Document:

panorthlouisiana.htm

    
      
        

      

      Exhibit
10.3

       

      PARTICIPATION
AGREEMENT

       

      RELATING
TO

       

      CWEI
NORTH LOUISIANA BOSSIER III

       

      This PARTICIPATION AGREEMENT (this
“Agreement”) is made and entered into as of May 5, 2008 (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
1

      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 3.88% 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.

      
        
          
             

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      “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 7% 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
Acquisition Costs, Well Costs and other expenses incurred by CWEI relating to
the Designated Property, plus (ii) an annual internal rate of return on such
costs equal to the Agreed Rate.  For this purpose, each proceed and
expense shall be deemed to have been made on the last day of the month during
which it was received or made.

      

      
        
          
             

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      “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.  The name and location of each “Well” is shown on Exhibit C, as amended
from time to time by CWEI.

      

      “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.

      
        
          
             

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      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;

      
        
          
             

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      (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;

      

      (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.

      
        
          
             

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      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

      
        
          
             

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      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.

      

      
        
          
             

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      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; or

      

      (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(b) were
made in accordance with Section 0 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

      
        
          
             

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      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 in 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.

      

      

      
        
          
             

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      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, or (iv) to amend Exhibit C from
time to time to add additional Wells to become subject to this
Agreement.

      

      (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
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      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

      
        
          
             

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      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]

      

      
        
          
             

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      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

              
	 
      	 
      	 
      	 
      

      

      

       

      
        
          
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      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.

              
	 
      	 
      	 
      	 
      

      

      

       

      

       

      

       

      
        
          
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      Exhibit
A

      Participants

      

      
        	 
      	 
      	
                Total

              
	 
      	 
      	
                %

              
	
                Williams

              	
                Clayton

              	
                28.5714%

              
	
                Reesby

              	
                Pat

              	
                14.2857%

              
	
                Beckham

              	
                Kelly

              	
                12.0214%

              
	
                Lipstreuer

              	
                Kenneth

              	
                3.5714%

              
	
                Amy

              	
                Phil

              	
                4.2857%

              
	
                Matthews

              	
                George

              	
                1.7857%

              
	
                Reesby

              	
                Martha

              	
                1.4286%

              
	
                Strickland

              	
                Cheryl

              	
                0.8357%

              
	
                Goodson

              	
                Barbara

              	
                0.7143%

              
	
                Lengefeld

              	
                Terri

              	
                0.7143%

              
	
                Vineyard

              	
                Tom

              	
                0.7143%

              
	
                Latham

              	
                Paul

              	
                2.5000%

              
	
                Riggs

              	
                Mel

              	
                2.8572%

              
	
                Lyssy

              	
                Sam

              	
                6.4286%

              
	
                Shultz

              	
                Jeff

              	
                1.7857%

              
	
                Welborn

              	
                Greg

              	
                0.7143%

              
	
                Gasser

              	
                Ron

              	
                3.5714%

              
	
                Wolfshohl

              	
                Clarence

              	
                0.7143%

              
	
                Kennedy

              	
                John

              	
                3.5714%

              
	
                Pollard

              	
                Mike

              	
                1.9643%

              
	
                Thomas

              	
                Robert

              	
                0.8929%

              
	
                Alford

              	
                Danny

              	
                0.8929%

              
	
                Hamilton

              	
                Janet

              	
                0.7143%

              
	
                Schwope

              	
                Kathy

              	
                0.5357%

              
	
                Smith

              	
                Mark

              	
                0.5357%

              
	
                Peacock

              	
                Ray

              	
                0.3571%

              
	
                Beebe

              	
                Willson

              	
                0.3571%

              
	
                Tisdale

              	
                Mark

              	
                0.7143%

              
	
                Polson

              	
                Dennis

              	
                0.7143%

              
	
                Pruitt

              	
                Donnie

              	
                0.7143%

              
	
                Kelly

              	
                Denise

              	
                0.3571%

              
	
                Luna

              	
                Betsy

              	
                0.1786%

              
	 
      	 
      	 
      
	 
      	
                Total

              	
                100.0000%

              

      

      

      

      

      

      

      
        
          
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      EXHIBIT
B

      AREA
OF INTEREST

      

      

      The
Area of Interest shall be the prospects located in the Louisiana Parishes of
Caddo, Desoto, Sabine, Natchitoches, Red River, Bienville, Jackson, Richland,
Caldwell, Franklin, Madison and Tensas, in which the Bossier Sand Trend is the
primary objective.

      .

       

      .

       

      
        
          
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      EXHIBIT
C

      

      Wells

      

       

      
        	
                Well
      Name

              	
                 County,
      State

              
	 
      	 
      
	 
      	 
      
	 
      	 
      
	 
      	 
      
	 
      	 
      

      

      

       

      
        
          
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      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 CWEI NORTH LOUISIANA BOSSIER III, dated May
5, 2008 (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.

       

      
        
          
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      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
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      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
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      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,

       

      
        
          
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      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.

       

      
        
          
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      (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]

       

       

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      Exhibit
10.4

       

      PARTICIPATION
AGREEMENT

       

      RELATING
TO

       

      CWEI
NORTH LOUISIANA HOSSTON/COTTON VALLEY III

       

      This PARTICIPATION AGREEMENT (this
“Agreement”) is made and entered into as of May 5, 2008 (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
1

      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 3.88% 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.

      
        
          
             

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      “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 7% 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
Acquisition Costs, Well Costs and other expenses incurred by CWEI relating to
the Designated Property, plus (ii) an annual internal rate of return on such
costs equal to the Agreed Rate.  For this purpose, each proceed and
expense shall be deemed to have been made on the last day of the month during
which it was received or made.

      

      
        
          
             

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      “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.  The name and location of each “Well” is shown on Exhibit C, as amended
from time to time by CWEI.

      

      “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.

      
        
          
             

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      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;

      
        
          
             

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      (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;

      

      (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;

      

      (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.

      
        
          
             

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      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 4.03 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

      
        
          
             

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      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 5.01, 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.

      

      
        
          
             

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      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; or

      

      (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(b) 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

      
        
          
             

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      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 in 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.

      

      
        
          
             

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      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, or (iv) to amend Exhibit C from
time to time to add additional Wells to become subject to this
Agreement.

      

      (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

      
        
          
             

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      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

      
        
          
             

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      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]

      

      
        
          
             

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      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

              
	 
      	 
      	 
      	 
      

      

      

       

      
        
          
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Page for Participation Agreement

            

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      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.

              
	 
      	 
      	 
      	 
      

      

      

       

      

       

      

       

      
        
          
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Page for Participation Agreement

            

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      Exhibit
A

      Participants

      

      
        	 
      	 
      	
                Total

              
	 
      	 
      	
                %

              
	
                Williams

              	
                Clayton

              	
                28.5714%

              
	
                Reesby

              	
                Pat

              	
                14.2857%

              
	
                Beckham

              	
                Kelly

              	
                12.0286%

              
	
                Lipstreuer

              	
                Kenneth

              	
                4.2857%

              
	
                Amy

              	
                Phil

              	
                5.7143%

              
	
                Matthews

              	
                George

              	
                2.1428%

              
	
                Reesby

              	
                Martha

              	
                1.4286%

              
	
                Strickland

              	
                Cheryl

              	
                1.0714%

              
	
                Goodson

              	
                Barbara

              	
                1.0714%

              
	
                Lengefeld

              	
                Terri

              	
                1.0714%

              
	
                Vineyard

              	
                Tom

              	
                0.7143%

              
	
                Gathmann

              	
                Jean

              	
                0.5357%

              
	
                Latham

              	
                Paul

              	
                2.8571%

              
	
                Riggs

              	
                Mel

              	
                3.5714%

              
	
                Lyssy

              	
                Sam

              	
                1.4286%

              
	
                Welborn

              	
                Greg

              	
                0.7143%

              
	
                Gasser

              	
                Ron

              	
                2.1428%

              
	
                Wolfshohl

              	
                Clarence

              	
                2.1429%

              
	
                Kennedy

              	
                John

              	
                2.8571%

              
	
                Pollard

              	
                Mike

              	
                2.3500%

              
	
                Thomas

              	
                Robert

              	
                1.1786%

              
	
                Alford

              	
                Danny

              	
                1.1786%

              
	
                Hamilton

              	
                Janet

              	
                0.7857%

              
	
                Schwope

              	
                Kathy

              	
                0.5929%

              
	
                Smith

              	
                Mark

              	
                0.5929%

              
	
                Peacock

              	
                Ray

              	
                0.3929%

              
	
                Beebe

              	
                Willson

              	
                0.3929%

              
	
                Tisdale

              	
                Mark

              	
                1.0714%

              
	
                Polson

              	
                Dennis

              	
                1.0714%

              
	
                Pruitt

              	
                Donnie

              	
                0.9429%

              
	
                Kelly

              	
                Denise

              	
                0.6357%

              
	
                Luna

              	
                Betsy

              	
                0.1786%

              
	 
      	 
      	 
      
	 
      	
                Total

              	
                100.0000%

              

      

      

      

      
        
          
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      EXHIBIT
B

      AREA
OF INTEREST

      

      

      The Area
of Interest shall be the prospects located in the Louisiana Parishes of Caddo,
Bossier, Webster, Claiborne, Lincoln, Union and Quachita, in which the
Hosston/Cotton Valley/Gray Sand Trend is the primary objective.

      

      .

       

      
        
          
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      EXHIBIT
C

      

      Wells

      

       

      
        	
                Well
      Name

              	
                 County,
      State

              
	 
      	 
      
	 
      	 
      
	 
      	 
      
	 
      	 
      
	 
      	 
      

      

      

       

      
        
          
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      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 CWEI NORTH LOUISIANA HOSSTON/COTTON VALLEY
III WELL, dated May 5, 2008 (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.

       

      
        
          
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      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
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      respective
share of the proceeds from the sale or other disposition of such property
provided for in Section 0 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
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      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,

       

      
        
          
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      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.

       

      
        
          
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      (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]

      
         

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