms and provisions of the
        Participation Agreement, including, without limitation, the power of attorney
        set forth in Section
        8.13
        thereof.

       

      Date:_____________________   ____________________________________

                                                                               
            Name
        of
        Participant 

      


                                                                                           
        Signature________________________

                                    

                                   
        Address: ________________________

                                      ________________________

       

                        Fax: ________________________      

       

                                 Taxpayer
        I.D. No.________________________    

      


      


      


      



      
        
          
            Signature
              Page for Participation Agreement

            


             

          

          
          

        

        
          
          

          
            

          

        

        
          
          

          
          

        

      



      Exhibit
        A

      Participants

      


      


      


      
        	
                Participant

              	
                Interests
                  (%)

              
	
                Paul
                  Latham

              	
                10.00

              
	
                Mel
                  Riggs

              	
                15.00

              
	
                Mark
                  Heinen

              	
                15.00

              
	
                Mark
                  Tisdale

              	
                12.50

              
	
                Mike
                  Senich

              	
                6.00

              
	
                Sam
                  Lyssy

              	
                5.00

              
	
                Jeff
                  Shultz

              	
                2.00

              
	
                Randy
                  Howard

              	
                4.00

              
	
                Bernie
                  Scott

              	
                2.00

              
	
                Ron
                  Gasser

              	
                5.75

              
	
                David
                  Grafe

              	
                5.75

              
	
                Matt
                  Swierc

              	
                3.00

              
	
                Jerry
                  Bailey

              	
                0.50

              
	
                Phillip
                  Creech

              	
                1.00

              
	
                John
                  Kennedy

              	
                5.00

              
	
                Mike
                  Pollard

              	
                2.75

              
	
                Robert
                  Thomas

              	
                1.00

              
	
                Kim
                  Jones

              	
                0.50

              
	
                Danny
                  Alford

              	
                1.00

              
	
                Janet
                  Hamilton

              	
                0.50

              
	
                Dennis
                  Polson

              	
                0.75

              
	
                Donnie
                  Pruitt

              	
                0.75

              
	
                Joe
                  Roome

              	
                0.25

              
	
                Total

              	
                100.00

              


      

      


      


      


      



      
        
          
             

          

          
          

        

        
          
          

          
            

          

        

        
          
          

          
            


            


          

        

      



      EXHIBIT
        B

       

      AREA
        OF INTEREST

       

      The
        Area
        of Interest shall be the prospects and the producing wells from the RMS
        acquisition and Southwest Royalties lands described below, all located in
        Ward
        County, Texas.

      


      Leases:   Lease
        Description   Bk/Pg

      


      University
        Lands Leases

              Lease
        No. 73491     N/2,
        Section 32, Block 18     407/513

             
        Lease No. 73492     S/2,
        Section 32, Block
        18             
  407/517

              Lease
        No. 82679      
S/2,
        Section 29, Block 17       
457/304

             
        Lease No. 82686      
S/2,
        Section 27, Block 18       
457/332

             
        Lease No. 75366     N/2,
        Section 20, Block 18      
417/277

                     
        Lease No. 67241     E/2
        of
        Section 28, Block 18    364/523

                     
        Lease No. 67242     W/2
        of
        Section 28, Block 18    364/526

      


      


      University
        Lands BB

      W/2
        Section 35, Block 18, ULS

      Ward
        Co,
        TX

      (Surface
        Down to 20,522 Feet)

      


      



      
        
          
          

          
          

        

        
          
          

          
            

          

        

        
          
          

          
            


            


          

        

      



      RMS/WARWINK

       

      EXHIBIT
        C

       

      Fair
        Market Value of Designated Property

      


      Fair
        market value of Designated Property is $472, 050 (5% of $9,441,000)

      


      



      
        
          
            


             

          

          
          

        

        
          
          

          
            

          

        

        
          
          

          
            


            


          

        

      



      EXHIBIT
        D

       

      Allocations
        of Profits and Losses and Other Tax Matters

      


      


      


      ARTICLE
        I

       

      TAX
        DEFINITIONS

       

      Section
        1.01 Definitions.
        All
        capitalized terms used herein shall have the meanings assigned to them in
        the
        Participation Agreement relating to RMS/WARWINK, dated December 5, 2006 (the
        “Agreement”), or as follows:

       

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

       

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

       

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

       

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

       

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

       

      “Simulated
        Basis”
        has the
        meaning set forth in Section 5.01(b) of this Exhibit.

       

      “Simulated
        Depletion”
has
        the
        meaning set forth in Section 5.01(b) of this Exhibit.

       

      “Simulated
        Gain”
        has the
        meaning set forth in Section 5.01(b) of this Exhibit.

       

      “Simulated
        Loss”
        has the
        meaning set forth in Section 5.01(b) of this Exhibit.

       

      ARTICLE
        II.

       

      REFLECTION
        OF ACTIVITIES FOR FEDERAL AND STATE TAX PURPOSES

       

      Section
        2.01 Entity
        Level Reflection of Activities.
        For
        federal and state tax purposes, but for no other purpose, all transactions
        effected by the Parties with respect to the Designated Property pursuant
        to the
        Agreement shall be deemed to have been effected through the Tax Partnership,
        rather than by the Parties individually, as set out in this Article
        II.

       

      Section
        2.02 Receipts,
        Profits, Income and Gains.
        For
        purposes of applying the provisions of this Exhibit
        D,
        all
        receipts by any Party in respect of the Designated Property pursuant to the
        Agreement shall be deemed first to have been received by the Tax Partnership
        and
        then to have been distributed to such Party by the Tax Partnership in the
        manner
        specified in the Agreement. All such items shall be taken into account in
        computing the Tax Partnership’s gross income and gain or loss, as appropriate,
        and shall be allocated among the Parties in accordance with Article III
        hereof.

       

      Section
        2.03 Costs,
        Expenses, Deductions and Losses.
        For
        purposes of applying the provisions of this Exhibit
        D,
        all
        costs incurred or payments made by any Party in respect of the Designated
        Property pursuant to the Agreement shall be deemed first to have been received
        by the Tax Partnership as a contribution by the Party incurring the cost
        or
        making the payment pursuant to the terms of the Agreement and then to have
        been
        paid, incurred or distributed by the Tax Partnership to the payee or obligee
        of
        the cost or the recipient of the payment. All such items shall be taken into
        account in computing the Tax Partnership’s basis, depreciation, depletion, gross
        income, deductible expenses, and/or gain or loss, as appropriate, and shall
        be
        allocated among the Parties in accordance with Article III hereof.

       

      Section
        2.04 Contributions
        and Distributions.
        For
        purposes of applying the provisions of this Exhibit
        D,
        contributions to the Tax Partnership (“Capital Contributions”) shall include all
        Acquisition Costs, Well Costs, and any other costs incurred or payments made
        in
        respect of the Designated Property pursuant to the Agreement. Similarly,
        for
        purposes of applying the provisions of this Exhibit
        D,
        distributions from the Tax Partnership shall include, in the case of any
        Party,
        all receipts by such Party in respect of the Designated Property pursuant
        to the
        Agreement.

       

      Section
        2.05 Debt
        Financing. For
        purposes of applying the provisions of this Exhibit
        D,
        unless
        the Parties agree otherwise and this Exhibit
        D
        is
        amended to reflect such agreement, (a) all debt financing incurred by a Party
        shall be for the sole account of that Party and shall not be considered debt
        financing of the Tax Partnership, and (b) no Tax Partnership asset shall
        be
        acquired by assumption of, or taking subject to, any debt
        financing.

       

      Section
        2.06 Record
        Title.  For
        purposes of applying the provisions of this Exhibit
        D,
        (a) all
        legal title to Designated Property held by any Party shall be deemed to be
        held
        by such Party strictly as nominee for the Tax Partnership, (b) all assignments
        made among the Parties with respect to Designated Property prior to termination
        of the Tax Partnership shall be disregarded, and (c) upon termination of
        the Tax
        Partnership each Party holding record title to any Designated Property shall
        make such assignments as are required to comply with the provisions of the
        Agreement.

       

      ARTICLE
        III

       

      ALLOCATIONS
        OF PROFIT AND LOSS

       

      Section
        3.01 Allocations
        for Capital Account and Tax Purposes.
        Subject
        to Section
        7.02
        of the
        Agreement and except as otherwise provided herein, for purposes of any
        applicable federal, state or local income tax law, rule or regulation items
        of
        income, gain, deduction, loss, credit and amount realized shall be allocated
        to
        the Parties as follows:

       

      (a) Income
        from the sale of oil or gas production and any credits allowed by
        Section 29 of the Code relating thereto shall be allocated in the same
        manner as proceeds therefrom are allocated and credited pursuant to Section 5.02
        of the
        Agreement.

       

      


      (b) Cost
        and
        percentage depletion deductions and the gain or loss on the sale or other
        disposition of property the production from which is subject to depletion
        (herein sometimes called “Depletable
        Property”)
        as
        computed for tax purposes shall be taken into account separately by the Parties
        rather than the Tax Partnership and, except to the extent and in the manner
        provided in Section
        5.01(b)
        of this
Exhibit
        D,
        shall
        not affect any Party’s Capital Account. For purposes of Section 613A(c)(7)(D)
        of the
        Code, the Tax Partnership’s adjusted basis in each Depletable Property shall be
        allocated to the Parties in proportion to each Party’s respective share of the
        costs and expenses which entered into the Tax Partnership’s adjusted basis for
        each Depletable Property, and the amount realized on the sale or other
        disposition of each Depletable Property shall be allocated to the Parties
        in
        proportion to each Party’s respective share of the proceeds from the sale or
        other disposition of such property provided for in Section
        5.02
        of the
        Agreement. For purposes of allocating amounts realized upon any such sale
        or
        disposition which are deemed to be received for federal or state income tax
        purposes and are attributable to Tax Partnership indebtedness or indebtedness
        to
        which the Depletable Property is subject at the time of such sale or
        disposition, such amounts shall be allocated in the same manner as Partnership
        proceeds used for the repayment of such indebtedness would have been allocated
        under Section
        5.02 of
        the
        Agreement.

      


      (c) Items
        of
        deduction, loss and credit not specifically provided for above (other than
        loss
        from the sale or other disposition of Designated Property), including
        depreciation, cost recovery and amortization deductions, shall be allocated
        to
        the Parties in the same manner that the costs and expenses of the Tax
        Partnership that gave rise to such items of deduction, loss and credit were
        allocated pursuant to Section 5.01 of
        the
        Agreement.

      


      (d) Gain
        from
        the sale or other disposition of Designated Property that is not specifically
        provided for above shall be allocated to the Parties in a manner which reflects
        each Party’s allocable share of the revenue from the sale of the Designated
        Property provided for in Section 5.02 of
        the
        Agreement, and loss from the sale or other disposition of Designated Property
        that is not specifically provided for above shall be allocated to the Parties
        in
        a manner which reflects each Party’s allocable share of the costs and expenses
        of the Designated Property provided for in Section 5.01 of
        the
        Agreement.

      


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

      


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

      


      (g) Notwithstanding
        any of the foregoing provisions of this Section 3.01
        to the
        contrary:

      


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

      


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

      


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

      


      (h) CWEI
        shall use all reasonable efforts to prevent any allocation or distribution
        from
        causing a negative balance in a Party’s Adjusted Capital Account. Consistent
        therewith, and notwithstanding any of the foregoing provisions of this
Section 3.01
        of this
Exhibit
        D
        to the
        contrary, if for any fiscal year of the Tax Partnership the allocation of
        any
        loss or deduction (net of any income or gain) to any Party would cause or
        increase a negative balance in such Party’s Adjusted Capital Account as of the
        end of such fiscal year (the “Deficit
        Party”)
        after
        taking into account the provisions of Section 3.01(g)
        of this
Exhibit
        D,
        only
        the amount of such loss or deduction that reduces the balance to zero shall
        be
        allocated to such Deficit Party and the remaining loss or deduction shall
        be
        allocated to the Parties whose Adjusted Capital Accounts have a positive
        balance
        remaining at such time (each, a “Positive
        Party”).
        After
        any such allocation, any Tax Partnership income or gain (including Simulated
        Gain) that would otherwise be allocated to the Deficit Party shall be allocated
        instead to the Positive Parties up to an amount equal to the Tax Partnership
        loss or deduction allocated to each Positive Party under the preceding sentence;
        provided,
        however,
        that no
        allocation of income or gain realized shall be made under this sentence if
        the
        effect of such allocation would be to cause the Adjusted Capital Account
        of the
        Deficit Party to be less than zero. If, after taking into account the allocation
        in the first sentence of this Section 3.01(h),
        the
        Adjusted Capital Account balance of the Deficit Party remains less than zero
        at
        the end of a fiscal year, a pro rata portion of each item of Tax Partnership
        income or gain (including Simulated Gain) otherwise allocable to the Positive
        Parties for such fiscal year (or if there is no such income or gain allocable
        to
        the Positive Parties for such fiscal year, all such income or gain (including
        Simulated Gain) so allocable in the succeeding fiscal year or years) shall
        be
        allocated to the Deficit Party in an amount necessary to cause its Adjusted
        Capital Account balance to equal zero; provided,
        that no
        allocation under this sentence shall have the effect of causing the Positive
        Party’s Adjusted Capital Account to be less than zero. After any such
        allocation, any Tax Partnership gain (including Simulated Gain) resulting
        from
        the sale or other disposition of Designated Property that would otherwise
        be
        allocated to the Deficit Party for any fiscal year under this Section 3.01
        shall be
        allocated instead to the Positive Parties until the amount of gain so allocated
        equals the amount of gain (including Simulated Gain) previously allocated
        to
        such Deficit Party under the preceding sentence of this Section 3.01(h);
        provided,
        however,
        that no
        allocation of gain (including Simulated Gain) shall be made under this sentence
        if the effect of such allocation would be to cause the Adjusted Capital Account
        of a Deficit Party to be less than zero.

      


      ARTICLE
        IV

       

      OTHER
        TAX MATTERS

       

      Section
        4.01 Tax
        Elections.

       

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

       

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

       

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

       

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

       

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

       

      ARTICLE
        V

       

      CAPITAL
        ACCOUNT MAINTENANCE

       

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

       

      (a) The
        Capital Account of each Party shall, except as otherwise provided herein,
        be (A)
        credited by such Party’s Capital Contributions when made (net of liabilities
        secured by contributed property that the Tax Partnership is considered to
        assume
        or take subject to under Section 752 of the Code), (B) credited with the
        amount
        of any item of taxable income or gain and the amount of any item of income
        or
        gain exempt from tax allocated to such Party, (C) credited with the Party’s
        share of Simulated Gain as provided in Section
        5.01(b)
        of this
Exhibit
        D,
        (D)
        debited by the amount of any item of tax deduction or loss allocated to such
        Party, (E) debited with the Party’s share of Simulated Loss and Simulated
        Depletion as provided in Section 5.01(b)
        of this
Exhibit
        D,
        (F)
        debited by such Party’s allocable share of expenditures of the Tax Partnership
        not deductible in computing the Tax Partnership’s taxable income and not
        properly chargeable as capital expenditures, including any non-deductible
        book
        amortizations of capitalized costs, and (G) debited by the amount of cash
        or the
        fair market value of any property distributed to such Party (net of liabilities
        secured by such distributed property that such Party is considered to assume
        or
        take subject to under Section 752 of the Code). Immediately prior to any
        distribution of assets by the Tax Partnership that is not pursuant to a
        liquidation of the Tax Partnership or all or any portion of a Party’s interest
        therein, the Parties’ Capital Accounts shall be adjusted by (X) assuming that
        the distributed assets were sold by the Tax Partnership for cash at their
        respective fair market values as of the date of distribution by the Tax
        Partnership and (Y) crediting or debiting each Party’s Capital Account with its
        respective share of the hypothetical gains or losses, including Simulated
        Gains
        and Simulated Losses, resulting from such assumed sales in the same manner
        as
        each such Capital Account would be debited or credited for gains or losses
        on
        actual sales of such assets.

       

      (b) The
        allocation of basis prescribed by Section 613A(c)(7)(D) of the Code and provided
        for in Section
        3.01(b)
        of this
Exhibit
        D
        and each
        Party’s separately computed depletion deductions shall not reduce such Party’s
        Capital Account, but such Party’s Capital Account shall be decreased by an
        amount equal to the product of the depletion deductions that would otherwise
        be
        allocable to the Tax Partnership in the absence of Section 613A(c)(7)(D)
        of the
        Code (computed without regard to any limitations which theoretically could
        apply
        to any Party) times such Party’s percentage share of the adjusted basis of the
        property (determined under Section
        3.01(b) of this Exhibit D)
        with
        respect to which such depletion is claimed (“Simulated
        Depletion”).
        The
        Tax Partnership’s basis in any Depletable Property as adjusted from time to time
        for the Simulated Depletion allocable to all Parties (and where the context
        requires, each Party’s allocable share thereof, which share shall be determined
        in the same manner as the allocation of basis prescribed in Section
        3.01(b) of this Exhibit D)
        is
        herein called “Simulated
        Basis.”
No
        Party’s Capital Account shall be decreased, however, by Simulated Depletion
        deductions attributable to any Depletable Property to the extent such deductions
        exceed such Party’s allocable share of the Tax Partnership’s remaining Simulated
        Basis in such property. The Tax Partnership shall compute simulated gain
        (“Simulated
        Gain”)
        or
        simulated loss (“Simulated
        Loss”)
        attributable to the sale or other disposition of a Depletable Property based
        on
        the difference between the amount realized from such sale or other disposition
        and the Simulated Basis of such property, as theretofore adjusted. Any Simulated
        Gain shall be allocated to the Parties and shall increase their respective
        Capital Accounts in the same manner as the amount realized from such sale
        or
        other disposition in excess of Simulated Basis shall have been allocated
        pursuant to Section
        3.01(b) of this Exhibit D.
        Any
        Simulated Loss shall be allocated to the Parties and shall reduce their
        respective Capital Accounts in the same percentages as the costs of the property
        sold were allocated up to an amount equal to each Party’s share of the Tax
        Partnership’s Simulated Basis in such property at the time of such
        sale.

       

      (c) Any
        adjustments of basis of Designated Property provided for under Sections 734
        and
        743 of the Internal Revenue Code and comparable provisions of state law
        (resulting from an election under Section 754 of the Code or comparable
        provisions of state law) and any election by an individual Party under Section
        59(e)(4) of the Code to amortize such Party’s share of intangible drilling and
        development costs shall not affect the Capital Accounts of the Parties (unless
        otherwise required by applicable Treasury Regulations), and the Parties’ Capital
        Accounts shall be debited or credited pursuant to the terms of this Section
        5.01
        as if no
        such election had been made.

       

      (d) Capital
        Accounts shall be adjusted, in a manner consistent with this Section
        5.01,
        to
        reflect any adjustments in items of Tax Partnership income, gain, loss or
        deduction that result from amended returns filed by the Tax Partnership or
        pursuant to an agreement by the Tax Partnership with the Internal Revenue
        Service or a final court decision.

       

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

       

      (f) It
        is the
        intention of the Parties that the Capital Accounts of each Party be kept
        in the
        manner required under Regulation Section 1.704-1(b)(2)(iv). To the extent
        any
        additional adjustment to the Capital Accounts is required by such regulations,
        CWEI is hereby authorized to make such adjustment after notice to the
        Party.

      [End
        of Exhibit D]