Exhibit 10.1

Execution Version

DEEPWATER
PRODUCTION HANDLING
AND
OPERATING SERVICES AGREEMENT

FOR

GARDEN BANKS BLOCKS 738, 782, 785, 826 and 827
PRODUCTION HANDLING
AT THE GARDEN BANKS BLOCK 783 MAGNOLIA TLP

BY AND BETWEEN

CONOCOPHILLIPS COMPANY AND
DEVON ENERGY PRODUCTION COMPANY, L.P.

AND

CALLON PETROLEUM OPERATING COMPANY

EFFECTIVE April 18, 2007

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY CALLON PETROLEUM COMPANY FOR CERTAIN PORTIONS OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. OMITTED PORTIONS ARE INDICATED IN THIS AGREEMENT WITH “*****”.

Execution Version

TABLE OF CONTENTS

ARTICLE I — CONTRACT APPLICATION					2
1.1		Application in General			2
1.2		Application of Magnolia TLP Operating Agreement			2
ARTICLE II — DEFINITIONS AND EXHIBITS					3
2.1		Preface			3
2.2		Definitions			3
2.3		Exhibits		10
ARTICLE III — INFRASTRUCTURE AND FACILITIES					10
3.1		Satellite Production System		10
3.1.1		Design and Installation of Satellite Production System			10
3.1.2		Costs of Satellite Production System			11
3.1.3		Scheduling Producer’s Work			12
3.1.4		Magnolia TLP Criteria			12
3.1.5		Riser and Umbilical Handover			13
3.1.6		Magnolia TLP Access & Boarding for Producer’s Work			13
3.1.7		Conduct of Producer’s Work			14
3.2		Receiving Facility		15
3.3		Capacity Upgrades		16
3.4		Magnolia Owners’ Tie-In Option		16
3.4.1		Costs of Tie-in Option			17
3.4.2		Operation, Maintenance and Abandonment of Tie-in			17
ARTICLE IV — SERVICES					18
4.1		General		18
4.1.1		Production Handling Services			18
4.1.2		Satellite Production System Operations			19
4.2		Well Unloading		19
4.3		Producer’s Responsibilities		19
4.4		Right of Use of Deck Space		19
4.5		Energy Sources		20
4.6		Communication Equipment		20
4.7		Emergency Response		20
ARTICLE V — FEES & EXPENSES/ACCOUNTING PROCEDURES					21
5.1		Operating and Maintenance		21
5.1.1		Monthly Charges			21
5.1.2		Annual Review			22
5.2		Fuel/Vent/Flare Gas		22
5.3		Infrastructure Access Fees		23
5.3.1		IAF for Firm Capacity, Interruptible Capacity and FA Capacity			23
5.3.2		Minimum Monthly Fee			23
5.4		Future Governmental Regulations Costs		24
5.5		Producer’s Sole Expenses		25
5.6		Magnolia Owners’ Sole Expenses		25
5.7		Deferred Production Compensation		25
5.7.1		Compensation for Magnolia Owners for Initial Tie-In			25

Execution Version

5.7.2		Compensation for Producer			25
5.7.3		Compensation Methodology			26
5.7.4		Duration of Shutdown			27
5.7.5		Compensation for Magnolia Owners after Initial Tie-In			28
5.8		Royalties and Taxes		28
5.9		Quality Bank Payments		28
ARTICLE VI — CAPACITY					28
6.1		Magnolia TLP Base Capacity		28
6.2		Production Processing and Handling Capacity		29
6.2.1		Firm Capacity			29
6.2.2		Interruptible Capacity			31
6.2.3		Flow Assurance Capacity			31
6.3		Production Prioritization		32
6.3.1		Processing Facility Constraints			32
6.3.2		Gas Export Pipeline Constraints			33
6.3.3		Oil Export Pipeline Constraints			33
6.4		Production Compatibility		34
6.4.1		Conforming Fluids			34
6.4.2		Non-Conforming Satellite Production			34
6.4.3		Market Value			35
ARTICLE VII – METERING AND ALLOCATION, PERMITS, AND QUALITY BANK					36
7.1		General Application		36
7.2		Permits		36
7.2.1		Surface Commingling Permit			36
7.2.2		Other Permits			36
7.2.3		Permit Denials			37
7.3		Quality Bank		37
ARTICLE VIII — GATHERING AND TRANSPORTATION					37
8.1		Product Disposition		37
8.2		Product Transportation		38
8.3		Pipeline Penalties		38
8.4		Gas Imbalances		39
ARTICLE IX — SUSPENSION OF OPERATIONS AND FORCE MAJEURE					39
9.1		Notice		39
9.2		Suspension of Obligation		39
9.3		Resolution		39
9.4		Suspension of Operations		39
9.5		Magnolia TLP Operator’s Right to ShutDown Operations on Magnolia TLP		40
ARTICLE X — TERM, DEFAULT, TERMINATION, AND CONTINUATION OF SERVICES					41
10.1		Term of Agreement		41
10.2		Default		41
10.3		Termination by Magnolia Owners		42
10.4		Termination by Producer		43
10.5		Responsibilities and Obligations at Termination		43
ARTICLE XI — LIABILITIES AND INDEMNIFICATION					45

Execution Version

11.1		Liability and Indemnity		45
11.1.1		Definition of Claims			45
11.1.2		Application of Indemnities			45
11.1.3		Producer’s Indemnity			46
11.1.4		Magnolia Owners’ Indemnity			48
11.1.5		Environmental Indemnity			49
11.1.6		Notices and Defense of Indemnified Claims			51
11.1.7		Non-Conforming Production			51
11.1.8		No Limitations			51
11.1.9		Allocation of Liability Among the Magnolia Owners			51
11.2		Indemnification With Respect to Warranty of Title		52
11.2.1		Satellite Production			52
11.2.2		Non-Satellite Production			52
11.3		Waiver of Consequential Damages		52
11.4		Individual Obligations		52
ARTICLE XII — INSURANCE AND BONDS					53
12.1		Insurance		53
12.2		Bonds		54
ARTICLE XIII — SUCCESSORS AND ASSIGNS					54
13.1		Successors and Assigns		54
13.2		Assignment		54
13.2.1		Assignment by Producer			54
13.2.2		Assignment by Magnolia Owners			56
ARTICLE XIV – NOTICES					56
14.1		Giving and Responding to Notices		56
14.2		Content of Notice		58
ARTICLE XV — ADMINISTRATIVE AND MISCELLANEOUS					59
15.1		Billing Procedures		59
15.2		Disclaimer of Warranties by Magnolia Owners		59
15.3		Disclaimer of Warranties by Producer		60
15.4		Representations and Warranties		61
15.5		Warranty of Title		62
15.6		Standard of Performance		62
15.7		Producer’s Employees, Consultants, and Contractors		62
15.8		Magnolia TLP Operator’s Employees, Consultants, and Contractors		63
15.9		Further Assurances		63
15.10		Non-Compliance Citations		63
15.11		Dispute Resolution		63
15.12		Waivers `		64
15.13		Remedies		64
15.14		No Third Party Beneficiaries		64
15.15		Confidentiality Provisions		64
15.16		Commitment of Oil and Gas Reserves		65
15.17		Compliance With Laws and Regulations		66
15.17.1		Applicable Law			66
15.17.2		Severance of Invalid Provisions			66
15.17.3		Fair and Equal Employment			67
15.18		Construction and Interpretation of this Agreement		67

Execution Version

15.18.1		Heading for Convenience			67
15.18.2		Gender			68
15.18.3		Number			68
15.18.4		Independent Representation			68
15.19		Integrated and Entire Agreement		68
15.20		Amendment and Modification		68
15.21		Survivability		69
15.22		Existing Agreements		69
ARTICLE XVI – EXECUTION					69
16.1		Effect		69
16.2		Counterparts		70
		EXHIBIT “A”			72
		EXHIBIT “B”			73
		EXHIBIT “C”			77
		EXHIBIT “C-1”			83
		EXHIBIT “D”			100
		EXHIBIT “E”			102
		EXHIBIT “F”			105
		EXHIBIT “G”			114
		EXHIBIT “G-1”			123
		EXHIBIT “G-2”			124
		EXHIBIT “H”			125
		EXHIBIT “I”			127
		EXHIBIT “J”			131
		EXHIBIT “K”			134
		EXHIBIT “L”			141
		EXHIBIT “M”			142
		EXHIBIT “N”			143

Execution Version

DEFINITIONS

Term		Page No.
Abandonment Notice			46
Abandonment Work			46
Affiliate			3
Agreement			1
Barrel			4
Bbl			4
BLPD			4
British Thermal Unit			4
Btu			4
Callon			1
Capacity Upgrade			18
Claims			47
Code			29
Confidential Information			4
COP			1
Day			4
Default			43
Delivery Point			4
Devon			1
DGPC			28
Dollar			4
DOPC			27
Downstream Gas Pipeline			34
Downstream Oil Pipeline			35
Effective Date			1
EI Index			25
Entry Point			5
Execution Date			5
FA Capacity			5
Firm Capacity			31
Flow Assurance Capacity			5
Force Majeure			5
Gas			6
Gas Constrained Parties			35
Gas Constrained Party			35
Gas Export Pipeline			6
Gas Unconstrained Parties			35
HPU			12
IAF			25
Infrastructure Access Fee			25
Interruptible Capacity			33
Laws			6
LEB			7
Magnolia Leases			1

Execution Version

Term		Page No.
Magnolia Owners			1
Magnolia TLP			7
Magnolia TLP Base Capacity			7
Magnolia TLP Capacity			7
Magnolia TLP Gas Production			7
Magnolia TLP Oil Production			7
Magnolia TLP Operating Agreement			7
Magnolia TLP Operator			1
Magnolia TLP Production			7
Magnolia TLP Shared Expenses			23
Magnolia TLP Ullage			7
MBO/d			7
MBtu			7
MBW/d			8
MCS			12
MMBtu			8
MMS			8
MMSCF			8
MMSCF/d			8
Mortgaged Property			57
MSCF			8
MSCF/d			8
Non-Conforming Production			36
Non-Performing Party			43
Non-Satellite Production			8
NORM			49
Notice Period			44
OEB			8
OFO’s			40
Oil			8
Oil Constrained Parties			35
Oil Constrained Party			35
Oil Export Pipeline			8
Oil Unconstrained Parties			35
Parties			1
Party			1
Permanent Cessation of Production			9
Person			9
Prevailing Gas Price			9
Prevailing Oil Price			9
Producer			1
Producer’s Work			13
Production Handling Services			9
Prorated Firm Capacity			34
PSOPEX			23
Receiving Facilities			16
Satellite First Production			9
Satellite Gas Production			9

Execution Version

Term		Page No.
Satellite Leases			1
Satellite Oil Production			9
Satellite Operating Problem			36
Satellite Operations Procedures Guide			10
Satellite Operator			1
Satellite Production			10
Satellite Production System			12
Satellite Production System Operations			10
SCF			10
Services			10
Standard Cubic Foot			10
Third Parties			10
Third Party			10
Third Party Production			11
Third Party Production System			11
Transfer of Interest			57
UTB			12

Execution Version

PREAMBLE

     This Production Handling and Operating Services Agreement (“Agreement”) effective as of April 18, 2007, (“Effective Date”) is entered into by and between ConocoPhillips Company (“COP”) and Devon Energy Production Company, L.P. (“Devon”), hereinafter collectively referred to as the “Magnolia Owners”, in their capacity as co-owners of the “Magnolia TLP” (as defined hereinbelow), and Callon Petroleum Operating Company (“Callon”), hereinafter referred to as the “Producer”, in its capacity as owner of the “Satellite Leases” (as defined hereinbelow) and “Satellite Production System” (as defined hereinbelow). Each signatory hereto is sometimes referred to singularly as a “Party” or collectively as the “Parties”.

     WHEREAS, the Producer is the owner of the oil and gas leases bearing Serial Numbers OCS-G 22336, OCS-G 20797, OCS-G 21403, OCS-G 20798 and OCS-G 20799, covering Blocks 738, 782, 785, 826 and 827 respectively, in Garden Banks, Offshore Louisiana, sometimes referred to as the “Satellite Leases”; and

     WHEREAS, the Producer is the owner of the Satellite Production System; and

     WHEREAS, the Satellite Leases and Satellite Production System are operated by Callon, who, in that capacity, is hereinafter also referred to as the “Satellite Operator”; and

     WHEREAS, the Magnolia Owners are the owners of various oil and gas leases, including OCS-G 11573 and OCS-G 11574, covering Blocks 783 and 784 respectively, in Garden Banks, Offshore Louisiana, sometimes referred to as the “Magnolia Leases”; and

     WHEREAS, the Magnolia Owners are the owners of the Magnolia TLP, which is located on Block 783 , Garden Banks, Offshore Louisiana; and

     WHEREAS, the Magnolia Leases and Magnolia TLP are operated by COP, who, in that capacity, is hereinafter referred to as the “Magnolia TLP Operator”; and

     WHEREAS, the Producer desires to attach the Satellite Production System to the Magnolia TLP, place control and monitoring equipment associated with the Satellite Production System on the Magnolia TLP, and have the Magnolia TLP Operator perform certain operations for the Satellite Production System from the Magnolia TLP; and

     WHEREAS, the Producer desires to deliver “Satellite Production” (as defined hereinbelow) to the Magnolia TLP at the “Entry Point” (as defined hereinbelow) via the Satellite Production System; and

Execution Version

     WHEREAS, the Producer desires to have the Magnolia TLP process, handle and redeliver the Satellite Production into offtake pipelines owned and operated by others; and

     WHEREAS, the Producer, as set forth hereinbelow, requests the Magnolia Owners to: (A) grant the right to (i) attach the Satellite Production System to the Magnolia TLP, and (ii) place control and monitoring equipment on the Magnolia TLP and; (B) (i) perform the hereinafter described operation functions for the Satellite Production System, and (ii) receive, process, handle and redeliver Satellite Production; and

     WHEREAS, the Magnolia Owners and Magnolia TLP Operator are willing to accommodate these desires and requests under the terms and conditions set forth below.

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

ARTICLE I — CONTRACT APPLICATION

1.1		Application in General
		This Agreement applies to the receipt, processing, handling and redelivery of Satellite Production delivered to the Entry Point via the Satellite Production System that is processed and handled on the Magnolia TLP between the Entry Point and the “Delivery Point” (as defined hereinbelow), and (ii) certain operations of the Satellite Production System from the Magnolia TLP by the Magnolia Owners through the Magnolia TLP Operator in accordance with the Satellite Operations Procedures Guide. Conversely, this Agreement does not apply to the processing and handling of “Third Party Production” (as defined hereinbelow) on the Magnolia TLP or to the operation of a “Third Party Production System” (as defined hereinbelow) connected to the Satellite Production System and/or the Magnolia TLP.
		The permission to enter on and use the Magnolia TLP as herein provided shall constitute a license to the Producer, and shall not convey or create any interest, leasehold or otherwise, in or title to the Magnolia TLP or the Magnolia Leases.

1.2		Application of Magnolia TLP Operating Agreement
		The provisions of the “Magnolia TLP Operating Agreement” (as defined hereinbelow) will govern the rights, duties and obligations between the Magnolia Owners and the Magnolia TLP Operator associated with the Magnolia TLP and the Magnolia Leases. It is not the intention of the Parties for this Agreement to amend or otherwise modify the provisions of the Magnolia TLP Operating Agreement.

ARTICLE II — DEFINITIONS AND EXHIBITS

Execution Version

2.1		Preface
		As used in this Agreement, the terms “Agreement”, “Effective Date”, “Magnolia Leases”, “Magnolia TLP Operator”, “Magnolia Owners”, “Parties”, “Party”, “Producer”, “Satellite Leases”, and “Satellite Operator” have the meanings set forth hereinabove. Other capitalized terms used throughout this Agreement and not listed in Article 2.2 (Definitions) have the meanings ascribed to them elsewhere in this Agreement.
2.2		Definitions
		The following capitalized terms have the meanings ascribed to them.

	2.2.1		“Abandonment Notice” has the meaning ascribed to it in Article 10.5.3.
	2.2.2		“Abandonment Work” has the meaning ascribed to it in Article 10.5.1(a).
	2.2.3		“Affiliate” means any corporation, limited liability company or partnership (including a limited partnership) or other entity owned or controlled by a Party to this Agreement. The term “Affiliate of a Party” includes any parent corporation, partnership or other entity that directly or indirectly owns or controls fifty percent (50%) or more of the outstanding stock (or other interests) having the right to vote for directors of a Party to this Agreement, and also includes any other corporation, partnership or other entity in which the parent corporation directly or indirectly owns or controls fifty percent (50%) or more of the voting stock (or other interests) in the other corporation.

	•		Ownership or control by a Party is deemed to exist if a Party to this Agreement directly or indirectly owns or controls fifty percent (50%) or more of the outstanding stock of the corporation having the right to vote for directors of the corporation or fifty percent (50%) or more of the interests in the partnership, general partner of a limited partnership, or other entity.
	•		The stock (or interests in a partnership or other entity) owned or controlled by a Party includes all stock (or other interests) directly or indirectly owned or controlled by any other corporation, partnership or other entity owned or controlled by a Party to this Agreement.

	2.2.4		“Barrel” or “Bbl” means forty-two (42) United States standard gallons at standard conditions of fourteen and seventy three hundredths pounds per square inch absolute (14.73 psiA) at sixty degrees Fahrenheit (60°F).
	2.2.5		“BLPD” means one (1) Barrel of liquid per day determined by treating as each one (1) Barrel of Oil or one (1) Barrel of water as a Barrel of liquid, or a combination thereof.
	2.2.6		“BOE” means one (1) equivalent Barrel determined by treating as one (1) BOE each: one (1) Barrel of Oil or five and eight tenths (5.8) MSCF of Gas.
	2.2.7		“British Thermal Unit” or “Btu” means the quantity of heat required to raise the temperature of one (1) pound in weight of pure water one degree Fahrenheit (1°F) from fifty-eight and five-

Execution Version

			tenths degrees (58.5°) Fahrenheit to fifty-nine and five-tenths degrees (59.5°) Fahrenheit at a constant pressure of fourteen and seventy-three hundredths pounds per square inch absolute (14.73 psiA) and determined on a gross, dry basis.
	2.2.8		“Claims” has the meaning ascribed to it in Article 11.1.1 (Definition of Claims)
	2.2.9		“Confidential Information” means (i) the terms and conditions of this Agreement, (ii) the production profiles provided pursuant to this Agreement, (iii) the metering and allocation reports and data (including, without limitation, data associated with production quality), (iv) the well test data, and (v) any other data and information provided by any of the Parties pursuant to the terms of this Agreement.
	2.2.10		“Day” means a period of twenty-four (24) consecutive hours, beginning at 12:00 a.m. central time.
	2.2.11		“Default” has the meaning ascribed to it in Article 10.2 (Default).
	2.2.12		“Delivery Point” means:

	(a)		for Gas, the point shall be at the inlet of the Gas Export Pipeline meter facility on the Magnolia TLP.
	(b)		for Oil, the point shall be at the beginning of the interconnecting pipeline deemed to be the upstream flange face of the flexjoint on the fourteen inch (14”) oil pipeline which is owned on the Effective Date by Shell Pipeline Company LP.

	2.2.13		“Dollar” and “$” means the lawful currency of the United States of America.
	2.2.14		“Entry Point” means (i) for each of the hydrocarbon flowlines, the flange face on the “tie-in spool” at the lowest elevation (deepest water depth) but at a higher elevation than the flexjoint or approved equivalent and (ii) for the umbilicals, the top of the hang off flange on the pull tube at the top of the northwest column.
	2.2.15		“Execution Date” means the date on which the last Party signatory to this Agreement executes this Agreement.
	2.2.16		“Firm Capacity” has the meaning ascribed to it in Article 6.2.1 (Firm Capacity).
	2.2.17		“Flow Assurance Capacity” or “FA Capacity” means the minimal amount of production handling capacity through the Magnolia TLP that is available for Satellite Production, on a flowline-by-flowline basis, as a contingency measure for the minimum flow necessary to prevent serious problems (including, but not limited to, waxing, the formation of hydrates, and slugging) with the wells and flowlines and for lease maintenance purposes in the event “Interruptible Capacity” (as defined hereinbelow) and Firm Capacity are not available, unless it is not possible to provide such Flow Assurance Capacity due to Magnolia TLP operating problems, “downstream” facilities’ or equipment problems, or Force Majeure. For purposes of this Article 2.2.17, “downstream” is after the Delivery

Execution Version

Point in the direction of flow. FA Capacity shall be 1********************* unless otherwise agreed by the Parties in writing.

2.2.18

“Force Majeure” means the following events, but only if such events are not reasonably within the control of the Party claiming suspension, and only if such events materially affect a Party’s ability to perform its obligations hereunder:

	(a)		flood, lightning, storm, hurricane, earthquake, adverse weather conditions, high sea states, loop currents, or other acts of God;
	(b)		a fire, explosion, loss of well control, oil spill, or other environmental catastrophe;
	(c)		war, terrorist actions, actions of the public enemy, blockade, insurrection, civil disturbance, labor dispute, strike, lockout, or other industrial disturbance, compliance with any Laws, governmental action or delay including the inability to secure permits or permit approvals as needed;
	(d)		inability to secure or unavailability of materials or equipment; or
	(e)		any other causes, whether of the kind specifically enumerated above or otherwise.

	2.2.19		“Gas” or “gas” means any mixture of gaseous hydrocarbons, consisting of methane and heavier liquefiable hydrocarbons and inert and noncombustible gases which are extracted from the subsurface of the earth, including any condensate recovered from the Gas Export Pipeline and re-injected in a downstream pipeline.
	2.2.20		“Gas Export Pipeline” means the gas export pipeline, owned on the Effective Date by Enbridge Offshore Facilities, LLC, which extends from the Gas Delivery Point on the Magnolia TLP to the Garden Banks Block 128 “A” Platform.
	2.2.21		“Gas Constrained Party (and Parties)” and “Oil Constrained Party (and Parties)” have the meanings ascribed to them in Article 6.3.2 (Gas Export Pipeline Constraints) and Article 6.3.3 (Oil Export Pipeline Constraints).
	2.2.22		“Gas Unconstrained Parties” and “Oil Unconstrained Parties” have the meanings ascribed to it in Articles 6.3.2 (Gas Export Pipeline Constraints) and 6.3.3 (Oil Export Pipeline Constraints).

Execution Version

	2.2.23		“Infrastructure Access Fee” or “IAF” has the meaning ascribed to it in Article 5.3 (Infrastructure Access Fees).
	2.2.24		“Interruptible Capacity” has the meaning ascribed to it in Article 6.2.2 (Interruptible Capacity).
	2.2.25		“Laws” means any laws, rules and regulations of the United States of America or any duly constituted instrumentality thereof and all other governmental bodies, agencies and other authorities having jurisdiction over or affecting the provisions contained in or the transactions contemplated by this Agreement or the Parties or their operations, whether such Laws now exist or are hereafter amended, enacted, promulgated or issued.
	2.2.26		“LEB” means one (1) liquid equivalent Barrel determined by treating as one (1) LEB each: one (1) Barrel of Oil, one (1) Barrel of water, or five and eight tenths (5.8) MSCF of Gas.
	2.2.27		“Magnolia TLP” means the tension leg platform (including the mooring system, the production risers not included in the Satellite Production System, and wells), together with all equipment and facilities between the Entry Point and the Delivery Point (including the Receiving Facilities to be installed), located on Block 783, Garden Banks, Offshore Louisiana, but excluding the Satellite Production System components owned by the Producer or Third Parties and located on the Magnolia TLP.
	2.2.28		“Magnolia TLP Base Capacity” has the meaning ascribed to it in Exhibit “A” (Magnolia TLP Base Capacity) and Article 6.1(Magnolia TLP Base Capacity).
	2.2.29		“Magnolia TLP Capacity” means the actual production handling capacity at a given time for each of Oil, Gas, and water of the Magnolia TLP, as reasonably determined by the Magnolia TLP Operator.
	2.2.30		“Magnolia TLP Gas Production” means Gas attributable to Magnolia TLP Production.
	2.2.31		“Magnolia TLP Oil Production” means Oil attributable to Magnolia TLP Production.
	2.2.32		“Magnolia TLP Operating Agreement” means that certain Operating Agreement dated effective January 1, 2000, by and between the Magnolia Owners.
	2.2.33		“Magnolia TLP Production” means Oil, Gas, water, and associated substances produced from the Magnolia Leases and processed and handled on the Magnolia TLP.

Execution Version

	2.2.34		“Magnolia TLP Ullage” means (for each of Oil, Gas, and water) for a calendar month the quantity of Magnolia TLP Capacity for each of Oil, Gas, and water, as may be amended from time to time, which is in excess of the quantity of Magnolia TLP Capacity required for handling Magnolia TLP Production, Satellite Production (up to Firm Capacity) and other Third Party Production for which the Magnolia Owners have granted firm production handling capacity on the Magnolia TLP.
	2.2.35		“MBO/d” means one thousand (1,000) Barrels of Oil per Day.
	2.2.36		“MBtu” means one thousand (1,000) Btu’s.
	2.2.37		“MBW/d” means one thousand (1,000) Barrels of water per Day.
	2.2.38		“MMBtu” means one million (1,000,000) Btu’s.
	2.2.39		“MMS” means the United States Department of the Interior, Minerals Management Service, or any successor thereof.
	2.2.40		“MMSCF” means one million (1,000,000) “Standard Cubic Feet” (as defined hereinbelow).
	2.2.41		“MMSCF/d” means one million (1,000,000) Standard Cubic Feet per Day.
	2.2.42		“Mortgaged Property” has the meaning ascribed to it in Article 13.2.1(b).
	2.2.43		“MSCF” means one thousand (1,000) Standard Cubic Feet.
	2.2.44		“MSCF/d” means one thousand (1,000) Standard Cubic Feet per Day.
	2.2.45		“Non-Conforming Production” has the meaning ascribed to it in Article 6.4.2 (Non-Conforming Production).
	2.2.46		“Non-Performing Party” has the meaning ascribed to it in Article 10.2.1.
	2.2.47		“Non-Satellite Production” means Oil, Gas, water, and all associated substances produced from sources other than the Satellite Leases and processed and handled on the Magnolia TLP.
	2.2.48		“Notice Period” has the meaning ascribed to it in Article 10.2.1.
	2.2.49		“Oil” or “oil” means any mixture of hydrocarbons, regardless of gravity, originally and naturally occurring as liquids and includes all condensate, distillate, and other liquid hydrocarbons recovered by use of conventional separators on the Magnolia TLP.

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	2.2.50		“Oil Export Pipeline” means the oil export pipeline, owned on the Effective Date by Shell Pipeline Company LP, which extends from the Oil Delivery Point on the Magnolia TLP to the Garden Banks Block 128 “A” Platform.
	2.2.51		“Permanent Cessation of Production” means the event which occurs when production has not been restored from the last producing well on the Satellite Leases in accordance with 30 CFR Part 250 of the federal regulations concerning suspensions of production or other operations or such other regulations promulgated by the relevant governing authority.
	2.2.52		“Person” means any individual or entity, including, without limitation, any corporation, limited liability company, joint venture, joint stock company, general or limited partnership, trust, agency, association, organization, governmental authority, or other entity.
	2.2.53		“Prevailing Gas Price” means first of the month Inside FERC Gas Market Report publication for one hundred percent (100%) of ANR Southern Louisiana (“ANR SLA”) price index, for the applicable production month, reduced by the sum of (i) the Magnolia TLP to the Garden Banks Block 128 “A” Platform transportation fee, and (ii) the Garden Banks Gas Pipeline FERC IT-1 Commodity Tariff, or such other published monthly index price as unanimously agreed by the Parties.
	2.2.54		“Prevailing Oil Price” means the average of the high price and the low price on a day for Eugene Island as reported in the Platts Oilgram, or such other published index price as unanimously agreed by the Parties.
	2.2.55		“Producer’s Work” has the meaning ascribed to it in Article 3.1.3 (Scheduling Producer’s Work).
	2.2.56		“Production Handling Services” means those services as set forth in Exhibit “B” (Magnolia TLP Services) attached to this Agreement.
	2.2.57		“Prorated Firm Capacity” has the meaning ascribed to it in Article 6.3.1(a).
	2.2.58		“Receiving Facilities” has the meaning ascribed to it in Article 3.2 (Receiving Facilities).
	2.2.59		“Satellite First Production” means the date of the initial introduction of Satellite Production at the Entry Point.
	2.2.60		“Satellite Gas Production” means Gas attributable to Satellite Production.
	2.2.61		“Satellite Oil Production” means Oil attributable to Satellite Production.
	2.2.62		“Satellite Operating Problem” has the meaning ascribed to it in Article 6.4.2 (Non-Conforming Satellite Production).

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	2.2.63		“Satellite Operations Procedures Guide” means those certain operations procedures to be performed from the Magnolia TLP by the Magnolia TLP Operator for the Satellite Production System as described in Exhibit “B” (Magnolia TLP Services), to be developed jointly by the Magnolia TLP Operator and the Satellite Operator, as may be amended from time to time by the Magnolia TLP Operator and the Satellite Operator.
	2.2.64		“Satellite Production” means Oil, Gas, water, and associated substances produced from the Satellite Leases limited to the stratigraphic equivalent of those depths from the surface of the earth down to 150 feet below the 5800 millisecond sand, the base of which is at a measured depth of 20,290’ on the Sperry Sun EWR/DGR (Electromagnetic Wave Resistivity/Dual Gamma Ray) log for the Vastar OCS-G-20797 #2 ST 1 well, and which is entirely owned by Producer and which is produced from Satellite Leases and wells entirely owned by Producer.
	2.2.65		“Satellite Production System” has the meaning ascribed to it in Article 3.1.1 (Design and Installation of Satellite Production System).
	2.2.66		“Satellite Production System Operations” means certain operations of the Satellite Production System from the Magnolia TLP by the Magnolia Owners through the Magnolia TLP Operator in accordance with the Satellite Operations Procedures Guide as set forth in Exhibit “B” (Magnolia TLP Services) to this Agreement.
	2.2.67		“Services” means the Production Handling Services and the Satellite Production System Operations, as defined in Articles 2.2.58 and 2.2.68, respectively.
	2.2.68		“Standard Cubic Foot” or “SCF” means that quantity of Gas that occupies one (1) cubic foot of space when held at a base temperature of sixty degrees (60°) Fahrenheit and a pressure of fourteen and seventy-three hundredths (14.73) pounds per square inch absolute (psiA), or other standards as may be required by the MMS.
	2.2.69		“Third Party” or “Third Parties” means any Person other than the Magnolia Owners, the Producer, and any Party hereto. A Third Party also includes any proposed transferee of the Producer not meeting the requirements for transfers under Article 13.2.1.
	2.2.70		“Third Party Production” means Oil, Gas, water, and all associated substances produced from sources other than the Magnolia Leases or the Satellite Leases, and processed and handled on the Magnolia TLP or owned by Third Parties.
	2.2.71		“Third Party Production System” means an offshore structure (i.e., where multiple wells or a single well could be utilized), subsea wells or a template and the components thereof (including flowlines and control systems) which are attached to the seafloor for use in obtaining Third Party Production from a well(s) not drilled in the Magnolia Leases or the Satellite Leases and being a system having similar components to that of the Satellite Production System and owned

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			by any Person other than the Magnolia Owners, the Producer, and/or any Party hereto.
	2.2.72		“Transfer of Interest” has the meaning ascribed to it in Article 13.2.1 (Assignment by Producer).

2.3

Exhibits

All references in this Agreement to “Exhibits”, without further qualification means the Exhibits listed below and attached to this Agreement. Each Exhibit listed below is made a part of this Agreement, and is deemed incorporated into the body of this Agreement by reference, as completely as if the full text of each Exhibit were contained within the text of this Agreement.

			Exhibit “A”: Magnolia TLP Base Capacity
			Exhibit “B”: Magnolia TLP Services
			Exhibit “C”: Accounting Procedures
			Exhibit “C-1”: Garden Banks 783 Unit Accounting Procedures
			Exhibit “D”: Magnolia TLP Facilities Schematic (two drawings)
			Exhibit “E”: Operating & Maintenance Expenses Matrix
			Exhibit “F”: Metering and Allocation
			Exhibit “G”: Gas Balancing Procedures
			Exhibit “G-1”: General Flow Diagram
			Exhibit “G-2”: Cashout Reconciliation
			Exhibit “H”: Satellite Production Fluid Limits/Operating Parameters
			Exhibit “I”: Project Team Responsibility Matrix
			Exhibit “J”: Insurance Provisions
			Exhibit “K”: Memorandum of Production Handling Agreement
			Exhibit “L”: Certification of Non-Segregated Facilities
			Exhibit “M”: Well Unloading Procedures
			Exhibit “N”: Platform Boarding Agreement

If the provisions of any of the Exhibits listed above conflict with any provisions of the body of this Agreement, the body of this Agreement will prevail. In the event of a conflict between Exhibit “C-1” (Garden Banks 783 Unit Accounting Procedures) and Exhibit “E” (Operating & Maintenance Expenses Matrix), the provisions of Exhibit “C-1” (Garden Banks 783 Unit Accounting Procedures) will prevail.

ARTICLE III — INFRASTRUCTURE AND FACILITIES

3.1

Satellite Production System

3.1.1

Design and Installation of Satellite Production System. The Producer at its sole cost, risk and expense will own, design, procure, fabricate, transport, and install as stipulated in (a) below, or cause to be installed by the Magnolia TLP Operator as stipulated in (b) below, the following components and any modifications thereto (the “Satellite Production System”):

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	(a)		All facilities and equipment upstream of the Entry Point including, but not limited to, the wells, well jumpers, subsea wellheads, choke tie-in bases, subsea manifolds, umbilicals and terminations, flowlines, two flowline risers, and wellhead master and wing valves associated with producing and gathering Satellite Production. For purposes of this Article III (Infrastructure and Facilities), “upstream” is between the Entry Point and the Satellite Leases; and
	(b)		The Hydraulic Power Unit (“HPU”), the Umbilical Termination Box (“UTB”), and the Master Control Station (“MCS”) and any facilities and equipment necessary to connect same to the components identified in 3.1.1 (a) above with the existing equipment and facilities on the Magnolia TLP. All of such facilities and equipment listed in this Article 3.1.1 (b) will be installed on the Magnolia TLP at the location(s) depicted on Exhibit “D” (Magnolia TLP Facilities Schematic). Such facilities and equipment will be designed and fabricated by the Satellite Operator, but will be installed and interconnected with other facilities on the Magnolia TLP, as well as commissioned, by the Magnolia TLP Operator.
	(c)		The weight of the risers shall not exceed 275 kips each in live load, and the umbilical shall not exceed 100 kips operating weight.

3.1.2

Costs of Satellite Production System. The Magnolia TLP Operator shall supply the Producer with a cost estimate describing in reasonable detail the scope of work to be conducted with respect to the installation, hookup, interconnection, startup, and commissioning of those Satellite Production System components described in Article 3.1.1(b) above which are to be installed on the Magnolia TLP and the costs associated therewith (including Magnolia TLP Operator’s overhead provided for in Exhibit “C” (Accounting Procedures) and shall obtain the prior written authorization of the Producer to conduct such scope of work; provided, however, nothing herein shall alter or diminish the liability and indemnity obligations of the Parties herein. If it appears the actual cost associated with the scope of work will exceed the cost estimate by more than ten percent (10%), the Magnolia TLP Operator will notify the Satellite Operator. The Producer will reimburse the Magnolia TLP Operator for those costs incurred in accordance with the terms of this Article 3.1.2 (Costs of Satellite Production System). The Magnolia TLP Operator will deliver to the Satellite Operator an invoice, on behalf of the Producer, for actual costs (including Magnolia TLP Operator’s overhead) incurred by the Magnolia TLP Operator in or for the installation, hookup, interconnection, startup, and/or commissioning of those Satellite Production System components described in Article 3.1.1(b) above which are installed on the Magnolia TLP. The Satellite Operator will submit payment to Magnolia TLP Operator for such costs invoiced by Magnolia TLP Operator. The determination and reimbursement by Satellite Operator of such costs incurred by the Magnolia TLP Operator shall be in accordance with Exhibit “C” (Accounting Procedures) to this Agreement.

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	3.1.3		Scheduling Producer’s Work
			The timing of all operations involving the tie-in and connection of the Satellite Production System to the Magnolia TLP will be performed at the Magnolia TLP Operator’s sole discretion to minimize interference with Magnolia TLP operations and for safety coordination. The Magnolia TLP Operator and the Satellite Operator will use reasonable efforts to tie-in the Satellite Production System and the Receiving Facilities in a manner and on a schedule which minimizes Magnolia TLP downtime. The Satellite Operator will give the Magnolia TLP Operator at least fifteen (15) Days prior written notice of the anticipated mobilization for the tie-in and connection of the Satellite Production System, and for any other installation, maintenance, repair, replacement, removal or abandonment related to the Satellite Production System or the Receiving Facilities requiring access to the Magnolia TLP by the Satellite Operator or its contractors (“Producer’s Work”). The Satellite Operator and the Magnolia TLP Operator shall mutually agree on the schedule for the tie-in and connection of the Satellite Production System to the Magnolia TLP and other of Producer’s Work. The Magnolia TLP Operator shall notify the Satellite Operator in a timely manner of any required changes in the timing of Producer’s Work which may impact the overall schedule of the tie-in and connection of the Satellite Production System. Once construction and/or installation of the Satellite Production System and/or the Receiving Facilities is commenced, the Satellite Operator shall provide the Magnolia TLP Operator with installation updates and its latest projected Magnolia TLP tie-in schedule on a frequency of at least once every thirty (30) Days. The Magnolia TLP Operator reserves the right to schedule Producer’s Work in accordance with its Magnolia TLP activities so as to minimize the circumstances whereby Producer’s Work would require Magnolia TLP Operator to shut-in or curtail any of the Magnolia TLP Production. In order to accommodate Producer’s Work the Magnolia TLP Operator shall not be required to shut in any wells on the Magnolia Leases for more than forty-eight (48) consecutive hours without prior agreement of the Magnolia Owners. If such well(s) is shut-in for a period of time exceeding forty-eight (48) consecutive hours, the Magnolia TLP Operator may, at its election, cause such well(s) to flow for at least eight (8) hours prior to any subsequent shut-in under this provision. The Magnolia TLP Operator shall provide advance notice of any planned Magnolia TLP shutdowns, along with reasonable notice of any unplanned Magnolia TLP shutdowns, to the Satellite Operator.

	3.1.4		Magnolia TLP Criteria
			The Magnolia TLP Operator will promptly provide the Satellite Operator with all design specifications and criteria that the Satellite Operator may reasonably require or request in connection with the design, procurement, fabrication, transportation, installation, hook-up, interconnection, startup and/or commissioning of the Satellite Production System.

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3.1.5

Riser and Umbilical Handover

The Satellite Operator will conduct or cause to be conducted the operations required to tie-in the Satellite Production System to the Magnolia TLP. Subject to Article 5.7.1 (Initial Tie-In) and the issuance of Builder’s Risk Insurance as provided for in Exhibit “J” (Insurance Provisions) and the execution of Exhibit “N” (Platform Boarding Agreement) by Satellite Operator’s contractors boarding the Magnolia TLP, the Satellite Operator will mobilize on the Magnolia TLP and receive the riser and umbilical loads in a coordinated handover. Exhibit “I” (Project Team Responsibility Matrix) provides the responsibilities of the respective Parties in this handover, but shall not alter or amend any cost or risk bearing provisions of this Agreement.

3.1.6

Magnolia TLP Access & Boarding for Producer’s Work

(a)

After the initial written notice of anticipated mobilization provided in Article 3.1.3 (Scheduling Producer’s Work), the Satellite Operator will give the Magnolia TLP Operator at least forty-eight (48) hours prior written notice of actual commencement of Producer’s Work, and obtain prior permission for, any intent to board the Magnolia TLP to conduct operations as contemplated herein except as may be otherwise provided for below under Section 3.1.6(c). This notice must include a detailed description of the operation(s) to be conducted, a summary of anticipated work procedures, a summary of the tools and equipment that are anticipated to be used when performing the operation(s), the anticipated work schedule, as well as a brief description of the number of Satellite Operator employees, or its contractors’ or subcontractors’ employees or agents requesting boarding permission and the length of stay. Furthermore, this notice must conform to the Magnolia TLP Operator’s standard requirements for a “work permit”, as provided in Exhibit “N” (Platform Boarding Agreement), amended from time to time (to include direct indemnities from Producer’s contractors). Upon receipt of such prior notice, and if the Magnolia TLP Operator determines, in its sole discretion, that there will be minimal conflict or interference with its own operations, the Magnolia TLP Operator will provide the Satellite Operator, at the Producer’s sole cost and expense, rights of ingress and egress to certain space on the Magnolia TLP for activities in connection with the rights and obligations granted to the Producer under this Agreement. The Satellite Operator’s right of ingress and egress herein provided includes the right for it and its contractors, agents and representatives, upon prior notification to Magnolia TLP Operator as herein provided, to land helicopters on the Magnolia TLP, to moor vessels to the Magnolia TLP mooring facilities, and to inspect the Magnolia TLP and its facilities, and the Satellite Production Facilities, all at the sole cost, risk, expense, and liability of the Producer and subject always to the above scheduling requirements. Such ingress and egress, and all activities conducted hereunder will be subject to the strict observance of all of the Magnolia TLP Operator’s safety policies and procedures applicable to the Magnolia TLP. Magnolia TLP Operator shall have the right to have a representative present to witness such Producer’s Work and activities. In addition,

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			neither the Satellite Operator, nor its contractor or subcontractor employees or agents, have the right to observe any drilling, workover or other operations conducted by the Magnolia TLP Operator or any Third Parties on the Magnolia TLP.
	(b)		The Magnolia Owners’ obligation to accommodate the Producer, as set forth herein, does not include any license, easement or right-of-way necessary for the installation of any subsea pipeline, which will be the sole responsibility of the Producer.
	(c)		All other rights of ingress and egress by Satellite Operator and its representatives on the Magnolia TLP including during times of an emergency shall be done substantially in accordance with the terms and conditions set forth in Exhibit “N” (Platform Boarding Agreement); provided, however, Satellite Operator and Producer and its and their officers, directors and actual employees shall not be required to execute Exhibit “N” (Platform Boarding Agreement) in order to board the Magnolia TLP, but all of Satellite Operator’s and Producer’s agents, representatives, contract employees, and contractors shall be required to execute Exhibit “N” (Platform Boarding Agreement) substantially in its form (but subject to negotiation of such terms and conditions as Magnolia TLP Operator may deem appropriate) in order to board the Magnolia TLP. Whether or not Exhibit “N” is executed by any Third Party, or the form of Exhibit “N” (Platform Boarding Agreement) actually executed by any Third Party, the duties, liabilities, indemnification obligations and benefits provided in Article XI (Liabilities and Indemnification) shall not be affected, altered, increased or diminished, nor shall the rights, duties and obligation as between the Magnolia Owners under the Magnolia TLP Operating Agreement be affected, altered, increased or diminished.

3.1.7

Conduct of Producer’s Work

	(a)		If Magnolia TLP Operator should at any time in its reasonable opinion determine that any Producer’s Work or other work and activities are not being performed in accordance herewith, are being performed in an unduly dangerous or unworkmanlike manner, or are not in accordance with Magnolia TLP Operator’s safety practices, procedures, and requirements, Magnolia TLP Operator will so inform the Producer and the Producer will cease such Producer’s Work, or other work or activities and will resume the same only when an agreement between the Satellite Operator and Magnolia TLP Operator is reached as to the manner and method in which such work should be performed. Magnolia TLP Operator will not arbitrarily, or without sufficient cause, delay the Producer’s Work under this provision.
	(b)		The Satellite Operator and Producer agrees at all times to conduct its activities and operations hereunder in accordance with all Laws of the Occupational Safety and Health Administration, U.S. Coast Guard, Corps

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of Engineers, MMS, Federal Communications Commission, and Environmental Protection Agency, as well as all other governmental agencies having jurisdiction over such activities. The Producer shall bear the expense of all necessary permits.

3.2

Receiving Facility

The Magnolia TLP Operator, at the sole cost, risk and expense of the Producer, is responsible for the design, procurement, fabrication, transportation, installation, hook-up, interconnection, start-up and commissioning of the facilities and equipment that are to be installed on the Magnolia TLP for the purpose of receiving Satellite Production at the Magnolia TLP and integrating said Satellite Production into the existing production handling systems (“Receiving Facilities”). The weight of the Receiving Facilities shall not exceed 250 kips operating weight and 350 kips weight during construction. The Magnolia TLP Operator shall supply the Satellite Operator with a cost estimate describing in reasonable detail the scope of work to be conducted with respect to the design, procurement, fabrication, transportation, installation, hook-up, interconnection, start-up and commissioning of the Receiving Facilities and the costs associated therewith (including Magnolia TLP Operator’s overhead provided for in Exhibit “C” (Accounting Procedures) and shall obtain the prior written authorization of the Producer to conduct such scope of work; provided, however, nothing herein shall alter or diminish the liability and indemnity obligations of the Parties herein. If it appears the actual cost associated with the scope of work will exceed the cost estimate by more than ten percent (10%), the Magnolia TLP Operator will notify the Satellite Operator. The Producer will reimburse the Magnolia TLP Operator for those costs incurred in accordance with the terms of this Article 3.2 (Receiving Facility). The Magnolia TLP Operator will deliver an invoice to the Satellite Operator, on behalf of the Producer, for actual costs (including Magnolia TLP Operator’s overhead) incurred by the Magnolia TLP Operator in or for the design, procurement, fabrication, transportation, installation, hook-up, interconnection, start-up and commissioning of the Receiving Facilities. The Satellite Operator will submit payment to Magnolia TLP Operator for such costs invoiced by Magnolia TLP Operator. The determination and reimbursement by Satellite Operator of such costs incurred by the Magnolia TLP Operator shall be in accordance with Exhibit “C” (Accounting Procedures) to this Agreement.

3.2.1

The Receiving Facilities include, but are not limited to:

	(a)		inlet heat exchanger;
	(b)		boarding valves;
	(c)		flowline pig launchers/receivers;
	(d)		chemical storage and injection pump skid (subsea chemical pumps);
	(e)		hot oiling/pigging pump and associated equipment, if added;
	(f)		chemical injection pumps for the Receiving Facilities (production chemical pumps), if needed; and
	(g)		Oil, Gas and water metering and fluid sampling equipment.

3.2.2

The Producer’s reimbursement obligation for the design, fabrication, and procurement of the Receiving Facilities will not apply for any equipment or

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			facilities that are designed, fabricated or procured by the Satellite Operator or Producer and delivered to the Magnolia TLP Operator at a mutually agreed location for installation, hookup, and/or commissioning on the Magnolia TLP. Reimbursement of costs incurred by the Magnolia TLP Operator will be in accordance with Exhibit “C” (Accounting Procedures) to this Agreement.
	3.2.3		No costs will be charged to the Magnolia TLP Operating Agreement joint account or otherwise incurred by the Magnolia Owners in connection with the Satellite Production System, other than those costs incurred by the Magnolia TLP Operator in connection with the Receiving Facilities and as provided in Section 3.4.1 (Costs of Tie-in Option).
	3.2.4		The Magnolia Owners will own the Receiving Facilities (including any modifications thereto), whether such facilities are procured and/or funded by the Magnolia TLP Operator, the Magnolia Owners, or the Producer.
	3.2.5		For reference purposes, an equipment layout and process flow schematic depicting the Magnolia TLP facilities and the interface between the Satellite Production System, the Receiving Facilities and the Magnolia TLP facilities is included as Exhibit “D” (Magnolia TLP Facilities Schematic).
	3.2.6		Except as expressly provided herein, (i) Producer and Magnolia Owners shall each be responsible for all capital expenditures with respect to their own properties, and, as between them, there shall be no recovery of such capital expenditures from the other; and (ii) there shall be no duty hereunder to perform work or expend funds for the benefit of the other.

3.3

Capacity Upgrades

Producer has the right to make a written proposal to the Magnolia Owners to request additional Firm Capacity by wholly or partially funding one or more expansions of Magnolia TLP Oil, Gas, and/or water production handling capacity (“Capacity Upgrade”). The proposal by Producer shall include the scope of the work to be performed and an estimate of the costs. The Magnolia Owners shall review the proposal and reply within sixty (60) days of receipt. Notwithstanding the foregoing, the Magnolia Owners are not obligated to perform or allow the Capacity Upgrade.

3.4

Magnolia Owners’ Tie-In Option

The Magnolia Owners may utilize the Satellite Production System for a single tie-in to be located on Garden Banks Block 783 for production from subsea wells drilled on the Magnolia Leases. The Producer grants the right to tie-in and will provide services from the tie-in point to the Entry Point for such subsea wells. Satellite Operator will provide notice to Magnolia Owners no sooner than December 31, 2007, and then Magnolia Owners may elect within thirty (30) days of such notice whether to pay for the costs of the tie-in as per Section 3.4.1 (if tie-in occurs or not), provided that the right to tie in, is subject to: (i) the introduction of such production into the Satellite Production System and any modifications to the Satellite Production System necessary to accommodate such

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production does not adversely affect the Producer’s Satellite Production; and (ii) any changes in the Oil and Gas measurement and allocation procedures to accommodate measurement and allocation of such production does not adversely affect the measurement and allocation of Satellite Production and are consistent with the principles and standards contained in Exhibit “F” (Metering and Allocation). Upon Magnolia Owners’ election to pay said costs, Producer will design, procure, fabricate, transport and install at a mutually agreeable location to all Parties the required tie-in equipment at the expense of Magnolia Owners, and thereafter will hook-up, interconnect, commission, start-up and operate the same, all as provided in Sections 3.4.1 and 3.4.2.

3.4.1

Costs of Tie-in Option. The Magnolia Owners shall be solely responsible for, and bear the costs of the design, procurement, fabrication, transportation, installation, hook-up, interconnection, commissioning and start-up of such single tie-in as follows:

	(a)		One in-line sled to establish the tie-in point of the southernmost flowline, located within Block 783, Garden Banks, Offshore Louisiana, for the handling of subsea Magnolia TLP Production, which will be designed, procured, fabricated, transported, installed, hooked-up, interconnected, commissioned and started-up by the Producer; however, the Magnolia Owners will reimburse the Satellite Operator for all such costs within thirty (30) days after receipt of invoice from Satellite Operator; and
	(b)		One tie-in point (in-line subsea umbilical termination assembly) in the umbilical, located within Block 783, Garden Banks, Offshore Louisiana, for the handling of subsea Magnolia TLP Production, which will be designed, procured, fabricated, transported, installed, hooked-up, interconnected, commissioned and started-up by the Satellite Operator; however, the Magnolia Owners will reimburse the Satellite Operator for all such costs within thirty (30) days after receipt of invoice from Satellite Operator.
	(c)		The foregoing installation costs will be reasonably prorated on the basis of the costs of all the sleds and umbilicals installed at the same time.
	(d)		The determination and reimbursement by Magnolia Owners of any reimbursable costs incurred by Satellite Operator and Producer hereunder shall be in accordance with Exhibit “C” (Accounting Procedures).
	(e)		If the foregoing costs are invoiced 100% to the Magnolia TLP Operator and paid 100% by Magnolia TLP Operator, the same may be charged to the Magnolia TLP Operating Agreement joint account.

3.4.2

Operation, Maintenance and Abandonment of Tie-in. The tie-in and services from the tie-in point to the Entry Point for such subsea wells will be made available by Producer and operated by Satellite Operator for the benefit of

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Magnolia Owners for the following gathering fee: ************2. This gathering fee shall apply from the first of the month in which commissioning of the tie-in occurs until the end of the month that such portion of the Satellite Production System ceases to be utilized by Magnolia Owners. This gathering fee includes all operation, maintenance, upgrades, capital investment and abandonment of such portion of the Satellite Production System, all of which shall be paid by (and be at the sole cost, risk and expense of) Producer without any reimbursement by Magnolia Owners, and no charges shall be made to Magnolia Owners on account of their use of that portion of the Satellite Production System other than the foregoing gathering fee.

ARTICLE IV — SERVICES

4.1

General

Pursuant to the terms of this Agreement, the Magnolia Owners agree to provide, via the Magnolia TLP Operator, certain Services with respect to the Satellite Production System and the Satellite Production delivered to the Magnolia TLP. The Magnolia Owners, the Magnolia TLP Operator, and anyone employed by them, will not be deemed for any purpose to be the employees, agents, servants, or representatives of the Producer or the Satellite Operator in the performance of any Services or part thereof in any manner dealt with hereunder. Except as otherwise provided herein, the Producer and the Satellite Operator will not have direction or control of the Magnolia Owners or the Magnolia TLP Operator, its or their employees and agents, or its or their contractors, in the Magnolia Owners’ or the Magnolia TLP Operator’s performance under this Agreement. It is not the intent or purpose of this Agreement to change, nor should it be construed as changing, the rights and duties of the Producer or the Satellite Operator to conduct operations associated with the Satellite Leases or the Satellite Production System.

	4.1.1		Production Handling Services
			The Magnolia Owners will provide via the Magnolia TLP Operator the Production Handling Services for Satellite Production in accordance with Exhibit “B” (Magnolia TLP Services). With respect to the Production Handling Services, the Magnolia Owners will handle and be responsible for production under this Agreement after such production passes through the Entry Point and until production enters the Delivery Point(s). In providing the Production Handling Services, the Magnolia TLP Operator shall never be required under this Agreement to conduct an operation that it believes would be unsafe or would endanger persons, property or the environment.

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	4.1.2		Satellite Production System Operations
			The Magnolia Owners will provide via the Magnolia TLP Operator the operations described on Exhibit “B” (Magnolia TLP Services) for the Satellite Production System in accordance with the Satellite Operations Procedures Guide, which are the limit of the Satellite Production System Operations provided hereunder. Such operations will be performed only to the extent that such functions can be performed from or on the Magnolia TLP by the Magnolia TLP Operator’s regular operating personnel with the standard equipment and/or tools typically available on the Magnolia TLP in accordance with the Magnolia TLP Operator’s day-to-day operating procedures and guidelines. The Magnolia Owners and the Magnolia TLP Operator shall not be liable to the Producer for losses sustained or liabilities incurred in conducting the specified operations for the Satellite Production System, except as may result from their gross negligence or willful misconduct. In operating the Satellite Production System, the Magnolia TLP Operator shall never be required under this Agreement to conduct an operation that it believes would be unsafe or would endanger persons, property or the environment.

4.2

Well Unloading

The Producer shall be entitled to the unloading of completion fluids (e.g. chemicals, fracture fluids, acids, and/or water, etc.) from Satellite Lease wells in accordance with Exhibit “M” (Well Unloading Procedures).

4.3

Producer’s Responsibilities

The Producer will retain responsibility for all Satellite Production System operations that are not included in the Services to be provided under this Agreement or not performed from or on the Magnolia TLP including, but not limited to, downhole well operations.

4.4

Right of Use of Deck Space

The Magnolia Owners hereby grant the Producer a limited right to use only so much of the surface and space for two Satellite Production System risers and one instrument umbilical pull tube on the Magnolia TLP as is essential, in the Magnolia TLP Operator’s sole discretion, for the placement, operation, maintenance and removal of the Satellite Production System components. The Satellite Production System components will be placed on the Magnolia TLP at a location acceptable to the Magnolia TLP Operator. Two flexjoint baskets and an umbilical pull tube (and the associated weight and buoyancy) are specifically allocated to the Producer. The Magnolia Owners will provide deck space, and associated weight and buoyancy (although there is no specific allocation of space) for components of the Satellite Production System to be located on the Magnolia TLP, the Receiving Facilities and other associated equipment. The size, weight and location of such equipment will be approved by the Magnolia TLP Operator. All use of the surface space shall be subject to platform weight and buoyancy limitations to be provided by the Magnolia TLP Operator.

Execution Version

4.5

Energy Sources

The Magnolia Owners will provide energy sources (electricity and air) for the Satellite Production System components located on the Magnolia TLP, as may be available from time to time. Such electricity to be provided from the Magnolia Owners’ existing electrical power source (i.e. generator) and such air supply to be provided from the Magnolia Owners’ existing air supply source (i.e. compressor).

4.6

Communication Equipment

The Magnolia Owners will provide access to the existing communication infrastructure (i.e. telephones) on the Magnolia TLP, subject to the Magnolia TLP Operator’s guidelines, for use by the Satellite Operator associated with conducting its operations on the Magnolia TLP contemplated herein. The Producer will provide, at its sole cost and expense and subject to any mutually acceptable agreement(s) that may be required, any necessary communication upgrades and required extra bandwidth for data transmission, as well as other forms of communication (e.g. microwave transmissions).

4.7 Emergency Response

	4.7.1		In the event of an imminent or actual emergency, including, but not limited to, a hydrocarbon leak, explosion, fire, storm or any other situation which threatens life, the environment, or property, the Magnolia TLP Operator, with no admission or presumption of liability, may promptly take such action as is deemed appropriate by the Magnolia TLP Operator under the circumstances to remedy or alleviate such emergency. Such action includes, but is not limited to, discontinuing the Services, shutting-in the Satellite Leases’ subsea wells and the Satellite Production System, and initiating emergency response operations. The Magnolia TLP Operator will promptly notify the Satellite Operator of such emergency by telephone, followed by written notification of the emergency and remedial actions taken.
	4.7.2		Subject to Article XI (Liabilities and Indemnification), all emergency response costs incurred by the Magnolia TLP Operator which are attributable to the Satellite Production System will be reimbursed to the Magnolia TLP Operator by the Producer.
	4.7.3		The Satellite Operator is responsible for making any reports required by governmental agencies for emergencies attributable to the Satellite Production System. The Magnolia TLP Operator is responsible for making any reports required by governmental agencies for emergencies attributable to the Magnolia TLP. The Parties will cooperate to the extent necessary in preparing such reports. All Parties will use reasonable efforts to provide the other Parties with a copy of any reports filed with governmental agencies in connection with emergency response operations.

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ARTICLE V — FEES & EXPENSES/ACCOUNTING PROCEDURES

5.1

Operating and Maintenance Expenses.

			5.1.1    Monthly Charges.
			The Producer is responsible for and will reimburse the Magnolia Owners on a monthly basis for the Producer’s pro-rata share of certain Magnolia TLP operating and maintenance expenses which are identified as “Magnolia TLP Shared Expenses” in this Agreement on Exhibit “E” (Operating & Maintenance Expenses Matrix).
			The Producer’s pro-rata share of expenses (“PSOPEX”) will be determined for each calendar month as follows: 3

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For purposes of determining Sprod and STHprod, the quantity of Oil produced means the sum of: (i) the quantity of Oil delivered to the Delivery Point, and (ii) the quantity of fluids used for pigging and/or hot oiling. The quantity of Gas produced means the quantity of Gas delivered to the Delivery Point. The quantity of water and associated substances produced means the quantity of water and associated substances attributed to Satellite Production and Non- Satellite Production, respectively, pursuant to Exhibit “F” (Metering and Allocation).

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	5.1.1.1		If temporary mechanical or operational problems (with a duration not to exceed six [6] months) associated with Satellite Production cause a twenty-five percent (25%) or greater reduction in SPROD in a calendar month, as compared to the arithmetic average of Sprod during the three (3) calendar months immediately preceding the occurrence of such problems, then Sprod used for purposes of determining the PSopex for such calendar month is equal to the arithmetic average of Sprod during such three (3) calendar months. If Sprod is adjusted in accordance with this Article 5.1.1.1, then STHprod shall be adjusted to take into account the revised Sprod.
	5.1.1.2		If temporary mechanical or operational problems (with a duration not to exceed six [6] months) associated with Non-Satellite Production cause a twenty-five percent (25%) or greater reduction in the STHPROD in a calendar month, as compared to the arithmetic average of the STHPROD during the three (3) calendar months immediately preceding the occurrence of such problems, then the STHPROD used for purposes of determining the PSOPEX for such calendar month is equal to the arithmetic average of the STHPROD during such three (3) calendar months.

	5.1.2		Annual Review
			The Producer or the Magnolia TLP Operator may perform an annual review of the average value of HOPEX recorded for the prior calendar year, the average value of SPROD and the average value of STHprod for the prior calendar year, and the average value of PSopex for the prior calendar year.

5.2

Fuel/Vent/Flare Gas

Magnolia TLP fuel gas consumption will be allocated on a monthly basis to the Magnolia Owners for Non-Satellite Production handling and to the Producer for Satellite Production handling in accordance with this Article 5.2 (Fuel Gas). The value of such gas is not to be included in the HOPEX in Article 5.1 (Operating and Maintenance Expenses).

	5.2.1		Fuel gas consumed by certain production handling equipment and facilities located on the Magnolia TLP will be allocated to Satellite Leases in accordance with Exhibit “F” (Metering and Allocation).
	5.2.2		Flare/vent/shrink gas will be handled and allocated in accordance with Exhibit “F” (Metering and Allocation).
	5.2.3		The Producer is obligated to and will furnish its monthly-allocated share of fuel gas for Satellite Production handling in kind. Each calendar month, the Magnolia TLP Operator will allocate and deduct from the Producer’s share of Gas production its allocated share of fuel/flare/vent/shrink gas.

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5.3

Infrastructure Access Fees

In consideration for: (i) access to the Magnolia TLP, (ii) utilization of Magnolia TLP facilities, including, but not limited to, risers, porches and umbilical boarding facilities, (iii) utilization of deck and riser space for the Satellite Production System components on the Magnolia TLP, (iv) utilization of deck space for the Receiving Facilities, and (v) for the Services provided by the Magnolia Owners, the Producer will pay the Magnolia Owners in accordance with Exhibit “C” (Accounting Procedures), on a monthly basis an Infrastructure Access Fee (“IAF” or “Infrastructure Access Fee”) for Satellite Production handled during the applicable month as follows:

5.3.1

IAF for Firm Capacity, Interruptible Capacity and FA Capacity

Infrastructure Access Fee (IAF) for Oil, Gas and Water⁴
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5.3.2

Minimum Monthly Fee

(a)

Effective as of the first day of the month following Satellite First Production, if the collective sum of Infrastructure Access Fees for Firm

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			Capacity for each product (Oil, Gas, and water) set forth in Article 5.3.1 (IAF for Firm Capacity Interruptible Capacity and FA Capacity), based upon throughput, is less than 5******************************** in any calendar month, the Producer will be charged a single fee of 5*** ******************************** for the Services for such calendar month, in lieu of the monthly Infrastructure Access Fees for Firm Capacity for each product (Oil, Gas, and water) set forth in Article 5.3.1 (IAF for Firm Capacity Interruptible Capacity and FA Capacity).
	(b)		The Producer’s obligation to pay the Magnolia Owners the minimum monthly fee set forth in Article 5.3.2(a) will be suspended in the event the Magnolia TLP is incapable of processing and handling any Satellite Production for a period greater than three (3) consecutive days in a calendar month as a result of: (i) problems occurring at the Magnolia TLP; (ii) conditions of the Magnolia TLP outlined in Articles 9.4 (Suspension of Operations) and 9.5 (Magnolia TLP Operator’s Right for Shut Down Operations on Magnolia TLP) [other than Articles 9.5.1(d), 9.5.1(e)], unless such problems are caused by Satellite Production and/or operations related to the Satellite Production System; or (iii) Force Majeure.
	(c)		Payment of the minimum monthly fee set forth in Article 5.3.2(a) will not mitigate, eliminate or be in lieu of any obligation to deliver Satellite Production to the Magnolia TLP pursuant to this Agreement.

5.4

Future Governmental Regulations Costs

	5.4.1		The Parties agree that the IAF for produced water attributable to the Satellite Leases as set forth in Article 5.3.1 may be increased to reflect future increased costs associated with modifications due to changes in Laws affecting discharge requirements of treated produced water into the Gulf of Mexico, which are verifiable and attributable to Satellite Production. Such modifications may include but are not limited to monitoring, testing, or treating (includes adding chemicals) the produced water. The Magnolia TLP Operator will provide justification and rationale for any cost increase for the Producer’s review. The Parties will mutually agree upon an appropriate methodology which would allow the Magnolia Owners to recover a proportionate share of such costs from the Producer.
	5.4.2		In addition to Article 5.4.1, the Parties recognize that the Laws could change during the term of the Agreement and such change could result in unforeseen

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costs to the Magnolia Owners in order to maintain compliance therewith. Accordingly, the Parties do hereby agree that in the event the Magnolia Owners incur additional costs due to changes in Laws which directly relate to the provision of Firm Capacity or Services provided for the Satellite Leases, then the Parties will mutually agree upon an appropriate methodology which would allow the Magnolia Owners to recover a proportionate share of such costs from the Producer.

5.5

Producer’s Sole Expenses

The Producer is solely responsible for the cost of those operations identified as Producer’s Sole Expenses in Exhibit “E” (Operating & Maintenance Expenses Matrix) to this Agreement.

5.6

Magnolia Owners’ Sole Expenses

The Magnolia Owners are responsible for (i) the cost of those operations identified as Magnolia Owners’ Sole Expenses in Exhibit “E” (Operating & Maintenance Expenses Matrix) to this Agreement, (ii) the Magnolia TLP Shared Expenses included as Exhibit “E” (Operating & Maintenance Expenses Matrix) to this Agreement which are not allocated to the Producer pursuant to Article 5.1 (Operations and Maintenance Expenses), and (iii) all sole expenses related to Non-Satellite Production.

5.7

Deferred Production Compensation

5.7.1

Compensation for Magnolia Owners for Initial Tie-In.

The Producer will compensate the Magnolia Owners for any Magnolia TLP Production which is deferred 6***************************************************** that is solely attributable to the initial fabrication, construction, installation, hookup, tie-in, and/or commissioning of the Satellite Production System and the Receiving Facilities to handle Satellite Production. Such compensation will be determined using the methodology described in Article 5.7.3 (Compensation Methodology) and shall be the sole remedy for such downtime and deferred production.

5.7.2

Compensation for Producer

Execution Version

The Producer will be compensated by the Magnolia Owners for any Satellite Production which is deferred in 7**************************** due to Magnolia TLP downtime that is solely attributable to the initial fabrication, construction, installation, hookup, tie-in, and/or commissioning of the tie-in as provided in Article 3.4 (Magnolia Owner’s Tie-in Option). Such compensation will be determined using the methodology consistent with that described in Article 5.7.3 (Compensation Methodology) and shall be the sole remedy for such downtime and deferred production.

5.7.3

Compensation Methodology

	(a)		Compensation paid by the Producer to the Magnolia Owners for deferred Magnolia TLP Oil Production (“DOPC”) pursuant to Articles 5.7.1 (Compensation for Magnolia Owners for Initial Tie-In) and 5.7.5 (Compensation for Magnolia Owners after Initial Tie-In) is equal to:
			DOPC = AOPR * SDD * (POP * 0.22)

		Where:
		AOPR		=		the average daily volume of Magnolia TLP Oil Production delivered to the Delivery Point during the first fourteen (14) Days of the twenty-one (21) Days immediately preceding initiation of the Magnolia TLP Oil Production shutdown (expressed in gross Barrels per Day, i.e., without any reduction for royalty), adjusted for downtime;
		SDD		=		the duration of the Magnolia TLP Oil Production shutdown which is solely attributable to Satellite Leases’ related activities (expressed in Days to the nearest one- ninety-sixth (1/96) of a day), and
		POP		=		the average Prevailing Oil Price during the duration of the Magnolia TLP Oil Production shutdown solely attributable to Satellite Leases’ related activities (expressed in Dollars per Barrel).

(b)

Compensation paid by the Producer to the Magnolia Owners for deferred Magnolia TLP Gas Production (“DGPC”) pursuant to Articles 5.7.1 (Compensation for Magnolia Owners for Initial Tie-In) and 5.7.5 (Compensation for Magnolia Owners after Initial Tie-In) is equal to:

Execution Version

DGPC = AGPR * HV * SDD * (PGP * 0.22)

		Where:
		AGPR		=		the average daily volume of Magnolia TLP Gas Production delivered to the Delivery Point during the first fourteen (14) Days of the twenty-one (21) Days immediately preceding initiation of the Magnolia TLP Gas Production shutdown (expressed in gross MSCF per Day, i.e., without any reduction for royalty), adjusted for downtime;
		HV		=		the average daily Btu content of the Magnolia TLP Gas Production during the first fourteen (14) Days of the twenty-one (21) Days immediately preceding initiation of the Magnolia TLP Gas Production shutdown (expressed in MMBtu per MSCF),
		SDD		=		the duration of the Magnolia TLP Gas Production shutdown which is solely attributable to Satellite Leases’ related activities (expressed in Days, to the nearest one- ninety-sixth (1/96) of a Day), and
		PGP		=		the average Prevailing Gas Price during the duration of the Magnolia TLP Gas Production shutdown solely attributable to Satellite Leases’ related activities (expressed in Dollars per MMBtu).

5.7.4

Duration of Shutdown

(a)

At least thirty (30) Days prior to a scheduled shutdown of the Magnolia TLP which is associated with non-Satellite Leases’ related activities, the Magnolia TLP Operator will provide the Satellite Operator:

	(i)		a detailed work schedule which lists the work activities planned during such shutdown, the estimated duration of each work activity, and the sequence and relationship of each work activity to other work activities; and
	(ii)		an estimate of the duration of such shutdown which is solely attributable to non-Satellite Leases’ related work activities.

(b)

Within thirty (30) Days immediately following completion of a shutdown of the Magnolia TLP which is associated with Non-Satellite Production and/or non-Satellite Leases’ related work activities, the Magnolia TLP Operator will provide the Satellite Operator with updated information furnished pursuant to Article 5.7.4(a) reflecting actual execution of the work activities.

Execution Version

	5.7.5		Compensation for Magnolia Owners after Initial Tie-In
			The Magnolia TLP Owners will be compensated by the Producer for any Magnolia TLP Production which is deferred due to Magnolia TLP downtime that is solely attributable to handling of Satellite Production at the Magnolia TLP subsequent to the initial fabrication, construction, installation, hookup, tie-in, and/or commissioning of facilities for the Satellite Production System. Such compensation will be determined using the methodology described in Article 5.7.3 (Compensation Methodology) and shall be the sole remedy for such downtime and deferred production.

5.8

Royalties and Taxes

	5.8.1		The Producer and each of the Magnolia Owners will be solely responsible for payment of the royalties and taxes attributable to its share of production.
	5.8.2		This Agreement and the operations hereunder are not intended to create, and will not be construed to create a joint venture, association or partnership with respect to the Parties. If, for United States federal income tax purposes, this Agreement is regarded as a partnership, each Party elects to be excluded from the application of all or any part of the provisions of Subchapter “K”, Chapter 1, Subtitle “A” of the United States Internal Revenue Code of 1986, as amended (the “Code”), to the extent permitted and authorized by Article 761(a) of the Code and the regulations promulgated thereunder, or similar provisions of applicable state Laws.

5.9

Quality Bank Payments

With respect to any monetary adjustments due the Magnolia Owners or the Producer pursuant to Article 7.3 (Quality Bank) of this Agreement, each of the Magnolia Owners or Producer, as applicable, will be responsible for any payments invoiced by the Magnolia TLP Operator. Article 7.3 (Quality Bank) of this Agreement will be interpreted to apply to the Producer or each of the Magnolia Owners, individually with respect to invoices and payments pursuant to Article 7.3 (Quality Bank).

ARTICLE VI — CAPACITY

6.1

Magnolia TLP Base Capacity

		The Magnolia TLP Base Capacity for Oil, Gas, and water handling is set forth on Exhibit “A” (Magnolia TLP Base Capacity). The Parties stipulate this is only an estimate, that the Magnolia TLP Base Capacity is not represented or warranted by the Magnolia Owners, and that the stated handling capacities for these substances has not been experienced or tested in the field. It is understood and agreed that the Magnolia TLP Base Capacity will fluctuate based on the inlet flow rates, conditions and compatibility,
		and the operating pressure of the export lines. Exhibit “A” (Magnolia TLP Base Capacity) reflects the current estimate of the Magnolia TLP Base Capacity at the current pipeline operating pressure and at the maximum pipeline operating pressure during all times of normal and routine operations. Subject to Article 6.2 (Production Processing

Execution Version

and Handling Capacity), Article IX (Suspension of Operations and Force Majeure) and Article 10.3 (Termination by Magnolia Owners), the Magnolia Owners commit to operate and maintain the Magnolia TLP consistent with prevailing industry operational and safety practices and standards for similar facilities and all applicable Laws, and to use all reasonable efforts to restore the Magnolia TLP to normal and routine operations in a timely manner when possible. Except as expressly provided in the foregoing sentence, the Magnolia Owners shall not be required to upgrade or maintain any facilities or equipment. The Magnolia Owners will not be obligated to maintain the Magnolia Leases in force and effect, or continue production at the Magnolia TLP for any reason.

6.2

Production Processing and Handling Capacity

The Magnolia Owners will provide the Producer the following types of capacity for production processing and handling on the Magnolia TLP for Satellite Production in accordance with, and subject to, the terms and conditions contained in this Article VI (Capacity). However, upon partial or entire loss of or damage to the Magnolia TLP (or any component of the Magnolia TLP) resulting from any incident, the Magnolia Owners will have no obligation to repair or replace the Magnolia TLP or any component thereof for purposes of resuming the processing and handling of Satellite Production (or the operation of the Satellite Production System or the placement of Satellite Production System components thereon). Notwithstanding the foregoing, nothing contained in this Agreement limits or restricts the Magnolia Owners from entering into other agreements for the utilization of the Magnolia TLP and/or its related equipment and facilities.

6.2.1

Firm Capacity

For the purposes of this Agreement, “Firm Capacity” means that portion of the Magnolia TLP Capacity representing:8

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(f)

Any Party may request, but is not guaranteed, a change in the Firm Capacity, as described above, with supporting data.

The Magnolia Owners agree to process and handle Satellite Production at volume rates not to exceed the Firm Capacity and the Producer will be entitled to utilize Firm Capacity for Satellite Production; provided, however, utilization of Firm Capacity for Satellite Production will only be subject to priority, curtailment and/or proration in accordance with Articles 6.3 (Production Prioritization) and 6.4.2 (Non-Conforming Satellite Production) and Magnolia TLP Operator’s rights and discretion as provided in Articles 4.1.1, 4.1.2, 6.4.2, 9.4 and 9.5. Firm Capacity, as provided above, will be determined individually for each product (Oil, Gas, and water) on a daily throughput basis.

	(i)		The amount of Firm Capacity for any single product (i.e. Oil, Gas, or water) will not be exceeded in order to allow the Producer to fully utilize the Firm Capacity for another product.
	(ii)		In the event the Producer does not utilize its entire share of Firm Capacity during a calendar month, the Magnolia Owners have the right to utilize, as they deem necessary and free of cost, any unused Firm Capacity for such calendar month on an interruptible basis.

6.2.2

Interruptible Capacity

The Magnolia Owners agree to process and handle Satellite Production at volume rates in excess of Firm Capacity to the extent that Magnolia TLP Ullage exists (“Interruptible Capacity”); provided, however, utilization of Magnolia TLP Ullage for Satellite Production handling will not result in any curtailment of Magnolia TLP Production or Third Party Production being processed and handled on the Magnolia TLP on a firm basis. Priority access to Magnolia TLP Ullage will be given in the following order: (i) Satellite Production; and (ii) Third Party Production.

6.2.3

Flow Assurance Capacity

The Magnolia Owners agree to process and handle Satellite Production at volume rates not to exceed FA Capacity and, the Producer will be entitled to utilize FA Capacity for Satellite Production, unless it is not possible to provide such FA Capacity due to Magnolia TLP operating problems and/or operating problems related to downstream facilities and equipment.

Execution Version

	(a)		The amount of FA Capacity for a given product (Oil, Gas or water) will be determined by the fluid type in a given flowline. If the flowline is defined as an oil flowline (the flowline’s primary product is oil), the FA Capacity for liquids (oil and water) will be that which is stated in Section 2.2.17 (Flow Assurance Capacity) and the FA Capacity for gas will not be pre-determined, but will be the amount of associated gas that the oil flowline is capable of flowing at the stated FA Capacity for liquids. If the flowline is defined as a gas flowline (the flowline’s primary product is gas), the FA Capacity for gas will be that which is stated in section 2.2.17 (Flow Assurance Capacity) and the FA Capacity for liquids (condensate and water) will not be pre-determined, but will be the amount of associated liquids that the gas flowline is capable of producing at the stated FA Capacity for gas.
	(b)		In the event the FA Capacity is insufficient to provide the Satellite Production with flow assurance, the Magnolia Owners and the Producer will make a good faith effort to unanimously agree on a revised FA Capacity. Approval by the Magnolia Owners of such revised FA Capacity will not be unreasonably withheld.

6.3

Production Prioritization

	6.3.1		Processing Facility Constraints.
			In the event of any interruption or reduction in the Magnolia TLP Capacity, including but not limited to: (i) a Force Majeure event, (ii) a planned or unplanned partial or complete shutdown of the Magnolia TLP or any component of the Magnolia TLP for maintenance, repair, replacement, construction or inspections, (iii) a constraint in the Oil Export Pipeline or Gas Export Pipeline, (iv) a Magnolia TLP equipment/facility upset or other such operating problem(s), or (v) the partial and/or entire loss of the Magnolia TLP resulting from fire, hurricane, explosion, or other Force Majeure events, the Magnolia TLP Operator (subject to the rights of the Magnolia Owners under Article 6.2 (Production Processing and Handling Capacity) hereinabove regarding no obligation to repair or replace the Magnolia TLP or any component thereof upon partial or entire loss of the Magnolia TLP or any component thereof resulting from any incident) will make reasonable and prudent efforts to promptly restore normal operations while maintaining safe and efficient production handling operations and in a manner facilitating the resumption of normal operations. During such interruption or temporary reduction in Magnolia TLP Capacity, the Magnolia Owners, through the Magnolia TLP Operator will allocate the available Magnolia TLP Capacity to the extent it is safe and practical to do so, in accordance with the following:

(a)

Priority access to available production handling capacity will be given in the following order: (i) FA Capacity and flow assurance for any future Magnolia Leases subsea wells, (ii) Magnolia TLP Production; (iii) Satellite Production which has been contractually granted firm

Execution Version

			capacity; and (iv) Third Party Production which has been contractually granted firm capacity. Such lesser allocation of Magnolia TLP Capacity being defined as “Prorated Firm Capacity”.
	(b)		If the Prorated Firm Capacity is less than FA Capacity, the Magnolia TLP Operator will endeavor to provide FA Capacity.

	6.3.2		Gas Export Pipeline Constraints
			In the event that: (i) Magnolia TLP Capacity cannot be fully utilized as a result of a transportation capacity constraint (including, but not limited to, inadequate pipeline capacity and/or pipeline operating conditions) in the Gas Export Pipeline or other gas pipeline(s) downstream of the Delivery Point (“Downstream Gas Pipeline”) and (ii) the gas transportation capacity available to all of the Magnolia Owners, Producer, and Third Parties for their respective share of Magnolia TLP Gas Production, Satellite Gas Production, and/or Third Party Production is restricted by the Gas Export Pipeline or Downstream Gas Pipeline(s) constraint, then the Magnolia TLP Capacity will be allocated to the Parties as follows:

	(a)		Subject to Article 6.3.1 (Processing Facility Constraints), each Party will be provided a sufficient amount of Magnolia TLP Capacity to accommodate such Party’s Gas nomination up to the maximum volume of Gas production which such Party is allowed to transport by the Gas Export Pipeline.
	(b)		In the event that transportation capacity in the Gas Export Pipeline is constrained for one or more (but fewer than all) of the Parties (the “Gas Constrained Party” or “Gas Constrained Parties”) and the Gas Constrained Party(ies) cannot provide for the transportation of its full entitlement share of Magnolia TLP Gas Production and/or Satellite Gas Production, each of the other Parties (the “Gas Unconstrained Parties”) may exercise their respective rights under this Agreement and the Magnolia TLP Operating Agreement, as appropriate to produce volumes of Gas exceeding their entitlement share. With regard to Satellite Gas Production, the rights provided in this Article will be subject to the Firm Capacity and Interruptible Capacity provided for in this Agreement.

	6.3.3		Oil Export Pipeline Constraints
			In the event that: (i) Magnolia TLP Capacity cannot be fully utilized as a result of a transportation capacity constraint (including, but not limited to, inadequate pipeline capacity and/or pipeline operating conditions) in the Oil Export Pipeline or other oil pipeline(s) downstream of the Delivery Point (“Downstream Oil Pipeline”) and (ii) the oil transportation capacity available to all of the Magnolia Owners, Producer, and Third Parties for their respective share of Magnolia TLP Oil Production, Satellite Oil Production, and/or Third Party Production is restricted by the Oil Export Pipeline or Downstream Oil Pipeline(s) constraint, then the Magnolia TLP Capacity will be allocated to the Parties as follows:

Execution Version

	(a)		Subject to Article 6.3.1 (Processing Facility Constraints), each Party will be provided a sufficient amount of Magnolia TLP Capacity to accommodate such Party’s Oil nomination up to the maximum volume of Oil production which such Party is allowed to transport by the Oil Export Pipeline.
	(b)		In the event that transportation capacity in the Oil Export Pipeline is constrained for one or more (but fewer than all) of the Parties (the “Oil Constrained Party” or “Oil Constrained Parties”) and the Oil Constrained Party(ies) cannot provide for the transportation of its full entitlement share of Magnolia TLP Oil Production and/or Satellite Oil Production, each of the other Parties (the “Oil Unconstrained Parties”) may exercise their respective rights under this Agreement and the Magnolia TLP Operating Agreement, as appropriate to produce volumes of Oil exceeding their entitlement share. With regard to Satellite Oil Production, the rights provided in this Article will be subject to the Firm Capacity and Interruptible Capacity provided for in this Agreement.

6.4

Production Compatibility

The Producer’s access to the types of capacity for production processing and handling on the Magnolia TLP set forth in this Article VI (Capacity) assumes the operating parameters/conditions of the Satellite Production System and the Satellite Production arriving at the Entry Point conform to specifications and characteristics stipulated in Exhibit “H” (Satellite Production Fluid Limits/Operating Parameters) to this Agreement. Additionally, the terms and conditions of this Agreement were established and agreed to by the Parties based on the assumption that the operating parameters/conditions of the Satellite Production System and the Satellite Production arriving at the Entry Point conform to such specifications and characteristics.

	6.4.1		Conforming Fluids
			If Satellite Production conforms to all of the specifications contained in Exhibit “H” (Satellite Production Fluid Limits/Operating Parameters) to this Agreement, then any incremental operating costs which may result from handling Satellite Production on the Magnolia TLP, which are not classified as Satellite Sole Expenses in Exhibit “E” (Operating & Maintenance Expenses Matrix) to this Agreement or otherwise designated as costs to be borne solely by the Producer, will be treated as Magnolia TLP Shared Expenses in Exhibit “E” (Operating & Maintenance Expenses Matrix) to this Agreement.
	6.4.2		Non-Conforming Satellite Production
			If Satellite Production does not conform to one or more of the operating parameters and/or specifications contained in Exhibit “H” (Satellite Production Fluid Limits/Operating Parameters) (“Non-Conforming Production”) of this Agreement, as evidenced by at least three (3) fluid samples taken over a period of seven (7) consecutive Days, and such non-conformance (i) results in incremental

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Magnolia TLP operating costs, (ii) causes a reduction in the Magnolia TLP Capacity, or (iii) causes other operational problems on the Magnolia TLP (hereinafter collectively or individually referred to as a “Satellite Operating Problem”), the Magnolia TLP Operator may endeavor, but the Magnolia Owners are not obligated, to accept and handle such Non- Conforming Production until the Satellite Operating Problem has been rectified by the Producer in accordance with the following:

(a)

The Producer is solely responsible for all costs and expenses incurred by the Magnolia TLP Operator and/or the Magnolia Owners:

	(i)		resulting from the Satellite Operating Problem (including, without limitation, deferred production); and/or
	(ii)		for measures taken to rectify or mitigate the Satellite Operating Problem, and/or
	(iii)		which are associated with the Satellite Operating Problem until such problem has been rectified.

	(b)		Promptly after identifying the Satellite Operating Problem, but prior to initiating any measures to rectify such problem which would result in material expenditures, the Magnolia TLP Operator will provide the Satellite Operator (with information copy to the Magnolia Owners) with a written proposal for measures to rectify the Satellite Operating Problem and an estimate of the associated costs.
	(c)		The Satellite Operator will have five (5) business Days from its receipt of the Magnolia TLP Operator’s written proposal submitted pursuant to Article 6.4.2(b) of this Agreement to approve such proposal in writing (failure to respond shall be deemed a non-approval). Should the Parties fail to determine a mutually acceptable technical alternative to mitigate the incompatibility, the Magnolia TLP Operator has the right to discontinue the Services set forth in Articles 4.1.1 (Production Handling Services) and 4.1.2 (Satellite Production System Operations) hereinabove.

	6.4.3		Market Value
			Notwithstanding Article 7.3 (Quality Bank), in the event Satellite Production is determined to be Non-Conforming Production and such nonconformance results in a documented reduction in the actual market value of the Non-Satellite Production, the Producer will compensate the Magnolia Owners for such reduction in value, only to the extent caused by such non-conformance and not addressed by the procedures referenced in Article 7.3 (Quality Bank). For purposes of this Article 6.4.3 (Market Value), the non-conformance will be measured/determined prior to commingling the Satellite Production with Non-Satellite Production.

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In the event Non-Satellite Production is determined to be Non-Conforming Production and such nonconformance results in a documented reduction in the actual market value of the Satellite Gas Production and/or Satellite Oil Production, the Magnolia Owners will compensate the Producer for such reduction in value, only to the extent caused by such non-conformance and not addressed by the procedures referenced in Article 7.3 (Quality Bank). For purposes of this Article 6.4.3 (Market Value), the non-conformance will be measured/determined prior to commingling the Satellite Production with Non-Satellite Production.

ARTICLE VII — METERING AND ALLOCATION, PERMITS, AND QUALITY BANK

7.1

General Application

Satellite Production and Non-Satellite Production will be sampled, metered and allocated in accordance with the provisions of Exhibit “F” (Metering and Allocation). The Exhibit “F” (Metering and Allocation) provisions, in their entirety, are (i) subject to and in accordance with the MMS approved surface commingling application referred to in Article 7.2.1 (Surface Commingling Permit) of this Agreement and any subsequent amendments and/or waivers thereto, (ii) in accordance with MMS requirements set forth in 30 CFR Part 250 Subpart L and any subsequent amendments and/or waivers thereof and (iii) conditioned upon approval by the MMS of the surface commingling application discussed in Article 7.2.1 (Surface Commingling Permit) of this Agreement and any subsequent amendments and/or waivers thereto.

7.2

Permits

	7.2.1		Surface Commingling Permit
			Satellite Production will not be delivered to the Entry Point and flow across the Magnolia TLP without first obtaining all required surface commingling permits. Magnolia TLP Operator shall use reasonable endeavors to seek approval from the MMS for the surface commingling of Satellite Production with Non-Satellite Production and shall, upon request, furnish the Producer and the Magnolia Owners copies of the application and approval. The Producer and Magnolia Owners will cooperate with the Magnolia TLP Operator to the extent necessary to achieve MMS approval of the application. The cost of obtaining such permit shall be at the sole expense of Producer.
	7.2.2		Other Permits

(a)

The Producer is responsible for acquiring all necessary permits, licenses authorizations and approvals required for the construction and installation of the Satellite Production System and connection to the Magnolia TLP (up to the Entry Point) at the sole cost and expense of the Producer.

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	(b)		The Magnolia TLP Operator is responsible for acquiring all necessary permits, licenses, authorizations and approvals required for the construction and installation of the Receiving Facilities on the Magnolia TLP at the sole cost and expense of the Producer.
	(c)		The Producer will obtain, or caused to be obtained, all other required approvals, permits, consents, orders or other documents, without limitation, from all appropriate jurisdictional authorities to produce the Satellite Leases, transport Satellite Production to the Magnolia TLP, and dispose/transport of Satellite Production from the Magnolia TLP. The Satellite Operator and the Magnolia TLP Operator will cooperate with each other to the extent necessary to obtain such permits, licenses, authorizations and regulatory approvals.
	(d)		The Magnolia TLP Operator will support the Producer’s application(s) to the MMS for new pipeline construction to the Magnolia TLP so long as it has met the Magnolia TLP Operator’s requirements for pipeline crossings and/or risers.

	7.2.3		Permit Denials
			The Parties hereby agree to use reasonable endeavors to obtain all agreements and approvals required from all governmental agencies and Third Parties with regard to the transportation and processing contemplated by this Agreement. No representation or warranty is made by the Magnolia TLP Operator or any Party that the necessary consents and approvals will be obtained, and should MMS or any other necessary consent or approval be denied, no Party shall have liability to any other Party on account thereof and this Agreement shall be terminable in accordance with Article X (Term, Default, Termination and Continuation of Services).

7.3

Quality Bank

The Producer and the Magnolia Owners will utilize the procedures in accordance with the Gravity and Sulfur Bank for the Shell Pipeline Company LP F.E.R.C. Tariff No. S-103, effective November 1, 2004, as supplemented by Supplement No. 1 to F.E.R.C No. S-103, effective July 1, 2006, as amended from time to time, to handle oil quality difference between Magnolia TLP Production, Satellite Production, and, if applicable, Third Party Production.

ARTICLE VIII — GATHERING AND TRANSPORTATION

8.1

Product Disposition

Commencing at the Delivery Point, the Producer will (i) take in kind and remain solely and separately responsible for the disposition, transportation, and sale of Satellite Production and (ii) bear all costs and liabilities associated with such disposition,

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transportation, and sale. The Magnolia Owners will have no liability for any costs of production transportation, production processing, and/or associated costs downstream of the Delivery Point, which are attributable to the Satellite Production and/or allocated to the Producer.

8.2

Product Transportation

The Producer will enter into transportation arrangements or agreements with the owners of the Oil Export Pipeline and/or the Gas Export Pipeline, as appropriate, at its own sole cost and expense for its share of Satellite Production.

	8.2.1		The Parties, independently, will be responsible for submitting, or causing to be submitted, Gas and/or Oil nominations, as applicable, to the transporter(s) of such product for their individual respective share of the appropriate Satellite Production and/or Magnolia TLP Production, and for advising the Magnolia TLP Operator of such nomination. The Parties, independently, will also be responsible for cooperating with the Magnolia TLP Operator and the transporters of the Gas and/or Oil to keep their nominations in balance with their respective deliveries on the Gas and/or Oil transporters’ pipeline system. The Parties will, to the extent possible, work in good faith to cause the nominations of their respective Gas and/or Oil production to closely approximate their actual production.
	8.2.2		To the extent required under this Agreement, the Magnolia TLP Operator will furnish test and production information to the Parties to adjust nominations; however, the Magnolia TLP Operator will not be responsible for, and will not be liable for any damages and/or penalties for any act done or omitted in the Magnolia TLP Operator’s performance under this Agreement or for errors in judgment, except such as may result from the Magnolia TLP Operator’s gross negligence or willful misconduct. The Parties will release, indemnify, defend and hold the Magnolia TLP Operator harmless from any transporter pipeline scheduling penalties or monthly balancing provisions imposed in Gas or Oil transportation contracts, associated with, or related to, such Party’s Gas or Oil production, by the Gas or Oil transporter, as applicable, including, without limitation, penalties imposed pursuant to its tariff, or which may be caused by Operational Flow Orders (“OFO’s”), or by unscheduled Gas, or by unauthorized Gas, except such as may result from the Magnolia TLP Operator’s gross negligence or willful misconduct.

8.3

Pipeline Penalties

8.3.1

As between the Magnolia Owners and the Producer, any penalties assessed by Gas or Oil transporters attributable to the Satellite Operator’s and/or Producer’s actions or omissions will be the responsibility of the Producer. As between the Magnolia Owners and the Producer, any penalties assessed by the Gas or Oil transporters attributable to the Non-Satellite Production, Magnolia TLP Operator’s (except as provided in Article 8.3.2) and/or Magnolia Owners’ actions or omissions will be the responsibility of the Magnolia Owners.

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8.3.2

Any costs or penalties imposed by the Gas Export Pipeline or the Oil Export Pipeline on the Magnolia TLP Operator as a result of OFO’s, unscheduled Gas, unauthorized Gas, Gas pipeline imbalances, or Oil pipeline imbalances with transporters, as described herein, will be borne by each Party, independently, in the proportion that its nomination, failure to nominate, failure to properly regulate production volumes, fault, negligence, or liability without fault, caused such imbalance and/or penalties, except such as may result from the Magnolia TLP Operator’s gross negligence or willful misconduct.

8.4

Gas Imbalances

Producer and the Magnolia Owners will utilize procedures in accordance with Exhibit “G” (Gas Balancing Procedures) to this Agreement to handle Gas imbalances between the Magnolia Leases and the Satellite Leases.

ARTICLE IX — SUSPENSION OF OPERATIONS AND FORCE MAJEURE

9.1

Notice

A Party which is unable, in whole or in part, to carry out its obligations under this Agreement due to Force Majeure will promptly give written notice to that effect to the other Party or Parties stating in reasonable detail the circumstances underlying such Force Majeure.

9.2

Suspension of Obligation

The obligation of the Party giving such notice as provided in Article 9.1, so far as it is affected by such Force Majeure, will be suspended during the continuance of any liability so caused, but for no longer period, and such cause will be remedied with all reasonable diligence. No Party will be liable to the other Party or Parties for failure to perform any of its obligations under this Agreement, other than the obligation to pay monies due hereunder, to the extent such performance is hindered, delayed or prevented by Force Majeure.

9.3

Resolution

A Party claiming Force Majeure will: (i) diligently use all reasonable and prudent efforts to remove the cause, condition, or event or circumstance of such Force Majeure, (ii) promptly give written notice to the other Party of the termination of such Force Majeure, (iii) resume performance of any suspended obligation as soon as reasonably possible after termination of such Force Majeure, and (iv) not be obligated to settle any labor dispute except on terms acceptable to it in its sole discretion.

9.4

Suspension of Operations

9.4.1

The Magnolia TLP Operator reserves and has the right to suspend the Services set forth in this Agreement during the existence of conditions which render the

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			Magnolia TLP, Third Party Production System, or any downstream facility unsafe, or during the existence of a Force Majeure condition (but for the Services, only to the extent that such Force Majeure prevents rendering such Services and subject to the priorities provided in Article 6.3 (Production Prioritization) affecting the Magnolia TLP, Third Party Production System, or any downstream facility as further provided in Article 9.2 (Suspension of Obligation) of this Agreement.
	9.4.2		The Producer specifically understands that operations and activities on facilities upstream or downstream of the Magnolia TLP may impact operations on the Magnolia TLP. Further, at its sole discretion, the Magnolia TLP Operator has the right to shut down the Magnolia TLP and temporarily discontinue the Services contemplated by this Agreement for any necessary repairs or changes to the Magnolia TLP, Third Party Production System or any downstream facility. In such a case neither the Magnolia TLP Operator nor the Magnolia Owners will have any liability to the Producer for deferred production, lost production, or any other direct, indirect or consequential damages, other than as provided in Article 5.7 (Deferred Production Compensation).

9.5

Magnolia TLP Operator’s Right to Shut Down Operations on Magnolia TLP

9.5.1

In addition to Section 9.4 (Suspension of Operations), the Magnolia TLP Operator has the absolute discretion and authority to partially or totally shutdown any and all operations and activities related to the Magnolia TLP, the Satellite Leases, Third Party Production System or downstream facilities, and to permanently or temporarily discontinue the Services related to the same hereunder or under any other arrangements at any time or from time to time (subject to the cure period for certain circumstances described below), if in the Magnolia TLP Operator’s sole discretion, such shutdown is warranted due to one or more of the following:

	(a)		To ensure the safety of persons, property or the environment; or
	(b)		To ensure the operational integrity of the Magnolia TLP, the Satellite Production System, Third Party Production System and/or downstream facilities; or
	(c)		Construction or repairs on or to the Magnolia TLP, the Satellite Production System, Third Party Production System and/or downstream facilities; or
	(d)		The existence of a Force Majeure condition (subject to Sections 9.1 (Notice), 9.2 (Suspension of Obligation) and 9.3 (Resolution); or
	(e)		The termination of this Agreement; or
	(f)		Producer’s failure to provide proper notice and/or obtain the review and/or consent to a proposed operation in accordance with the requirements of this Agreement; or

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	(g)		Producer’s failure to conduct operations in accordance with this Agreement; or
	(h)		Any material breach by the Producer of this Agreement.

9.5.2

The Magnolia TLP Operator will notify the Producer in writing in the event of any of the occurrences listed above. In such cases, the Magnolia Owners have no liability to the Producer or any Party or Third Party for deferred or lost production or throughput, deferred or lost revenue, damage to, loss (or loss of use—e.g. paraffin and/or hydrate damage) of flowlines, wells or reservoirs, or any actual, direct, indirect or consequential damages arising from such shutdowns. Whenever reasonably possible, the Magnolia TLP Operator agrees to give the Producer reasonable advance notice of any scheduled shutdowns of said facilities while this Agreement is in effect. In the event of the occurrence of one or more of the events listed in subsections (f), (g) or (h), prior to shutting down the Satellite Production System or discontinuance of Services, the Magnolia TLP Operator shall give the Producer prior written notice of the occurrence of such event. In the event the Producer do not cure same within thirty (30) days after receipt of such written notice, the Magnolia TLP Operator may act (and the Magnolia Owners shall be fully relieved of any liability for the same) as described above. However, if the event specified in such notice is of such a nature that it reasonably cannot be corrected within the thirty (30) day period, and the Producer begins within said period corrective action and thereafter diligently carries such corrective action to completion, Magnolia TLP Operator shall defer acting so long as Producer is carrying out such corrective action in good faith.

ARTICLE X — TERM, DEFAULT, TERMINATION, AND CONTINUATION OF SERVICES

10.1

Term of Agreement

As of the Effective Date, this Agreement will continue until terminated pursuant to the voluntary and involuntary provisions set forth in Articles 10.2 (Default), 10.3 (Termination by Magnolia Owners), and 10.4 (Termination by Producer).

10.2

Default

The occurrence of any of the following events constitutes default (“Default”), giving the right to terminate this Agreement to Parties other than the Non-Performing Party:

10.2.1

The failure of a Party (the “Non-Performing Party”) to pay amounts owed, provide a required defense, or materially to provide Services as required by this Agreement when such failure has not been remedied by the Non-Performing Party within (i) fifteen (15) days for any nonpayment or failure to provide a required defense, and (ii) sixty (60) days for failure to materially provide the required Services (the “Notice Period”) following receipt of written notice from one or

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more of the other Party(ies) describing the alleged non-performance or non-compliance with particularity and demanding that such non-performance or noncompliance be cured or remedied; provided, however, that there is no Default if the failure cannot reasonably be cured within such Notice Period so long as:

	(a)		in the case of failure to make payments or provide a required defense, the Non-Performing Party remedies or cures said failure within the Notice Period; and
	(b)		in the case of failure to materially provide the required Services the Non-Performing Party commences reasonable efforts to remedy or cure said failure and continues these efforts after the Notice Period and until the failure has been cured or remedied, and such remedy or cure has been effected within a reasonable period of time.

	10.2.2		The entry of a Party into voluntary or involuntary bankruptcy, receivership or similar protective proceedings; or
	10.2.3		The material breach of any representation or warranty contained in Article 15.5 (Warranty of Title).

In the event of termination for Default, the Non-Performing Party remains liable for all duties, obligations and liabilities accrued or incurred prior to the termination date.

10.3

Termination by Magnolia Owners

10.3.1

The Magnolia Owners, upon their unanimous agreement, have the right to terminate this Agreement in the following circumstances:

	(a)		On not less than three (3) months written notice by the Magnolia TLP Operator to the Satellite Operator, if the MMS issues a decision disapproving the surface commingling permit application submitted by the Magnolia TLP Operator pursuant to Article 7.2.1 (Surface Commingling Permit) or any other necessary permits and the Parties agree in writing that: (i) such decision shall not be appealed; and (ii) a revised application shall not be filed; or
	(b)		On not less than one (1) month written notice by the Magnolia TLP Operator to the Satellite Operator, if no Satellite Production is delivered to the Entry Point for any reason, including Force Majeure, for any period of twelve (12) consecutive calendar months following the Execution Date of this Agreement (unless an extension is mutually agreed by all Parties).

10.3.2

This Agreement terminates on not less than six (6) months written notice by the Magnolia TLP Operator to the Satellite Operator, if (i) the Magnolia TLP is no longer economic to operate in the sole judgment of the Magnolia Owners, and (ii) the Magnolia Owners permanently cease production operations on the Magnolia TLP within the time period of such notice.

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10.3.3

This Agreement terminates on not less than one (1) month written notice by the Magnolia TLP Operator to the Satellite Operator, if destruction of, major damage to, or total or constructive loss of the Magnolia TLP occurs and the Magnolia Owners elect in their sole discretion to not repair or replace the Magnolia TLP for use at the Magnolia Leases. In such event, the Magnolia Owners have no obligation to replace or repair the Magnolia TLP. The Magnolia Owners shall retain all causes of action and claims against any Third Party arising out of such damage or destruction.

10.4

Termination by Producer

10.4.1

The Producer has the right to terminate this Agreement in the following circumstances:

	(a)		On not less than three (3) months written notice by the Satellite Operator to the Magnolia TLP Operator, if the MMS issues a decision disapproving the surface commingling permit application submitted by the Magnolia TLP Operator pursuant to Article 7.2.1 (Surface Commingling Permit) or any other necessary permits and the Parties agree in writing that: (i) such decision shall not be appealed; and (ii) a revised application shall not be filed; or
	(b)		On not less than one (1) month written notice by the Satellite Operator to the Magnolia TLP Operator, if no production handling capacity in excess of FA Capacity is available for Satellite Production for any reason, including Force Majeure, for any period of twenty-four (24) consecutive calendar months following the Execution Date of this Agreement.

	10.4.2		This Agreement terminates on not less than three (3) months written notice by the Satellite Operator to the Magnolia TLP Operator, if (i) delivery of Satellite Production to the Magnolia TLP is not technically feasible or economically justifiable in the sole judgment of the Producer, and (ii) the Producer will permanently cease Satellite operations due to Permanent Cessation of Production; provided, however, that the Satellite operations (excluding abandonment operations) permanently cease within six (6) months of said notice.
	10.4.3		This Agreement terminates on not less than one (1) month written notice by the Satellite Operator to the Magnolia TLP Operator, if Satellite Production permanently ceases for any reason whatsoever.

10.5

Responsibilities and Obligations at Termination

The Parties to this Agreement have the following responsibilities upon termination of this Agreement and/or Permanent Cessation of Production from the Satellite Leases:

10.5.1

The Satellite Operator is responsible for: (i) disconnection of the Satellite Production System from the Entry Point, (ii) removal of those Satellite Production

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System components located on the Magnolia TLP, and (iii) all costs, risk and expense associated with such disconnection and removal. However, the Magnolia Owners, at their sole discretion may either:

	(a)		Require Satellite Operator to remove and/or abandon the Satellite Production System from the Magnolia TLP and remove and/or abandon all facilities connecting the Satellite Production System to the Magnolia TLP including (i) the Producer’s pipeline(s) and riser(s) up to the Entry Point insofar as such facilities are located within five hundred (500) feet of the Magnolia TLP; (ii) cleanup and paint the area on the Magnolia TLP which is occupied by components of the Satellite Production System, and (iii) repair and replace any damages to the Magnolia TLP resulting from the placement of the Satellite Production System on the Magnolia TLP or the removal of the Satellite Production System, if deemed necessary by the Magnolia Owners, at the Producer’s sole cost, risk, expense and liability. (All such work listed in this paragraph 10.5.1(a) shall be referred to as “Abandonment Work”). In the event this Agreement terminates pursuant to the provisions of Sections 10.3.2 or 10.3.3, then Producer shall not be required to perform the work described in 10.5.1(a)(i) or 10.5.1 (a)(ii) above.
	(b)		Agree with Producer on other acceptable way(s) to salvage and abandon the Satellite Production System.

	10.5.2		If the Magnolia Owners select Article 10.5.1 (a), Abandonment Work will be completed by the Satellite Operator within twenty-four (24) months subsequent to the termination of this Agreement. All Abandonment Work performed by or on behalf of the Producer will be performed within the time frame required by this Agreement and in compliance with all applicable Laws.
	10.5.3		In the event the Satellite Operator fails to perform any or all of Abandonment Work obligations as specified in this Agreement within the applicable time periods, the Magnolia TLP Operator may at its election perform such work and invoice the Producer (or Satellite Operator, on behalf of the Producer) for all actual costs and expenses associated with the Abandonment Work. However, prior to the Magnolia TLP Operator performing such Abandonment Work, the Magnolia TLP Operator is required to give the Satellite Operator written notice of its intent to perform the work (“Abandonment Notice”). In the event the Satellite Operator does not commence Abandonment Work within thirty (30) days after receipt of the Abandonment Notice, the Magnolia TLP Operator has the right to perform Abandonment Work related to the Satellite Production System without incurring any liability or obligation to the Producer. Accordingly, in the event the Magnolia TLP Operator conducts the Abandonment Work, the Magnolia TLP Operator will directly charge and invoice the Producer (or Satellite Operator, on behalf of the Producer) who is responsible for any costs associated with such Abandonment Work.

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ARTICLE XI — LIABILITIES AND INDEMNIFICATION

11.1

Liability and Indemnity

	11.1.1		Definition of Claims. As used in this Agreement, the term “Claims” means any and all losses, liabilities, damages, punitive damages, obligations, expenses, fines, penalties, interest, costs, claims, causes of action and judgments for: (i) breaches of contract; (ii) loss or damage to property, injury to or death of persons, and other tortious injury; (iii) environmental damage or pollution; and (iv) violations of applicable Laws or any other legal right or duty actionable at law or equity. The term “Claims” also includes reasonable attorneys’ fees, court costs, and other reasonable costs of litigation resulting from the defense of any Claim or cause of action within the scope of the indemnities in this Agreement.
	11.1.2		Application of Indemnities

	(a)		Covered Claims and Parties. All indemnities set forth in this Agreement extend to the officers, directors, employees, and Affiliates of the Party indemnified.9 ************************************************************************************* ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ******************************************************************************************************** ************************** However, the indemnities set forth in this Agreement do not extend to any part of an indemnified Claim that (i) is the result of the gross negligence or willful misconduct of the indemnified Party, or (ii) is the result of the imposition of punitive damages on the indemnified Party to the extent arising from the acts of the indemnified Party.
	(b)		Other Limitations. The indemnities of the indemnifying Party in this Agreement do not cover or include any amounts that the indemnified Party may legally recoup from other Parties or Third Parties under applicable joint operating agreements, insurance or other agreements, or for which the indemnified Party is reimbursed by any Third Party. The indemnities in this Agreement do not relieve the Parties to this Agreement from any obligations to Third Parties.

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The indemnities of the Parties in this Agreement do not relieve the indemnified Party from, or extend to cover, any obligations of the indemnified Party under the terms of any operating agreement or other cost-sharing arrangement which is applicable to any Claim.

	11.1.3		Producer’s Indemnity. The Producer shall indemnify, release, defend and hold the Magnolia Owners harmless from and against any and all Claims caused by, resulting from, or incidental to:
	(a)		Producer’s Activities. (i) All activities, acts and omissions of the Producer and the Magnolia Owners with respect to the installation, hookup, interconnection, startup, and/or commissioning of the Receiving Facilities (but excluding all activities with respect to the Receiving Facilities thereafter), (ii) all of the Producer’s activities, acts and omissions with respect to the Satellite Production System upstream of the Entry Point, including the activities, acts and omissions of its contractors, suppliers, subcontractors, lessees, and (iii) the activities or omissions of any Third Parties present on the Magnolia TLP or the Satellite Production System under authority of the Producer as provided in Article 3.1.6 (Magnolia TLP Access & Boarding for Producer’s Work) and Exhibit “N” (Platform Boarding Agreement), in the construction, transportation, installation, operation, maintenance, repair, replacement, Abandonment Work, inspections of the Magnolia TLP, ingress and egress to and from the Magnolia TLP, landing helicopters and mooring vessels, utilization of the Magnolia TLP and other necessary or required activities by the Producer under this Agreement; provided, however, the foregoing shall not apply to (i) any Claims in excess of $25 million (per occurrence) for damage to Magnolia Owners’ property arising out of the initial construction of the Receiving Facilities as described in Article 3.2 and the riser and umbilical handover as described in Article 3.1.5, and (ii) any Claims for damage to Magnolia Owners’ property not arising out of the initial construction of the Receiving Facilities as described in Article 3.2 and the riser and umbilical handover as described in Article 3.1.5.
	(b)		Producer’s Property. Loss or damage to, or destruction of, the property and facilities of the Producer and its Affiliates, co-owners, co-venturers, and partners, and its and their employees, officers, directors, agents, representatives, and invitees, including the Satellite Production System, Satellite Production and any other Producer’s property connected to the same, for which the Producer also releases the indemnified Parties;
	(c)		Producer’s Contractor Property. Loss or damage to, or destruction of, the property and facilities of (i) the Producer’s contractors, suppliers, subcontractors, lessees, and any Third Parties present on the Magnolia TLP or the Producer’s property under authority of the Producer as provided in Article 3.1.6 (Magnolia TLP Access & Boarding for Producer’s Work) and Exhibit “N” (Platform Boarding Agreement) (and their contractors), (ii) their parents, affiliates, co-owners, co-venturers, and partners, and (iii) their employees, officers, directors, agents, representatives, and invitees;

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	(d)		Producer’s Employees, Invitees, etc. Personal injury to, or death of, the employees, officers, directors, agents, representatives, and invitees of the Producer and its Affiliates, co-owners, co-venturers, and partners;
	(e)		Producer’s Contractor Employees. Personal injury to, or death of, employees, officers, directors, agents, representatives, and invitees of (i) the Producer’s contractors, suppliers, subcontractors, lessees, and any Third Parties present on the Magnolia TLP or the Producer’s property under authority of the Producer as provided in Article 3.1.6 (Magnolia TLP Access & Boarding for Producer’s Work) and Exhibit “N” (Platform Boarding Agreement) (and their contractors), and (ii) their affiliates, co-owners, co-venturers, and partners;
	(f)		Producer’s Abandonment Obligations. The Producer’s abandonment, removal, disposal and restoration obligations, which the Producer shall conduct in a good and workmanlike manner and in compliance with all applicable Laws, to include but not necessarily be limited to:

	(1)		The Producer agrees to assume and pay, perform, fulfill and discharge all future abandonment, removal, and site clearance costs and expenses in connection with the abandonment and removal of the Satellite Production System as may be necessary or proper or required by applicable Laws;
	(2)		Any necessary plugging, abandonment, or replugging of Producer’s wells;
	(3)		Capping and burying of all associated pipelines located on, comprising part of, or included with the Satellite Production System;
	(4)		Removal, disposal, and abandonment of any wastes, equipment, or fixtures associated with the Satellite Production System;
	(5)		Removal, abandonment, and disposal of the risers and umbilical, and all other structures located on or comprising part of the Satellite Production System, or on the sea floor in the vicinity of the Satellite Production System and associated therewith, as may be required by applicable Laws; and
	(6)		Clean-up or disposal of any Satellite Production System contaminated by naturally occurring radioactive material (“NORM”) as may be required by applicable Laws.

(g)

The Producer’s gross negligence or willful misconduct, if any.10

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Execution Version

	11.1.5		Environmental Indemnity
	(a)		Producer’s Environmental Indemnity. The Producer shall indemnify, release, defend and hold the Magnolia Owners harmless from and against all the clean-up responses, costs of remediation, control, assessment or compliance, and any civil fines or penalties, for the following occurrences, events and activities on or related to the Satellite Production System and the operations conducted by the Producer while on the Magnolia TLP (including the design, procurement, fabrication, transportation, installation, hook-up, interconnection, start-up and commissioning of the Receiving Facilities, but excluding all activities with respect to the Receiving Facilities thereafter), regardless of whether arising from any sole or concurrent acts or omissions of Magnolia Owners or the condition of the Magnolia TLP:

	(1)		Environmental pollution or contamination including pollution or contamination of the soil, sea, groundwater or air by hydrocarbons, brine, NORM, or otherwise, emanating from the Satellite Production System upstream of the Entry Point;
	(2)		The Producer’s waste disposal onsite or offsite of any hazardous substances, wastes, materials and products generated by or used in connection with the ownership or operation of the Satellite Production System; and
	(3)		Any of the Producer’s failure to comply with applicable land use, surface disturbance, licensing or notification requirements; provided, however, the preceding Producer’s environmental indemnity obligations exclude and do not include:

(i)    Any civil or criminal fines or penalties that may be levied against the Magnolia Owners or the Producer by any court or regulatory authority for any violation of any Laws in connection with the ownership or

Execution Version

operation of the Magnolia TLP by the Magnolia Owners, all of which shall remain the responsibility of the Magnolia Owners; or

(ii) Transportation and disposal offsite from the Magnolia TLP by the Magnolia Owners of any hazardous substances, wastes, NORM, materials and products generated by or used in connection with the ownership or operation of the Magnolia TLP by the Magnolia Owners, all of which shall remain the responsibility of the Magnolia Owners.

Execution Version

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11.1.6

Notices and Defense of Indemnified Claims

Each Party shall immediately notify the other Party of any Claim of which it becomes aware and for which it is entitled to indemnification from the other Party under this Agreement. The indemnifying Party shall be obligated to defend at the indemnifying Party’s sole expense any litigation or other administrative or adversarial proceeding against the indemnified Party relating to any Claim for which the indemnifying Party has agreed to indemnify and hold the indemnified Party harmless under this Agreement. However, the indemnified Party shall owe a duty of cooperation to the indemnifying Party and shall have the right to participate with the indemnifying Party in the defense of any such Claim at its own expense. Each Party shall owe a duty of cooperation to the other with respect to any Claim covered by the terms of this Agreement. The indemnifying Party may not settle any Claim for other than money damages without the consent of the indemnified Party.

11.1.7

Non-Conforming Production

			The Producer will defend, indemnify, release and hold the Magnolia Owners harmless against all Claims arising from the operation, inspection, maintenance, repair, replacement, and/or modification of the Magnolia TLP to the extent such Claims are caused by Non-Conforming Production, except to the extent such Claims are caused by the gross negligence or willful misconduct of any of the Magnolia Owners.
			To the extent such Claims are caused by the gross negligence or willful misconduct of any of the Magnolia Owners, the Magnolia Owners will defend, indemnify, release and hold the Producer harmless against all Claims arising from the operation, inspection, maintenance, repair, replacement, and/or modification of the Magnolia TLP to the extent such Claims are caused by Non-Conforming Satellite Production.

11.1.8

No Limitations

The liability of the Parties hereunder is not limited by any amounts of insurance carried by them.

11.1.9

Allocation of Liability Among the Magnolia Owners

Notwithstanding anything contained in this Article 11.1 (Liability and Indemnity) to the contrary, as among the Magnolia Owners, including the Magnolia TLP

Execution Version

Operator, the allocation of responsibility for the liabilities assumed by the Magnolia Owners in Article 11.1 (Liability and Indemnity) are governed by the Magnolia TLP Operating Agreement.

11.2

Indemnification With Respect to Warranty of Title

	11.2.1		Satellite Production
			The Producer will defend, indemnify, release and hold the Magnolia Owners harmless against all Claims brought by any Person(s) challenging, or claiming an entitlement to, the ownership of Satellite Production and any royalties or other interests burdening such ownership.
	11.2.2		Non-Satellite Production
			The Magnolia Owners will defend, indemnify, release and hold the Producer harmless against all Claims brought by any Person(s) challenging, or claiming an entitlement to, the ownership of the Non-Satellite Production and any royalties or other interests burdening such ownership.

11.3

Waiver of Consequential Damages

EACH PARTY: (I) AGREES THAT ONLY ACTUAL DAMAGES SHALL BE RECOVERABLE BY IT AGAINST THE OTHER PARTIES UNDER THIS AGREEMENT; AND (II) HEREBY WAIVES AND RELEASES THE OTHER PARTIES FROM ANY RIGHT TO RECOVER SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, CONSEQUENTIAL, INCIDENTAL OR EXEMPLARY DAMAGES (WHETHER SUCH DAMAGES ARE CLAIMED UNDER BREACH OF WARRANTY, BREACH OF CONTRACT, TORT OR ANY OTHER THEORY OR CAUSE OF ACTION AT LAW OR IN EQUITY, INCLUDING LOST BUSINESS PROFITS, DOWNTIME, CESSATION OR REDUCTION OF PRODUCTION, LOST THROUGHPUT, JOINT USE OF THE MAGNOLIA TLP BY THE PARTIES AND ANY THIRD PARTIES, AND ANY BREACH OF THIS AGREEMENT), INCLUDING, WITHOUT LIMITATION, LOSS OF PROFIT OR BUSINESS INTERRUPTION, DAMAGE TO WELL(S) OR RESERVOIRS, OR LOSS OF WELL(S), FROM OR AGAINST ANY OTHER PARTY, EXCEPT TO THE EXTENT SUCH PARTY SUFFERS SUCH DAMAGES TO AN UNAFFILIATED THIRD-PARTY IN CONNECTION WITH A THIRD-PARTY CLAIM FOR WHICH AN INDEMNITY IS EXPRESSLY PROVIDED HEREUNDER AND IN WHICH EVENT SUCH DAMAGES SHALL BE RECOVERABLE. However, nothing in this section shall alter the Parties’ rights to payments for deferred production as expressly provided in this Agreement.

11.4

Individual Obligations

Notwithstanding any provisions herein, the rights and liabilities hereunder are several and not joint or collective, and each Party will be responsible only for its share of the costs and liabilities incurred as provided hereunder. Except as provided in Article 5.8

Execution Version

(Royalties and Taxes), nothing contained herein will ever be construed as creating a partnership, joint venture, association or other character of business entity recognizable in law for any purpose. Each Party will hold all the other Parties harmless from liens and encumbrances on the Magnolia Leases, Magnolia TLP, Satellite Leases, Receiving Facilities, and Satellite Production System as a result of its acts, but subject to Section 13.2.

ARTICLE XII — INSURANCE AND BONDS

12.1

Insurance

	12.1.1		At all times during the term of this Agreement, Producer shall maintain the insurance described on Exhibit “J” (Insurance Provisions) attached hereto and made a part hereof, and Producer shall maintain all insurance that may be required under applicable Laws.
	12.1.2		Each policy required under Article 12.1.1 above, and each applicable insurance policy which Producer elects to obtain in connection with its property or the operations and activities contemplated by this Agreement, shall contain an endorsement waiving underwriters’ rights of subrogation against Magnolia Owners and shall, with the exception of Worker’s Compensation expressly include Magnolia Owners as additional assureds, all as provided in Exhibit “J” (Insurance Provisions). Magnolia Owners shall not have any liability for the payment of any premiums for such insurance maintained by Producer hereunder.
	12.1.3		Both the face value of applicable coverages and any applicable umbrella liability insurance coverage shall be counted towards meeting the required limits of coverages provided for by this Article 12.1 and Exhibit “J” (Insurance Provisions). Producer’s obligation to obtain such insurance coverage is separate and distinct from the other obligations assumed by Producer hereunder or under applicable Laws. The insurance policies set forth in Exhibit “J” (Insurance Provisions) shall be endorsed to provide that the coverage afforded is primary irrespective of the existence of other applicable insurance.
	12.1.4		Contemporaneously with execution hereof and from time to time upon request by Magnolia Owners, Producer shall furnish Magnolia Owners with documentary evidence showing that such insurance required by this Article 12.1 is in effect. Producer further agrees that its insurance will not be canceled for any cause whatsoever or materially changed without thirty (30) days prior to written notice to Magnolia Owners, and further that any such lapse of insurance is a material breach of this Agreement.
	12.1.5		Without limiting Producer’s liability under this Agreement, Producer shall require all of its contractors to carry all insurance required by Laws and other types of insurance in amounts and limits normally carried by prudent contractors for the type of work being performed. All contractors so engaged by Producer may be required to provide proof of adequate insurance to Magnolia Owners prior to

Execution Version

commencing any work on the Magnolia TLP and any agreement with such contractors shall evidence this requirement.

12.2		Bonds
		The Magnolia TLP Operator and the Satellite Operator will obtain and maintain any and all bonds required to be carried by any applicable Laws. The Magnolia TLP Operator and the Satellite Operator will require all contractors to obtain and maintain all bonds required to be carried by any applicable Laws.

ARTICLE XIII — SUCCESSORS AND ASSIGNS

13.1		Successors and Assigns
		This Agreement is binding upon and inures to the benefit of the Parties and their respective heirs, successors and assigns. Each Party will incorporate in any assignment or transfer of its interest in the Magnolia TLP, Satellite Leases or Satellite Production System a provision that such assignment is subject to this Agreement.