Document:

exv10w3

 

EXHIBIT 10.3

EXECUTION VERSION

TAX SHARING AGREEMENT

BY AND AMONG

PIONEER NATURAL RESOURCES COMPANY

AND

PIONEER SOUTHWEST ENERGY PARTNERS L.P.

May 6, 2008

 

 

TAX SHARING AGREEMENT

BY AND AMONG

PIONEER NATURAL RESOURCES COMPANY AND

PIONEER SOUTHWEST ENERGY PARTNERS L.P.

     Tax Sharing Agreement (the “Agreement”), dated this 6th day of May, 2008, by and
among PIONEER NATURAL RESOURCES COMPANY (“Pioneer”), a Delaware corporation, and PIONEER SOUTHWEST
ENERGY PARTNERS L.P. (the “Partnership”), a Delaware limited partnership.

RECITALS

     WHEREAS, Pioneer is the common parent of an affiliated group of corporations within the
meaning of Section 1504(a) of the Code (as defined below), which currently files a consolidated
federal income tax return;

     WHEREAS, the Partnership Group (as defined below) includes various entities that may be
required to join with Pioneer in the filing of a consolidated, combined or unitary state tax
return;

     WHEREAS, the Parties wish to set forth the general principles under which they will allocate
and share various Taxes (as defined below) and related liabilities;

     WHEREAS, Pioneer, on behalf of itself and its present and future subsidiaries other than the
Partnership Group (“Pioneer Group”), and the Partnership, on behalf of itself and its present and
future subsidiaries (the “Partnership Group”), are entering into this Agreement to provide for the
allocation among the Pioneer Group and the Partnership Group of all responsibilities, liabilities
and benefits relating to any Tax for which a Combined Return (as defined herein) is filed for a
taxable period including or beginning on or after the Effective Date (as defined herein) and to
provide for certain other matters;

     NOW, THEREFORE, in consideration of the mutual agreements, provisions, and covenants contained
in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Parties hereby agree as follows:

ARTICLE I

DEFINITIONS

     Section 1.01 Definitions. The following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and the plural forms of the terms defined):

     “Accounting Referee” is defined in Section 6.11 herein.

     “Code” means the Internal Revenue Code of 1986, as amended, or any successor thereto,
as in effect for the taxable period in question.

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     “Combined Group” means a group of corporations or other entities that files a Combined
Return.

     “Combined Return” means any Tax Return (other than a Tax Return for Federal income
taxes) filed on a consolidated, combined (including nexus combination, worldwide combination,
domestic combination, line of business combination or any other form of combination), or unitary
basis that includes activities of any member of the Pioneer Group and any member of the Partnership
Group.

     “Effective Date” means 7:00 a.m. on May 1, 2008.

     “Final Determination” means the final resolution of any Tax (or other matter) for a
taxable period, including related interest or penalties, that, under applicable law, is not subject
to further appeal, review or modification through proceedings or otherwise, including (i) by the
expiration of a statute of limitations or a period for the filing of claims for refunds, amending
Tax Returns, appealing from adverse determinations, or recovering any refund (including by offset),
(ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which
has become final and unappealable, (iii) by a closing agreement, an accepted offer in compromise,
or a comparable agreement under laws of the particular Tax Authority, (iv) by execution of a form
under the laws of a Tax Authority that is comparable to an Internal Revenue Service Form 870 or
870-AD (excluding, however, with respect to a particular Tax Item for a particular taxable period
any such form that reserves (whether by its terms or by operation of law) the right of the taxpayer
to file a claim for refund and/or the right of the Tax Authority to assert a further deficiency
with respect to such Tax Item for such period), or (v) by any allowance of a refund or credit, but
only after the expiration of all periods during which such refund may be adjusted.

     “Notice” is defined in Section 6.01 herein.

     “Partnership Group” is defined in the Recitals to this Agreement.

     “Partnership Group Combined Tax Liability” means, with respect to any Tax, the
Partnership Group’s liability for such Tax owed with respect to a Combined Return for a taxable
period, as determined under Section 3.02 of this Agreement.

     “Partnership Group Deposit” is defined in Section 3.04 herein.

     “Partnership Group Members” means those entities included in the Partnership Group.

     “Partnership Group Pro Forma Combined Return” means a pro forma Combined Return or
other schedule prepared pursuant to Section 3.02 of this Agreement.

     “Party” means each of Pioneer and the Partnership, and solely for purposes of this
definition, “Pioneer” includes the Pioneer Group and the “Partnership” includes the Partnership
Group. Each of Pioneer and the Partnership shall cause the Pioneer Group and the Partnership
Group, respectively, to comply with this Agreement.

     “Pioneer Group” is defined in the Recitals to this Agreement.

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     “Tax” means any of the Taxes.

     “Tax Attribute” means a Tax Item of a member of the Partnership Group reflected on a
Combined Return that is comparable to one or more of the following attributes with respect to a
Federal income tax consolidated tax return: a net operating loss, a net capital loss, an unused
investment credit, an unused foreign tax credit, an excess charitable contribution, a U.S. federal
minimum tax credit or a U.S. federal general business credit (but not tax basis or earnings and
profits).

     “Tax Authority” means a domestic governmental authority (other than the United States)
or any subdivision, agency, commission or authority thereof or any quasi-governmental or private
body having jurisdiction over the assessment, determination, collection or imposition of any Tax
(excluding the U.S. Internal Revenue Service).

     “Tax Controversy” means any audit, examination, dispute, suit, action, litigation or
other judicial or administrative proceeding initiated by Pioneer or the Partnership or any Tax
Authority.

     “Tax Item” means any item of income, gain, loss, deduction or credit, or other item
reflected on a Tax Return or any Tax Attribute.

     “Tax Return” means any return, report, certificate, form or similar statement or
document (including any related or supporting information or schedule attached thereto and any
information return, amended Tax Return, claim for refund or declaration of estimated tax) required
to be supplied to, or filed with, a Tax Authority in connection with the determination, assessment
or collection of any Tax or the administration of any laws, regulations or administrative
requirements relating to any Tax.

     “Taxes” means all forms of taxation, whenever created or imposed, and whether imposed
by a domestic, local, municipal, governmental, state, federation or other body, but excluding taxes
imposed by the United States, and without limiting the generality of the foregoing, shall include
net income, alternative or add-on minimum, gross income, sales, use, ad valorem, gross receipts,
value added, franchise, profits, license, transfer, recording, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property, windfall profit, custom duty, or other
tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any
related interest, penalties, or other additions to tax, or additional amounts imposed by any such
Tax Authority.

     Any term used but not capitalized herein that is defined in the Code or in the Treasury
Regulations thereunder shall, to the extent required by the context of the provision at issue, have
the meaning assigned to it in the Code or such regulation.

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ARTICLE II

PREPARATION AND FILING OF TAX RETURNS 

     Section 2.01 Manner of Filing.

     (a) For periods that include the Effective Date and periods after the Effective Date, Pioneer
shall have the sole and exclusive responsibility for the preparation and filing of, and shall
prepare and file, all Combined Returns or cause to be prepared and filed all Combined Returns.
Pioneer shall be authorized to take any and all action necessary or incidental to the preparation
and filing of a Combined Return, including, without limitation, (i) making elections and adopting
accounting methods, (ii) filing all extensions of time, including extensions of time for payment of
tax, (iii) filing claims for refund or credit, or (iv) giving waivers or bonds.

     (b) For periods that include the Effective Date and periods after the Effective Date, the
Partnership Group shall have the sole and exclusive responsibility for the preparation and filing
of, and shall prepare and file or cause to be prepared and filed, all Tax Returns of the
Partnership Group Members that are not Combined Returns.

     (c) Pioneer shall have sole discretion to include, or cause to be included, in a Combined
Return for any Tax any member of the Partnership Group for which inclusion in such Combined Return
is elective; provided, however, that the Partnership Group Combined Tax Liability for any period
shall not exceed the aggregate of (x) each such elective Partnership Group Member’s liability for
such Tax for such period, computed as if such Partnership Group Member were not included in such
Combined Return and (y) the Partnership Group Combined Tax Liability calculated for the Partnership
Group Members for which inclusion is not elective. Pioneer shall provide pro forma Tax Returns
pursuant to Section 3.05 of this Agreement to support the calculation of the amount of any decrease
in the Partnership Group Combined Tax Liability pursuant to this Section 2.01(c).

     Section 2.02 Franchise Tax Taxable Period. References to “taxable period” for any
franchise or other doing business Tax shall mean the taxable period during which the income,
operations, assets or capital comprising the base of such Tax is measured, regardless of whether
the right to do business for another taxable period is obtained by the payment of such franchise
Tax.

ARTICLE III

ALLOCATION OF TAXES

     Section 3.01 Liability of the Partnership Group for Combined Taxes. For each Tax for
each taxable period that includes or begins on or after the Effective Date and for which a Combined
Return is filed, the Partnership Group Members included in such Combined Return shall be liable to
Pioneer for an amount equal to the Partnership Group Combined Tax Liability in respect of such Tax.

     Section 3.02 Partnership Group Combined Tax Liability. With respect to each Tax for
each taxable period that includes or begins on or after the Effective Date and for which a

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member of the Partnership Group is included in a Combined Return, the Partnership Group
Combined Tax Liability for such Tax for such taxable period shall be the Tax for such taxable
period as determined on a Partnership Group Pro Forma Combined Return prepared:

     (a) by including only the Tax Items of the members of the Partnership Group that are included
in the Combined Return and computing the liability of the Partnership Group Members for such Tax as
if such Partnership Group Members were included in a separate consolidated or unitary group;

     (b) except as provided in Section 3.02(e) hereof, using all elections, accounting methods and
conventions used on the Combined Return for such period;

     (c) applying the Tax rate in effect for the Combined Return of the Combined Group for such
taxable period;

     (d) assuming that the Partnership Group elects not to carry back any net operating losses; and

     (e) assuming that the Partnership Group’s utilization of any Tax Attribute carryforward or
carryback is limited to the Tax Attributes of the Partnership Group that would be available if the
Partnership Group Combined Tax Liability for each taxable period ending after January 1, 2008 were
determined in accordance with this Section 3.02.

     Section 3.03 Preparation and Delivery of Pro Forma Tax Returns. Not later than 90
days following the date on which a Combined Return is filed with the appropriate Tax Authority,
Pioneer shall prepare and deliver to the Partnership the related Partnership Group Pro Forma
Combined Return calculating the Partnership Group Combined Tax Liability attributable to the period
covered by such filed Combined Return.

     Section 3.04 Payment of Tax. Pioneer shall timely pay (or shall cause to be timely
paid) any Tax reflected on a Combined Return and hold harmless the Partnership for all liability
for such Tax. In the event Pioneer is required to make an estimated payment or deposit of any Tax
of any Combined Group which includes any member of the Partnership Group, Pioneer shall calculate
the portion, if any, of such estimated payment or deposit attributable to the Partnership Group
using a methodology similar to that described in Section 3.02 (the “Partnership Group Deposit”) and
shall present such calculation to the Partnership. Within 5 days thereafter, the Partnership shall
pay the Partnership Group Deposit to Pioneer. Within 30 days after delivery by Pioneer of a
Partnership Group Pro Forma Combined Return to the Partnership calculating the Partnership Group
Combined Tax Liability with respect to a Combined Return, the Partnership shall pay to Pioneer such
Partnership Group Combined Tax Liability less the amount of any Partnership Group Deposit relating
to the same Combined Return.

     Section 3.05 Subsequent Changes in Treatment of Tax Items. With respect to any
Combined Return for any taxable period beginning on or after the Effective Date, in the event of a
change in the treatment of any Tax Item of any member of a Combined Group as a result of a Final
Determination, within 30 days following such Final Determination (i) Pioneer shall calculate the
change, if any, to the Partnership Group Combined Tax Liability resulting from such change, (ii)
Pioneer shall pay any decrease in the Partnership Group Combined Tax

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Liability to the Partnership, and (iii) the Partnership shall pay any increase in the
Partnership Group Combined Tax Liability to Pioneer.

ARTICLE IV

CONTROL OF TAX PROCEEDINGS; COOPERATION AND EXCHANGE OF INFORMATION

     Section 4.01 Control of Proceedings. Except as provided in this Article IV, Pioneer
shall have full responsibility and discretion in handling, settling or contesting any Tax
Controversy involving a Tax Return for which it has filing responsibility under this Agreement as
well as all Tax Returns for all taxable periods ending before the Effective Date. The Partnership
shall have full responsibility and discretion in handling, settling or contesting any Tax
Controversy involving a Tax Return for which it has filing responsibility under this Agreement.
Except as otherwise provided in this Article IV, any costs incurred in handling, settling or
contesting any Tax Controversy shall be borne by the Party having full responsibility and
discretion thereof.

     Section 4.02 Cooperation and Exchange of Information.

     (a) Each Party shall cooperate fully at such time and to the extent reasonably requested by
any other Party in connection with the preparation and filing of any Tax Return or claim for
refund, or the conduct of any audit, dispute, proceeding, suit or action concerning any issues or
other matters considered in this Agreement. Such cooperation shall include, without limitation,
the following: (i) the retention and provision on demand of Tax Returns, books, records (including
those concerning ownership and Tax basis of property which a Party may possess), documentation or
other information relating to the Tax Returns, including accompanying schedules, related
workpapers, and documents relating to rulings or other determinations by Taxing Authorities, until
the expiration of the applicable statute of limitations (giving effect to any extension, waiver or
mitigation thereof); (ii) the provision of additional information, including an explanation of
material provided under clause (i) of this Section 4.02(a), to the extent such information is
necessary or reasonably helpful in connection with the foregoing; (iii) the execution of any
document that may be necessary or reasonably helpful in connection with the filing of a Tax Return
by Pioneer, the Partnership or of their respective subsidiaries, or in connection with any audit,
dispute, proceeding, suit or action; and (iv) such Party’s commercially reasonable efforts to
obtain any documentation from a governmental authority or a third party that may be necessary or
reasonably helpful in connection with any of the foregoing.

     (b) Each Party shall make its employees and facilities available on a reasonable and mutually
convenient basis in connection with any of the foregoing matters.

     (c) If any Party fails to provide any information requested pursuant to Section 4.02 hereof
within a reasonable period, as determined in good faith by the Party requesting the information,
then the requesting Party shall have the right to engage a public accounting firm to gather such
information, provided that 30 days’ prior written notice is given to the unresponsive Party. If
the unresponsive Party fails to provide the requested information within 30 days of

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receipt of such notice, then such unresponsive Party shall permit the requesting Party’s
public accounting firm full access to all appropriate records or other information as reasonably
necessary to comply with this Section 4.02 and shall reimburse the requesting Party or pay directly
all costs connected with the requesting Party’s engagement of the public accounting firm.

ARTICLE V

WARRANTIES AND REPRESENTATIONS; PAYMENT OBLIGATIONS

     Section 5.01 Warranties and Representations Relating to Actions of Pioneer and the
Partnership. Each of Pioneer and the Partnership warrants and represents to the other that:

     (a) in the case of Pioneer, it is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite power to carry out the
transactions contemplated by this Agreement;

     (b) in the case of the Partnership, it is a limited partnership duly organized, validly
existing and in good standing under the laws of the State of Delaware and has all requisite power
to carry out the transactions contemplated by this Agreement;

     (c) it has duly and validly taken all action necessary to authorize the execution, delivery
and performance of this Agreement and the consummation of the transactions contemplated hereby;

     (d) this Agreement has been duly executed and delivered by it and constitutes its legal, valid
and binding obligation enforceable in accordance with its terms subject, as to the enforcement of
remedies, to (i) applicable bankruptcy, reorganization, insolvency, moratorium or other similar
laws affecting the enforcement of creditors’ rights generally from time to time in effect and (ii)
to general principles of equity, whether enforcement is sought in a proceeding at law or in equity;
and

     (e) the execution and delivery of this Agreement, the consummation of the transactions
contemplated hereby, or the compliance with any of the provisions of this Agreement will not (i)
conflict with or result in a breach of any provision of its certificate of incorporation, by-laws,
certificate of limited partnership, limited partnership agreement or general partnership agreement,
(ii) breach, violate or result in a default under any of the terms of any agreement or other
instrument or obligation to which it is a party or by which it or any of its properties or assets
may be bound, or (iii) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to it or affecting any of its properties or assets.

     Section 5.02 Calculation of Payment Obligations. Except as otherwise provided under
this Agreement, to the extent that the payor Party has a payment obligation to the payee Party
pursuant to this Agreement, the payee Party shall provide the payor Party with its calculation of
the amount of such obligation. The documentation of such calculation shall provide sufficient
detail to permit the payor Party to reasonably understand the calculation. All payment obligations
shall be made to the payee Party or to the appropriate Tax Authority as specified by the payee
Party within 30 days after delivery by the payee Party to the payor Party of written

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notice of a payment obligation. Any disputes with respect to payment obligations shall be
resolved in accordance with Section 6.11 below.

     Section 5.03 Prompt Performance. All actions required to be taken by any Party under
this Agreement shall be performed within the time prescribed for performance in this Agreement, or
if no period is prescribed, such actions shall be performed promptly.

     Section 5.04 Interest. Payments pursuant to this Agreement that are not made within
the period prescribed therefor in this Agreement shall bear interest (compounded daily) from and
including the date immediately following the last date of such period through and including the
date of payment at a rate equal to the Federal short-term rate or rates established pursuant to
Section 6621 of the Code for the period during which such payment is due but unpaid.

     Section 5.05 Tax Records. The Parties to this Agreement hereby agree to retain and
provide on proper demand by any Tax Authority (subject to any applicable privileges) the books,
records, documentation and other information relating to any Tax Return until the later of (a) the
expiration of the applicable statute of limitations (giving effect to any extension, waiver or
mitigation thereof), (b) the date specified in an applicable records retention agreement entered
into with a Tax Authority, (c) a Final Determination made with respect to such Tax Return and (d)
the final resolution of any claim made under this Agreement for which such information is relevant.

     Section 5.06 Continuing Covenants. Each Party agrees (1) not to take any action
reasonably expected to result in a new or changed Tax Item that is detrimental to any other Party
and (2) to take any action reasonably requested by any other Party that would reasonably be
expected to result in a new or changed Tax Item that produces a benefit or avoids a detriment to
such other Party; provided that such action does not result in any additional cost not fully
compensated for by the requesting Party. The Parties hereby acknowledge that the preceding
sentence is not intended to limit, and therefore shall not apply to, the rights of the Parties with
respect to matters otherwise covered by this Agreement.

ARTICLE VI

MISCELLANEOUS PROVISIONS

     Section 6.01 Notice. Any notice, demand, claim, or other communication required or
permitted to be given under this Agreement (a “Notice”) shall be in writing and may be personally
served provided a receipt is obtained therefor, or may be sent by certified mail return receipt
requested postage prepaid, to the Parties at the following addresses (or at such other address as
one Party may specify by notice to any other Party):

	 	 	 	 	 
	 

	 	Pioneer at:	 	Pioneer Natural Resources Company
	 

	 	 	 	5205 N. O’Connor Blvd., Suite 200 
	 

	 	 	 	Irving, Texas 75039
	 

	 	 	 	Phone: (972) 444-9001
	 

	 	 	 	Fax: (972) 969-3587
	 

	 	 	 	Attention: General Counsel

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	 	Partnership at:
	 	Pioneer Southwest Energy Partners L.P.
	 

	 	 	 	c/o Pioneer Natural Resources GP LLC
	 

	 	 	 	5205 North O’Connor Blvd., Suite 200 
	 

	 	 	 	Irving, Texas 75039-3746
	 

	 	 	 	Phone: (972) 444-9001
	 

	 	 	 	Facsimile: (972) 969-3552
	 

	 	 	 	Attention: Secretary

     A Notice which is delivered personally shall be deemed given as of the date specified on the
written receipt therefor. A Notice mailed as provided herein shall be deemed given on the third
business day following the date so mailed. Notification of a change of address may be given by any
Party to another in the manner provided in this Section 6.01 for providing a Notice.

     Section 6.02 Required Payments. Unless otherwise provided in this Agreement, any
payment of Tax required shall be due within 30 days of a Final Determination of the amount of such
Tax.

     Section 6.03 Injunctions. The Parties acknowledge that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in accordance with its
specific terms or were otherwise breached. The Parties hereto shall be entitled to an injunction
or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court having jurisdiction, such remedy being in
addition to any other remedy to which they may be entitled at law or in equity.

     Section 6.04 Further Assurances. Subject to the provisions hereof, the Parties hereto
shall make, execute, acknowledge and deliver such other instruments and documents, and take all
such other actions, as may be reasonably required in order to effectuate the purposes of this
Agreement and to consummate the transactions contemplated hereby. Subject to the provisions
hereof, each of the Parties shall, in connection with entering into this Agreement, perform its
obligations hereunder and take any and all actions relating hereto, comply with all applicable
laws, regulations, orders, and decrees, obtain all required consents and approvals and make all
required filings with any governmental agency, other regulatory or administrative agency,
commission or similar authority and promptly provide the other Parties with all such information as
such Parties may reasonably request in order to be able to comply with the provisions of this
sentence.

     Section 6.05 Parties in Interest. Except as herein otherwise specifically provided,
nothing in this Agreement expressed or implied is intended to confer any right or benefit upon any
person, firm or corporation other than the Parties and their respective successors and permitted
assigns.

     Section 6.06 Setoff. Except as provided by Section 2.01(c) of this Agreement, all
payments to be made under this Agreement shall be made without setoff, counterclaim or withholding,
all of which are expressly waived.

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     Section 6.07 Change of Law. If, due to any change in applicable law or regulations or
the interpretation thereof by any court of law or other governing body having jurisdiction
subsequent to the date of this Agreement, performance of any provision of this Agreement or any
transaction contemplated hereby shall become impracticable or impossible, the Parties hereto shall
use their best efforts to find and employ an alternative means to achieve the same or substantially
the same result as that contemplated by such provision.

     Section 6.08 Termination and Survival. Notwithstanding anything in this Agreement to
the contrary, this Agreement shall remain in effect and its provisions shall survive for the full
period of all applicable statutes of limitation (giving effect to any extension, waiver or
mitigation thereof) or until otherwise agreed to in writing by Pioneer and the Partnership, or
their successors.

     Section 6.09 Amendments; No Waivers.

     (a) Any provision of this Agreement may be amended or waived if, and only if, such amendment
or waiver is in writing and signed, in the case of an amendment, by Pioneer and the Partnership, or
in the case of a waiver, by the Party against whom the waiver is to be effective.

     (b) No failure or delay by any Party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or privilege.

     Section 6.10 Governing Law and Interpretation. This Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware applicable to agreements made
and to be performed in the State of Delaware.

     Section 6.11 Resolution of Certain Disputes. Any disagreement between the Parties
with respect to any matter that is the subject of this Agreement, including, without limitation,
any disagreement with respect to any calculation or other determinations by Pioneer hereunder,
which is not resolved by mutual agreement of the Parties, shall be resolved by a nationally
recognized independent accounting firm chosen by and mutually acceptable to the Parties hereto (an
“Accounting Referee”). Such Accounting Referee shall be chosen by the Parties within fifteen (15)
business days from the date on which one Party serves written notice on another Party requesting
the appointment of an Accounting Referee, provided that such notice specifically describes the
calculations to be considered and resolved by the Accounting Referee. In the event the Parties
cannot agree on the selection of an Accounting Referee, then the Accounting Referee shall be any
office or branch of the public accounting firm of PricewaterhouseCoopers. The Accounting Referee
shall resolve any such disagreements as specified in the notice within 30 days of appointment;
provided, however, that no Party shall be required to deliver any document or take any other action
pursuant to this Section 6.11 if it determines that such action would result in the waiver of any
legal privilege or any detriment to its business. Any resolution of an issue submitted to the
Accounting Referee shall be final and binding on the Parties hereto without further recourse. The
Parties shall share the costs and fees of the Accounting Referee equally.

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     Section 6.12 Confidentiality. Except to the extent required to protect a Party’s
interests in a Tax Controversy, each Party shall hold and shall cause its consultants and advisors
to hold in strict confidence, unless compelled to disclose by judicial or administrative process
or, in the opinion of its counsel, by other requirements of law, all information (other than any
such information relating solely to the business or affairs of such Party) concerning another Party
or its representatives pursuant to this Agreement (except to the extent that such information can
be shown to have been (i) previously known by the Party to which it was furnished, (ii) in the
public domain through no fault of such Party, or (iii) later lawfully acquired from other sources
by the Party to which it was furnished), and each Party shall not release or disclose such
information to any other person, except its auditors, attorneys, financial advisors, bankers and
other consultants and advisors who shall be advised of the provisions of this Agreement. Each
Party shall be deemed to have satisfied its obligation to hold confidential information concerning
or supplied by another Party if it exercises the same care as it takes to preserve confidentiality
for its own similar information.

     Section 6.13 Costs, Expenses and Attorneys’ Fees. Except as expressly set forth in
this Agreement, each Party shall bear its own costs and expenses incurred pursuant to this
Agreement. In the event a Party to this Agreement brings an action or proceeding for the breach or
enforcement of this Agreement, the prevailing party in such action, proceeding, or appeal, whether
or not such action, proceeding or appeal proceeds to final judgment, shall be entitled to recover
as an element of its costs, and not as damages, such reasonable attorneys’ fees as may be awarded
in the action, proceeding or appeal in addition to whatever other relief the prevailing party may
be entitled. For purposes of this Section 6.13, the “prevailing party” shall be the Party who is
entitled to recover its costs; a Party not entitled to recover its costs shall not recover
attorneys’ fees. No sum for attorneys’ fees shall be counted in calculating the amount of the
judgment for purposes of determining whether a Party is entitled to recover its costs or attorneys’
fees.

     Section 6.14 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.

     Section 6.15 Severability. The Parties hereby agree that, if any provision of this
Agreement should be adjudicated to be invalid or unenforceable, such provision shall be deemed
deleted herefrom with respect, and only with respect, to the operation of such provision in the
particular jurisdiction in which such adjudication was made, and only to the extent of the
invalidity, and any such invalidity or unenforceability in a particular jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction. All other remaining
provisions of this Agreement shall remain in full force and effect for the particular jurisdiction
and all other jurisdictions.

     Section 6.16 Entire Agreement.

     (a) This Agreement contains the entire agreement between the Parties with respect to the
subject matter hereof and supersedes all other agreements, whether or not written, in respect of
any Tax between the Pioneer Group and the Partnership Group.

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     (b) In the event of any conflict or inconsistency between the provisions of this Agreement and
the provisions of any other agreement between the Pioneer Group and the Partnership Group the
provisions of this Agreement shall take precedence and to such extent shall be deemed to supersede
such conflicting provisions under the other agreement.

     Section 6.17 Assignment. This Agreement is being entered into by Pioneer and the
Partnership on behalf of themselves and each member of the Pioneer Group and the Partnership Group.
This Agreement shall constitute a direct obligation of each such member and shall be deemed to
have been readopted and affirmed on behalf of any entity that becomes a member of the Pioneer Group
or the Partnership Group in the future. Each of Pioneer and the Partnership hereby guarantee the
performance of all actions, agreements and obligations provided for under this Agreement of each
member of the Pioneer Group and the Partnership Group, respectively. Each of Pioneer and the
Partnership shall, upon the written request of the other, cause any of their respective group
members to formally execute this Agreement. This Agreement shall be binding upon, and shall inure
to the benefit of, the successors, assigns and persons controlling any of the entities bound hereby
for so long as such successors, assigns or controlling persons are members of the Pioneer Group or
the Partnership Group or their successors and assigns.

     Section 6.18 Fair Meaning. This Agreement shall be construed in accordance with its
fair meaning and shall not be construed strictly against the drafter.

     Section 6.19 Titles and Headings. Titles and headings to sections herein are inserted
for the convenience of reference only and are not intended to be a part or to affect the meaning or
interpretation of this Agreement.

     Section 6.20 Construction. In this Agreement, unless the context otherwise requires
the terms “herein,” “hereof,” and “hereunder” refer to this Agreement.

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     IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Agreement as of the
day and year first above written.

	 	 	 	 	 	 	 
	 	 	PIONEER NATURAL RESOURCES COMPANY	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Richard P. Dealy
 

Richard P. Dealy
	 	 
	 

	 	Title:
	 	Executive Vice President and	 	 
	 

	 	 	 	Chief Financial Officer	 	 
	 
	 	 	 	 	 	 
	 	 	PIONEER SOUTHWEST ENERGY PARTNERS
L.P.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Pioneer Natural Resources GP LLC, its	 	 
	 

	 	 	 	general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Richard P. Dealy
 

Richard P. Dealy
	 	 
	 

	 	Title:
	 	Executive Vice President and	 	 
	 

	 	 	 	Chief Financial Officerexv10w4

 

EXHIBIT 10.4

EXECUTION VERSION

OMNIBUS OPERATING AGREEMENT

     This Omnibus Operating Agreement (this “Agreement”) is made and entered
into this 6th day of May, 2008, by and between Pioneer Natural Resources USA, Inc., a
Delaware corporation (“Pioneer USA”), and Pioneer Southwest Energy Partners
USA LLC, a Texas limited liability company (“PSE USA”). Pioneer USA and PSE
USA are sometimes hereinafter referred to individually as a “Party” and collectively
as the “Parties.”

     In consideration of the premises, the covenants set forth herein, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereby agree as follows:

ARTICLE I

DEFINITIONS

     As used in this Agreement, the following terms shall have the respective meanings
set forth below:

     “AAA” means the American Arbitration Association.

     “Applicable Wellbore” means (a) with respect to a Replacement Well, the
Wellbore in replacement of which such Replacement Well was drilled, as described below
in the definition of “Replacement Well,” and (b) with respect to a Down-Spaced Well,
the previously existing Wellbore associated with such Down-Spaced Well, as described
below in the definition of “Down-Spaced Well.”

     “Boundary Line Down-Spaced Well” means a Down-Spaced Well having a
bottom-hole location on or within one hundred feet (100’) of a boundary line of an
Existing Wellbore Tract.

     “Down-Spaced Well” means an additional well authorized or permitted by
the Texas Railroad Commission to be drilled and produced from a bottom hole location
within, or on a boundary of, an Existing Wellbore Tract, or outside of an Existing
Wellbore Tract but within one hundred feet (100’) of a boundary line of such Existing
Wellbore Tract. In no event shall PSE USA propose a Down-Spaced Well to be drilled,
deepened, sidetracked, or completed to a depth below the deepest perforation producing
in the Applicable Wellbore.

     “Dual Boundary Down-Spaced Well” means a Down-Spaced Well having a
bottom-hole location on or within one hundred feet (100’) of two (2) boundary lines of
an Existing Wellbore Tract.

     “Existing Production Facility” means any Production Facility currently
handling production from one or more Wellbores.

     “Expanded Production Facility” means an Existing Production Facility
which has been expanded to increase capacity in order to accommodate production from
Pioneer Wells, as more particularly described in Section 6.06.

 

 

     “Existing Wellbore Tract” means the forty (40) acre, quarter-quarter
section of land within which is located the bottom hole of a Wellbore or Replacement
Well which is then completed in and producing from the interval defined in the
Spraberry (Trend Area) special field rules.

     “Governmental Body” – any:

	 	(a)	 	nation, state, county, city, town, village, district, or
other jurisdiction of any nature;
	 
	 	(b)	 	federal, state, local, municipal, foreign, or other
government;
	 
	 	(c)	 	governmental or quasi-governmental authority of any nature
(including any Governmental Body, branch, department, official, or entity
and any court or other tribunal);
	 
	 	(d)	 	multi-national organization or body; or
	 
	 	(e)	 	body exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or
taxing authority or power of any nature.

     “New Production Test Equipment” means the test separator(s), production
separator, header, pumps, and lines or such other equipment added at an Existing
Production Facility solely to measure, separate, and allocate/transfer production
to/from the Pioneer Wells, as more particularly described in Section 6.06(a).

     “Offsetting Tract” means (a) with respect to a Single Boundary
Down-Spaced Well, that certain forty (40) acre, quarter-quarter section of land that
adjoins that certain boundary line of the Existing Wellbore Tract with respect to
which the proposed Single Boundary Down-Spaced Well is to be bottom-holed within one
hundred feet (100’), and (b) with respect to a Dual Boundary Down-Spaced Well, those
certain three (3) forty (40) acre, quarter-quarter sections of land that touch that
certain corner of the Existing Wellbore Tract with respect to which the proposed Dual
Boundary Down-Spaced Well is to be bottom-holed on or within one hundred feet (100’).

     “Omnibus Agreement” means that certain Omnibus Agreement dated May 6,
2008, by and among Pioneer Southwest Energy Partners L.P., Pioneer Natural Resources
GP LLC, Pioneer Natural Resources Company, Pioneer USA, and Pioneer Southwest Energy
Partners USA LLC.

     “Person” means an individual, corporation, partnership, joint venture,
trust, limited liability company, unincorporated organization, or any other entity.

Page 2 of 17

 

     “Pioneer Operating Agreement” has the meaning assigned thereto in Section
2.03.

     “Pioneer Wells” means both (a) wells operated by Pioneer USA, and (b)
wells that Pioneer USA owns a working interest in but does not operate, other than (in
both cases (a) and (b)) the Wellbores, Replacement Wells, and Down-Spaced Wells.

     “Production Facility” means the surface equipment beyond the wellhead
connections, including stock tanks, separators, treaters, pumping equipment, saltwater
disposal wells (excluding salt water disposal facilities jointly owned by Pioneer USA
and third party(ies)), and associated equipment, handling the production from one or
more Wellbores.

     “Replacement Well” means any well proposed to be drilled to a bottom hole
location within the same forty (40) acre, quarter-quarter section of land upon which
the bottom hole location of a Wellbore or Down-Spaced Well is physically located or
within one hundred feet (100’) of the surface location in the event such bottom hole
location or quarter-quarter section cannot be reasonably determined, and which is
drilled in replacement of such Wellbore or Down-Spaced Well as a result of the
temporary or permanent plugging and abandonment of such Wellbore or Down-Spaced Well
due to mechanical failure and not due to depletion in the then producing perforations.
In no event shall PSE USA propose a Replacement Well to be drilled, deepened,
sidetracked, or completed to a depth below the deepest perforation producing in the
Applicable Wellbore immediately prior to the mechanical failure of the Applicable
Wellbore. Within the same limitations, a Replacement Well may also be drilled in
replacement of a previously drilled Replacement Well.

     “Rules” means the Commercial Arbitration Rules of the AAA.

     “Single Boundary Down-Spaced Well” means a Down-Spaced Well having a
bottom-hole location on or within one hundred feet (100’) of only a single boundary
line of an Existing Wellbore Tract.

     “Third Party Operating Agreement” has the meaning assigned thereto in
Section 2.02.

     “Wellbores” means all of those certain wellbores described in the Omnibus
Agreement.

ARTICLE II

RECITALS

     2.01. Pursuant to the transactions referred to in the Omnibus Agreement, PSE USA
has acquired, or is or will be acquiring, an undivided interest in and to the
Wellbores.

     2.02. With respect to certain Wellbores, operating agreements between Pioneer
USA, as operator, and third parties, as non-operators (the “Third Party Operating
Agreements”), are already in place.

     2.03 With respect to those Wellbores that are not presently subject to a Third
Party Operating Agreement, the Parties are entering into an operating agreement of
even date herewith,

Page 3 of 17

 

with Pioneer USA as operator and PSE USA as non-operator (the “Pioneer
Operating Agreement”).

     2.04. The Parties desire to enter into this Agreement to set forth their
understanding and agreement with respect to certain restrictions and limitations on
the rights of PSE USA and the further rights of the Parties under the Pioneer
Operating Agreement and the Third Party Operating Agreements.

ARTICLE III

TERM

     This Agreement shall remain in effect until the earlier to occur of the
following: (a) the termination of the Pioneer Operating Agreement and all Third Party
Operating Agreements; or (b) the termination of this Agreement by the mutual written
consent of the Parties. In addition, if Pioneer USA resigns as operator under the
Pioneer Operating Agreement or any Third Party Operating Agreement (or is no longer
the operator under any Third Party Operating Agreement for any reason), this Agreement
shall terminate, insofar and only insofar as it applies to any then-existing
Wellbores, Replacement Wells, and Down-Spaced Wells covered by such operating
agreement(s) under which Pioneer USA has resigned as or is no longer operator, when
such resignation or other termination of operatorship becomes effective; however, this
Agreement shall continue in effect insofar as it applies to any subsequently proposed
Replacement Wells or Down-Spaced Wells for the Applicable Wellbores. Notwithstanding
the termination of this Agreement: (a) Pioneer USA shall continue to have the rights
set forth below in Section 6.06 for so long as necessary, in its sole discretion, to
utilize Existing Production Facilities or Expanded Production Facilities for the
delivery and handling of production from Pioneer Wells; (b) PSE USA shall continue to
have the right to propose, participate, and/or go non-consent in Replacement Wells and
Down-Spaced Wells indefinitely; and (c) Pioneer USA shall continue to have the rights
set forth below in Section 6.07 indefinitely.

ARTICLE IV

SPECIAL PROVISIONS REGARDING THE PIONEER OPERATING AGREEMENT

     Notwithstanding anything to the contrary contained in the Pioneer Operating
Agreement, the Parties agree as follows:

     4.01. PSE USA shall not have the right to remove Pioneer USA as the operator
under the Pioneer Operating Agreement; however, if Pioneer USA resigns as the
operator, or sells all of its interest in the area covered by the Pioneer Operating
Agreement to a third party, PSE USA shall have the right to vote for the selection of
a successor operator pursuant to the terms and conditions of Article V.B.2 of the
Pioneer Operating Agreement.

     4.02. PSE USA shall have the right, along with Pioneer USA, to propose (subject
to the limitation in the following sentence), participate, and/or go non-consent in
subsequent operations in the Wellbores and the drilling of Replacement Wells and/or
Down-Spaced Wells pursuant to the terms and conditions of Article VI.B of the Pioneer
Operating Agreement; however, if a subsequent operation proposal by PSE USA conflicts
with a subsequent operation proposal by

Page 4 of 17

 

Pioneer USA (regardless of which proposal preceded the other), PSE USA shall withdraw
its proposal in favor of Pioneer USA’s proposal. PSE USA shall not propose the
drilling of a Down-Spaced Well with less than twenty (20) acre density.

     4.03. With respect to any Replacement Well or Down-Spaced Well for which the
Applicable Wellbore is subject to the Pioneer Operating Agreement:

     (a) PSE USA shall not propose any Replacement Well or Down-Spaced Well to
a depth below the deepest producing perforation in the Applicable Wellbore.

     (b) If Pioneer USA proposes a Replacement Well or Down-Spaced Well to be
both (i) drilled and completed in an objective depth and/or interval that is
deeper than the deepest producing perforation in the Applicable Wellbore, and
(ii) dually completed in or commingled with production from a producing
perforation in the Applicable Wellbore, PSE USA shall have the right to
participate in such proposal.

     (c) If PSE USA participates in the drilling of any Replacement Well or
Down-Spaced Well, then, following the completion of such Replacement Well or
Down-Spaced Well, Pioneer USA shall execute and deliver (or cause to be
executed and delivered) to PSE USA a recordable assignment and bill of sale and
such other documents (comparable to those executed in conjunction with the
Wellbores, and containing a comparable title indemnity) as necessary to convey
to PSE USA an undivided interest in the wellbore of the Replacement Well or
Down-Spaced Well from the surface to the deepest producing perforation in the
Replacement Well or Down-Spaced Well, as the case may be (together with an
easement for operating purposes extending an additional one hundred feet (100’)
in depth), which undivided interest shall be in such amount that the ratio of
PSE USA’s interest to Pioneer USA’s interest is the same in the Replacement
Well or Down-Spaced Well as it is in the Applicable Wellbore. Prior to the
spudding of any Replacement Well or Down-Spaced Well that is proposed under
Section 4.03(b) to be drilled and completed in a deeper objective depth and/or
interval than the deepest producing perforation in the Applicable Wellbore, and
in consideration of the rights to participate in such well and to receive such
assignment and bill of sale, PSE USA shall pay to Pioneer USA its working
interest share of the fair market value of such objective depth and/or interval
that is deeper than the deepest producing perforation in the Applicable
Wellbore, as mutually agreed by Pioneer USA and PSE USA. If the Parties are
unable to reach an agreement on the fair market value of such objective depth
and/or interval, then the Parties shall select an independent appraiser to make
such determination. If the Parties are unable to agree on an independent
appraiser, each Party shall select one independent appraiser, and the two
appraisers so selected shall select a third independent appraiser, who shall
make the determination of fair market value. The independent appraiser’s
determination will be binding on the Parties.

     (d) If no Replacement Well is proposed by Pioneer USA or PSE USA, but
Pioneer USA subsequently drills and completes a well in which PSE USA does not
have the right to participate as a producer or a dry hole at a deeper depth
than the deepest existing perforation in the Applicable Wellbore within the
applicable Existing Wellbore Tract, and Pioneer USA thereafter proposes a
plugback of such subsequent well as a Replacement Well or Down-Spaced Well, PSE
USA shall have the right to participate in

Page 5 of 17

 

such plugback attempt, subject to a well cost adjustment to be calculated
in a manner consistent with the well cost adjustment mechanisms set forth in
Article VI.B.4(a) or VI.B.4(b) of the Pioneer Operating Agreement, as
applicable. If PSE USA participates in such plugback attempt, Pioneer USA
shall execute and deliver (or cause to be executed and delivered) to PSE USA a
recordable assignment and bill of sale conveying to PSE USA an undivided
interest in the Replacement Well or Down-Spaced Well from the surface to the
deepest producing perforation in such well (together with an easement for
operating purposes extending an additional one hundred feet (100’) in depth),
which undivided interest shall be in such amount that the ratio of PSE USA’s
interest to Pioneer USA’s interest is the same in the Replacement Well and
Down-Spaced Well as it is in the Applicable Wellbore.

     (e) Following each transaction described in subsection 4.03(c) or (d)
above, the Parties shall amend Exhibit A-1 to the Pioneer Operating Agreement
to reflect the Parties’ respective interests in the Replacement Well or
Down-Spaced Well from the surface to the deepest producing perforation in such
Replacement Well or Down-Spaced Well.

     4.04 Pioneer USA shall have the right to take over Wellbores, Replacement Wells,
and Down-Spaced Wells agreed to be permanently plugged and abandoned by the Parties
for Pioneer USA’s exclusive use. If Pioneer USA elects to exercise such right, it
shall pay PSE USA for its pro-rata share of the value of the salvable material and
equipment, less its pro-rata shares of the estimated costs of salvaging, plugging and
abandoning, and restoring the surface. If, however, such plugging and restoration
costs are higher than the salvage value, PSE USA shall tender its pro-rata share of
such excess to Pioneer USA. If Pioneer USA exercises this right to take over a
Wellbore, Replacement Well, or Down-Spaced Well, PSE USA shall execute and deliver (or
cause to be executed and delivered) to Pioneer USA a recordable assignment and bill of
sale conveying to Pioneer USA all of PSE USA’s interest in such Wellbore, Replacement
Well, or Down-Spaced Well. Pioneer USA shall fully protect, defend, indemnify, and
hold PSE USA harmless from and against all losses, costs, claims, demands, expenses,
damages, liabilities, suits, actions, judgments, and decrees arising out of,
attributable to, or resulting from Pioneer USA’s subsequent operations on and in such
Wellbore, Replacement Well, or Down-Spaced Well.

ARTICLE V

SPECIAL PROVISIONS REGARDING THE THIRD PARTY OPERATING AGREEMENTS

     Notwithstanding anything to the contrary contained in any Third Party Operating
Agreement, the Parties agree as follows:

     5.01. PSE USA shall never vote to remove Pioneer USA as operator.

     5.02 PSE USA shall have the right (along with other parties to the Third Party
Operating Agreements) to propose, participate, and/or go non-consent in subsequent
operations in the Wellbores and the drilling of Replacement Wells and/or Down-Spaced
Wells, pursuant to the terms of such applicable Third Party Operating Agreement,
subject to the following restrictions:

Page 6 of 17

 

     (a) If a subsequent operation proposal by PSE USA conflicts with a
subsequent operation proposal by Pioneer USA (regardless of which proposal
preceded the other), PSE USA shall withdraw its proposal in favor of Pioneer
USA’s proposal.

     (b) If a subsequent operation proposal by Pioneer USA conflicts with a
subsequent operation proposal by a third party Non-Operator, PSE USA shall vote
in favor of Pioneer USA’s proposal.

     5.03 With respect to any Replacement Well or Down-Spaced Well for which the
Applicable Wellbore is subject to a Third Party Operating Agreement:

     (a) PSE USA shall not propose any Replacement Well or Down-Spaced Well to
a depth below the deepest producing perforation in the Applicable Wellbore.

     (b) If Pioneer USA or any third party non-operator proposes a Replacement
Well or Down-Spaced Well to be both (i) drilled and completed in an objective
depth and/or interval that is deeper than the deepest producing perforation in
the Applicable Wellbore, and (ii) dually completed in or commingled with
production from a producing perforation in the Applicable Wellbore, then PSE
USA shall have the right to participate in such proposal.

     (c) If PSE USA participates in any proposal to drill a Replacement Well or
Down-Spaced Well, then, following the completion of such Replacement Well or
Down-Spaced Well, the Parties shall prepare and execute (or cause to be
executed) such documents (comparable to those executed in conjunction with the
Wellbores, and containing a comparable title indemnity) as are necessary for
PSE USA to acquire an undivided interest in the wellbore of the Replacement
Well or Down-Spaced Well from the surface to the deepest producing perforation
in the Replacement Well or Down-Spaced Well, as the case may be (together with
an easement for operating purposes extending an additional one hundred feet
(100’) in depth), which undivided interest shall be in such amount that the
ratio of PSE USA’s interest to Pioneer USA’s interest is the same in the
Replacement Well and Down-Spaced Well as it is in the Applicable Wellbore.
Prior to the spudding of any Replacement Well or Down-Spaced Well that is
proposed to be drilled and completed in a deeper objective depth and/or
interval than the deepest producing perforation in the Applicable Wellbore, and
in consideration of the rights to participate in such well and to acquire such
interest, PSE USA shall pay to Pioneer USA its working interest share of the
fair market value of such objective depth and/or interval that is deeper than
the deepest producing perforation in the Applicable Wellbore, as mutually
agreed by Pioneer USA and PSE USA. If the Parties are unable to reach an
agreement on the fair market value of such objective depth and/or interval,
then the fair market value shall be determined by an independent appraiser as
described above in Section 4.03(c).

     (d) If no Replacement Well is proposed by any party, but Pioneer USA or
any other party to a Third Party Operating Agreement subsequently drills and
completes a well in which PSE USA does not have the right to participate as a
producer or a dry hole at a deeper depth than the deepest existing perforation
in the Applicable Wellbore within

Page 7 of 17

 

the applicable Existing Wellbore Tract, and Pioneer USA or any other party to
such Third Party Operating Agreement thereafter proposes a plugback of such
subsequent well as a Replacement Well or Down-Spaced Well, PSE USA shall have
the right to participate in such plugback attempt, subject to (i) the approval
of the other parties to such Third Party Operating Agreement, (ii) a well cost
adjustment to be calculated in a manner consistent with the well cost
adjustment mechanisms set forth in such Third Party Operating Agreement, as
applicable, and (iii) if applicable, recovery of the nonconsent penalty under
such Third Party Operating Agreement. If PSE USA participates in such plugback
attempt, the Parties shall prepare and execute (or cause to be executed) such
documents as are necessary for PSE USA to acquire an undivided interest in the
Replacement Well or Down-Spaced Well from the surface to the deepest producing
perforation in such well (together with an easement for operating purposes
extending an additional one hundred feet (100’) in depth), which undivided
interest shall be in such amount that the ratio of PSE USA’s interest to
Pioneer USA’s interest is the same in the Replacement Well or Down-Spaced Well
as it is in the Applicable Wellbore.

     (e) Following each transaction described in subsection 5.03(c) or (d)
above, Pioneer USA shall prepare and circulate to the other parties to the
applicable Third Party Operating Agreement an amended Exhibit “A-1” (or other
applicable exhibit) to such Third Party Operating Agreement to reflect the
respective interests of the Parties and the other parties to such Third Party
Operating Agreement in the Replacement Well or Down-Spaced Well from the
surface to the deepest producing perforation in such Replacement Well or
Down-Spaced Well.

ARTICLE VI

SPECIAL PROVISIONS REGARDING BOTH THE PIONEER OPERATING AGREEMENT AND THE THIRD

PARTY OPERATING AGREEMENTS

     Notwithstanding anything to the contrary contained in either the Pioneer
Operating Agreement or any Third Party Operating Agreement, the Parties agree as
follows:

     6.01. PSE USA shall have the right to take its share of production under any
Third Party Operating Agreement in kind pursuant to terms and conditions substantially
similar to those applicable to PSE USA in Article VI.G of the Pioneer Operating
Agreement.

     6.02 Subject to PSE USA’s right to take in kind as set forth above in Section
6.01 and in Article VI.G of the Pioneer Operating Agreement, for so long as Pioneer
USA owns an interest in the Wellbores, Replacement Wells, and/or Down-Spaced Wells,
Pioneer USA shall market all of PSE USA’s production on behalf of PSE USA from such
Wellbores, Replacement Wells, and/or Down-Spaced Wells under the same terms and
conditions as Pioneer USA markets its own production. While this right to market may
include arrangements for processing gas, PSE USA shall be responsible for all
applicable processing fees and charges and shall not share in plant revenues,
discounts, or benefits derived from or attributable to Pioneer USA’s ownership in any
such processing plant or facilities. Pioneer USA shall disburse (or cause to be
disbursed) revenues to PSE USA and the other owners of production, including the
royalty owners. Pioneer USA shall not have any liability to PSE USA for the failure
to timely or properly pay any such disbursements to the other owners of production, or
for any penalties and/or interest resulting therefrom.

Page 8 of 17

 

     6.03. If a lease is lost due to title failure or by operation of its terms, PSE
USA shall be allowed to participate under the renewal provision but INSOFAR AND ONLY
INSOFAR as to the productive interval or behind-pipe intervals in the existing
Wellbores, Replacement Wells, or Down-Spaced Wells, as the case may be. PSE USA shall
reimburse Pioneer USA for its pro-rata share (being equal to its working interest in
the well affected by the failure, or its weighted working interest, if more than one
well is affected) of the actual leasing costs incurred by Pioneer USA.

     6.04. PSE USA shall neither (a) make any application before a Governmental Body,
including applications regarding spacing, down-spacing, density, special field rules,
or allowables, except as hereinafter provided in this Section 6.04, nor (b) object to
any such application made by Pioneer USA. Further, upon the request of Pioneer USA,
PSE USA will affirmatively waive any objections to any such application by Pioneer
USA. Notwithstanding anything in this paragraph to the contrary, PSE USA shall have
the right to make application before a Governmental Body for exceptions to the
Spraberry (Trend Area) special field rules for down-spacing to no less than twenty
(20) acre density. If revised proration unit plats, Railroad Commission of Texas
Forms P-15, and/or similar filings are needed in Pioneer USA’s sole judgment for any
purpose, Pioneer USA shall prepare such proration unit plats, Railroad Commission of
Texas Forms P-15, and/or similar filings for the Parties and submit same to the
appropriate Governmental Body.

     6.05. Pioneer USA shall tender all lease maintenance payments, if any, on behalf
of PSE USA, subject to reimbursement from PSE USA. Pioneer USA shall retain and
maintain all division of interest and revenue decks, and all well, lease, and contract
files. Pioneer USA shall not have any liability to PSE USA for the failure to timely
or properly tender any such lease maintenance payments, unless such failure results
from the gross negligence or willful misconduct of Pioneer USA.

     6.06. Subject to the further terms and conditions set forth below, PSE USA
authorizes Pioneer USA to utilize the Existing Production Facilities as necessary in
Pioneer USA’s sole discretion for separating, storing, handling, compressing,
dehydrating, treating, and delivering oil, gas, and water from Pioneer Wells. Pioneer
USA recognizes, however, that the Existing Production Facilities may be limited by
physical restrictions from accepting some or all of the production from the Pioneer
Wells, such that Pioneer USA may be required to construct its own Production
Facilities.

     (a) If Pioneer USA, as operator of the Existing Production Facilities,
determines, in its sole discretion, that there is sufficient capacity (physical
and contractual) at an Existing Production Facility to accommodate separately
metered production from Pioneer Wells, Pioneer USA is authorized to construct,
maintain, and operate gathering lines to deliver production from the Pioneer
Wells to such Existing Production Facility. If the production from the Pioneer
Wells will not be metered prior to being delivered to the Existing Production
Facility, Pioneer USA shall install New Production Test Equipment to measure
the production from the Pioneer Well(s). Pioneer USA shall pay for one hundred
percent (100%) where no third party owners exist, and its pro-rata share (which
shall include PSE USA’s share) where third party owners exist, of the costs of
connecting the Pioneer Wells to the Existing Production Facility, including

Page 9 of 17

 

all costs associated with the installation of the New Production Test
Equipment. Pioneer USA shall have no liability to PSE USA if the connection
of a Pioneer Well to an Existing Production Facility requires or results in the
temporary interruption of production delivered from other Wellbores,
Replacement Wells, or Down-Spaced Wells connected to such Existing Production
Facility. Further, Pioneer USA shall bear its proportionate share of the cost
of maintaining and operating each Existing Production Facility, including any
New Production Test Equipment – such proportionate share to be determined by
dividing the total number of Pioneer Wells utilizing the Existing Production
Facility by the total number of all wells utilizing such Existing Production
Facility. After installation, the New Production Test Equipment shall be owned
by the then-current owners and maintained and operated by the then-current
operator of the Existing Production Facility.

     (b) If Pioneer USA determines, in its sole discretion, that there is
insufficient capacity (physical or contractual) at an Existing Production
Facility to handle production from any Pioneer Well, Pioneer USA may elect to
expand an Existing Production Facility to increase its capacity in order to
handle such production. Pioneer USA shall pay for one hundred percent (100%)
where no third party owners exist, and its pro-rata share (which shall include
PSE USA’s share) where third party owners exist, of the expansion costs and the
costs to subsequently connect the Pioneer Wells to the Expanded Production
Facility. Pioneer USA shall have no liability to PSE USA if the expansion of
an Existing Production Facility results in the temporary interruption of
production from other Wellbores, Replacement Wells, or Down-Spaced Wells
connected to such Existing Production Facility. Further, Pioneer USA shall
bear its proportionate share of the cost of maintaining and operating the
Expanded Production Facility – such proportionate share to be determined by
dividing the total number of Pioneer Wells utilizing the Expanded Production
Facility by the total number of all wells utilizing such Expanded Production
Facility. After installation, the Expanded Production Facility shall be owned
by the then-current owners and maintained and operated by the then-current
operator of the applicable Existing Production Facility.

     (c) Nothing herein shall be construed to impart, transfer, or convey any
additional ownership or liability in an Existing Production Facility or
Expanded Production Facility to Pioneer USA.

     6.07 If Pioneer USA resigns as operator under the Pioneer Operating Agreement or
any Third Party Operating Agreement (or is no longer the operator under any Third
Party Operating Agreement for any reason), then any successor operator shall, upon the
request of Pioneer USA, prepare and file with the appropriate Governmental Body such
revised proration unit plats, Railroad Commission of Texas Forms P-15, and/or similar
filings as may be necessary in Pioneer USA’s sole judgment for any purpose.

     6.08 If (a) either Party proposes a Boundary Line Down-Spaced Well to be bottomed
under or on the boundary line of an Existing Wellbore Tract, or (b) Pioneer USA, as
the owner of a working interest in an Offsetting Tract, proposes a Boundary Line
Down-Spaced Well to be bottomed under such Offsetting Tract, then Pioneer USA shall be
authorized to negotiate an operating agreement for such well among the working
interest owners in the Existing Wellbore

Page 10 of 17

 

Tract and the Offsetting Tract(s) to provide for the allocation of the working and net
revenue interests among the working interest owners in the Existing Wellbore Tract and
the working interest owners in the Offsetting Tract(s) who participate in such well;
provided, however, that the participating working interest owners in the Existing
Wellbore Tract, collectively, and the participating working interest owners in each
Offsetting Tract, collectively, shall be allocated exactly fifty percent (50%) of such
interests in the case of a Single Boundary Down-Spaced Well and exactly twenty-five
percent (25%) of such interests in the case of a Dual Boundary Down-Spaced Well. PSE
USA agrees to ratify any operating agreement that meets the foregoing conditions.

ARTICLE VII

MISCELLANEOUS PROVISIONS

     7.01. Notices. All notices, requests, or consents provided for or permitted to
be given pursuant to this Agreement must be in writing and must be given by depositing
same in the United States mail, addressed to the Party to be notified, postpaid, and
registered or certified with return receipt requested, or by delivering such notice in
person or by telecopier or telegram to such Party. Notice given by personal delivery
or mail shall be effective upon actual receipt. Notice given by telegram or
telecopier shall be effective upon actual receipt if received during the recipient’s
normal business hours, or at the beginning of the recipient’s next business day after
receipt if not received during the recipient’s normal business hours. All notices to
be sent to a Party pursuant to this Agreement shall be sent to or made to the
attention of such Party at the address set forth below or at such other address as
such Party may stipulate to the other Parties in the manner provided in this Section
7.01.

PIONEER USA:

5205 N. O’Connor Blvd., Suite 200

Irving, Texas 75039

Phone: (972) 444-9001

Fax: (972) 969-3587

Attention: General Counsel

PSE USA:

c/o Pioneer Natural Resources GP LLC

5205 N. O’Connor Blvd., Suite 200

Irving, Texas 75039

Phone: (972) 444-9001

Fax: (972) 969-3587

Attention: General Counsel

     7.02. Additional Properties. If the Parties acquire additional properties that
they desire to be subject to this Agreement, they agree that Pioneer USA shall be the
operator of such properties (unless the properties are subject to an operating
agreement under which a third party is operator and will continue as operator), and
agree to make such amendments to this Agreement (and, if applicable, the Pioneer
Operating Agreement) as are necessary for this

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Agreement (and, if applicable, the Pioneer Operating Agreement) to apply to such
additional properties.

     7.03. Jurisdiction; Service of Process. Without limiting the Parties’ agreement to
arbitrate in Section 7.17, any action or proceeding seeking a temporary or preliminary
injunction to enforce any provision of, or based on any right arising out of, this
Agreement must be brought against any of the Parties in the courts of the State of
Texas, County of Dallas, or, if it has or can acquire jurisdiction, in the United
States District Court for the Northern District of Texas (Dallas Division), and each
of the Parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) for such limited purpose in any such action or proceeding and waives
any objection to venue laid therein for such limited purpose. Process in any action
or proceeding referred to in the preceding sentence may be served on any Party
anywhere in the world.

     7.04. Further Action. In connection with this Agreement and all transactions
contemplated by this Agreement, each Party agrees to execute and deliver such
additional documents and instruments and to perform such additional acts as may be
necessary or appropriate to effectuate, carry out, and perform all of the terms,
provisions, and conditions of this Agreement and all such transactions.

     7.05. Binding Effect. This Agreement shall be binding upon and inure to the benefit
of the Parties and their heirs, executors, administrators, successors, legal
representatives, and permitted assigns, as well as any Persons asserting rights or
claims on behalf of any of the foregoing Persons. Without limiting the preceding
sentence, if Pioneer USA resigns as operator under the Pioneer Operating Agreement or
any Third Party Operating Agreement (or is no longer the operator under any Third
Party Operating Agreement for any reason), the Parties shall cause the successor
operator to be subject to and bound by the terms of this Agreement.

     7.06. Effect of Waiver or Consent. No waiver or consent, express or implied, by any
Party to or of any breach or default by the other Party in the performance by such
Party of its obligations hereunder shall be deemed or construed to be a consent or
waiver to or of any other breach or default in the performance by such Party of the
same or any other obligations of such Party hereunder. Failure on the part of a Party
to complain of any act of the other Party or to declare any Party in default,
irrespective of how long such failure continues, shall not constitute a waiver by such
Party of its rights hereunder until the applicable statute of limitations period has
run.

     7.07. Counterparts. This Agreement may be executed in counterparts, each of
which together shall constitute an agreement binding on both Parties, notwithstanding
that both Parties are not signatories to the original or the same counterpart. Each
Party shall become bound by this Agreement immediately upon affixing its signature
hereto.

     7.08. Invalidity of Provisions. If any provision of this Agreement or the
application thereof to any Party or circumstance shall be held invalid or
unenforceable to any extent, the remainder of this Agreement and the application of
such provision to the other Party or other circumstances shall not be affected thereby
and shall be enforced to the greatest extent permitted by law.

Page 12 of 17

 

     7.09. Amendment or Restatements. This Agreement may be amended or restated only
by a written instrument executed by each of the Parties; provided, however, that after
the completion of the initial public offering of units by Pioneer Southwest Energy
Partners L.P., PSE USA may not, without the prior approval of the conflicts committee
of the board of directors of Pioneer Natural Resources GP LLC, or, if there is no such
committee, the independent members of such board of directors, agree to any amendment
or modification of this Agreement that Pioneer Natural Resources GP LLC determines
will adversely affect the holders of such units .

     7.10. Assignment. Neither Party may assign all or any portion of its rights, nor
delegate all nor any portion of its duties, hereunder, unless it continues to remain
liable for the performance of its obligations hereunder, and obtains the prior written
consent of the other Party, which consent shall not be unreasonably withheld;
provided, however, a merger shall not be deemed to be an assignment and a transfer of
the rights and an assumption of the obligations under this Agreement; provided
further, however, that the transfer of all or substantially all of the assets of a
Party shall not be deemed an assignment of such rights or obligations of such Party to
this Agreement if the assignee assumes all of the obligations under this Agreement.
Nothing contained in this Agreement, express or implied, shall confer on any person
other than the Parties or their respective successors and permitted assigns, any
rights, remedies, obligations, or liabilities under or by reason of this Agreement.
If PSE USA makes a permitted conveyance of interests in a Wellbore, Replacement Well,
or Down-Spaced Well, it shall, at Pioneer USA’s request, take such actions as
necessary to bind the assignee of such conveyance to this Agreement.

     7.11. Direct or Indirect Action. Where any provision of this Agreement refers to
action to be taken by any Party, or which such Party is prohibited from taking, such
provision shall be applicable whether such action is taken directly or indirectly by
such Party, including actions taken by or on behalf of any affiliate of such Party.

     7.12. Laws and Regulations. Notwithstanding any provision of this Agreement to the
contrary, no Party shall be required to take any act, or fail to take any act, under
this Agreement if the effect thereof would be to cause such Party to be in violation
of any applicable law, statute, rule or regulation.

     7.13. No Recourse Against Officers, Directors, Managers, or Employees. For the
avoidance of doubt, the provisions of this Agreement shall not give rise to any right
of recourse against any officer, director, manager, or employee of any Party or any
officer, director or employee of any affiliate of any Party.

     7.14. Negation of Rights of Third Parties. The provisions of this Agreement are
enforceable solely by the Parties, and no shareholder, member, or assignee of any
Party shall have the right, separate and apart from such Party, to enforce any
provision of this Agreement or to compel any Party to comply with the terms of this
Agreement.

     7.15. Construction. Unless the context requires otherwise: (a) any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular form
of nouns, pronouns and verbs shall include the plural and vice versa; (b) references
to Articles and Sections refer to Articles and Sections of this Agreement; (c)
references to Exhibits refer to the Exhibits attached to this Agreement, each of which
is made a part hereof for all purposes; (d) the terms “include,” “includes,”
“including” and words of like import shall be

Page 13 of 17

 

deemed to be followed by the words
“without limitation”; (e) the terms “hereof,” “herein” and “hereunder” refer to this
Agreement as a whole and not to any particular provision of this Agreement; and (f)
references to money refer to legal currency of the United States of America. The
table of contents and headings contained in this Agreement are for reference purposes
only, and shall not affect in any way the meaning or interpretation of this Agreement.

     7.16. Choice of Law. This Agreement shall be subject to and governed by the laws
of the State of Texas, excluding any conflicts-of-law rule or principle that might
refer the construction or interpretation of this Agreement to the laws of another
state, except that the law of another jurisdiction shall apply to this Agreement
insofar as this Agreement covers or relates to additional properties that become
subject to this Agreement under Section 7.02 above for which it is mandatory that the
law of another jurisdiction, wherein or adjacent to which such part of the Assets are
located, shall apply.

     7.17. Arbitration. Any disputes regarding fair market value under Sections
4.03(c) and 5.03(c) shall be resolved as provided in such sections. Any other claim,
counterclaim, demand, cause of action, dispute, or any other controversy arising out
of or relating in any way to this Agreement or to the subject matter of this Agreement
or to any relationship created thereby (each a “Dispute”) shall be resolved by binding
arbitration. A Dispute must be resolved through arbitration regardless of whether the
Dispute involves claims that this Agreement is unlawful, unenforceable, void, or
voidable, or involves claims sounding in tort, contract, statute, or common law. This
Section 7.17 shall be binding on and shall inure to the benefit of the Parties and
their respective affiliates and subsidiaries. The validity, construction, and
interpretation of this agreement to arbitrate, and all other procedural aspects of the
arbitration conducted pursuant hereto, shall be decided by the arbitral tribunal. Any
arbitration under this Agreement shall be administered by the AAA and conducted in
accordance with the Rules in existence at the time of the arbitration. In resolving
any Dispute, the arbitral tribunal shall refer to the governing law as specified in
Section 7.16 of this Agreement. The arbitral tribunal shall not be empowered to award
exemplary, punitive, indirect, consequential, remote, speculative, treble, multiple,
or special damages, and the Parties and their affiliates and subsidiaries waive any
right they may have to recover such damages from one another. The arbitral tribunal
shall not be empowered to decide any dispute ex aequo et bono or amiable compositeur.
The seat (or legal place) and venue of the arbitration shall be in Dallas, Texas. The
arbitration shall be conducted in the English language. The Dispute shall be decided
by a panel of three neutral arbitrators. The claimant or claimants shall nominate an
arbitrator at the time of service of a request for arbitration. The respondent or
respondents shall nominate an arbitrator at the time of service of the response to the
request for arbitration. If the claimant(s) or respondent(s) fail to appoint an
arbitrator, then that arbitrator shall be appointed in accordance with the Rules. The
two appointed arbitrators shall together agree upon a third arbitrator to recommend to
the AAA to chair the arbitration. If the two party-appointed arbitrators are unable to
agree upon an arbitrator within fifteen (15) days
of the respondent’s appointment of an arbitrator, then the chairman shall be chosen
according to the Rules. Notwithstanding the foregoing, if two or more respondents have
interests with regard to a Dispute that are not completely common, then all
arbitrators shall be appointed in accordance with the Rules and not by nomination or
appointment by the Parties. Any arbitration award may be enforced by the courts
sitting in Dallas, Texas, or any other court of competent subject matter jurisdiction
(including any jurisdiction in which a Party holds or keeps assets).

Page 14 of 17

 

Any action to
challenge, vacate, or set aside the award in whole or in part must be brought in the
courts sitting in Dallas, Texas. The Parties and their affiliates and subsidiaries
agree to waive any objections they may have to personal jurisdiction, venue, or forum
non-conveniens for any action brought to enforce the award in the courts sitting in
Dallas, Texas, or any other jurisdiction where a party against which enforcement of
the award is sought holds or keeps assets.

     7.18. Entire Agreement. This Agreement constitutes the entire agreement of the
Parties relating to the matters contained herein, superseding all prior contracts or
agreements, whether oral or written, relating to the matters contained herein. No
representation, promise, inducement, or statement of intention with respect to the
subject matter of this Agreement has been made by either Party which is not embodied
in this Agreement together with the documents, instruments, and writings that are
delivered pursuant hereto, and neither Party shall be bound by or liable for any
alleged representation, promise, inducement, or statement of intention not so set
forth.

     7.19. No Partnership Intended. If, for federal income tax purposes, this
Agreement and the operations hereunder are regarded as a partnership, each Party
elects to be excluded from the application of all of the provisions of Subchapter “K,”
Chapter 1, Subtitle “A,” of the Internal Revenue Code of 1986, as amended (“Code”), as
permitted and authorized by Section 761 of the Code and the regulations promulgated
thereunder. Pioneer USA is authorized and directed to execute on behalf of each Party
such evidence of this election as may be required by the Secretary of the Treasury of
the United States or the Federal Internal Revenue Service, including specifically all
of the returns, statements, and the data required by Treasury Regulation § 1.761.
Should there be any requirement that each Party give further evidence of this
election, each Party shall execute such documents and furnish such other evidence as
may be required by the Federal Internal Revenue Service or as may be necessary to
evidence this election. Neither Party shall give any notices or take any other action
inconsistent with the election made hereby. If any present or future income tax laws
of the state or states in which any Wellbore, Down-Spaced Well, or Replacement Well is
located or any future income tax laws of the United States contain provisions similar
to those in Subchapter “K,” Chapter 1, Subtitle “A,” of the Code, under which an
election similar to that provided by Section 761 of the Code is permitted, each Party
shall make such election as may be permitted or required by such laws. In making the
foregoing election, each party states that the income derived by such party from
operations hereunder can be adequately determined without the computation of
partnership taxable income.

     7.20. Rule Against Perpetuities. It is not the intent of the Parties that any
provision herein violate any applicable law regarding the rule against perpetuities,
and this Agreement shall be construed as not violating such rule to the extent the
same can be construed consistent with the expressed intent of the Parties as set forth
in this Agreement. In the event, however, that any provision of this Agreement is
determined to violate such rule, then such provision shall
nevertheless be effective for the maximum period (but not longer than the maximum
period) permitted by such rule that will result in no such violation. To the extent
such maximum period is permitted to be determined by reference to lives in being, the
Parties agree that “lives in being” shall refer to the lifetime of the last to die of
the now living lineal descendants of the late Joseph P. Kennedy, father of the late
John F. Kennedy, the 35th President of the United States of America.

Page 15 of 17

 

[Signature Page Follows]

Page 16 of 17

 

     EXECUTED as of the date hereof.

	 	 	 	 	 	 	 
	 	 	Pioneer Natural Resources, USA, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Richard P. Dealy
 

	 	 
	 

	 	Name:
	 	Richard P. Dealy	 	 
	 

	 	Title:
	 	Executive Vice President and
Chief Financial Officer	 	 
	 
	 	 	 	 	 	 
	 	 	Pioneer Southwest Energy Partners USA LLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Pioneer Natural Resources USA, Inc.,	 	 
	 

	 	 	 	its sole member	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Richard P. Dealy
 

	 	 
	 

	 	Name:
	 	Richard P. Dealy	 	 
	 

	 	Title:
	 	Executive Vice President and
Chief Financial Officer

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